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, 2004 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 23, 2004 Common Stock, $.01 par value 20,365,187 TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003 Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (Unaudited) Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (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, 2004 (Unaudited) and December 31, 2003 (Dollars in thousands) March 31, 2004 December 31, 2003 --------------- ----------------- Assets: Real estate assets: Land $ 145,540 $ 142,416 Buildings and improvements 1,520,670 1,481,854 Furniture, fixtures and equipment 40,078 38,812 Capital improvements in progress 2,043 7,335 -------------------------------------------------------------------------------------------------------------- 1,708,331 1,670,417 Less accumulated depreciation (356,309) (339,704) -------------------------------------------------------------------------------------------------------------- 1,352,022 1,330,713 Land held for future development 1,366 1,366 Commercial properties, net 6,951 7,150 Investment in and advances to real estate joint venture 17,206 12,620 -------------------------------------------------------------------------------------------------------------- Real estate assets, net 1,377,545 1,351,849 Cash and cash equivalents 8,300 10,152 Restricted cash 9,362 10,728 Deferred financing costs, net 13,693 13,185 Other assets 10,156 14,857 Goodwill, net 5,762 5,762 -------------------------------------------------------------------------------------------------------------- Total assets $ 1,424,818 $ 1,406,533 ============================================================================================================== Liabilities and Shareholders' Equity: Liabilities: Notes payable $ 979,495 $ 951,941 Accounts payable 1,736 1,696 Accrued expenses and other liabilities 52,950 54,547 Security deposits 5,181 5,036 -------------------------------------------------------------------------------------------------------------- Total liabilities 1,039,362 1,013,220 Minority interest 30,749 32,019 Shareholders' equity: Preferred stock, $.01 par value, 20,000,000 shares authorized, $176,862,500 or $25 per share liquidation preference: 9.25% Series F Cumulative Redeemable Preferred Stock, 474,500 shares authorized, 474,500 shares issued and outstanding 5 5 8.625% Series G Cumulative Redeemable Preferred Stock, 400,000 shares authorized, 400,000 shares issued and outstanding 4 4 8.30% Series H Cumulative Redeemable Preferred Stock, 6,200,000 shares authorized, 6,200,000 shares issued and outstanding 62 62 Common stock, $.01 par value per share, 50,000,000 shares authorized; 20,353,652 and 20,031,614 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively 204 200 Additional paid-in capital 630,672 622,406 Other (3,633) (3,711) Accumulated distributions in excess of net income (242,598) (232,224) Accumulated other comprehensive loss (30,009) (25,448) -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 354,707 361,294 -------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,424,818 $ 1,406,533 ============================================================================================================== See accompanying notes to consolidated financial statements. Mid-America Apartment Communities, Inc. Consolidated Statements of Operations Three months ended March 31, 2004 and 2003 (Dollars in thousands, except per share data) (Unaudited) 2004 2003 --------------- ---------- Revenues: Rental revenues $ 63,744 $ 55,249 Other property revenues 2,456 2,049 --------------------------------------------------------------------------------------------------- Total property revenues 66,200 57,298 Interest and other non-property income 143 229 Management and fee income, net 145 248 --------------------------------------------------------------------------------------------------- Total revenues 66,488 57,775 --------------------------------------------------------------------------------------------------- Property operating expenses: Personnel 7,744 6,426 Building repairs and maintenance 2,138 1,772 Real estate taxes and insurance 9,098 7,799 Utilities 3,605 2,844 Landscaping 1,773 1,525 Other operating 3,109 2,692 Depreciation 17,233 13,875 --------------------------------------------------------------------------------------------------- 44,700 36,933 Property management expenses 2,553 2,261 General and administrative expenses 2,371 1,826 --------------------------------------------------------------------------------------------------- Income from continuing operations before non-operating items 16,864 16,755 Interest expense (12,595) (11,635) Gain on debt extinguishment 82 - Amortization of deferred financing costs (463) (624) Minority interest in operating partnership income (420) (133) Loss from investments in unconsolidated entities (41) (125) Net gain on insurance settlement proceeds 1,628 79 --------------------------------------------------------------------------------------------------- Income from continuing operations 5,055 4,317 Discontinued operations: Property operations - 9 --------------------------------------------------------------------------------------------------- Net income 5,055 4,326 Preferred dividend distribution 3,706 3,925 --------------------------------------------------------------------------------------------------- Net income available for common shareholders $ 1,349 $ 401 =================================================================================================== Net income available per common share: Basic (in thousands): Weighted average common shares outstanding 20,038 17,752 Net income available per common share - Basic $ 0.07 $ 0.02 Diluted (in thousands): Weighted average common shares outstanding 20,038 17,752 Effect of dilutive stock options 327 169 --------------------------------------------------------------------------------------------------- Weighted average dilutive common shares outstanding 20,365 17,921 =================================================================================================== Net income available per common share - Diluted $ 0.07 $ 0.02 See accompanying notes to consolidated financial statements. MID-AMERICA APARTMENT COMMUNITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three months ended March 31, 2004 and 2003 (Dollars in thousands) Three months ended ------------------------------------ March 31, 2004 March 31, 2003 ------------------ --------------- Cash flows from operating activities: Net income $ 5,055 $ 4,326 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,696 14,539 Amortization of unearned stock compensation 132 93 Amortization of debt premium (770) - Equity in loss of real estate joint venture 41 125 Minority interest in operating partnership income 420 133 Gain on debt extinguishment (82) - Net gain on insurance settlement proceeds and dispositions of assets (1,628) (79) Changes in assets and liabilities: Restricted cash 1,366 717 Other assets 4,585 983 Accounts payable 40 573 Accrued expenses and other (6,125) (5,486) Security deposits 145 (44) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 20,875 15,880 ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of real estate and other assets (31,255) (19,020) Improvements to existing real estate assets (7,024) (3,747) Distributions from real estate joint venture 288 125 Contributions to real estate joint ventures (4,915) (2,488) Proceeds from insurance settlements and disposition of real estate assets 2,330 295 ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (40,576) (24,835) ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net change in credit lines 61,589 170,399 Proceeds from notes payable 22,100 - Principal payments on notes payable (55,966) (148,326) Payment of deferred financing costs (971) (2,676) Proceeds from issuances of common shares and units 7,901 692 Distributions to unitholders (1,561) (1,601) Dividends paid on common shares (11,537) (10,443) Dividends paid on preferred shares (3,706) (3,925) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 17,849 4,120 ---------------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (1,852) (4,835) ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of period 10,152 10,594 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 8,300 $ 5,759 ---------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Interest paid $ 13,317 $ 12,171 Supplemental disclosure of noncash investing and financing activities: Conversion of units to common shares $ 121 $ 31 Issuance of restricted common shares $ 54 $ 175 Marked-to-market adjustment on derivative instruments $ (4,561) $ (1,427) See accompanying notes to consolidated financial statements. Mid-America Apartment Communities, Inc. Notes to Consolidated Financial Statements March 31, 2004 and 2003 (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, 2003, 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, 2004 are not necessarily indicative of the results to be expected for the full year. STOCK BASED COMPENSATION The Company adopted the 1994 Restricted Stock and Stock Option Plan (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 note 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 for employee stock options 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, ----------------------------- 2004 2003 ------------- ------------- Net income available for common shareholders $ 1,349 $ 401 Add: Stock-based employee compensation expense included in reported net income - - Less: Stock-based employee compensation expense determined under fair value method of accounting 73 29 ------------- ------------- Pro forma net income available for common shareholders $ 1,276 $ 372 ============= ============= Average common shares outstanding - Basic 20,038 17,752 Average common shares outstanding - Diluted 20,365 17,921 Net income available per common share: Basic as reported $ 0.07 $ 0.02 Basic pro forma $ 0.06 $ 0.02 Diluted as reported $ 0.07 $ 0.02 Diluted pro forma $ 0.06 $ 0.02 Assumptions: Risk free interest rate 3.36% 3.06% Expected life - Years 6.3 6.2 Expected volatility 15.56% 10.25% Expected dividends 6.30% 9.87% RECLASSIFICATION Certain prior year amounts have been reclassified to conform to 2004 presentation. The reclassifications had no effect on net income available for common shareholders. 2. REAL ESTATE ACQUISITIONS On January 15, 2004, the Company established a second joint venture with Crow Holdings, Mid-America CH/Realty II LP ("CH/Realty II") which acquired the Verandas at Timberglen apartments, a 522-unit community in Dallas, Texas. The Company retains a 33.33% ownership interest in CH/Realty II and is paid a management fee of 4% of revenues from the Verandas at Timberglen apartments owned by the joint venture. On January 23, 2004, the Company acquired the Monthaven Park Apartments, a 456-unit community located in Hendersonville, Tennessee and assumed $22.1 million of debt. 3. SHARE AND UNIT INFORMATION At March 31, 2004, 20,353,652 common shares and 2,671,232 operating partnership units were outstanding, a total of 23,024,884 shares and units. Additionally, the Company had outstanding options for 732,021 shares of common stock at March 31, 2004, of which 503,247 were anti-dilutive. 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, of which 1,341,683 were anti-dilutive. 4. SEGMENT INFORMATION At March 31, 2004, the Company owned or had an ownership interest in 129 multifamily apartment communities, including the apartment communities owned by the Company's joint ventures, 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 individually monitors local and area trends in rental rates, occupancy percentages, and operating costs. Property managers are given the on-site responsibility and discretion to react to such trends in the best interest of the Company. The Company's chief operating decision maker evaluates the performance of each individual property based on its contribution to net operating income in order to ensure that the individual property continues to meet the Company's return criteria and long term investment goals. The Company defines each of its multifamily communities as an individual operating segment. It has also determined that all of its communities have similar economic characteristics and also meet the other criteria which permit the communities to be aggregated into one reportable segment, which is acquisition and operation of the multifamily communities owned. The revenues, profits and assets for the aggregated communities are summarized as follows (dollars in thousands): Three months ended March 31, ------------------------- 2004 2003 ------------ ------------ Multifamily rental revenues $ 67,264 $ 61,232 Other multifamily revenues 2,563 2,303 ------------ ------------ Segment revenues 69,827 63,535 Reconciling items to consolidated revenues: Joint venture revenues (3,627) (6,237) Interest and other non-property income 143 229 Management and fee income, net 145 248 ------------ ------------ Total revenues $ 66,488 $ 57,775 ============ ============ Multifamily net operating income $ 40,679 $ 37,513 Reconciling items to net income available for common shareholders: Joint venture net operating income (1,946) (3,273) Interest and other non-property income 143 229 Management and fee income, net 145 248 Depreciation and amortization (17,233) (13,875) Property management expenses (2,553) (2,261) General and administrative expenses (2,371) (1,826) Interest expense (12,595) (11,635) Gain on debt extinguishment 82 - Amortization of deferred financing costs (463) (624) Minority interest in operating partnership income (420) (133) Loss from investments in unconsolidated entities (41) (125) Net gain on insurance settlement proceeds 1,628 79 Discontinued operations: Property operations - 9 Preferred dividend distribution (3,706) (3,925) ------------ ------------ Net income available for common shareholders $ 1,349 $ 401 ============ ============ March 31, 2004 December 31, 2003 ----------------------- ----------------------- Assets: Multifamily real estate assets $ 1,830,082 $ 1,747,154 Accumulated depreciation - multifamily assets (361,930) (343,968) ----------------------- ----------------------- Segment assets 1,468,152 1,403,186 Reconciling items to total assets: Joint venture multifamily real estate assets, net (116,130) (72,473) Land held for future development 1,366 1,366 Commercial properties, net 6,951 7,150 Investment in and advances to real estate joint venture 17,206 12,620 Cash and restricted cash 17,662 20,880 Other assets, net 29,611 33,804 ----------------------- ----------------------- Total assets $ 1,424,818 $ 1,406,533 ======================= ======================= 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 also has a forward interest rate swap that goes into effect April 1, 2004, which has been designated as a cash flow hedge against current borrowings. 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 derivative financial instruments designated as cash flow hedges be 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 the hedging criteria are formally designated as hedging instruments 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 inception of the hedging relationship 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 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 interest rate caps that limit the exposure to rising interest rates. The unrealized gains/losses in the fair value of these hedging instruments 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. During the three months ended March 31, 2004 and 2003, the ineffective portion of the hedging transactions was not significant. 6. COMPREHENSIVE INCOME (LOSS) Total comprehensive income and its components for the three months ended March 31, 2004 and 2003 were as follows (dollars in thousands): Three months ended March 31, ------------------------------------ 2004 2003 ----------------- ------------------ Net income $ 5,055 $ 4,326 Marked-to-market adjustment on derivative instruments (4,561) (1,427) ----------------- ------------------ Total comprehensive income $ 494 $ 2,899 ================= ================== 7. NET GAIN ON INSURANCE SETTLEMENT PROCEEDS The Company had a net gain on insurance settlement proceeds of $1.6 million in the first quarter of 2004 related to insurance settlement proceeds for fires at two of the Company's communities. $1.1 million was related to a fire at the Post House Jackson apartments in January of 2003 while the remaining $0.5 million was related to a fire at the Pear Orchard apartments in February 2002. The Company does not expect to receive any further insurance settlements related to these fires. 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, and 3 years for computers, 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 and 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 in the Company's fiscal fourth quarter, or sooner if a goodwill impairment indicator is identified. 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 long-lived assets for impairment, 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, primarily interest rate swaps and caps, 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 hedging instrument, the relationship between the hedging instrument and the hedged item must be highly effective. The Company performs ineffectiveness tests using the change in the variable cash flows method at the inception of the hedge and for each reporting period thereafter, through the term of the hedging instruments. Any amounts determined to be ineffective are recorded in earnings. The change in 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 cash flows of the hedging instruments and the underlying hedged item are measured by the Company before entering into the hedging relationship and have been highly related. OVERVIEW OF THE THREE MONTHS ENDED MARCH 31, 2004 The Company's operating results for the first three months of 2004 benefited from improved occupancy rates experienced by the Company's same store portfolio. The Company also benefited from acquisitions made throughout 2003 and 2004. The following is a discussion of the consolidated financial condition and results of operations of the Company for the three months ended March 31, 2004. 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 properties owned by its 33.33% unconsolidated joint ventures, at March 31, 2004 was 36,712 in 129 communities compared to 34,507 units in 125 communities owned at March 31, 2003. The average monthly rental per apartment unit for the Company's 100% owned apartment units not in lease-up was $667 at March 31, 2004 compared to $660 at March 31, 2003. Occupancy for these same apartment units at March 31, 2004 and 2003 was 93.0% and 91.7%, respectively. RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE MONTHS ENDED MARCH 31, 2003 Property revenues for the three months ended March 31, 2004, increased by approximately $8,902,000 from the three months ended March 31, 2003, due to (i) a $4,792,000 increase in property revenues from the properties acquired in the purchase of the limited partnership interest held by Blackstone Real Estate Advisors in BRE/MAAC Associates, LLC in 2003 (the "BreMaac Buyout"), (ii) a $2,664,000 increase in property revenues from the acquisitions of the Legacy Pines, Los Rios Park and Lighthouse Court apartments in 2003 (the "2003 Acquisitions"), (iii) a $997,000 increase in property revenues from the communities held throughout both periods, (iv) a $777,000 increase in property revenues from the acquisition of Monthaven Park apartments in 2004 (the "2004 Acquisition"), and (v) a $59,000 increase in property revenues from the communities in lease-up in the first quarter of 2003 (the "Communities in Lease-up"). These increase were partially offset by a decrease in property revenues of $387,000 due to the transfer of the Seasons of Green Oaks to one of the Company's joint ventures with Crow Holdings in 2003 (the "Green Oaks Transfer"). 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 the three months ended March 31, 2004, increased by approximately $4,409,000 from the three months ended March 31, 2003, due primarily to increases of property operating expenses of (i) $2,225,000 from the BreMaac Buyout, (ii) $1,303,000 from the 2003 Acquisitions, (iii) $792,000 from communities held throughout both periods, and (iv) $326,000 from 2004 Acquisition. These increases were partially offset by decreases in property operating expenses of (i) $199,000 from the Green Oaks Transfer, and (ii) $38,000 from the Communities in Lease-up. Depreciation expense increased by approximately $3,358,000 primarily due to the increases of depreciation expense of (i) $1,442,000 from 2003 Acquisitions, (ii) $1,422,000 from the BreMaac Buyout, (iii) $269,000 from the communities held throughout both periods, and (iv) $246,000 from the 2004 Acquisition. These increases were partially offset by a decrease to depreciation expense of $21,000 from the Communities in Lease-up. Property management expenses increased by approximately $292,000 from the first quarter of 2003 to the first quarter of 2004 mainly due to increased personnel expense related to property acquisitions. General and administrative expenses increased by approximately $545,000 over this same period partially related to expenses associated with the implementation of new property management software, expenses resulting from new regulatory requirements and expenses related to the settlement of litigation. Interest expense for the three months ended March 31, 2004, increased by approximately $960,000 from the same period in 2003. This increase was due to the increase in debt balances from approximately $826,000,000 at March 31, 2003 to approximately $979,000,000 at March 31, 2004. 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 on disposition of real estate assets, plus depreciation of real estate, and adjustments for 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. Disposition of real estate assets includes sales of discontinued operations as well as proceeds received from insurance settlements from property damage. 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. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, as an indicator of operating performance or as an alternative to cash flow from operating, investing, and financing activities as a measure of liquidity. The Company believes that FFO is helpful in understanding the Company's operating performance in that such calculation 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. 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. The following table is a reconciliation of FFO to net income for the three months ended March 31, 2004 and 2003 (dollars and shares in thousands): Three months ended March 31, ---------------------------- 2004 2003 ------------- ------------- Net income $ 5,055 $ 4,326 Depreciation real estate assets 16,899 13,531 Net gain on insurance settlement proceeds (1,628) (79) Depreciation real estate assets of discontinued operations - 39 Depreciation real estate assets of unconsolidated entities 451 499 Preferred dividend distribution (3,706) (3,925) Minority interest in operating partnership income 420 133 ------------- ------------- Funds from operations $ 17,491 $ 14,524 ============= ============= Weighted average shares and units: Basic 22,717 20,487 Diluted 23,044 20,657 Net income and FFO increased for the three months ended March 31, 2004 from the same period in 2003 mainly as acquisitions and favorable occupancy rates boosted results from operations. TRENDS Property performance over the past two years has been pressured by an imbalance between supply and demand for apartment units in many of the Company's markets. The economic downturn and the related low interest rate environment have combined to contribute to a temporary decline in demand for apartment units, while allowing delivery levels of newly constructed apartment units to remain consistent with historical averages. The recent economic environment has impacted demand in two main ways: 1) producing lower job growth, which reduced the number of potential renters in most of the Company's markets, and 2) producing lower interest rates which has increased the affordability of single family housing, prompting more renters to purchase homes. On the supply side, the declining interest rates have provided an incentive to developers to construct new apartment units in many of the Company's markets, especially in the larger metropolitan markets. Delivery of these new units during this period of weakened apartment demand has increased competition, adding pressure to apartment occupancy levels and pricing in a number of the Company's markets. As part of its strategy to create continued stable and growing performance, the Company maintains a portfolio of properties diversified across large metropolitan markets, mid-sized markets, and smaller tier markets, as defined by population levels. During the economic downturn, the Company's smaller-tier and mid-sized markets produced more stable performance, while its larger metropolitan markets proved more susceptible to declining job formation and apartment supply imbalances. The Company is beginning to see indications of stronger job growth in many of its markets, which could indicate an improvement in the general economic environment. As (and if) the economic environment improves, the Company expects to see more household formations and increasing interest rates, which should combine to increase the number of apartment renters. The Company expects that this increase in demand will generate stronger property performance across the Company's portfolio. The Company's large-tier markets, which have been under the most pressure during the economic downturn, should begin to absorb the oversupply of new apartment units and return to historical occupancy and pricing levels, while the Company's smaller-tier and mid-sized markets would benefit from improving market fundamentals which support continued stable growth. Over the long term, general demographic trends are expected to favor apartment owners, as immigration growth, combined with the increasing demand for rental housing from the "echo boomers" (children of the "baby boomers") is expected to produce more apartment renters over the next ten years. The Company believes its portfolio location throughout the Southeast and South central regions of the country position it well to take advantage of these improving demographic trends. LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities increased to approximately $20.9 million for the first three months of 2004 from $15.9 million for the first three months of 2003. Net cash used in investing activities increased during the first three months of 2004 from the first three months of 2003 to approximately $40.6 million from $24.8 million mainly related to the purchase of the Monthaven Park apartments. Capital improvements to existing properties during the first three months of 2004 and 2003 totaled approximately $7.0 million and $3.7 million, respectively. Actual capital expenditures are summarized below (dollars in thousands): March 31, 2004 March 31, 2003 ---------------- ---------------- Recurring capital expenditures at existing properties $ 2,588 $ 2,493 Revenue enhancing capital expenditures at existing properties 4,402 1,180 Corporate/commercial capital improvements 34 74 ---------------- ---------------- $ 7,024 $ 3,747 ================ ================ Net cash provided by financing activities was approximately $17.8 million for the first three months ended March 31, 2004 compared to $4.1 million during the same period in 2003. During the first three months of 2004 the Company increased its borrowings under its credit lines by approximately $61.6 million to accommodate refinancing activities. In the first three months of 2003 the Company increased its credit lines by approximately $170.4 million also to accommodate refinancing activities. The Company made principal payments on notes payable of approximately $56.0 million in the first three months of 2004 compared to payments of approximately $148.3 million for the same period in 2003. New deferred financing costs decreased to $1.0 million for the first three months of 2004 compared to $2.7 million for the same period in 2003. The Company received proceeds from issuances of common shares and units of $7.9 million in the first three months of 2004 compared to $0.7 million for the same period in 2003 as the Company's stock price in 2004 prompted the exercise of a higher than historical number of options. In the first three months of 2004, the Company refinanced $2.3 million of bonds using its secured credit facility with a group of banks led by AmSouth Bank. The Company refinanced an additional $14.3 million of bonds using its tax-free bond facility, credit enhanced by the Federal National Mortgage Association ("FNMA") (the "Tax-Free Bond Facility"). The Company also refinanced six of the properties it acquired through its partnership buyout of Bre/Maac Associates, LLC in 2003 using a renegotiated secured credit facility with Prudential Mortgage Capital, credit enhanced by Fannie Mae (the "FNMA Facility"). The FNMA Facility has a line limit of $850 million, $641 million of which was available to borrow following the refinancing of the properties previously owned by Bre/Maac Associates, LLC. Various traunches of the facility mature from 2010 through 2014. 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 0.07%, plus a credit enhancement fee of 0.60%, 0.67% or 0.72%, based on the outstanding borrowings. At March 31, 2004, the FNMA Facility had an outstanding balance of $597.9 million, with available unused borrowing capacity of $43 million. Excluding the effect of interest rate swaps, the average variable interest rate at March 31, 2004 was 1.8% on variable rate borrowings of $488 million under the FNMA Facility. Fixed rate borrowings under the FNMA Facility totaled $110 million at March 31, 2004, at interest rates (inclusive of credit-enhancement fees) from 5.77% to 7.71%, and maturities from 2006 to 2009. The Company's Tax-Free Bond Facility has a borrowing limit of $100 million maturing in 2034. At March 31, 2004, the available borrowing base and amount outstanding on the Tax-Free Bond Facility was $81.6 million. At March 31, 2004, the Company had an outstanding balance of $20 million on its loan with Compass Bank at a variable interest rate of 1.6%. The Company has a $40 million secured credit facility with a group of banks led by AmSouth Bank. At March 31, 2004, the outstanding balance under this facility was $7.7 million and the available borrowing base was $13.5 million. There was also $10.5 million of letters of credit issued under this facility at March 31, 2004. At March 31, 2004, the Company had a promissory note with Union Planters National Bank ("Union Planters") for $40 million at a variable rate of 2.1%. 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. At March 31, 2004, the Company also had a total of $171.3 million of individual conventional fixed rate debt at an average interest rate of 7.0%, a total of $56.2 million of individual tax-exempt fixed rate debt at an average interest rate of 5.9% and $4.8 million of tax-exempt variable rate bonds at an interest rate of 2.0%. The Company uses interest rate swaps to manage its current and future interest rate risk. The Company has nine interest rate swaps designated as cash flow hedges on its FNMA Facility. These swaps have a total notional balance of $275 million which have variable legs based on one or three-month LIBOR, and fixed legs with an average rate of 5.6%. The swaps have expirations between 2005 and 2010, and have to date proven to be highly effective hedges. The Company also has a forward interest rate swap with a notional balance of $40 million that goes into effect April 1, 2004, with a variable leg based on three-month LIBOR and a fixed leg of 4.9% which has been designated as a cash flow hedge against current borrowings with the FNMA Facility. This swap matures in 2010. Through the use of these swaps the Company believes it has effectively fixed the borrowing rate during these periods on $315 million of variable rate borrowings issued through the FNMA Facility, leaving only $173 million of the FNMA Facility on which the interest rate has not been fixed or hedged. Additionally, the Company has seven interest rate swaps designated as cash flow hedges against the Tax-Free Bond Facility. These swaps have a total notional amount of $53.0 million which have variable legs based on the BMA Municipal Swap Index and fixed legs with an average rate of 3.2%. These swaps expire in 2007, 2008 and 2009, and have to date proven to be highly effective hedges. The Company also has an interest rate swap designated as a cash flow hedge against the Union Planters note. This swap has a notional balance of $25 million with a variable leg based on three-month LIBOR, and a fixed leg with a rate of 4.0%. The swap expires in 2009 and to date has proven to be a highly effective hedge. The Company has also entered into three interest rate cap agreements with a total notional amount of $22.6 million. These interest rate cap agreements all have a strike rate of 6% as indexed on the BMA Municipal Swap Index or three-month LIBOR and mature from 2007 through 2009. The weighted average interest rate and the weighted average maturity at March 31, 2004, for the $979.5 million of debt outstanding were 5.0% and 11.2 years, compared to 5.0% and 12.4 years on $826 million of debt outstanding at March 31, 2003. The Company believes that it has adequate resources to fund 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 approximately $680 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 correlated 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, 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. For the three months ended March 31, 2004, the Company's net cash provided by operating activities was approximately $3.0 million short of funding improvements to existing real estate assets, distributions to unitholders, dividends paid on common shares and dividends paid on preferred shares. This compared to a shortfall of approximately $3.8 million for the same period in 2003. While the Company has sufficient liquidity to permit distributions at current rates through additional borrowings, any significant 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, 2004 and 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, 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 ventures with Crow Holdings were established to acquire 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 11 in the Company's 2003 Annual Report on Form 10-K. INSURANCE 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 there under, and thus may enable the Company to seek rent increases. Almost all 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 December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("FIN46R"). FIN46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, which was issued in January 2003, and addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and how, accordingly, it should consolidate the entity. The Company was required to comply with the requirements of FIN46R effective March 31, 2004. The adoption of FIN46R had no impact on the Company's consolidated financial condition or results of operations taken as a whole. 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 rental concessions, 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 2003 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 an investment in two unconsolidated entities which are not under its control. Consequently, the Company's disclosure controls and procedures with respect to these entities are necessarily more limited than those it maintains with respect to its consolidated subsidiaries. As of the end of the period covered by 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-15(e) and 15d-15(e) 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 CONTROL OVER FINANCIAL REPORTING During the three months ended March 31, 2004, there were no significant changes in the Company's internal control over financial reporting that materially affected, or that are reasonably likely to affect, the registrant's internal control over financial reporting. 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 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 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 32.2 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 (b) Reports on Form 8-K Form Event Reported Date of Report Date Filed 8-K Taxable composition of 2003 distributions 1-22-2004 1-23-2004 8-K Acquisitions of Jefferson at Timberglen and Monthaven Park apartments 1-26-2004 1-26-2004 8-K Institutional investor update 1-28-2004 1-28-2004 8-K Financial statements of business acquired - Bre/Maac Associates, LLC 2-3-2004 2-3-2004 8-K Update of Items. 6, 7 and 8 of the 10-K for discontinued operations - Crossings apartments 2-3-2004 2-3-2004 8-K 4Q03 earnings release 2-12-2004 2-13-2004 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 4, 2004 /s/Simon R.C. Wadsworth Simon R.C. Wadsworth Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)