MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (MAA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: MAA is a Real Estate Investment Trust (REIT) engaged in the acquisition and operation of multifamily apartment communities. As of September 30, 2006, the company owned or had an ownership interest in 137 communities across 13 states, comprising approximately 39,987 units. The company operates under a decentralized structure where property managers monitor local trends in rental rates and occupancy.

Key Financial Metrics

Portfolio Statistics (Sep 30, 2006):
- Average Monthly Rent (excluding joint ventures): $720
- Average Physical Occupancy (excluding joint ventures): 95.8%
- Weighted Average Interest Rate on Debt: 5.6%

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by approximately $7.8 million (10.4%) for the three months and $22.7 million (10.4%) for the nine months compared to the same periods in 2005. This growth was driven by acquisitions in 2006 and 2005, as well as a 3.6% increase in average rent per unit in the same-store portfolio.
• Expense Increases: Property operating expenses rose due to higher insurance premiums (policy renewal July 1, 2006) and a 7.7% increase in utility rates. Interest expense increased by $254,000 (quarterly) and $3.7 million (year-to-date) due to higher debt balances and a slight increase in average borrowing costs.
• Net Income: Net income increased by approximately $2.0 million for the quarter and $0.5 million for the nine months. The year-to-date increase was partially offset by a $551,000 loss on debt extinguishment and the absence of a $3.0 million gain on joint venture dispositions recorded in 2005.
• Acquisitions: The company acquired 808 units in the third quarter of 2006 (Reserve at Woodwind Lakes in Houston and Talus Ranch/Sansol in Phoenix) and 306 units in a subsequent event in October 2006.

Guidance, Outlook, and Risks

Management Commentary & Outlook:
Management reports continued improvement in market conditions, with strong demand in major metros (Atlanta, Dallas, Austin) and muted supply pressures due to high construction costs and rising interest rates. The company anticipates that improved demand and reduced competition from single-family homes will contribute to better operating results for the remainder of the year, despite cost pressures from insurance and utilities.

Liquidity and Capital Resources:
- Operating cash flow for the nine months ended September 30, 2006, was short of funding improvements, distributions, and dividends by approximately $8.9 million, compared to an excess of $5.1 million in the prior year.
- The company maintains secured credit facilities with a total borrowing capacity of $1.1 billion, with $997 million outstanding as of September 30, 2006.
- Approximately 71% of outstanding obligations are credit-enhanced by FNMA. Management notes reliance on the creditworthiness of FNMA and the efficiency of the FNMA DMBS market.

Risks and Contingencies:
- Insurance: The company reduced insurance limits for windstorm events due to cost and availability, increasing self-insured deductibles. Approximately 20% of property value is in "Wind Tier 1" risk areas.
- REIT Compliance: Failure to distribute at least 90% of taxable income would subject the company to corporate income tax and a 4% excise tax.
- Interest Rate Risk: The company uses interest rate swaps ($679 million notional) and caps ($42 million notional) to hedge variable rate debt. Changes in interest rates affect borrowing costs and the fair value of these derivatives.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that a significant portion of variable rate debt is subject to renewal or maturity in the near term (e.g., Oct 2006, Jan 2007).
• Insurance Coverage: Review the specific limits and deductibles for windstorm and earthquake coverage, particularly given the concentration of assets in Florida and the New Madrid earthquake zone.
• FFO vs. Net Income: Analyze the reconciliation between Net Income and Funds From Operations (FFO) to understand the impact of depreciation and non-recurring gains/losses on reported earnings.
• Acquisition Integration: Assess the performance of the 2006 acquisitions (Houston and Phoenix properties) to ensure they meet projected return criteria.
• Dividend Sustainability: Monitor the coverage ratio of operating cash flow to dividends, noting the $8.9 million shortfall in the first nine months of 2006.