MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: The Company owns and operates 137 multifamily apartment communities across 13 states. It operates as a single reportable segment focused on the acquisition and operation of these communities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by approximately $7.6 million (9.8%) compared to Q1 2006. This was driven by a $4.0 million increase from six properties acquired in 2006 and a $3.6 million increase from the existing portfolio due to a 3.6% rise in average rent per unit.
• Profitability Surge: Net income increased by $6.2 million (121%). This significant jump was primarily due to non-recurring gains: a $5.4 million gain on the disposition of a joint venture property (Verandas at Timberglen) and a $1.0 million incentive fee from the same transaction.
• Expense Increases: Property operating expenses rose by $3.7 million, largely due to the inclusion of acquired properties and a $746,000 increase in insurance premiums following a policy renewal in July 2006. Depreciation expense increased by $2.6 million.
• Cash Flow: Net cash provided by operating activities decreased slightly by $1.3 million to $20.1 million. Net cash used in investing activities dropped significantly to $0.99 million (from $59.8 million used in Q1 2006) as no acquisitions were made in Q1 2007, offset by $9.9 million in distributions from the joint venture sale.

Guidance, Outlook, and Risks

• Market Outlook: Management reports improving market conditions with strong demand in previously weak areas (Atlanta, Dallas, Austin). Supply pressures are muted due to high construction costs and rising interest rates affecting developers. The Company anticipates continued better operating results driven by improved demand and reduced competition from single-family homes.
• Cost Pressures: The Company faces rising operating expenses, specifically in insurance, real estate taxes, and maintenance materials.
• Liquidity: Operating cash flow was short of funding capital improvements and dividends by approximately $3.3 million in Q1 2007. The Company maintains $1.2 billion in available borrowing capacity under secured credit facilities (primarily FNMA and Freddie Mac) to fund operations and distributions.
• Interest Rate Risk: The Company utilizes interest rate swaps ($714 million notional) and caps ($42 million notional) to hedge variable rate debt. The weighted average interest rate on debt increased slightly to 5.6%.
• Insurance Risk: Approximately 20% of property value is in "Wind Tier 1" risk areas. The Company self-insures the first $500,000 of individual property losses and up to 10% of windstorm/earthquake losses.

Investor Verification Checklist

• Non-Recurring Gains: Verify the sustainability of earnings by excluding the $6.4 million in one-time gains (disposition gain and incentive fee) from the joint venture sale.
• Insurance Exposure: Review the specific limits and deductibles of the insurance program, particularly regarding windstorm and earthquake coverage in Florida and the New Madrid seismic zone.
• Debt Maturity Profile: Assess the concentration of debt maturities, noting that a significant portion of the FNMA facilities mature between 2010 and 2014, and the reliance on FNMA credit enhancement.
• Dividend Coverage: Monitor the shortfall between operating cash flow and dividend/capex requirements to ensure liquidity remains sufficient to maintain the current distribution rate.
• Discontinued Operations: Track the status of the four communities (Gleneagles, Hickory Farm, Somerset, Woodridge) currently held for sale.