MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: MAA is a self-administered and self-managed REIT focused on acquiring, constructing, developing, owning, and operating apartment communities in the Southeastern United States and Texas. As of December 31, 2002, the Company owned 112 properties (30,666 units) and held a 33.33% interest in two joint ventures (BRE/MAAC and CH/Realty) containing an additional 3,257 units. The Company's strategy emphasizes the acquisition of repositionable assets, selective disposition of mature assets, and intensive on-site property management.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by approximately $12.6 million (44%) compared to 2001. This was primarily due to the absence of significant gains on asset dispositions in 2002 ($0.4 million gain) compared to 2001 ($11.9 million gain). In 2001 and 2000, the Company sold multiple properties; in 2002, no assets were sold.
• Operating Expenses: Property operating expenses increased to 40.0% of total property revenues in 2002 from 38.7% in 2001. This increase was driven by a $1.6 million rise in insurance costs and a $0.8 million increase in real estate taxes.
• Interest Expense: Interest expense decreased by approximately $3.2 million due to the Company's ability to refinance debt at lower rates. The average borrowing cost dropped from 6.3% in 2001 to 5.8% in 2002.
• Occupancy and Rents: Overall occupancy for properties owned 100% by the Company decreased to 91.9% in 2002 from 92.7% in 2001, attributed to general economic weakness and excess supply in the market. Average monthly rent per unit increased slightly to $661 from $660.
• Preferred Stock Activity: The Company redeemed all 1,000,000 shares of Series E Preferred Stock at a 7% premium ($26.75 million) and issued new Series F and Series G Preferred Stock ($21.9 million aggregate).

Guidance, Outlook, Risks, and Unusual Items

• Market Outlook: Management notes that property revenues were impacted by general economic weakness and excess supply of apartments. Demand has been affected by low interest rates driving single-family home purchases. Management expects these competitive leasing environments to continue for the next several quarters.
• Liquidity and Distributions: The Company stated that current operating cash flow is insufficient to fully finance distributions at the current rate without additional borrowings. While liquidity is currently sufficient, significant further deterioration in operations could necessitate a cut in the distribution rate.
• Refinancing: On March 3, 2003, the Company refinanced $142 million of bonds maturing in 2003 using its FNMA Facility. The Company has entered into forward interest rate swaps totaling $175 million to manage interest rate risk on future refinancings.
• Unusual Items: The Company recorded an extraordinary loss of $1.3 million in 2002 related to the early extinguishment of debt. Additionally, a fire at the corporate headquarters in March 2002 resulted in increased corporate capital improvements, though the Company expects reimbursement via insurance.
• Risks: Key risks include variable interest rate exposure (approx. $299 million of debt is variable, though hedged), rising insurance costs, and the potential inability to access capital markets for refinancing.

Investor Verification Checklist

• Dividend Coverage: Verify the sustainability of the $0.585 quarterly dividend given the reported net loss to common shareholders and the reliance on borrowings to fund distributions.
• Debt Maturities: Review the $164.5 million in debt maturing in 2003 and the Company's reliance on the FNMA Facility and forward swaps to refinance this volume.
• Occupancy Trends: Monitor occupancy rates in the Southeast and Texas markets, as the 91.9% rate represents a decline from historical levels and may impact future revenue growth.
• Insurance Costs: Assess the impact of rising property and casualty insurance premiums on future operating margins, as costs increased significantly in 2002.
• Joint Venture Performance: Review the financial performance of the BRE/MAAC and CH/Realty joint ventures, which represent a significant portion of the portfolio but are not fully consolidated.