MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: The Company owns and operates 132 multifamily apartment communities across 12 states, totaling 38,227 units (including a 33.33% interest in a joint venture). The Company operates as a single reportable segment focused on the acquisition and operation of multifamily communities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by approximately $20.5 million (10.3%) for the nine months ended September 30, 2005, compared to the same period in 2004. This was driven by acquisitions in 2004 and 2005, as well as improved performance in same-store properties.
• Profitability: Net income available to common shareholders increased significantly to $5.3 million for the nine months ended September 30, 2005, compared to $2.1 million in the prior year. This improvement was largely due to a $3.0 million gain from the disposition of properties in a joint venture and a $1.7 million incentive fee, partially offset by higher interest expenses.
• Interest Expense: Interest expense increased by approximately $6.3 million for the nine-month period due to higher debt balances ($1.14 billion vs. $1.02 billion) and rising average interest rates (5.4% vs. 5.2%).
• Acquisitions: In July 2005, the Company acquired two communities: Waterford Forest (384 units) and Boulder Ridge (478 units).
• Dispositions: The Company sold the Eastview apartments (432 units) in April 2005, which was classified as a discontinued operation. Additionally, the Company sold its remaining interest in the CH/Realty joint venture, realizing a gain of approximately $3.0 million.

Guidance, Outlook, and Risks

• Market Trends: Management notes a turnaround in many markets, particularly in Florida and Georgia, with improving demand and slowing supply. Large-tier markets are beginning to absorb oversupply. Hurricane Katrina evacuees leased approximately 220 units in September 2005, providing a temporary boost in specific markets.
• Interest Rate Hedging: To mitigate rising interest rates, the Company has fixed, swapped, forward-swapped, or capped approximately 89% of its debt, up from 81% at the end of 2004. This includes $150 million in forward swaps initiated in June 2005.
• Liquidity: The Company has $992 million in available borrowing capacity under secured credit facilities. Net cash provided by operating activities exceeded capital improvements and distributions by approximately $5.5 million for the nine months ended September 30, 2005.
• Preferred Stock Redemption: The Company notified investors of its intent to redeem all 400,000 shares of 8.625% Series G Cumulative Redeemable Preferred Stock on May 26, 2006. Consequently, this security is classified as a liability (notes payable) rather than equity.
• Risks: Key risks include potential deterioration in economic conditions, overbuilding in certain markets, rising interest rates, and reliance on the creditworthiness of FNMA for a significant portion of its debt financing.

Investor Verification Checklist

• Debt Structure: Verify the impact of the $1.14 billion debt load and the 5.4% average interest rate on future cash flows, especially given the reliance on FNMA credit facilities.
• One-Time Gains: Assess the sustainability of earnings by excluding the $4.7 million in gains and fees from the CH/Realty joint venture disposition.
• Preferred Stock Liability: Confirm the cash requirements for the $10 million Series G preferred stock redemption due in May 2006.
• Occupancy and Rent Trends: Monitor the 96.2% occupancy rate and $691 average rent to ensure the reported market recovery is sustained beyond the temporary impact of Hurricane Katrina evacuees.
• Capital Expenditures: Review the $19.2 million spent on capital improvements to ensure it aligns with the Company's refurbishment strategy and does not strain liquidity.