MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (MAA)
Reporting Period: Fiscal year ended December 31, 2005
Business Overview: MAA is a self-administered and self-managed REIT focused on acquiring, owning, and operating apartment communities in the Southeastern United States. As of December 31, 2005, the Company owned 100% of 131 properties (37,705 units) and held a 33.33% interest in one joint venture property (522 units), totaling 38,227 units across 12 states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $29.9 million (11.1%) driven by acquisitions in 2004 and 2005, as well as improved same-store operating results (higher occupancy and rental rates).
• Net Income Decline: Net income decreased by $5.5 million primarily due to a $7.9 million increase in interest expense (driven by higher debt levels and borrowing costs) and a reduction in one-time gains from property dispositions compared to 2004.
• FFO Growth: FFO increased by $7.4 million (10.5%) due to improved operational results and the accretive impact of new acquisitions.
• Portfolio Activity: The Company acquired three properties (1,519 units) and sold one property (432 units) in 2005. A joint venture with Crow Holdings was liquidated following the sale of two properties, generating approximately $3 million in gains and $1.7 million in incentive fees.
• Dividends: The quarterly dividend on common stock was increased to $0.595 per share in the fourth quarter of 2005.

Guidance, Outlook, and Risks

• Market Outlook: Management anticipates improved operating results in 2006 due to higher demand, reduced supply growth, and reduced competition from single-family homes. However, rising interest rates will increase borrowing costs.
• Interest Rate Risk: Approximately 87% of the Company's debt was fixed, swapped, forward-swapped, or capped as of December 31, 2005. The Company utilizes interest rate swaps and caps to mitigate exposure to variable rate debt.
• Liquidity: The Company maintains $1.0 billion in available borrowing capacity under secured credit facilities. Net cash provided by operating activities exceeded capital expenditures and distributions in 2005.
• Key Risks:
  • Debt Refinancing: Reliance on Fannie Mae and Freddie Mac for credit enhancement; potential inability to access capital markets at attractive rates.
  • Market Conditions: Overbuilding in large metropolitan areas (Atlanta, Houston, Dallas) could pressure occupancy and rents.
  • Environmental: Potential liability for hazardous substances or mold, though the Company maintains insurance and remediation programs.
  • REIT Qualification: Failure to qualify as a REIT would result in corporate taxation.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that a significant portion of variable rate debt is hedged, but monitor the impact of rising rates on unhedged portions.
• FFO vs. Net Income: Confirm the reconciliation of Net Income to FFO, noting the exclusion of depreciation and gains on sales, which are standard for REIT analysis.
• Preferred Stock Redemption: Note the $10 million redemption of Series G Preferred Stock scheduled for May 26, 2006, and its classification as a liability.
• Acquisition Strategy: Review the performance of 2005 acquisitions (Lake Lanier Club, Waterford Forest, Boulder Ridge) to ensure they meet accretive targets.
• Joint Venture Status: Confirm the complete liquidation of the Crow Holdings joint venture and the status of the new CH/Realty II venture.