MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc. (MAAC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: MAAC owns and operates 126 apartment communities with 35,233 units across 12 states. The company operates as a Real Estate Investment Trust (REIT). As of September 30, 2003, occupancy for 100% owned units was 94.5%, with an average monthly rent of $661.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by approximately $1.6 million (0.9%) for the nine months ended September 30, 2003, compared to the same period in 2002. This was driven by acquisitions (BreMaac Buyout and 2003 Acquisitions) and lease-up communities, partially offset by a $3.3 million decrease in revenue from communities held throughout both periods due to market weakness.
• Net Income: Net income increased by $2.8 million to $15.9 million, primarily due to a $1.9 million gain on the sale of the Crossings apartments and $2.7 million in net gains from insurance settlements and asset dispositions.
• Common Shareholder Loss: Despite positive net income, net income available to common shareholders was a loss of $1.5 million (vs. $0.98 million profit in 2002). This was caused by $11.4 million in preferred dividend distributions and $6.0 million in original issuance costs associated with the redemption of preferred stock.
• FFO Decline: Funds From Operations decreased by $4.2 million to $38.2 million, largely due to the one-time costs associated with preferred stock redemptions.
• Interest Expense: Interest expense decreased by $3.3 million to $34.1 million, reflecting a reduction in the average interest rate from 6.0% to 5.5% due to refinancing and lower variable rates.

Guidance, Outlook, and Risks

• Market Outlook: Management cites general economic weakness and excess apartment supply as headwinds. Demand is affected by low new household formations and increased single-family home purchases due to low interest rates. Occupancy and rent growth are not at historical levels and are not expected to improve until the national economy recovers.
• Liquidity: The company maintains a $552 million secured credit facility with Prudential Mortgage Capital (FNMA Facility), with $41 million currently available. The company believes cash from operations is adequate for current operations and distributions, though operating cash flow after capital expenditures is currently insufficient to fully fund distributions without additional borrowings.
• Capital Markets: The company relies heavily on the creditworthiness of Fannie Mae (FNMA) for credit enhancement on approximately $566 million of debt. Risks include potential inefficiency in the FNMA DMBS market or impairment of FNMA's credit.
• Derivatives: The company utilizes interest rate swaps to hedge variable rate debt. As of September 30, 2003, $275 million of variable borrowings were effectively fixed via swaps.
• Unusual Items: Significant one-time items included the $21.9 million purchase of the Blackstone interest in the BreMaac joint venture and the $6.0 million cost associated with redeeming preferred stock.

Investor Verification Checklist

• Preferred Stock Redemption Costs: Verify the impact of the $6.0 million original issuance costs on future earnings and the timeline for preferred stock redemptions.
• Debt Maturities: Confirm the schedule for the $315 million portion of the FNMA Facility expiring in 2004 and the company's refinancing strategy.
• Occupancy Trends: Monitor occupancy rates and rental concessions in the company's 12 markets to assess the severity of the cited "excess supply" and economic weakness.
• FFO vs. Net Income: Analyze the divergence between GAAP Net Income and FFO, specifically regarding the treatment of depreciation and one-time transaction costs.
• Joint Venture Consolidation: Review the implications of the BreMaac buyout on future leverage ratios and consolidated asset base.