MAA

Business Context and Reporting Period

Company: Mid-America Apartment Communities, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: The Company owns and operates 123 apartment communities containing 33,923 units across 12 states. It also holds a 33.33% interest in a joint venture (BRE/MAAC Associates, LLC) owning 10 additional properties. In June 2002, the Company formed a new joint venture with Crow Holdings to acquire approximately $150 million in multifamily properties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenues: Total property revenues decreased slightly by $124,000 compared to the nine months ended September 30, 2001. This was due to the loss of revenue from properties sold in 2001 ($2.07 million) and lower revenues from held communities ($1.03 million), partially offset by new acquisitions ($903,000) and development communities ($2.07 million).
• Net Income: Net income available to common shareholders dropped significantly to $982,000 from $10,468,000 in the prior year. The prior year included a $10.06 million net gain on the disposition of assets and insurance settlement proceeds, whereas the current year included only a $437,000 gain.
• Operating Expenses: Property operating expenses increased by $1.6 million, driven by new acquisitions and development communities, despite a decrease from dispositions.
• Interest Expense: Interest expense decreased by $2.95 million year-over-year due to refinancing and a drop in variable rates, lowering the weighted average interest rate from 6.6% to 6.0%.
• Acquisitions: The Company acquired the Preston Hills apartments (464 units) in Atlanta, GA, for $33.7 million in July 2002.

Outlook, Risks, and Management Commentary

• Market Conditions: Management notes general economic weakness, job losses, and low single-family home interest rates have created competitive leasing environments. Occupancy for 100% owned units was 93.7% at September 30, 2002, down from 94.4% in the prior year.
• Liquidity and Capital Resources: The Company expanded its secured credit facility with Prudential Mortgage Capital (FNMA Facility) from $309 million to $550 million. It maintains $14.2 million in cash and equivalents. Management believes cash from operations is adequate to meet REIT distribution requirements and operating needs.
• Debt Maturities: Approximately $154 million of debt matures in 2003. The Company plans to refinance this using the expanded FNMA Facility and has utilized forward interest rate swaps to lock in replacement rates of 6.0% (down from the maturing 6.5%).
• Risks: Key risks include the potential collapse of debt markets affecting refinancing, the creditworthiness of FNMA (which enhances over $300 million of debt), and the inability to obtain terrorism insurance coverage at reasonable rates.
• Subsequent Events: In October 2002, the Company issued Series F and Series G preferred stock to retire Series E preferred stock and refinanced $29.5 million in tax-free bonds.

Investor Verification Checklist

• Refinancing Execution: Verify the successful refinancing of the $154 million debt maturing in 2003 at the pre-set 6.0% rate.
• Joint Venture Transfer: Confirm the transfer of the Preston Hills acquisition to the Crow Holdings joint venture and the subsequent repayment of the $23 million funding.
• Stabilization of Developments: Monitor the lease-up and stabilization of the three communities in lease-up (Grand View, Reserve at Dexter Lake II & III) projected to stabilize in Q2 2003.
• FNMA Credit Exposure: Assess the credit risk associated with the heavy reliance on FNMA for credit enhancement on over $300 million of debt.
• Insurance Coverage: Review the status of terrorism insurance coverage and the impact of higher retention levels on liability and workers' compensation.