form10-q.htm
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 September 30, 2007
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 its charter)
TENNESSEE
|
62-1543819
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
6584
POPLAR AVENUE, SUITE 300
|
|
MEMPHIS,
TENNESSEE
|
38138
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(901)
682-6600
(Registrant's
telephone number, including area code)
N/A
|
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer [X]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[ ]
Yes [X] No
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
October 17, 2007
|
Common
Stock, $0.01 par value
|
25,578,329
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
|
|
|
|
TABLE
OF CONTENTS
|
|
|
Page
|
|
PART
I – FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2007 (Unaudited)
and
December 31, 2006
|
2
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
September 30, 2007, and 2006 (Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September
30, 2007, and 2006 (Unaudited)
|
4
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
5
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
17
|
Item
4.
|
Controls
and Procedures
|
17
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
18
|
Item
1A.
|
Risk
Factors
|
18
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
18
|
Item
3.
|
Defaults
Upon Senior Securities
|
18
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
18
|
Item
5.
|
Other
Information
|
18
|
Item
6.
|
Exhibits
|
18
|
|
Signatures
|
19
|
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Item
1. Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-America Apartment Communities, Inc.
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
|
|
|
September
30, 2007 (Unaudited) and December 31, 2006
|
|
|
|
|
|
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
December
31, 2006
|
Assets:
|
|
|
|
|
|
|
Real
estate assets:
|
|
|
|
|
|
|
Land
|
|
|
|
$ 214,748
|
|
$ 206,635
|
|
Buildings
and improvements
|
|
2,023,609
|
|
1,921,462
|
|
Furniture,
fixtures and equipment
|
|
53,111
|
|
51,374
|
|
Capital
improvements in progress
|
|
23,724
|
|
20,689
|
|
|
|
|
|
|
2,315,192
|
|
2,200,160
|
|
Less
accumulated depreciation
|
|
(594,870)
|
|
(543,802)
|
|
|
|
|
|
|
1,720,322
|
|
1,656,358
|
|
|
|
|
|
|
|
|
|
|
Land
held for future development
|
|
2,360
|
|
2,360
|
|
Commercial
properties, net
|
|
7,163
|
|
7,103
|
|
Investments
in and advances to real estate joint ventures
|
|
51
|
|
3,718
|
|
|
Real
estate assets, net
|
|
|
1,729,896
|
|
1,669,539
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
4,041
|
|
5,545
|
Restricted
cash
|
|
|
5,095
|
|
4,145
|
Deferred
financing costs, net
|
|
|
15,695
|
|
16,033
|
Other
assets
|
|
|
31,164
|
|
38,865
|
Goodwill
|
|
|
|
4,106
|
|
4,472
|
Assets
held for sale
|
|
|
-
|
|
8,047
|
|
|
Total
assets
|
|
|
$ 1,789,997
|
|
$ 1,746,646
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
$ 1,247,545
|
|
$ 1,196,349
|
|
Accounts
payable
|
|
|
1,931
|
|
2,773
|
|
Accrued
expenses and other liabilities
|
|
72,927
|
|
57,919
|
|
Security
deposits
|
|
|
8,535
|
|
7,670
|
|
Liabilities
associated with assets held for sale
|
|
-
|
|
269
|
|
|
Total
liabilities
|
|
|
1,330,938
|
|
1,264,980
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
30,161
|
|
32,600
|
|
|
|
|
|
|
|
|
|
Redeemable
stock
|
|
|
2,920
|
|
3,418
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value per share, 20,000,000 shares
authorized,
|
|
|
|
|
$166,863
or $25 per share liquidation preference;
|
|
|
|
|
|
|
9
1/4% Series F Cumulative Redeemable Preferred Stock,
|
|
|
|
|
|
|
|
3,000,000
shares authorized, 474,500 shares called for redemption
|
|
|
|
|
|
|
and
474,500 shares issued and outstanding at September 30,
2007,
|
|
|
|
|
|
|
and
December 31, 2006, respectively
|
|
-
|
|
5
|
|
|
8.30%
Series H Cumulative Redeemable Preferred Stock, 6,200,000
|
|
|
|
|
|
|
|
shares
authorized, 6,200,000 shares issued and outstanding
|
|
62
|
|
62
|
|
Common
stock, $0.01 par value per share, 50,000,000 shares
authorized;
|
|
|
|
|
|
25,572,886
and 25,093,156 shares issued and outstanding at
|
|
|
|
|
|
|
September
30, 2007, and December 31, 2006, respectively (1)
|
|
255
|
|
251
|
|
Additional
paid-in capital
|
|
|
827,466
|
|
814,006
|
|
Accumulated
distributions in excess of net income
|
|
(403,481)
|
|
(379,573)
|
|
Accumulated
other comprehensive income
|
|
1,676
|
|
10,897
|
|
|
Total
shareholders' equity
|
|
425,978
|
|
445,648
|
|
|
Total
liabilities and shareholders' equity
|
|
$ 1,789,997
|
|
$ 1,746,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
(1)
|
Number
of shares issued and outstanding represent total shares of common
stock
regardless of classification on the
|
|
condensed
consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
Mid-America Apartment Communities, Inc.
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|
Three
and nine months ended September 30, 2007, and
2006
|
|
|
(Dollars in thousands,
except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30,
|
Nine
months ended September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ 86,172
|
|
$ 78,598
|
|
$ 250,259
|
|
$ 228,757
|
|
Other
property revenues
|
|
3,992
|
|
3,532
|
|
11,641
|
|
10,455
|
|
Total
property revenues
|
|
90,164
|
|
82,130
|
|
261,900
|
|
239,212
|
|
Management
fee income
|
|
-
|
|
53
|
|
34
|
|
157
|
|
Total
operating revenues
|
|
90,164
|
|
82,183
|
|
261,934
|
|
239,369
|
Property
operating expenses:
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
10,952
|
|
10,063
|
|
31,438
|
|
29,256
|
|
Building
repairs and maintenance
|
|
3,597
|
|
3,317
|
|
9,841
|
|
8,642
|
|
Real
estate taxes and insurance
|
|
10,436
|
|
10,582
|
|
33,158
|
|
29,945
|
|
Utilities
|
|
5,649
|
|
5,409
|
|
15,197
|
|
14,554
|
|
Landscaping
|
|
2,402
|
|
2,184
|
|
6,970
|
|
6,366
|
|
Other
operating
|
|
4,191
|
|
3,626
|
|
12,038
|
|
10,609
|
|
Depreciation
|
|
21,959
|
|
19,481
|
|
64,355
|
|
57,507
|
|
Total
property operating expenses
|
|
59,186
|
|
54,662
|
|
172,997
|
|
156,879
|
Property
management expenses
|
|
4,357
|
|
3,367
|
|
13,150
|
|
9,325
|
General
and administrative expenses
|
|
2,401
|
|
2,555
|
|
7,629
|
|
7,721
|
Income
from continuing operations before non-operating items
|
24,220
|
|
21,599
|
|
68,158
|
|
65,444
|
Interest
and other non-property income
|
|
4
|
|
162
|
|
149
|
|
494
|
Interest
expense
|
|
(16,147)
|
|
(15,398)
|
|
(48,195)
|
|
(46,736)
|
Loss
on debt extinguishment
|
|
(71)
|
|
-
|
|
(123)
|
|
(551)
|
Amortization
of deferred financing costs
|
|
(614)
|
|
(519)
|
|
(1,749)
|
|
(1,508)
|
Minority
interest in operating partnership income
|
|
(1,034)
|
|
(375)
|
|
(2,835)
|
|
(1,196)
|
Loss
from investments in real estate joint ventures
|
|
-
|
|
(16)
|
|
(58)
|
|
(135)
|
Incentive
fee from real estate joint ventures
|
|
-
|
|
-
|
|
1,019
|
|
-
|
Net
(loss) gain on insurance and other settlement proceeds
|
|
(197)
|
|
(54)
|
|
645
|
|
171
|
Gain
on sale of non-depreciable assets
|
|
29
|
|
32
|
|
255
|
|
32
|
Gain
on dispositions within real estate joint ventures
|
|
1
|
|
-
|
|
5,388
|
|
-
|
Income
from continuing operations
|
|
6,191
|
|
5,431
|
|
22,654
|
|
16,015
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
(Loss)
income from discontinued operations before
|
|
|
|
|
|
|
|
|
|
|
asset
impairment, settlement proceeds and gain on sale
|
(5)
|
|
199
|
|
531
|
|
633
|
|
Gain
on sale of discontinued operations
|
|
5,714
|
|
-
|
|
9,157
|
|
-
|
Net
income
|
|
11,900
|
|
5,630
|
|
32,342
|
|
16,648
|
Preferred
dividend distribution
|
|
3,491
|
|
3,491
|
|
10,472
|
|
10,472
|
Net
income available for common shareholders
|
|
$ 8,409
|
|
$ 2,139
|
|
$ 21,870
|
|
$ 6,176
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
25,362
|
|
23,990
|
|
25,247
|
|
23,099
|
|
Effect
of dilutive stock options
|
|
152
|
|
225
|
|
176
|
|
227
|
|
Diluted
|
|
25,514
|
|
24,215
|
|
25,423
|
|
23,326
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available for common shareholders
|
|
$ 8,409
|
|
$ 2,139
|
|
$ 21,870
|
|
$ 6,176
|
Discontinued
property operations
|
|
(5,709)
|
|
(199)
|
|
(9,688)
|
|
(633)
|
Income
from continuing operations available for common
shareholders
|
$ 2,700
|
|
$ 1,940
|
|
$ 12,182
|
|
$ 5,543
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.11
|
|
$ 0.08
|
|
$ 0.48
|
|
$ 0.24
|
|
Discontinued
property operations
|
|
0.22
|
|
0.01
|
|
0.39
|
|
0.03
|
|
Net
income available for common shareholders
|
|
$ 0.33
|
|
$ 0.09
|
|
$ 0.87
|
|
$ 0.27
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.11
|
|
$ 0.08
|
|
$ 0.48
|
|
$ 0.24
|
|
Discontinued
property operations
|
|
0.22
|
|
0.01
|
|
0.38
|
|
0.02
|
|
Net
income available for common shareholders
|
|
$ 0.33
|
|
$ 0.09
|
|
$ 0.86
|
|
$ 0.26
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
(1)
|
|
$ 0.605
|
|
$ 0.595
|
|
$ 1.815
|
|
$ 2.380
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
Company declared and paid $1.785 per common share during the nine
months
ended September 30, 2006. During that same period
|
|
the
Company also declared an additional $0.595 per common share that
was not
paid until October 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
|
|
Consolidated
Statements of Cash Flows
|
|
Nine
Months Ended September 30, 2007 and 2006
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
32,342
|
|
|
$ |
16,648
|
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Income
from
discontinued operations before asset impairment,
settlement
|
|
|
|
|
|
proceeds
and gain on sale
|
|
|
(531 |
) |
|
|
(633 |
) |
Depreciation
and amortization of deferred financing costs
|
|
|
66,104
|
|
|
|
59,015
|
|
Stock
compensation expense
|
|
|
558
|
|
|
|
1,009
|
|
Stock
issued to employee stock ownership plan
|
|
|
658
|
|
|
|
577
|
|
Redeemable
stock issued
|
|
|
348
|
|
|
|
273
|
|
Amortization
of debt premium
|
|
|
(1,528 |
) |
|
|
(1,407 |
) |
Income
from investments in real estate joint ventures
|
|
|
58
|
|
|
|
135
|
|
Minority
interest in operating partnership income
|
|
|
2,835
|
|
|
|
1,196
|
|
Loss
on debt extinguishment
|
|
|
123
|
|
|
|
551
|
|
Derivative
interest expense
|
|
|
(234 |
) |
|
|
(130 |
) |
Gain
on sale of non-depreciable assets
|
|
|
(255 |
) |
|
|
(32 |
) |
Gain
on sale of discontinued operations
|
|
|
(9,157 |
) |
|
|
-
|
|
Gain
on disposition within real estate joint ventures
|
|
|
(5,388 |
) |
|
|
-
|
|
Incentive
fee from real estate joint ventures
|
|
|
(1,019 |
) |
|
|
-
|
|
Net
gain on insurance and other settlement proceeds
|
|
|
(645 |
) |
|
|
(171 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(950 |
) |
|
|
89
|
|
Other
assets
|
|
|
776
|
|
|
|
(6,168 |
) |
Accounts
payable
|
|
|
(842 |
) |
|
|
(2,476 |
) |
Accrued
expenses and other
|
|
|
7,020
|
|
|
|
7,877
|
|
Security
deposits
|
|
|
778
|
|
|
|
1,069
|
|
Net
cash provided by operating activities
|
|
|
91,051
|
|
|
|
77,422
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of real estate and other assets
|
|
|
(88,601 |
) |
|
|
(165,723 |
) |
Improvements
to existing real estate assets
|
|
|
(23,968 |
) |
|
|
(21,743 |
) |
Renovations
to existing real estate assets
|
|
|
(7,897 |
) |
|
|
(4,651 |
) |
Development
|
|
|
(11,771 |
) |
|
|
(3,230 |
) |
Distributions
from real estate joint ventures
|
|
|
9,855
|
|
|
|
208
|
|
Contributions
to real estate joint ventures
|
|
|
(126 |
) |
|
|
-
|
|
Proceeds
from disposition of real estate assets
|
|
|
28,429
|
|
|
|
2,039
|
|
Net
cash used in investing activities
|
|
|
(94,079 |
) |
|
|
(193,100 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
change in credit lines
|
|
|
52,888
|
|
|
|
63,374
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
|
27,842
|
|
Principal
payments on notes payable
|
|
|
(12,027 |
) |
|
|
(29,189 |
) |
Payment
of deferred financing costs
|
|
|
(1,468 |
) |
|
|
(2,204 |
) |
Proceeds
from issuances of common shares and units
|
|
|
23,112
|
|
|
|
105,299
|
|
Distributions
to unitholders
|
|
|
(4,612 |
) |
|
|
(4,412 |
) |
Dividends
paid on common shares
|
|
|
(45,897 |
) |
|
|
(40,935 |
) |
Dividends
paid on preferred shares
|
|
|
(10,472 |
) |
|
|
(10,472 |
) |
Net
cash provided by financing activities
|
|
|
1,524
|
|
|
|
109,303
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,504 |
) |
|
|
(6,375 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
5,545
|
|
|
|
14,064
|
|
Cash
and cash equivalents, end of period
|
|
$ |
4,041
|
|
|
$ |
7,689
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
50,427
|
|
|
$ |
48,919
|
|
Supplemental
disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Conversion
of units to common shares
|
|
$ |
90
|
|
|
$ |
330
|
|
Interest
capitalized
|
|
$ |
720
|
|
|
$ |
115
|
|
Marked-to-market
adjustment on derivative instruments
|
|
$ |
(9,221 |
) |
|
$ |
3,871
|
|
Fair
value adjustment on debt assumed
|
|
$ |
-
|
|
|
$ |
1,553
|
|
Reclass
of redeemable stock from equity to liabilities
|
|
$ |
445
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2007, and 2006 (Unaudited)
1. BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the management of Mid-America Apartment Communities, Inc., or
Mid-America, in accordance with U.S. generally accepted accounting principles
for interim financial information and applicable rules and regulations of
the
Securities and Exchange Commission and Mid-America’s accounting policies in
effect as of December 31, 2006 as set forth in our annual consolidated financial
statements, as of such date. In the opinion of management, all adjustments
necessary for a fair presentation of the condensed 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
and
nine month periods ended September 30, 2007 are not necessarily indicative
of
the results to be expected for the full year. These financial statements
should
be read in conjunction with our audited financial statements and notes thereto
included in Mid-America’s Annual Report on Form 10-K for the year ended December
31, 2006.
2. RECLASSIFICATION
Certain
prior period amounts have been reclassified to conform to the 2007 presentation;
specifically, certain expenses previously classified as property management
expenses have been reclassified as property operating expenses. The
reclassifications had no effect on net income available for common
shareholders.
3. SEGMENT
INFORMATION
As
of
September 30, 2007, Mid-America owned 137 multifamily apartment communities
in
13 different states from which it derives all significant sources of earnings
and operating cash flows. Our 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 market
and
submarket 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 Mid-America. Our 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 our return criteria and long-term investment goals.
We define each of our multifamily communities as an individual operating
segment. We have also determined that all of our communities have similar
economic characteristics and also meet the other criteria which permit the
communities to be aggregated into one reportable segment, which is the
acquisition and operation of the multifamily communities owned.
4. COMPREHENSIVE
INCOME
Total
comprehensive income and its components for the three and nine month periods
ended September 30, 2007, and 2006 were as follows (dollars in
thousands):
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
|
ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,900
|
|
|
$ |
5,630
|
|
|
$ |
32,342
|
|
|
$ |
16,648
|
|
Marked-to-market
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
derivative
instruments
|
|
|
(16,166 |
) |
|
|
(13,634 |
) |
|
|
(9,221 |
) |
|
|
3,871
|
|
Total
comprehensive (loss)income
|
|
$ |
(4,266 |
) |
|
$ |
(8,004 |
) |
|
$ |
23,121
|
|
|
$ |
20,519
|
|
The
marked-to-market adjustment on derivative instruments is based upon the change
of interest rates available for derivative instruments with similar terms and
remaining maturities existing at each balance sheet date.
5. REAL
ESTATE DISPOSITIONS
On
July
16, 2007, Mid-America sold the Somerset and Woodridge apartments, 144 and 192
units, respectively, generating a combined $5.7 million gain. Both communities
are located in Jackson, Mississippi.
6. REAL
ESTATE ACQUISITIONS
On
July
6, 2007, Mid-America acquired the Chalet at Fall Creek apartments, a 268-unit
community located in Humble, Texas.
On
September 14, 2007, Mid-America entered into an option contract to purchase
the
Cascade at Fall Creek apartments, a 246-unit community being built next to
the
Chalet at Fall Creek apartments in Humble, Texas. Among other provisions, the
contract requires certain construction completion levels for purchase.
Currently, we expect that a purchase of the property would take place in early
2008.
On
September 20, 2007, we acquired the Farmington Village apartments, a 280-unit
community located in Summerville, South Carolina.
7. DISCONTINUED
OPERATIONS
As
part
of Mid-America’s disposition strategy to selectively dispose of mature assets
that no longer meet our investment criteria and long-term strategic objectives,
in April 2006, we entered into an agreement to list the 184-unit Gleneagles
apartments and the 200-unit Hickory Farm apartments both located in Memphis,
Tennessee, for sale. Both of these communities were subsequently sold on May
3,
2007. Also in line with this strategy, in March 2007 we entered into an
agreement to list the 144-unit Somerset apartments and the 192-unit Woodridge
apartments both located in Jackson, Mississippi, for sale. Both of these
communities were subsequently sold on July 16, 2007. In accordance with
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, these communities are considered discontinued
operations in the accompanying condensed consolidated financial
statements.
The
following is a summary of discontinued operations for the three and nine month
periods ended September 30, 2007, and 2006, (dollars in thousands):
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ 97
|
|
$ 1,131
|
|
$ 2,059
|
|
$ 3,465
|
|
Other
revenues
|
|
6
|
|
56
|
|
119
|
|
178
|
|
Total
revenues
|
|
103
|
|
1,187
|
|
2,178
|
|
3,643
|
Expenses
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
91
|
|
640
|
|
1,194
|
|
1,844
|
|
Depreciation
|
|
1
|
|
132
|
|
133
|
|
552
|
|
Interest
expense
|
|
16
|
|
216
|
|
320
|
|
614
|
|
Total
expense
|
|
108
|
|
988
|
|
1,647
|
|
3,010
|
Income
from discontinued operations before
|
|
|
|
|
|
|
|
|
|
gain
on sale and settlement proceeds
|
|
(5)
|
|
199
|
|
531
|
|
633
|
Income
from discontinued operations
|
|
$ (5)
|
|
$ 199
|
|
$ 531
|
|
$ 633
|
8. SHARE
AND UNIT INFORMATION
On
September 30, 2007, 25,572,886 common shares and 2,482,110 operating partnership
units were outstanding, representing a total of 28,054,996 shares and units.
Additionally, Mid-America had outstanding options for the purchase of 112,706
shares of common stock at September 30, 2007, of which 53,260 were
anti-dilutive. At September 30, 2006, 24,489,874 common shares and 2,493,325
operating partnership units were outstanding, representing a total of 26,983,199
shares and units. Additionally, Mid-America had outstanding options for the
purchase of 232,452 shares of common stock at September 30, 2006, of which
99,743 were anti-dilutive.
9. 9¼%
SERIES F CUMULATIVE REDEEMABLE PREFERRED STOCK
On
August
28, 2007, in accordance with the prospectus supplement, Mid-America gave
the
required 30 to 60-days notice to redeem all of the issued and outstanding
shares
of our 9¼% Series F Cumulative Redeemable Preferred Stock, also referred to as
Series F, on October 16, 2007. As a result, in accordance with Statement
No.
150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, or Statement 150, we classified the Series F
as a liability within notes payable as of September 30, 2007 on the accompanying
consolidated financial statements. Statement 150 also requires that all
subsequent dividend payments be classified as interest expense on the
consolidated financial statements.
10. DERIVATIVE
FINANCIAL INSTRUMENTS
In
the
normal course of business, Mid-America uses certain derivative financial
instruments to manage, or hedge, the interest rate risk associated with our
variable rate debt or to hedge anticipated future debt transactions to
manage well-defined interest rate risk associated with the
transaction.
We
do not
use derivative financial instruments for speculative or trading purposes.
Further, Mid-America 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, Mid-America
has not sustained any material loss from those instruments nor do we anticipate
any material adverse effect on our net income or financial position in the
future from the use of derivatives.
Mid-America
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. We formally document
all relationships between hedging instruments and hedged items, as well as
our
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. We also formally
assess, 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, Mid-America discontinues
hedge accounting prospectively.
All
of
our derivative financial instruments are reported at fair value, are 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. As of September 30, 2007, and 2006, the ineffective portion of
the
hedging transactions reclassified to earnings was $283,000 and $149,000,
respectively.
11. RECENT
ACCOUNTING PRONOUNCEMENTS
In
June
2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
No. 48 “Accounting for Uncertainty in Income Taxes”, or FIN 48. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. Mid-America adopted FIN 48 effective January 1, 2007. FIN 48
prescribes a recognition threshold and measurement attribute for the recognition
and measurement of tax positions taken in tax returns. Mid-America has
identified and examined our tax positions, including our status as a real
estate
investment trust, for all open tax years through December 31, 2006, and
concluded that the full benefit of each tax position taken should be recognized
in the financial statements. There are no significant changes in unrecognized
tax benefits that are reasonably likely to occur within the twelve months
following the adoption date.
FIN
48
requires that an enterprise must calculate interest and penalties related
to
unrecognized tax benefits. The decision regarding where to classify
interest and penalties on the income statement is an accounting policy decision
that should be consistently applied. Interest and penalties
calculated on any future uncertain tax positions will be presented as a
component of income tax expense. No interest and penalties are
accrued under FIN 48 on our balance sheet as of September 30, 2007.
Mid-America’s
tax years that remain subject to examination for U.S. federal purposes range
from 2003 through 2006. Our tax years that remain open for state examination
vary but range from 2002 through 2006.
In
September 2006, the FASB issued Statement No. 157 “Fair Value
Measurements”, or Statement 157. Statement 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. Statement 157 is effective
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. Mid-America does not believe the adoption of Statement
157
will have a material impact on our consolidated financial condition or results
of operations taken as a whole.
12. SUBSEQUENT
EVENTS
9¼%
SERIES F CUMULATIVE REDEEMABLE PREFERRED STOCK
On
October 16, 2007, Mid-America redeemed $11.9 million shares of stock
representing all of the issued and outstanding shares of our Series F. More
information on the redemption can be found in Note 9. 9¼% Series F Cumulative
Redeemable Preferred Stock.
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 Mid-America’s condensed consolidated financial
statements, and the notes thereto, which have been prepared in accordance
with
U.S. generally accepted accounting principles, or GAAP. The preparation of
these
condensed consolidated financial statements requires us to make a number
of
estimates and assumptions that affect the reported amounts and disclosures
in
the condensed consolidated financial statements. On an ongoing basis, we
evaluate our estimates and assumptions based upon historical experience and
various other factors and circumstances. We believe that our estimates and
assumptions are reasonable under the circumstances; however, actual results
may
differ from these estimates and assumptions.
We
believe that the estimates and assumptions listed below are most important
to
the portrayal of our financial condition and results of operations because
they
require the most subjective determinations and form the basis of accounting
policies deemed to be most critical. These critical accounting policies include
revenue recognition, capitalization of expenditures and depreciation of assets,
impairment of long-lived assets, including goodwill, and fair value of
derivative financial instruments.
Revenue
Recognition
Mid-America
leases multifamily residential apartments under operating leases primarily
with
terms of one year or less. Rental revenues are recognized using a
method that represents a straight-line basis over the term of the lease and
other revenues are recorded when earned.
We
record
all gains and losses on sales of real estate in accordance with Statement
No.
66, Accounting for Sales of Real Estate.
Capitalization
of expenditures and depreciation of assets
Mid-America
carries 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, 5 years
for
furniture, fixtures, and equipment, and 3 to 5 years for computers and software,
all of which are subjective 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 us in order to elevate the condition
of
the property to our standards are capitalized as incurred.
Development
costs, which are limited to adding new units to three existing properties,
are
capitalized in accordance with Statement No. 67, Accounting for Costs and
Initial Rental Operations of Real Estate
Projects and Statement No. 34, Capitalization of
Interest Cost.
Impairment
of long-lived assets, including goodwill
Mid-America
accounts for long-lived assets in accordance with the provisions of Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
or Statement 144, and evaluates goodwill for impairment under Statement
No.
142, Goodwill and Other Intangible Assets, or Statement 142. We
evaluate goodwill for impairment on an annual basis in our fiscal fourth
quarter, or sooner if a goodwill impairment indicator is identified. We
periodically evaluate long-lived assets, including 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.
In
accordance with Statement 144, long-lived assets, such as real estate assets,
equipment, and purchased intangibles subject to amortization, are reviewed
for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to
be held and used is measured by a comparison of the carrying amount of an
asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower
of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as
held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill
is tested annually for impairment, and is tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds
the
asset’s fair value. This determination is made at the reporting unit level and
consists of two steps. First, we determine the fair value of a reporting
unit
and compare it to its carrying amount. In the apartment industry, the primary
method used for determining fair value is to divide annual operating cash
flows
by an appropriate capitalization rate. We determine the appropriate
capitalization rate by reviewing the prevailing rates in a property’s market or
submarket. Second, if the carrying amount of a reporting unit exceeds its
fair
value, an impairment loss is recognized for any excess of the carrying amount
of
the reporting unit’s goodwill over the implied fair value of that goodwill. The
implied fair value of goodwill is determined by allocating the fair value
of the
reporting unit in a manner similar to a purchase price allocation, in accordance
with Statement No. 141, Business Combinations. The residual fair value
after this allocation is the implied fair value of the reporting unit
goodwill.
Fair
value of derivative financial instruments
Mid-America
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 our variable rate debt or to hedge anticipated
future
debt transactions to manage well-defined interest rate risk associated with
the
transaction. The valuation of the derivative financial instruments under
Statement No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended, requires us 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. While our 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 before entering into
the
hedging relationship and have been found to be highly correlated.
We
measure ineffectiveness 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 interest rate
swaps and caps designated as cash flow hedges are recorded to accumulated
other
comprehensive income in the statement of shareholders’ equity.
OVERVIEW
OF THE THREE MONTHS ENDED SEPTEMBER 30, 2007
Mid-America’s
operating results for the three months ended September 30, 2007 benefited
from
continued improvement in market conditions which helped us increase rental
revenues at our existing communities. Our operations also benefited from
a full
quarter of performance from the eight communities acquired in 2006 and during
the first two quarters of 2007, as well as the partial quarter of performance
from the two additional communities purchased during the third quarter of
2007. Increased operating and administrative expenses offset some of
the benefit of the revenue increases.
Net
income benefited from the sale of two communities, resulting in a combined
gain
of approximately $5.7 million.
During
the three months ended September 30, 2007, Mid-America gave notice to redeem
all
of the issued and outstanding shares of our 9¼% Series F Cumulative Redeemable
Preferred Stock, also referred to as Series F. As a result, the Series F
was
classified as a liability within notes payable on the accompanying consolidated
financial statements.
The
following is a discussion of the consolidated financial condition and results
of
operations of Mid-America for the three and nine month periods ended September
30, 2007. This discussion should be read in conjunction with the condensed
consolidated 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
period presented, and all such adjustments are of a normal recurring
nature.
RESULTS
OF OPERATIONS
COMPARISON
OF THE THREE MONTHS ENDED SEPTEMBER 30, 2007 TO THE THREE MONTHS ENDED SEPTEMBER
30, 2006
Property
revenues for the three months ended September 30, 2007 were approximately
$90,164,000, an increase of approximately $8,034,000 from the three months
ended September 30, 2006 due to (i) a $4,238,000 increase in property revenues
from the seven properties acquired since the end of the second quarter of
2006,
(ii) a $302,000 increase in property revenues from our development communities,
and (iii) a $3,494,000 increase in property revenues from all other communities.
The increase in property revenues from all other communities was generated
primarily by our same store portfolio and was driven by a 2.1% increase in
average rent per unit and a reduction in the rate of concessions of net
potential rent from 3.1% in the third quarter of 2006 to 2.2% in the third
quarter of 2007.
Property
operating expenses include costs for property personnel, property bonuses,
building repairs and maintenance, real estate taxes and insurance, utilities,
landscaping and other property related costs. Property operating expenses
for
the three months ended September 30, 2007 were approximately $37,227,000,
an
increase of approximately $2,046,000 from the three months ended September
30,
2006 due primarily to increases in property operating expenses of (i) $1,904,000
from the seven properties acquired since the end of the second quarter of
2006,
(ii) $106,000 from our development communities, and (iii) $36,000 from all
other
communities.
Depreciation
expense for the three months ended September 30, 2007 was approximately
$21,959,000, an increase of approximately $2,478,000 from the three months
ended September 30, 2006 primarily due to the increases in depreciation
expense of (i) $1,417,000 from the seven properties acquired since the end
of
the second quarter of 2006, (ii) $83,000 from our development communities,
(iii)
$640,000 from the amortization of the fair market value of leases of acquired
communities, and (iv) $338,000 from all other communities. Increases of
depreciation expense from all other communities resulted from asset additions
made during the normal course of business.
Property
management expenses for the three months ended September 30, 2007 were
approximately $4,357,000, an increase of approximately $990,000 from the
third
quarter of 2006 primarily related to an increase in personnel costs resulting
from improved property operations. General and administrative expenses decreased
by approximately $154,000 over this same period mainly as a result of decreases
in various employee and director insurance programs.
Interest
expense for the three months ended September 30, 2007 was approximately
$16,147,000, an increase of approximately $749,000, from the three months
ended
September 30, 2006 primarily due to an approximate $69,012,000 increase in
our
average debt outstanding, excluding the reclassification of our Series F,
due to
new acquisitions, and our development and redevelopment programs. The increase
in interest expense was partially offset by a decrease in average borrowing
cost
for the quarter from 5.51% in the third quarter of 2006 to 5.37% in the third
quarter of 2007.
In
the
three months ended September 30, 2007, Mid-America benefited from a $5.7
million
gain due to the sale of two of our communities. No such gains were experienced
in the third quarter of 2006.
Primarily
as a result of the foregoing, net income increased by approximately $6,270,000
in the third quarter of 2007 from the third quarter of 2006.
COMPARISON
OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 TO THE NINE MONTHS ENDED SEPTEMBER
30, 2006
Property
revenues for the nine months ended September 30, 2007 were approximately
$261,900,000, an increase of approximately $22,688,000 from the nine months
ended September 30, 2006 due to (i) a $12,270,000 increase in property revenues
from the ten properties acquired in 2006 and through the third quarter of 2007,
(ii) a $370,000 increase in property revenues from our development communities,
and (iii) a $10,048,000 increase in property revenues from all other
communities. The increase in property revenues from all other communities was
generated primarily by our same store portfolio and was driven by increases
in
average rent per unit and a reduction in the rate of concessions of net
potential rent from the first nine months of 2006 to the first nine months
of
2007.
Property
operating expenses include costs for property personnel, property bonuses,
building repairs and maintenance, real estate taxes and insurance, utilities,
landscaping and other property related costs. Property operating expenses for
the nine months ended September 30, 2007 were approximately $108,642,000, an
increase of approximately $9,270,000 from the nine months ended September 30,
2006 due primarily to increases in property operating expenses of (i) $5,779,000
from the ten properties acquired in 2006 and through the third quarter of 2007,
(ii) $234,000 from our development communities, and (iii) $3,257,000 from all
other communities. The increase in property operating expenses from all other
communities consisted primarily of our same store portfolio and roughly
represents a normal increase in expenses year over year.
Depreciation
expense for the nine months ended September 30, 2007 was approximately
$64,355,000, an increase of approximately $6,848,000 from the nine months ended
September 30, 2006 primarily due to the increases in depreciation expense
of (i) $3,677,000 from the ten properties acquired in 2006 and through the
third quarter of 2007, (ii) $110,000 from our development communities, (iii)
$1,443,000 from the amortization of the fair market value of leases of acquired
communities, and (iv) $1,618,000 from all other communities. Increases of
depreciation expense from all other communities resulted from asset additions
made during the normal course of business.
Property
management expenses for the nine months ended September 30, 2007 were
approximately $13,150,000, an increase of approximately $3,825,000 from the
first nine months of 2006 primarily related to an increase in personnel
incentives resulting from improved property operations, and increased franchise
and excise taxes resulting from state law changes. General and administrative
expenses decreased by approximately $92,000 over this same period mainly as
a
result of decreased corporate level personnel costs.
Interest
expense for the nine months ended September 30, 2007 was approximately
$48,195,000, an increase of approximately $1,459,000, from the nine months
ended
September 30, 2006 primarily due to an approximate $41,472,000 increase in
our
average debt outstanding, excluding the reclassification of our Series F, due
to
new acquisitions, and our development and redevelopment programs. Our average
borrowing cost remained flat at 5.47% for the first nine months of 2006 and
2007.
During
the first nine months of 2007, Mid-America benefited from the sale of our last
joint venture property with Crow Holdings, resulting in a gain of $5.4 million
and incentive fees of $1.0 million, and a $9.2 million gain due to the sale
of
four of our communities. No such gains were experienced in the first nine months
of 2006.
Primarily
as a result of the foregoing, net income increased by approximately $15,694,000
in the first nine months of 2007 from the first nine months of
2006.
FUNDS
FROM OPERATIONS AND NET INCOME
Funds
from operations, or FFO, represents net income (computed in accordance with
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, or NAREIT, definition. Disposition of real
estate assets includes sales of discontinued operations as well as proceeds
received from insurance and other settlements from property damage.
In
response to the Securities and Exchange Commission’s Staff Policy Statement
relating to Emerging Issues Task Force Topic D-42 concerning the
calculation of earnings per share for the redemption of preferred stock, we
include the amount charged to retire preferred stock in excess of carrying
values in our FFO calculation.
Mid-America’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. We believe that FFO is helpful to investors in
understanding our operating performance in that such calculation excludes
depreciation expense on real estate assets. We believe 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. Our 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 and
nine
month periods ended September 30, 2007, and 2006 (dollars and shares in
thousands):
|
|
|
Three
months
|
|
Nine
months
|
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net
income
|
|
$ 11,900
|
|
$ 5,630
|
|
$ 32,342
|
|
$ 16,648
|
|
Depreciation
of real estate assets
|
|
21,652
|
|
19,154
|
|
63,404
|
|
56,498
|
|
Net
loss (gain) on insurance and other settlement proceeds
|
197
|
|
54
|
|
(645)
|
|
(171)
|
|
Gain
on dispositions within real estate joint ventures
|
|
(1)
|
|
-
|
|
(5,388)
|
|
-
|
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
1
|
|
132
|
|
133
|
|
552
|
|
Gain
on sale of discontinued operations
|
|
(5,714)
|
|
-
|
|
(9,157)
|
|
-
|
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
|
real
estate joint ventures
|
|
-
|
|
118
|
|
14
|
|
379
|
|
Preferred
dividend distribution
|
|
(3,491)
|
|
(3,491)
|
|
(10,472)
|
|
(10,472)
|
|
Minority
interest in operating partnership income
|
|
1,034
|
|
375
|
|
2,835
|
|
1,196
|
|
Funds
from operations
|
|
$ 25,578
|
|
$ 21,972
|
|
$ 73,066
|
|
$ 64,630
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and units:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
27,844
|
|
26,491
|
|
27,733
|
|
25,609
|
|
|
Diluted
|
|
27,996
|
|
26,716
|
|
27,909
|
|
25,835
|
|
FFO
for
the three and nine month periods ended September 30, 2007 increased primarily
as
the result of recently acquired properties and improved performance from
existing properties.
TRENDS
Mid-America
believes that the primary driver of demand by apartment residents is job
growth,
which has continued to be strong throughout the Sunbelt, our operating
region.
In
the
first nine months of 2007, community performance continued to be stable and
growing throughout most of Mid-America’s markets. Overall, demand for
apartment homes continues to be strong throughout our markets, allowing for
absorption of new supply and continued pricing traction in most
markets. Some of our markets had weaker revenue growth or modest
declines over the equivalent period a year ago than the portfolio as a whole,
including Tampa and Orlando, where we have a total of five communities. These
markets had unsustainably strong operating conditions for a two year period
and
experienced weaker job growth and some new supply from condominium rentals.
Columbus, Georgia, where military deployment caused a temporary reduction
in
demand, was also weaker than the portfolio as a whole.
Mid-America
faces cost pressures from increasing operating expenses, including real estate
tax costs, personnel and increasing prices of materials that we use in
maintaining, renovating and further developing our apartments.
We
believe that the current environment of reduced competition from single family
homes and limited new supply of apartment homes, while somewhat offset by
rising
expenses and moderate job growth, will continue to contribute to better
operating results.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
flow provided by operating activities increased by approximately $13.6 million
from $77.4 million in the first nine months of 2006 to $91.1 million in the
first nine months of 2007 mainly as a result of cash from improved existing
and
new property operations.
Net
cash
used in investing activities decreased by approximately $99.0 million during
the
first nine months of 2007 to $94.1 million from $193.1 million in the first
nine
months of 2006 mainly due to a decrease in the cash used for acquisitions.
Also
contributing to the decrease in net cash used in investing activities was
a
distribution from real estate joint ventures in the first nine months of
2007 of
$9.9 million resulting from the sale of a joint venture property and an
incentive fee from the venture’s subsequent closing, as well as proceeds from
dispositions of real estate assets of $28.4 million from the sale of four
of our
communities. The comparable amounts for the first nine months of 2006 were
$208,000 and $2.0 million, respectively.
The
first
nine months of 2007 provided $1.5 million for financing activities compared
to
$109.3 million provided during the first nine months of 2006, a decrease
of
$107.8 million. This change was due mainly to a reduction in the amount of
common shares issued.
The
weighted average interest rate at September 30, 2007 for the $1.2 billion
of
debt outstanding was 5.6%, which is consistent with the weighted average
interest rate of 5.6% on $1.2 billion of debt outstanding at September 30,
2006.
Mid-America utilizes both conventional and tax exempt debt to help finance
its
activities. Borrowings are made through individual property mortgages as
well
as company-wide secured credit facilities. We utilize fixed rate
borrowings, interest rate swaps and interest rate caps to manage our current
and
future interest rate risk. More details on our borrowings can be found in
the
schedule presented later in this section.
At
September 30, 2007, Mid-America had secured credit facility relationships
with
Prudential Mortgage Capital which are credit enhanced by the Federal National
Mortgage Association, or FNMA, Federal Home Loan Mortgage Corporation, or
Freddie MAC, and a group of banks led by AmSouth Bank. Together, these credit
facilities provided a total borrowing capacity of $1.4 billion and an
availability to borrow of $1.2 billion at September 30, 2007. Mid-America
had
total borrowings outstanding under these credit facilities of $1.0 billion
at September 30, 2007.
Approximately
71% of Mid-America’s outstanding obligations at September 30, 2007, excluding
the Series F, were borrowed through facilities with/or credit enhanced by
FNMA,
also referred to as the FNMA facilities. The FNMA facilities have a combined
line limit of $1.0 billion, all of which was available to borrow at September
30, 2007. Mid-America had total borrowings outstanding under the FNMA facilities
of approximately $874 million at September 30, 2007. Various traunches of
the
facilities mature from 2010 through 2014. The FNMA facilities provide for
both
fixed and variable rate borrowings. The interest rate on the majority of
the
variable portion renews every 90 days and is based on the FNMA Discount Mortgage
Backed Security, or DMBS, rate on the date of renewal, which has typically
approximated three-month LIBOR less an average spread of 0.05% - 0.07% over
the
life of the FNMA facilities, plus a credit enhancement fee of 0.62% to
0.795%. Recently, however, the spread between three-month LIBOR and
DMBS has increased up to 0.51%. While we feel the current liquidity market
is an
anomaly and believe that this spread will return to more historic levels,
Mid-America cannot forecast when or if the uncertainty and volatility in
the
market may change.
Each
of
Mid-America’s secured credit facilities is subject to various covenants and
conditions on usage, and is subject to periodic re-evaluation of collateral.
If
we 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
our liquidity. In the event of a reduction in real estate values the amount
of
available credit could be reduced. Moreover, if we were to fail to make a
payment or violate a covenant under a credit facility, after applicable cure
periods, one or more of our 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.
As
of
September 30, 2007, Mid-America had entered into interest rate swaps totaling
a
notional amount of $739 million. To date, these swaps have proven to be highly
effective hedges. We also had interest rate cap agreements totaling a notional
amount of approximately $42 million as of September 30, 2007.
Summary
details of the debt outstanding at September 30, 2007 follows in the table
below
(dollars in thousands):
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance/
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
|
|
Line
|
|
Line
|
|
Notional
|
|
Interest
|
|
Rate
|
|
Contract
|
|
|
|
|
|
Limit
|
|
Availability
|
|
Amount
|
|
Rate
|
|
Maturity
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMBINED
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate or Swapped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
(including $11.9 million Series F)
|
|
|
|
$ 913,981
|
|
5.6%
|
|
11/2/2011
|
|
11/2/2011
|
|
|
Tax
Exempt
|
|
|
|
|
|
73,355
|
|
4.3%
|
|
1/3/2012
|
|
1/3/2012
|
|
|
|
Subtotal
Fixed Rate or Swapped
|
|
|
|
|
|
987,336
|
|
5.6%
|
|
11/6/2011
|
|
11/6/2011
|
|
Variable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
207,328
|
|
5.9%
|
|
11/22/2007
|
|
5/5/2012
|
|
|
Tax
Exempt
|
|
|
|
|
|
10,855
|
|
4.7%
|
|
10/22/2007
|
|
5/30/2020
|
|
|
Conventional
- Capped
|
|
|
|
|
|
17,936
|
|
5.8%
|
|
11/13/2009
|
|
11/13/2009
|
|
|
Tax
Exempt - Capped
|
|
|
|
|
|
24,090
|
|
4.6%
|
|
11/27/2009
|
|
11/27/2009
|
|
|
|
Subtotal
Variable Rate
|
|
|
|
|
|
260,209
|
|
5.7%
|
|
11/18/2007
|
|
12/2/2012
|
|
Total
Combined Debt Outstanding
|
|
|
|
|
|
$ 1,247,545
|
|
5.6%
|
|
1/8/2011
|
|
1/27/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNDERLYING
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Property Mortgages/Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
Fixed Rate
|
|
|
|
|
|
$ 134,118
|
|
4.8%
|
|
9/4/2013
|
|
9/4/2013
|
|
|
9
1/4% Series F Cumulative Redeemable Preferred Stock
|
|
|
11,863
|
|
9.3%
|
|
10/16/2007
|
|
10/16/2007
|
|
|
Tax
Exempt Fixed Rate
|
|
|
|
|
|
12,025
|
|
5.2%
|
|
12/1/2028
|
|
12/1/2028
|
|
|
Tax
Exempt Variable Rate
|
|
|
|
|
|
4,760
|
|
4.9%
|
|
10/31/2007
|
|
6/1/2028
|
|
FNMA
Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Free Borrowings
|
|
$ 91,515
|
|
$ 91,515
|
|
91,515
|
|
4.6%
|
|
10/15/2007
|
|
3/1/2014
|
|
|
Conventional
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Borrowings
|
|
90,000
|
|
90,000
|
|
90,000
|
|
7.5%
|
|
7/1/2009
|
|
7/1/2009
|
|
|
|
Variable
Rate Borrowings
|
|
862,914
|
|
862,914
|
|
692,318
|
|
5.8%
|
|
11/29/2007
|
|
5/26/2013
|
|
Subtotal
FNMA Facilities
|
|
1,044,429
|
|
1,044,429
|
|
873,833
|
|
5.8%
|
|
1/23/2008
|
|
1/28/2013
|
|
Freddie
Mac Credit Facility I
|
|
100,000
|
|
96,404
|
|
96,404
|
|
5.5%
|
|
12/8/2007
|
|
7/1/2011
|
|
Freddie
Mac Credit Facility II
|
|
200,000
|
|
47,325
|
|
47,325
|
|
5.3%
|
|
10/31/2007
|
|
6/2/2014
|
|
AmSouth
Credit Facility
|
|
50,000
|
|
42,794
|
|
27,493
|
|
6.6%
|
|
10/31/2007
|
|
5/24/2008
|
|
Union
Planters Bank
|
|
|
|
|
|
39,724
|
|
6.5%
|
|
10/31/2007
|
|
4/1/2009
|
|
Total
Underlying Debt Outstanding
|
|
|
|
|
|
$ 1,247,545
|
|
5.7%
|
|
10/30/2008
|
|
1/2/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEDGING
INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
$ 678,000
|
|
5.5%
|
|
10/20/2011
|
|
|
|
|
BMA
indexed
|
|
|
|
|
|
61,330
|
|
4.1%
|
|
9/10/2008
|
|
|
|
Total
Interest Rate Swaps
|
|
|
|
|
|
$ 739,330
|
|
5.4%
|
|
7/17/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
$ 17,936
|
|
6.2%
|
|
11/13/2009
|
|
|
|
|
BMA
indexed
|
|
|
|
|
|
24,090
|
|
6.0%
|
|
11/27/2009
|
|
|
|
Total
Interest Rate Caps
|
|
|
|
|
|
$ 42,026
|
|
6.1%
|
|
11/21/2009
|
|
|
|
Mid-America
believes that it has adequate resources to fund its current operations, annual
refurbishment of its properties, and incremental investment in new apartment
properties. We rely on the efficient operation of the financial markets to
finance debt maturities, and are also heavily reliant on the creditworthiness
of
FNMA, which provided credit enhancement for approximately $874 million of
our
debt as of September 30, 2007. The interest rate market for FNMA DMBS, which
in
our experience is highly correlated with three-month LIBOR interest rates,
is
also an important component of our liquidity and interest rate swap
effectiveness. In the event that the FNMA DMBS market becomes less efficient,
or
the credit of FNMA becomes impaired, we would seek alternative sources of
debt
financing.
For
the
nine months ended September 30, 2007, Mid-America’s net cash provided by
operating activities was in excess of covering funding improvements to existing
real estate assets, distributions to unitholders, and dividends paid on common
and preferred shares by approximately $6.1 million. This compares to a shortfall
of approximately $140,000 for the same period in 2006. While Mid-America
has
sufficient liquidity to permit distributions at current rates through additional
borrowings, if necessary, any significant deterioration in operations could
result in our financial resources being insufficient to pay distributions
to
shareholders at the current rate, in which event we would be required to
reduce
the distribution rate.
The
following table reflects the Company’s total contractual cash obligations which
consists of its long-term debt and operating leases as of September 30, 2007,
(dollars in thousands):
Contractual
|
|
Payments
Due by Period
|
Obligations
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
Long-Term
Debt
(1)
|
$
13,052
|
|
$
137,898
|
|
$
106,456
|
|
$121,828
|
|
$216,962
|
|
$
42,036
|
|
$ 609,313
|
|
$1,247,545
|
Operating
Lease
|
|
2
|
|
9
|
|
7
|
|
7
|
|
7
|
|
5
|
|
-
|
|
37
|
|
Total
|
|
$
13,054
|
|
$
137,907
|
|
$
106,463
|
|
$121,835
|
|
$216,969
|
|
$
42,041
|
|
$ 609,313
|
|
$1,247,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents
principal payments and includes $11.9 million in 2007 representing
our
Series F.
|
|
|
|
|
OFF-BALANCE
SHEET ARRANGEMENTS
At
September 30, 2007, and 2006, Mid-America 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. On May 9, 2007, Mid-America
entered into a joint venture, Mid-America Multifamily Fund I, LLC. The joint
venture was established to acquire multifamily properties. No properties
had
been acquired by the joint venture as of September 30, 2007. In addition,
we do
not engage in trading activities involving non-exchange traded contracts.
As
such, we are not materially exposed to any financing, liquidity, market,
or
credit risk that could arise if we had engaged in such relationships.
Mid-America does not have any relationships or transactions with persons
or
entities that derive benefits from their non-independent relationships with
us
or our related parties other than those disclosed in Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements
Note 14 in the Company’s 2006 Annual Report on Form 10-K.
Mid-America’s
investments in real estate joint ventures are unconsolidated and are recorded
on
the equity method as we do not have a controlling interest.
INSURANCE
Mid-America
renegotiated our insurance programs effective July 1, 2007. Management believes
that the property and casualty insurance program in place provides appropriate
insurance coverage for financial protection against insurable risks such
that
any insurable loss experienced would not have a significant impact on
Mid-America’s liquidity, financial position or results of operation. Management
expects to obtain a reduction in annual policy premiums of approximately
$1.5
million from the renegotiated programs when compared to the higher rates
experienced after the July 1, 2006 renewal.
INFLATION
Substantially
all of the resident leases at our communities allow, at the time of renewal,
for
adjustments in the rent payable hereunder, and thus may enable us 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 of the adverse effects of
inflation.
IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, or Interpretation 48. Interpretation 48 provides
clarification concerning the accounting for uncertainty in income taxes in an
enterprise’s financial statement in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Interpretation 48 is
effective for fiscal years beginning after December 15, 2006. Mid-America
adopted Interpretation 48 effective January 1, 2007. The adoption of
Interpretation 48 had no material impact on Mid-America’s consolidated financial
condition or results of operations taken as a whole.
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements, or Statement 157. Statement 157
defines fair value, establishes a framework for measuring fair value and
expands
disclosures about fair value measurements. Statement 157 is effective for
fiscal
years beginning after November 15, 2007 and interim periods within those
fiscal
years. Mid-America does not believe the adoption of Statement 157 will have
a
material impact on our consolidated financial condition or results of operations
taken as a whole.
RISKS
ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This
and
other sections of this Quarterly Report contain 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 market
conditions, expected growth rates of revenues and expenses, planned asset
dispositions, disposition pricing, planned acquisitions and developments,
property financings, expected interest rates and planned capital expenditures.
In some cases, you can identify forward-looking statements by terms including
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and
similar expressions intended to identify forward-looking statements. 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 Mid-America or any other person that the objectives and plans
of Mid-America will be achieved. In evaluating any forward-looking statement,
you should specifically consider the information set forth under the caption
“Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2006 as supplemented herein by Part II, Item 1A: “Risk Factors,” as
well as other cautionary statements contained elsewhere in this report,
including the matters discussed in “Critical Accounting Policies and Estimates”
above.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
This
information has been omitted as there have been no material changes in
Mid-America’s market risk as disclosed in the 2006 Annual Report on Form 10-K
except for the changes as discussed under Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations under the “Liquidity
and Capital Resources” section, which is incorporated by reference
herein.
Item
4. Controls
and Procedures
MANAGEMENT’S
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The
management of Mid-America, with the participation of our principal executive
and
financial officers, has evaluated the effectiveness of our disclosure controls
and procedures in ensuring that the information required to be disclosed in
our
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms, including ensuring that such information
is accumulated and communicated to Mid-America’s management as appropriate to
allow timely decisions regarding required disclosure. Based on such evaluation,
our principal executive and financial officers have concluded that such
disclosure controls and procedures were effective as of September 30, 2007,
(the
end of the period covered by this Quarterly Report on Form 10-Q).
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During
the three months ended September 30, 2007, there were no changes in
Mid-America’s internal control over financial reporting that materially
affected, or that are reasonably likely to materially affect, Mid-America’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk
Factors
The
following risk factor supplements the risk factors set forth under “Item 1A.
Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2006.
Mid-America’s
financing could be impacted by negative capital market
conditions.
Recently,
domestic financial markets have experienced unusual volatility and uncertainty.
While this condition has occurred most visibly within the “subprime” mortgage
lending sector of the credit market, liquidity has tightened in overall domestic
financial markets, including the investment grade debt and equity capital
markets. Consequently, there is greater risk that the financial institutions
Mid-America does business with could experience disruptions that would upset
our
current financing program.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
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
(a)
|
The
following exhibits are filed as part of this
report.
|
Exhibit
Number
|
Exhibit
Description
|
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
|
Signatures
Pursuant
to the requirements 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: November
1, 2007
|
By:
/s/Simon R.C. Wadsworth
|
|
Simon
R.C. Wadsworth
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|