UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-12762
MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact Name of Registrant as Specified in Charter)
TENNESSEE 62-1543819
(State of Incorporation) (I.R.S. Employer Identification Number)
6584 POPLAR AVENUE, SUITE 300
MEMPHIS, TENNESSEE 38138
(Address of principal executive offices)
(901) 682-6600
Registrant's telephone number, including area code
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at April 28, 2003
Common Stock, $.01 par value 17,896,457
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and
December 31, 2002
Consolidated Statements of Operations for the three months ended March
31, 2003 and 2002 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March
31, 2003 and 2002 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Mid-America Apartment Communities, Inc.
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002
(Dollars in thousands)
March 31, 2003 December 31, 2002
------------------------------------------------------------------------------------------- -------------------
Assets:
Real estate assets:
Land $ 125,842 $ 124,130
Buildings and improvements 1,312,248 1,290,478
Furniture, fixtures and equipment 35,092 34,531
Construction in progress 1,636 3,223
----------------------------------------------------------------------------------------------------------------
1,474,818 1,452,362
Less accumulated depreciation (297,053) (283,593)
----------------------------------------------------------------------------------------------------------------
1,177,765 1,168,769
Land held for future development 1,366 1,366
Commercial properties, net 6,669 7,088
Investment in and advances to real estate joint ventures 17,300 15,000
----------------------------------------------------------------------------------------------------------------
Real estate assets, net 1,203,100 1,192,223
Cash and cash equivalents 5,759 10,594
Restricted cash 6,746 7,463
Deferred financing costs, net 12,348 10,296
Other assets 17,908 18,891
----------------------------------------------------------------------------------------------------------------
Total assets $ 1,245,861 $ 1,239,467
================================================================================================================
Liabilities and Shareholders' Equity:
Liabilities:
Notes payable $ 825,776 $ 803,703
Accounts payable 1,037 464
Accrued expenses and other liabilities 51,375 55,372
Security deposits 4,362 4,406
Deferred gain on disposition of properties 3,887 3,946
----------------------------------------------------------------------------------------------------------------
Total liabilities and deferred gain 886,437 867,891
Minority interest 31,906 33,405
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
$170,333,250 or $25 per share liquidation preference:
2,000,000 shares at 9.5% Series A Cumulative 20 20
1,938,830 shares at 8.875% Series B Cumulative 19 19
2,000,000 shares at 9.375% Series C Cumulative 20 20
474,500 shares at 9.25% Series F Cumulative 5 5
400,000 shares at 8.625% Series G Cumulative 4 4
Common stock, $.01 par value (authorized 50,000,000 shares;
issued 17,882,032 and 17,840,183 shares at
March 31, 2003 and December 31, 2002, respectively) 179 178
Additional paid-in capital 559,336 558,479
Other (4,341) (4,299)
Accumulated distributions in excess of net income (198,197) (188,155)
Accumulated other comprehensive loss (29,527) (28,100)
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 327,518 338,171
----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,245,861 $ 1,239,467
================================================================================================================
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Consolidated Statements of Operations
Three months ended December 31, 2003 and 2002
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
-----------------------------------------------------------------------------------------------
2003 2002
---------------------------------------------------------------------------------- -----------
Revenues:
Rental revenues $ 55,357 $ 55,024
Other property revenues 2,050 1,847
-----------------------------------------------------------------------------------------------
Total property revenues 57,407 56,871
Interest and other non-property income 229 134
Management and fee income, net 248 186
Equity in loss of real estate joint ventures (125) (23)
-----------------------------------------------------------------------------------------------
Total revenues 57,759 57,168
-----------------------------------------------------------------------------------------------
Expenses:
Property operating expenses:
Personnel 6,442 6,485
Building repairs and maintenance 1,775 2,175
Real estate taxes and insurance 7,827 7,002
Utilities 2,851 2,751
Landscaping 1,526 1,543
Other operating 2,697 2,443
Depreciation and amortization 13,915 13,509
-----------------------------------------------------------------------------------------------
37,033 35,908
Property management expenses 2,244 2,313
General and administrative expenses 1,843 1,605
Interest expense 11,635 12,362
Amortization of deferred financing costs 624 657
-----------------------------------------------------------------------------------------------
Total expenses 53,379 52,845
-----------------------------------------------------------------------------------------------
Income before gain on disposition of assets and
insurance settlement proceeds, minority interest in
operating partnership income and extraordinary items 4,380 4,323
Net gain on disposition of assets and
insurance settlement proceeds 79 64
-----------------------------------------------------------------------------------------------
Income before minority interest in operating
partnership income and extraordinary items 4,459 4,387
Minority interest in operating partnership income 133 87
-----------------------------------------------------------------------------------------------
Net income 4,326 4,300
Preferred dividend distribution 3,925 4,028
-----------------------------------------------------------------------------------------------
Net income available for common shareholders $ 401 $ 272
===============================================================================================
Net income available per common share:
Basic (in thousands):
Average common shares outstanding 17,752 17,455
===============================================================================================
Basic earnings per share:
Net income available per common share $ 0.02 $ 0.02
Diluted (in thousands):
Average common shares outstanding 17,752 17,455
Effect of dilutive stock options 169 141
-----------------------------------------------------------------------------------------------
Average dilutive common shares outstanding 17,921 17,596
===============================================================================================
Diluted earnings per share:
Net income available per common share $ 0.02 $ 0.02
See accompanying notes to consolidated financial statements.
MID-AMERICA APARTMENT COMMUNITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2003 and 2002
(Dollars in thousands)
Three Months Ended
----------------------------------------------------------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
------------------------------------------------------------------------------------------------------------- ------------------
Cash flows from operating activities:
Net income $ 4,326 $ 4,300
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 14,539 14,166
Amortization of unearned stock compensation 93 124
Equity in loss of real estate joint venture 125 23
Minority interest in operating partnership income 133 87
Net gain on dispositions and insurance settlement proceeds (79) (64)
Changes in assets and liabilities:
Restricted cash 717 2,751
Other assets 983 (2,247)
Accounts payable 573 137
Accrued expenses and other (5,424) (4,006)
Security deposits (44) 75
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,942 15,346
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of real estate and other assets (19,020) -
Improvements to existing real estate assets (3,747) (2,865)
Construction of units in progress and future development - (545)
Distributions from real estate joint ventures (2,425) (34)
Proceeds from disposition of assets 295 -
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,897) (3,444)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in credit lines 170,399 5,000
Principal payments on notes payable (148,326) (1,057)
Payment of deferred financing costs (2,676) (143)
Proceeds from issuances of common shares and units 702 565
Distributions to unitholders (1,601) (1,705)
Dividends paid on common shares (10,443) (10,205)
Dividends paid on preferred shares (3,925) (4,028)
Proceeds from isssuance of preferred stock (10) -
----------------------------------------------------------------------------------------------------------------------------------
Net cash received from (used in) financing activities 4,120 (11,573)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,835) 329
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year 10,594 12,192
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,759 $ 12,521
----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 12,171 $ 12,222
Supplemental disclosure of noncash investing and financing activities:
Conversion of units for common shares $ 31 $ 53
Issuance of restricted common shares $ 175 $ 114
Interest capitalized $ - $ 127
See accompanying notes to consolidated financial statements.
Mid-America Apartment Communities, Inc.
Notes to Consolidated Financial Statements
March 31, 2003 and 2002 (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the accounting policies in effect as of December 31, 2002, as
set forth in the annual consolidated financial statements of Mid-America
Apartment Communities, Inc. (the "Company"), as of such date. In the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial statements have been included and all such adjustments
were of a normal recurring nature. All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
for the three month period ended March 31, 2003 are not necessarily indicative
of the results to be expected for the full year.
2. REAL ESTATE ACQUISITIONS
On January 20, 2003, Mid-America CH/Realty LP ("CH/Realty"), the Company's joint
venture with Crow Holdings, acquired The Preserve at Arbor Lakes, a 284-unit
apartment community in Jacksonville, FL, for $22.1 million.
On February 7, 2003, the Company acquired the Green Oaks apartments, a 300-unit
apartment community located in Grand Prairie, TX for $18.9 million. The Company
plans to transfer the property to CH/Realty once a financing commitment has been
received under the provisions of the joint venture's Freddie Mac credit
facility.
3. SHARE AND UNIT INFORMATION
At March 31, 2003, 17,882,032 common shares and 2,734,026 operating partnership
units were outstanding, a total of 20,616,058 shares and units. Additionally,
the Company had outstanding options for 1,397,974 shares of common stock at
March 31, 2003.
4. SEGMENT INFORMATION
At March 31, 2003, the Company owned or had ownership interest in, and operated
125 apartment communities in 12 different states from which it derives all
significant sources of earnings and operating cash flows. The Company's
operational structure is organized on a decentralized basis, with individual
property managers having overall responsibility and authority regarding the
operations of their respective properties. Each property manager reports to and
is assisted by a multisite manager who helps them monitor local and area trends
in rental rates, occupancy percentages, and operating costs. The property and
multisite managers are given the on-site responsibility and discretion to react
to such trends in the best interest of the Company. Management evaluates the
performance of each individual property based on its contribution of revenues
and net operating income ("NOI"), which is composed of property revenues less
all operating costs including insurance and real estate taxes. The Company's
reportable segments are its individual properties because each is managed
separately and requires different operating strategy and expertise based on the
geographic location, community structure and quality, population mix, and
numerous other factors unique to each community.
The revenues, profits and assets for the aggregated communities are summarized
as follows (Dollars in thousands):
Three months
ended March 31,
-------------------------
2003 2002
------------ ------------
Multifamily rental revenues $ 61,313 $ 59,641
Other multifamily revenues 2,332 1,883
------------ ------------
Segment revenues 63,645 61,524
Reconciling items to consolidated revenues:
Joint venture revenues (6,238) (4,653)
Interest and other non-property income 229 134
Management and fee income, net 248 186
Equity in loss of real estate joint venture (125) (23)
------------ ------------
Total revenues $ 57,759 $ 57,168
============ ============
Multifamily net operating income $ 37,562 $ 37,117
Reconciling items to net income available for common shareholders:
Joint venture net operating income (3,273) (2,645)
Interest and other non-property income 229 134
Management and fee income, net 248 186
Equity in loss of real estate joint venture (125) (23)
Depreciation and amortization (13,915) (13,509)
Property management expenses (2,244) (2,313)
General and administrative expenses (1,843) (1,605)
Interest expense (11,635) (12,362)
Amortization of deferred financing costs (624) (657)
Net gain on dispositions and insurance settlement proceeds 79 64
Minority interest in operating partnership (133) (87)
Dividends on preferred shares (3,925) (4,028)
------------ ------------
Net income available for common shareholders $ 401 $ 272
============ ============
March 31, 2003 December 31, 2002
----------------------- -----------------------
Assets:
Multifamily real estate assets $ 1,637,685 $ 1,592,353
Accumulated depreciation - multifamily assets (312,512) (297,556)
----------------------- -----------------------
Segment assets 1,325,173 1,294,797
Reconciling items to total assets:
Joint venture multifamily real estate assets, net (147,408) (126,028)
Land held for future development 1,366 1,366
Commercial properties, net 6,669 7,088
Investment in and advances to real estate joint venture 17,300 15,000
Cash and restricted cash 12,505 18,057
Other assets 30,256 29,187
----------------------- -----------------------
Total assets $ 1,245,861 $ 1,239,467
======================= =======================
5. DERIVATIVE FINANCIAL INSTRUMENTS
In the normal course of business, the Company uses certain derivative financial
instruments to manage, or hedge, the interest rate risk associated with the
Company's variable rate debt or as hedges in anticipation of future debt
transactions to manage well-defined interest rate risk associated with the
transaction.
The Company does not use derivative financial instruments for speculative or
trading purposes. Further, the Company has a policy of entering into contracts
with major financial institutions based upon their credit rating and other
factors. When viewed in conjunction with the underlying and offsetting exposure
that the derivatives are designated to hedge, the Company has not sustained any
material loss from those instruments nor does it anticipate any material adverse
effect on its net income or financial position in the future from the use of
derivatives.
The Company requires that hedging derivatives instruments are effective in
reducing the interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Instruments that
meet these hedging criteria are formally designated as hedges at the inception
of the derivative contract. The Company formally documents all relationships
between hedging instruments and hedged items, as well as its risk-management
objective and strategy for undertaking the hedge transaction. This process
includes linking all derivatives that are designated as fair-value or cash flow
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedges inception and on an ongoing basis, whether the derivatives
used are highly effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly effective as
a hedge or that it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively.
All of the Company's derivative financial instruments are reported at fair value
and represented on the balance sheet, and are characterized as cash flow hedges.
These transactions hedge the future cash flows of debt transactions through
interest rate swaps that convert variable payments to fixed payments and an
interest rate cap that hedges cash flows from interest payments above a specific
level. The unrealized gains/losses in the fair value of these hedges are
reported on the balance sheet with a corresponding adjustment to accumulated
other comprehensive income, with any ineffective portion of the hedging
transactions reclassified to earnings. Within the next twelve months, the
Company expects to reclassify to earnings an estimated $100,000 of the current
balance held in accumulated other comprehensive income due to the
ineffectiveness associated with the hedging transactions.
6. COMPREHENSIVE INCOME
Total comprehensive income and its components for the three months ended March
31, 2003 and 2002 were as follows (Dollars in thousands):
Three months
ended March 31,
-------------------------------------
2003 2002
----------------- -----------------
Net income $ 4,326 $ 4,300
Marked-to-market adjustment
on derivative instruments (1,427) 3,788
----------------- -----------------
Total comprehensive income $ 2,899 $ 8,088
================= =================
7. STOCK BASED COMPENSATION
The Company adopted the 1994 Restricted Stock and Stock Option Pan (the "Plan")
to provide incentives to attract and retain independent directors, executive
officers and key employees.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which requires either the (i) fair value of employee stock-based compensation
plans be recorded as a component of compensation expense in the statement of
operations as of the date of grant of awards related to such plans, or (ii)
impact of such fair value on net income and earnings per share be disclosed on a
pro forma basis in a footnote to financial statements for awards granted after
December 15, 1994, if the accounting for such awards continues to be in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25"). The Company will continue such
accounting under the provisions of APB 25.
The following table reflects the effect on net income if the fair value method
of accounting allowed under SFAS No. 123 had been used by the Company along with
the applicable assumptions utilized in the Black-Scholes option pricing model
calculation (dollars and shares in thousands, except per share data):
Three Months Ended March 31,
-----------------------------------------
2003 2002
------------------- -------------------
Net income available for common shareholders $ 401 $ 272
Add: Stock-based employee compensation expense included
in reported net income - -
Less: Stock-based employee compensation expense determined
under fair value method of accounting 29 37
------------------- -------------------
Pro forma net income available for common shareholders $ 372 $ 235
Average common shares outstanding - Basic 17,752 17,455
Average common shares outstanding - Diluted 17,921 17,596
Net income available per common share:
Basic as reported $ 0.02 $ 0.02
Basic pro forma $ 0.02 $ 0.01
Diluted as reported $ 0.02 $ 0.02
Diluted pro forma $ 0.02 $ 0.01
Assumptions:
Risk free interest rate 3.06% 5.14%
Expected life - Years 6.2 6.7
Expected volatility 10.25% 11.44%
Expected dividends 9.87% 8.95%
8. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to 2003
presentation. The reclassifications had no effect on net income available for
common shareholders.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, and
the notes thereto, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these consolidated financial statements requires the Company to make a number
of estimates and assumptions that affect the reported amounts and disclosures in
the consolidated financial statements. On an ongoing basis, the Company
evaluates its estimates and assumptions based upon historical experience and
various other factors and circumstances. The Company believes that its estimates
and assumptions are reasonable in the circumstances; however, actual results may
differ from these estimates and assumptions under different future conditions.
The Company believes that the estimates and assumptions that are most important
to the portrayal of its financial condition and results of operations, in that
they require the most subjective judgments, form the basis of accounting
policies deemed to be most critical. These critical accounting policies include
capitalization of expenditures and depreciation of assets, impairment of
long-lived assets, including goodwill, and fair value of derivative financial
instruments.
Capitalization of Expenditures and Depreciation of Assets
The Company carries its real estate assets at their depreciated cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets, which range from 8 to 40 years for land
improvements and buildings, to 5 years for furniture, fixtures, and equipment,
all of which are judgmental determinations. Repairs and maintenance costs are
expensed as incurred while significant improvements, renovations, and
replacements are capitalized. The cost to complete any deferred repairs and
maintenance at properties acquired by the Company in order to elevate the
condition of the property to the Company's standards are capitalized as
incurred.
Impairment of Long-Lived Assets, Including Goodwill
The Company accounts for long-lived assets in accordance with the provisions of
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144) and evaluates its goodwill for impairment under Statement
No. 142, Goodwill and Other Intangible Assets (Statement 142). The Company
evaluates its goodwill for impairment on an annual basis. The Company
periodically evaluates its long-lived assets, including its investments in real
estate and goodwill, for indicators that would suggest that the carrying amount
of the assets may not be recoverable. The judgments regarding the existence of
such indicators are based on factors such as operating performance, market
conditions, and legal factors.
To evaluate goodwill and the recovery value of long-lived assets, the Company
estimates future operating cash flows and uses these cash flow estimates to
determine the asset's fair value. In the apartment industry the primary method
used for determining fair values is to divide annual operating cash flows by an
appropriate capitalization rate. The Company determines the appropriate
capitalization rate by reviewing the prevailing rates in the Community's market
or submarket.
Fair Value of Derivative Financial Instruments
The Company utilizes certain derivative financial instruments during the normal
course of business to manage, or hedge, the interest rate risk associated with
the Company's variable rate debt or as hedges in anticipation of future debt
transactions to manage well-defined interest rate risk associated with the
transaction. The valuation of the derivative financial instruments under SFAS
No. 133 requires the Company to make estimates and judgments that affect the
fair value of the instruments.
In order for a derivative contract to be designated as a hedge, the relationship
between the hedging instrument and the hedged item must be highly effective. The
Company performs effectiveness tests using the change in the variable cash flows
method at the inception of the hedge and for each reporting period thereafter,
through the maturity of the hedge. Any amounts determined to be ineffective are
recorded in earnings. The fair value of the hedges are recorded to accumulated
other comprehensive income.
While the Company's calculation of hedge effectiveness contains some subjective
determinations, the historical correlation of the rates of the hedge and the
underlying hedged item are measured by the Company before entering into the
hedge and have been highly related.
OVERVIEW
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three months ended March 31, 2003
and 2002. This discussion should be read in conjunction with the financial
statements appearing elsewhere in this report. These financial statements
include all adjustments, which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim periods presented, and
all such adjustments are of a normal recurring nature.
The total number of apartment units the Company owned or had an ownership
interest in, including the 12 properties containing 3,541 apartment units owned
by its 33.33% unconsolidated joint ventures, at March 31, 2003 was 34,507 in 125
communities compared to 33,434 units in 122 communities owned at March 31, 2002.
The average monthly rental per apartment unit for the Company's 100% owned
apartment units not in lease-up remained flat at $660 at March 31, 2003 compared
to March 31, 2002. Occupancy for these same apartment units at March 31, 2003
and 2002 was 91.7% and 94.1%, respectively.
FUNDS FROM OPERATIONS AND NET INCOME
Funds from operations ("FFO") represents net income (computed in accordance with
accounting principles generally accepted in the United States of America, or
"GAAP") excluding extraordinary items, minority interest in Operating
Partnership income, gain or loss on disposition of real estate assets, plus
depreciation and amortization related to real estate, and adjustments for the
joint ventures to reflect FFO on the same basis. This definition of FFO is in
accordance with the National Association of Real Estate Investment Trust's
("NAREIT") recommended definition.
The Company's policy is to expense the cost of interior painting, vinyl
flooring, and blinds as incurred for stabilized properties. During the
stabilization period for acquisition properties, these items are capitalized as
part of the total repositioning program of newly acquired properties, and, thus
are not deducted in calculating FFO.
The Company believes that FFO is helpful in understanding the Company's
operating performance in that FFO excludes depreciation expense on real estate
assets. The Company believes that GAAP historical cost depreciation of real
estate assets is generally not correlated with changes in the value of those
assets, whose value does not diminish predictably over time, as historical cost
depreciation implies. FFO should not be considered as an alternative to cash
flows from operating, investing and financing activities as a measure of
liquidity. The Company's calculation of FFO may differ from the methodology for
calculating FFO utilized by other REITs and, accordingly, may not be comparable
to such other REITs.
FFO increased for the three months ended March 31, 2003 by approximately
$647,000 to $14,524,000 versus $13,877,000 for the three months ended March 31,
2002, principally related to reduced repair and maintenance expense and reduced
interest expense.
Net income remained relatively flat for the three months ended March 31, 2003 at
$4,326,000 compared to $4,300,000 for the three months ended March 31, 2002, as
the growth in revenues between the periods was offset by the increase in
operating expenses.
The following table is a reconciliation of FFO to net income for the three
months ended March 31, 2003 and 2002 (dollars and shares in thousands):
Three months
ended March 31,
----------------------------
2003 2002
------------- -------------
Net income $ 4,326 $ 4,300
Preferred dividend distribution (3,925) (4,028)
------------- -------------
Net income available for common shareholders 401 272
Depreciation and amortization - real estate property 13,571 13,239
Adjustment for joint venture depreciation 498 343
Minority interest in operating partnership 133 87
Net gain on disposition of assets and
insurance settlement proceeds (79) (64)
------------- -------------
Funds from operations $ 14,524 $ 13,877
============= =============
Weighted average shares and units:
Basic 20,487 20,371
Diluted 20,657 20,512
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 TO THE THREE MONTHS ENDED
MARCH 31, 2002
Property revenues for 2003 increased by approximately $536,000 due to increases
of (i) $388,000 from the purchase of the Green Oaks apartments in 2003 (the
"Green Oaks Acquisition"), and (ii) $686,000 from the communities in development
or lease-up (the "Development Communities"). These increases were partially
offset by a decrease in property revenues of $538,000 from communities held
throughout both periods.
Property operating expenses include costs for property personnel, building
repairs and maintenance, real estate taxes and insurance, utilities, landscaping
and other property related costs. Property operating expenses for 2003 increased
by approximately $719,000 due primarily to increases of (i) $199,000 from the
Green Oaks Acquisition, (ii) $79,000 from the Development Communities, and (iii)
$441,000 from the communities held throughout both periods.
Property management expenses decreased by approximately $69,000 over the same
period last year mainly related to decreases in employee incentives. General and
administrative expenses increased approximately $238,000 over the same period
last year mainly related to increases in insurance costs associated with
worker's compensation, software maintenance expenses and expenses resulting from
new regulatory and compliance requirements.
Depreciation and amortization expense increased by approximately $406,000
primarily due to the increases of (i) $95,000 from the Development Communities,
and (ii) $311,000 from the remaining communities.
Interest expense for 2003 decreased by approximately $727,000 from 2002.
Refinancings of debt in 2002 and 2003, and the reduction in variable rates since
March 31, 2002, decreased the Company's average interest rate from 6.3% at March
31, 2002 to 5.0% at March 31, 2003. This decrease was partially offset by an
increase in average debt balances.
TRENDS
Property revenues during the three months ended March 31, 2003, were impacted by
general economic weakness and excess supply of apartments, which was evident
throughout the majority of the Company's portfolio. The decrease in new
household formations and increase in single family home purchases due to
historically low interest rates have affected demand in many of the Company's
markets, which has created extremely competitive leasing environments. These
dynamics are expected to continue for the next several quarters. Current
occupancy rates, rent growth, and concession levels are not at historical levels
and are not expected to improve until the national economy improves.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities remained relatively flat at
approximately $15,942,000 for the first three months of 2003 from $15,346,000
for the first three months of 2002.
Net cash used in investing activities increased during the first three months of
2003 from the first three months of 2002 to approximately $24,897,000 from
approximately $3,444,000 mainly due to approximately $18,900,000 used to
purchase the Green Oaks apartments.
The following table summarizes the Company's remaining communities in various
stages of lease-up, as of March 31, 2003 (Dollars in thousands):
Construction Anticipated
Total Finish Initial Stabil-
Location Units Date Occupancy ization
---------------- ------- ------------ ------------- ---------------
Completed Communities
In Lease-up:
Grand View Nashville Nashville, TN 433 2Q 2001 3Q 2000 2Q 2003
Reserve at Dexter Lake II Memphis, TN 244 2Q 2001 1Q 2000 2Q 2003
Reserve at Dexter Lake III Memphis, TN 244 2Q 2002 2Q 2001 2Q 2003
The Company's projections assume that the three properties completed but still
under lease-up will substantially stabilize during 2003. At March 31, 2003, 825
of the 921 apartments were occupied, and the Company believes that the
completion of stabilization of these properties in the second quarter of 2003 is
highly likely. The Company does not anticipate that its liquidity will be
impacted should these properties fail to stabilize in 2003.
Capital improvements to existing properties during the first three months of
2003 and 2002 totaled $3,747,000 and $2,865,000, respectively. Actual capital
expenditures are summarized below (Dollars in thousands):
March 31, 2003 March 31, 2002
---------------- -----------------
Recurring capital expenditures at existing properties $ 2,493 $ 1,800
Revenue enhancing capital expenditures at existing properties 1,180 1,054
Corporate/commercial capital improvements 74 11
---------------- -----------------
$ 3,747 $ 2,865
================ =================
Net cash received from financing activities was approximately $4,120,000 for the
first three months ended March 31, 2003 compared to net cash used in financing
activities of approximately $11,573,000 during the same period in 2002. During
the first three months of 2003 the Company increased its borrowings under its
credit lines by approximately $170,399,000 to accommodate refinancing
activities. In the first three months of 2002 the Company increased its credit
lines by approximately $5,000,000. The Company made principal payments on notes
payable of approximately $148,326,000 in the first three months of 2003 compared
to payments of approximately $1,057,000 for the same period in 2002.
In March 2003, the Company refinanced $147 million of debt maturities by
utilizing the $550 million borrowing capacity of its existing secured credit
facility with Prudential Mortgage Capital, credit enhanced by Fannie Mae (the
"FNMA Facility"). At March 31, 2003 the FNMA Facility had an outstanding balance
of $528 million. $313 million of the FNMA Facility expires in 2004, renewable
for two successive 5-year terms, while the remaining $237 million expires in
2007, renewable for a 5-year term.
The FNMA Facility provides for both fixed and variable rate borrowings. The
interest rate on the variable portion renews every 90 days and is based on the
FNMA Discount Mortgage Backed Security ("DMBS") rate on the date of renewal,
which has typically approximated three-month LIBOR less an average spread of
0.09%, plus a credit enhancement fee of 0.67% - 0.72% based on the outstanding
borrowings. Excluding the effect of interest rate swaps, the average variable
interest rate at March 31, 2003 was 2.0% on variable rate borrowings of $418
million under the FNMA Facility. Fixed rate borrowings under the FNMA Facility
totaled $110 million at March 31, 2003, at interest rates (inclusive of
credit-enhancement fees) from 5.77% to 7.71%, and maturities from 2006 to 2009.
In March 2003, the Company paid off its $15 million loan with Compass Bank.
The Company currently maintains a $70 million secured credit facility with a
group of banks led by AmSouth Bank. Other than $10 million of letters of credit,
there was no outstanding balance under this facility at March 31, 2003.
Available borrowing base capacity under this facility was $20 million at March
31, 2003.
Each of the Company's credit facilities is subject to various covenants and
conditions on usage. If the Company were to fail to satisfy a condition to
borrowing, the available credit under one or more of the facilities could not be
drawn, which could adversely affect the Company's liquidity. Moreover, if the
Company were to fail to make a payment or violate a covenant under a credit
facility, after applicable cure periods one or more of its lenders could declare
a default, accelerate the due date for repayment of all amounts outstanding
and/or foreclose on properties securing such facilities. Any such event could
have a material adverse effect on the Company.
The Company uses interest rate swaps to manage its current and future interest
rate risk. The Company has six interest rate swaps with a total notional balance
of $150 million which have variable legs based on one or three-month LIBOR, and
fixed legs with an average rate of 6.8%. The swaps have expirations between 2003
and 2007, and have to date proven to be highly effective hedges of the Company's
designated variable rate borrowings of its FNMA Facility. The Company has
designed these interest rate swaps as cash flow hedges on its FNMA Facility.
Through the use of these swaps the Company believes it has effectively fixed the
borrowing rate during these periods of $150 million of variable rate borrowings
issued through the FNMA Facility, leaving only $268 million of the FNMA Facility
of which the interest rate has not been fixed or hedged (excluding the effect of
forward interest rate swaps). Additionally, the Company has a $46,690,000
Tax-Free Bond Facility with FNMA. The Company has three interest rate swaps with
a total notional amount of $34,790,000 which have variable legs based on the BMA
Municipal Swap Index and fixed legs with an average rate of 4.2%. These swaps
expire in 2007 and 2008, and have to date proven to be highly effective hedges
of the designated borrowings of the Tax-Free Bond Facility. The Company also
entered into a cap agreement on a notional amount of $6.8 million within the
Tax-Free Bond Facility. The 5-year cap agreement has a strike rate of 6% as
indexed on the BMA Municipal Swap Index.
Through March 31, 2003, the Company has also executed four forward interest rate
swaps with a total notional balance of $150 million all of which go into effect
in 2003. The variable legs of these forward interest rate swaps are based on
three-month LIBOR and the fixed legs have an average rate of 5.2%. The swaps
have lives from four to seven years and are designated as cash flow hedges on
planned refinancings.
The weighted average interest rate and the weighted average maturity at March
31, 2003, for the $826 million of debt outstanding were 5.0% and 12.4 years,
compared to 6.3% and 9.7 years on $784 million of debt outstanding at March 31,
2002.
The Company believes that it has adequate resources to fund both its current
operations, annual refurbishment of its properties, and incremental investment
in new apartment properties. The Company is relying on the efficient operation
of the financial markets to finance debt maturities, and also is heavily reliant
on the creditworthiness of FNMA, which provides credit enhancement for nearly
$575 million of the Company's debt. The interest rate market for FNMA Discount
Mortgage Backed Securities ("DMBS"), which in the Company's experience is highly
effective with three-month LIBOR interest rates, is also an important component
of the Company's liquidity and swap effectiveness. In the event that the FNMA
DMBS market becomes less efficient, or the credit of FNMA becomes impaired, the
Company would seek alternative sources of debt financing.
The Company believes that cash provided by operations is adequate and
anticipates that it will continue to be adequate in both the short and long-term
to meet operating requirements (including recurring capital expenditures at the
communities) and payment of distributions by the Company in accordance with REIT
requirements under the Internal Revenue Code. The Company has loan covenants
that limit the total amount of distributions, but believes that it is unlikely
that these will be a limiting factor on the Company's future levels of
distributions based on the Company's current range of forecast of operating
performance. The Company expects to meet its long-term liquidity requirements,
such as scheduled mortgage debt maturities, property acquisitions, preferred
stock redemptions, expansions, and non-recurring capital expenditures, through
long and medium term collateralized fixed rate borrowings, potential joint
venture transactions and the Company's existing and new credit facilities.
Currently, the Company's operating cash flow after capital expenditures is
insufficient to fully finance the payment of distributions to shareholders at
the current rate. While the Company has sufficient liquidity to permit
distributions at current rates through additional borrowings, any significant
further deterioration in operations could result in the Company's financial
resources to be insufficient to pay distributions to shareholders at the current
rate, in which event the Company would be required to reduce the distribution
rate.
At March 31, 2003 and 2002, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. The Company's joint venture
with Blackstone Real Estate Acquisitions, LLC was established in order to sell
assets to fund development while acquiring management fees to help offset the
reduction in revenues from the sale. The Company's joint venture with Crow
Holdings was established to acquire approximately $150 million of multifamily
properties. In addition, the Company does not engage in trading activities
involving non-exchange traded contracts. As such, the Company is not materially
exposed to any financing, liquidity, market, or credit risk that could arise if
it had engaged in such relationships. The Company does not have any
relationships or transactions with persons or entities that derive benefits from
their non-independent relationships with the Company or its related parties
other than what is disclosed in Item 8. Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements Note 10 in the Company's 2002
Annual Report on Form 10-K.
INSURANCE
The Company put in place a new insurance program effective July 1, 2002. The
program is substantially the same as the program entered into by the Company in
2001, but includes greater retention levels for property, casualty, and workers'
compensation insurance. The Company retains the first $15 million of loss
related to acts of foreign terrorism and does not have insurance for acts of
domestic terrorism. In the opinion of management, property and casualty
insurance is in place that provides adequate coverage to provide financial
protection against normal insurable risks such that it believes that any loss
experienced would not have a significant impact on the Company's liquidity,
financial position, or results of operations.
INFLATION
Substantially all of the resident leases at the Communities allow, at the time
of renewal, for adjustments in the rent payable thereunder, and thus may enable
the Company to seek rent increases. The substantial majority of these leases are
for one year or less. The short-term nature of these leases generally serves to
reduce the risk to the Company of the adverse effects of inflation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections
(Statement 145). The rescission of Statement No. 4, Reporting Gains and Losses
from Extinguishment of Debt and Statement No. 64, Extinguishments of Debt made
to Satisfy Sinking-Fund Requirements eliminates an exception to general practice
relating to the determination of whether certain items should be classified as
extraordinary and is effective in fiscal years beginning after May 15, 2002,
with earlier implementation encouraged. The rescission of Statement No. 44 and
all other provisions of Statement 145 are effective for fiscal years beginning
after May 15, 2002. The impact of adopting Statement 145 in 2003 results in the
Company presenting early extinguishments of debt as a component of operating
income as opposed to an extraordinary item.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (Statement 146). Statement 146 requires all
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Statement 146 is to be applied prospectively to exit or disposal
activities after December 31, 2002. The impact of adopting Statement 146 is not
expected to be material to the Company's consolidated financial condition or
results of operations taken as a whole.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34 (Interpretation 45).
Interpretation 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. Interpretation 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of
Interpretation 45 are applicable to guarantees issued or modified after December
31, 2002 and are not expected to have a material effect on the Company's
consolidated financial statements. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 15,
2002.
In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123
(Statement 148). Statement 148 provides alternative transition methods for
voluntary changes to the fair value method of accounting for stock-based
employee compensation. Statement 148 is to be adopted for fiscal years ending
after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (Interpretation 46). Interpretation 46 requires all
companies to consolidate the results of variable interest entities as defined by
the Interpretation for which the company has a majority variable interest.
Interpretation 46 is to be adopted for fiscal years or interim periods beginning
after June 15, 2003. Interpretation 46 requires certain disclosures in the
financial statements issued after January 31, 2003 if it is reasonably possible
that the company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective. The impact of
adopting Interpretation 46 is not expected to have a material effect on the
Company's consolidated financial statements.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. These statements include, but are not limited
to, statements about anticipated growth rate of revenues and expenses,
anticipated lease-up (and rental concessions) at development properties, planned
asset dispositions, disposition pricing, and planned acquisition and
developments. Actual results and the timing of certain events could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including a continued downturn in general
economic conditions or the capital markets, competitive factors including
overbuilding or other supply/demand imbalances in some or all of our markets,
changes in interest rates, and other items that are difficult to control such as
insurance rates, increases in real estate taxes, and other general risks
inherent in the apartment business. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and, therefore, there can be no assurance that
the forward-looking statements included in this report on Form 10-Q will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This information has been omitted as there have been no material changes in the
Company's market risk as disclosed in the 2002 Annual Report on Form 10-K except
for changes as discussed in the Liquidity and Capital resources section in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Management necessarily applied its judgment in assessing
the costs and benefits of such controls and procedures which, by their nature,
can provide only reasonable assurance regarding management's control objectives.
The Company also has investments in two unconsolidated entities which are not
under its control. Consequently, the Company's disclosure controls and
procedures with respect to such entities are necessarily more limited than those
it maintains with respect to its consolidated subsidiaries.
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
that is required to be included in the Company's Exchange Act filings.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the evaluation was completed.
Special Note Regarding Analyst Reports
Investors should also be aware that while the Company's management does, from
time to time, communicate with securities analysts, it is against the Company's
policy to disclose to them any material non-public information or other
confidential commercial information. Accordingly, shareholders should not assume
that the Company agrees with any statement or report issued by any analyst
irrespective of the content of the statement or report. Furthermore, the Company
has a policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities analysts
contain any projections, forecasts or opinions, such reports are not the
responsibility of Mid-America Apartment Communities, Inc.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
Exhibit No
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.3 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
99.4 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form Event Reported Date of Report Date Filed
8-K Announced acquisition 1-20-2003 1-21-2003
8-K Tax composition of 2002 1-22-2003 1-22-2003
dividends
8-K Announced acquisition 2-7-2003 2-7-2003
8-K 4Q02 conference call and 2-14-2003 2-14-2003
earnings release
8-K Completed refinancing 3-3-2003 3-3-2003
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MID-AMERICA APARTMENT COMMUNITIES, INC.
Date: May 15, 2003 /s/Simon R.C. Wadsworth
Simon R.C. Wadsworth
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)