Form 10-Q for the period ending 9-30-2006
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, 2006
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
|
38138
|
MEMPHIS,
TENNESSEE
|
|
(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 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
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
October 19, 2006
|
Common
Stock, $.01 par value
|
24,491,514
|
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, 2006 (Unaudited)
and
December 31, 2005
|
2
|
|
Condensed
Consolidated Statements of Operations for the three and nine months
ended
September 30, 2006 and 2005 (Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended
September
30, 2006 and 2005 (Unaudited)
|
4
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
5
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
Item
4.
|
Controls
and Procedures
|
27
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
28
|
Item
1A.
|
Risk
Factors
|
28
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
29
|
Item
3.
|
Defaults
Upon Senior Securities
|
29
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
29
|
Item
5.
|
Other
Information
|
29
|
Item
6.
|
Exhibits
|
29
|
|
Signatures
|
32
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Balance Sheets
|
September
30, 2006 (Unaudited) and December 31, 2005
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Assets:
|
|
|
|
|
|
Real
estate assets:
|
|
|
|
|
|
Land
|
|
$
|
204,569
|
|
$
|
179,523
|
|
Buildings
and improvements
|
|
|
1,888,083
|
|
|
1,740,818
|
|
Furniture,
fixtures and equipment
|
|
|
50,032
|
|
|
46,301
|
|
Capital
improvements in progress
|
|
|
10,549
|
|
|
4,175
|
|
|
|
|
2,153,233
|
|
|
1,970,817
|
|
Less
accumulated depreciation
|
|
|
(522,721
|
)
|
|
(473,421
|
)
|
|
|
|
1,630,512
|
|
|
1,497,396
|
|
|
|
|
|
|
|
|
|
Land
held for future development
|
|
|
2,360
|
|
|
1,366
|
|
Commercial
properties, net
|
|
|
6,966
|
|
|
7,345
|
|
Investments
in and advances to real estate joint venture
|
|
|
3,839
|
|
|
4,182
|
|
Real
estate assets, net
|
|
|
1,643,677
|
|
|
1,510,289
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
7,689
|
|
|
14,064
|
|
Restricted
cash
|
|
|
5,186
|
|
|
5,534
|
|
Deferred
financing costs, net
|
|
|
15,715
|
|
|
15,338
|
|
Other
assets
|
|
|
38,730
|
|
|
20,181
|
|
Goodwill
|
|
|
5,051
|
|
|
5,051
|
|
Assets
held for sale
|
|
|
7,435
|
|
|
-
|
|
Total
assets
|
|
$
|
1,723,483
|
|
$
|
1,570,457
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
1,202,217
|
|
$
|
1,140,046
|
|
Accounts
payable
|
|
|
678
|
|
|
3,278
|
|
Accrued
expenses and other liabilities
|
|
|
50,827
|
|
|
28,380
|
|
Security
deposits
|
|
|
7,498
|
|
|
6,429
|
|
Liabilities
associated with assets held for sale
|
|
|
213
|
|
|
-
|
|
Total
liabilities
|
|
|
1,261,433
|
|
|
1,178,133
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
32,207
|
|
|
29,798
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value, 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 issued and outstanding
|
|
|
5
|
|
|
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, $.01 par value per share, 50,000,000 shares
authorized;
|
|
|
|
|
|
|
|
24,489,874
and 22,048,372 shares issued and outstanding at
|
|
|
|
|
|
|
|
September
30, 2006, and December 31, 2005, respectively
|
|
|
245
|
|
|
220
|
|
Additional
paid-in capital
|
|
|
782,249
|
|
|
671,885
|
|
Other
|
|
|
-
|
|
|
(2,422
|
)
|
Accumulated
distributions in excess of net income
|
|
|
(363,717
|
)
|
|
(314,352
|
)
|
Accumulated
other comprehensive income
|
|
|
10,999
|
|
|
7,128
|
|
Total
shareholders' equity
|
|
|
429,843
|
|
|
362,526
|
|
Total
liabilities and shareholders' equity
|
|
$
|
1,723,483
|
|
$
|
1,570,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Statements of
Operations
|
Three
and nine months ended September 30, 2006 and
2005
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
|
|
|
$
|
79,132
|
|
$
|
72,136
|
|
$
|
230,396
|
|
$
|
209,463
|
|
Other
property revenues
|
|
|
|
|
|
3,564
|
|
|
2,735
|
|
|
10,558
|
|
|
8,746
|
|
Total
property revenues
|
|
|
|
|
|
82,696
|
|
|
74,871
|
|
|
240,954
|
|
|
218,209
|
|
Management
fee income
|
|
|
|
|
|
53
|
|
|
51
|
|
|
157
|
|
|
272
|
|
Total
operating revenues
|
|
|
|
|
|
82,749
|
|
|
74,922
|
|
|
241,111
|
|
|
218,481
|
|
Property
operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
|
|
|
9,774
|
|
|
9,233
|
|
|
28,230
|
|
|
26,140
|
|
Building
repairs and maintenance
|
|
|
|
|
|
3,354
|
|
|
3,195
|
|
|
8,737
|
|
|
8,107
|
|
Real
estate taxes and insurance
|
|
|
|
|
|
10,653
|
|
|
9,347
|
|
|
30,158
|
|
|
28,205
|
|
Utilities
|
|
|
|
|
|
5,468
|
|
|
4,784
|
|
|
14,726
|
|
|
12,941
|
|
Landscaping
|
|
|
|
|
|
2,207
|
|
|
2,048
|
|
|
6,429
|
|
|
5,926
|
|
Other
operating
|
|
|
|
|
|
3,655
|
|
|
3,758
|
|
|
10,690
|
|
|
10,598
|
|
Depreciation
|
|
|
|
|
|
19,613
|
|
|
19,017
|
|
|
57,899
|
|
|
55,152
|
|
Total
property operating expenses
|
|
|
|
|
|
54,724
|
|
|
51,382
|
|
|
156,869
|
|
|
147,069
|
|
Property
management expenses
|
|
|
|
|
|
3,616
|
|
|
2,749
|
|
|
9,591
|
|
|
8,449
|
|
General
and administrative expenses
|
|
|
|
|
|
2,665
|
|
|
2,329
|
|
|
8,708
|
|
|
7,148
|
|
Income
from continuing operations before non-operating items
|
|
|
|
|
|
21,744
|
|
|
18,462
|
|
|
65,943
|
|
|
55,815
|
|
Interest
and other non-property income
|
|
|
|
|
|
162
|
|
|
70
|
|
|
494
|
|
|
357
|
|
Interest
expense
|
|
|
|
|
|
(15,505
|
)
|
|
(15,251
|
)
|
|
(47,039
|
)
|
|
(43,324
|
)
|
Gain
(loss) on debt extinguishment
|
|
|
|
|
|
-
|
|
|
12
|
|
|
(551
|
)
|
|
(82
|
)
|
Amortization
of deferred financing costs
|
|
|
|
|
|
(519
|
)
|
|
(462
|
)
|
|
(1,508
|
)
|
|
(1,411
|
)
|
Minority
interest in operating partnership income
|
|
|
|
|
|
(375
|
)
|
|
(91
|
)
|
|
(1,196
|
)
|
|
(1,129
|
)
|
(Loss)
income from investments in real estate joint ventures
|
|
|
|
|
|
(16
|
)
|
|
(52
|
)
|
|
(135
|
)
|
|
73
|
|
Incentive
fee from real estate joint ventures
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,723
|
|
Net
(loss) gain on insurance and other settlement proceeds
|
|
|
|
|
|
(54
|
)
|
|
874
|
|
|
171
|
|
|
865
|
|
Gain
on sale of non-depreciable assets
|
|
|
|
|
|
32
|
|
|
-
|
|
|
32
|
|
|
334
|
|
Gain
on disposition within real estate joint ventures
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,034
|
|
Income
from continuing
operations
|
|
|
|
|
|
5,469
|
|
|
3,562
|
|
|
16,211
|
|
|
16,255
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset
impairment, settlement proceeds and gain on sale
|
|
|
|
|
|
161
|
|
|
53
|
|
|
437
|
|
|
147
|
|
Asset
impairment on discontinued operations
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(243
|
)
|
Net
loss on insurance and other settlement proceeds on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Net
income
|
|
|
|
|
|
5,630
|
|
|
3,615
|
|
|
16,648
|
|
|
16,134
|
|
Preferred
dividend distribution
|
|
|
|
|
|
3,491
|
|
|
3,490
|
|
|
10,472
|
|
|
10,838
|
|
Net
income available for common shareholders
|
|
|
|
|
$
|
2,139
|
|
$
|
125
|
|
$
|
6,176
|
|
$
|
5,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
23,990
|
|
|
21,548
|
|
|
23,099
|
|
|
21,278
|
|
Effect
of dilutive stock options
|
|
|
|
|
|
225
|
|
|
296
|
|
|
226
|
|
|
284
|
|
Diluted
|
|
|
|
|
|
24,215
|
|
|
21,844
|
|
|
23,325
|
|
|
21,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available for common shareholders
|
|
|
|
|
$
|
2,139
|
|
$
|
125
|
|
$
|
6,176
|
|
$
|
5,296
|
|
Discontinued
property operations
|
|
|
|
|
|
(161
|
)
|
|
(53
|
)
|
|
(437
|
)
|
|
121
|
|
Income
from continuing operations available for common
shareholders
|
|
|
|
|
$
|
1,978
|
|
$
|
72
|
|
$
|
5,739
|
|
$
|
5,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for common
shareholders
|
|
|
|
|
$
|
0.08
|
|
$
|
0.01
|
|
$
|
0.25
|
|
$
|
0.25
|
|
Discontinued
property operations
|
|
|
|
|
|
0.01
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
Net
income available for common shareholders
|
|
|
|
|
$
|
0.09
|
|
$
|
0.01
|
|
$
|
0.27
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
|
|
|
$
|
0.08
|
|
$
|
0.01
|
|
$
|
0.24
|
|
$
|
0.25
|
|
Discontinued
property operations
|
|
|
|
|
|
0.01
|
|
|
-
|
|
$
|
0.02
|
|
|
-
|
|
Net
income available for common shareholders
|
|
|
|
|
$
|
0.09
|
|
$
|
0.01
|
|
$
|
0.26
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
(1)
|
|
|
|
|
$
|
0.595
|
|
$
|
1.180
|
|
$
|
2.380
|
|
$
|
2.350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The
Company declared and paid $1.785 per common share during the nine
months
ended September 30, 2006.
|
During
this same period the Company also declared an additional $0.595
per common
share that will not be paid until October 31,
2006.
|
The
Company declared and paid $1.755 per common share during the nine
months
ended September 30, 2005.
|
During
this same period the Company also declared an additional $0.595
per common
share that was not paid until October 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Statements of Cash Flows
|
Nine
Months Ended September 30, 2006 and 2005
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
16,648
|
|
$
|
16,134
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Gain
from discontinued operations before asset impairment,
settlement
|
|
|
|
|
|
|
|
proceeds
and gain on sale
|
|
|
(437
|
)
|
|
(147
|
)
|
Depreciation
and amortization of deferred financing costs
|
|
|
59,407
|
|
|
56,563
|
|
Stock
compensation expense
|
|
|
1,009
|
|
|
574
|
|
Amortization
of debt premium
|
|
|
(1,407
|
)
|
|
(1,397
|
)
|
Loss
(income) from investments in real estate joint
ventures
|
|
|
135
|
|
|
(73
|
)
|
Minority
interest in operating partnership income
|
|
|
1,196
|
|
|
1,129
|
|
Loss
on debt extinguishment
|
|
|
551
|
|
|
82
|
|
Derivative
interest (income) expense
|
|
|
(130
|
)
|
|
-
|
|
Gain
on sale of non-depreciable assets
|
|
|
(32
|
)
|
|
(334
|
)
|
Gain
on disposition within real estate joint ventures
|
|
|
-
|
|
|
(3,034
|
)
|
Incentive
fee from real estate joint ventures
|
|
|
-
|
|
|
(1,723
|
)
|
Net
loss on insurance and other settlement proceeds on
discontinued
|
|
|
|
|
|
|
|
operations
|
|
|
-
|
|
|
25
|
|
Asset
impairment on discontinued operations
|
|
|
-
|
|
|
243
|
|
Net
(gain) loss on insurance and other settlement
proceeds
|
|
|
(171
|
)
|
|
(865
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
89
|
|
|
(2,241
|
)
|
Other
assets
|
|
|
(6,168
|
)
|
|
(26
|
)
|
Accounts
payable
|
|
|
(2,476
|
)
|
|
1,825
|
|
Accrued
expenses and other
|
|
|
7,877
|
|
|
9,013
|
|
Security
deposits
|
|
|
1,069
|
|
|
577
|
|
Net
cash provided by operating activities
|
|
|
77,160
|
|
|
76,325
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of real estate and other assets
|
|
|
(165,723
|
)
|
|
(103,592
|
)
|
Improvements
to existing real estate assets
|
|
|
(30,212
|
)
|
|
(18,495
|
)
|
Distributions
from real estate joint ventures
|
|
|
208
|
|
|
14,795
|
|
Proceeds
from disposition of real estate assets
|
|
|
2,039
|
|
|
9,790
|
|
Net
cash used in investing activities
|
|
|
(193,688
|
)
|
|
(97,502
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
change in credit lines
|
|
|
63,374
|
|
|
28,348
|
|
Proceeds
from notes payable
|
|
|
27,842
|
|
|
19,486
|
|
Principal
payments on notes payable
|
|
|
(29,189
|
)
|
|
(1,991
|
)
|
Payment
of deferred financing costs
|
|
|
(2,204
|
)
|
|
(789
|
)
|
Proceeds
from issuances of common shares and units
|
|
|
106,149
|
|
|
29,833
|
|
Distributions
to unitholders
|
|
|
(4,412
|
)
|
|
(4,579
|
)
|
Dividends
paid on common shares
|
|
|
(40,935
|
)
|
|
(37,333
|
)
|
Dividends
paid on preferred shares
|
|
|
(10,472
|
)
|
|
(10,838
|
)
|
Net
cash provided by financing activities
|
|
|
110,153
|
|
|
22,137
|
|
Net
decrease in cash and cash equivalents
|
|
|
(6,375
|
)
|
|
960
|
|
Cash
and cash equivalents, beginning of period
|
|
|
14,064
|
|
|
9,133
|
|
Cash
and cash equivalents, end of period
|
|
$
|
7,689
|
|
$
|
10,093
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
48,919
|
|
$
|
45,333
|
|
Supplemental
disclosure of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
Conversion
of
units to common shares
|
|
$
|
330
|
|
$
|
229
|
|
Issuance
of
restricted common shares
|
|
$
|
14
|
|
$
|
813
|
|
Interest
capitalized
|
|
$
|
115
|
|
$
|
-
|
|
Marked-to-market
adjustment on derivative instruments
|
|
$
|
3,871
|
|
$
|
16,029
|
|
Fair
value adjustment on debt assumed
|
|
$
|
1,553
|
|
$
|
2,277
|
|
Reclass
of preferred stock from equity to liabilities
|
|
$
|
-
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
Mid-America
Apartment Communities, Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2006 and 2005 (Unaudited)
1.
BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the management of Mid-America Apartment Communities, Inc. (the
“Company”) in accordance with generally accepted accounting principles for
interim financial information and applicable rules and regulations of the
Securities and Exchange Commission and the Company’s accounting policies in
effect as of December 31, 2005, as set forth in the Company’s 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, 2006, are not
necessarily indicative of the results to be expected for the full year. These
financial statements should be read in conjunction with the Company’s audited
financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2005.
RECLASSIFICATION
Certain
prior period amounts have been reclassified to conform to the 2006 presentation.
The reclassifications had no effect on net income available for common
shareholders.
2. STOCK
BASED COMPENSATION
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123 (revised December 2004), Share-Based
Payment
(“Statement 123(R)”). Statement 123(R) replaces FASB Statement No. 123,
Accounting
for Stock-Based Compensation,
and
supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
Statement 123(R) requires compensation costs related to share-based payment
transactions be recognized in the financial statements. With limited exceptions,
the amount of compensation cost will be measured based on the grant-date
fair
value of the equity or the liability instruments issued. In addition, liability
awards will be remeasured each reporting period. Compensation cost will be
recognized over the period that an employee provides service in exchange
for the
award. Statement 123(R) is effective as of the beginning of the first annual
reporting period that begins after June 15, 2005.
The
Company adopted Statement 123(R) effective January 1, 2006 using the “modified
prospective” method permitted by Statement 123(R) in which compensation cost is
recognized beginning with the effective date (a) based on the requirements
of
Statement 123(R) for all share-based payments granted after the effective
date
and (b) based on the requirements of Statement 123 for all awards granted
to
employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date.
The
effect of adopting Statement 123(R) for the three months ending September
30,
2006 was an increase of approximately $197,800 in net income from continuing
operations and in net income, resulting in an increase of approximately $0.01
in
both basic and diluted earnings per share. The effect of adopting Statement
123(R) for the nine months ending September 30, 2006 was an increase of
approximately $466,200 in net income from continuing operations and in net
income, resulting in an increase of approximately $0.02 in both basic and
diluted earnings per share. These increases occurred primarily because the
fair
market values assigned to certain plans at grant date were not impacted by
the
increase in share price that the Company has experienced over the last two
years, resulting in plans generating higher payouts for participants than
their
fair market value models would have predicted based on then stock price
volatility. This series of events resulted in the expense booked to compensation
expense in accordance with Statement 123(R) being smaller than the actual
number
of shares issued times their issue price. The adoption of Statement 123(R)
had
no impact on cash flow from operations or cash flow from financing
activities.
The
modified prospective method of Statement 123(R) does not require prior periods
to be restated to reflect the amount of compensation cost that would have
been
reflected in the financial statements. The following table reflects the effect
on net income if Statement 123(R) had been used by the Company along with
the
applicable assumptions utilized in the Black-Scholes option pricing model
calculation for those periods in which option grants were issued (dollars
and
shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
|
|
|
Three
|
|
Nine
|
|
|
|
|
|
Months
|
|
Months
|
|
|
|
|
|
Ended
|
|
Ended
|
|
Net
income
|
|
|
|
|
$
|
3,615
|
|
$
|
16,134
|
|
Preferred
dividend distribution
|
|
|
|
|
|
3,490
|
|
|
10,838
|
|
Net
income available for
|
|
|
|
|
|
|
|
|
|
|
common
shareholders
|
|
|
|
|
|
125
|
|
|
5,296
|
|
Add:
Stock-based employee
|
|
|
|
|
|
|
|
|
|
|
compensation
expense included
|
|
|
|
|
|
|
|
|
|
|
in
reported net income
|
|
|
|
|
|
-
|
|
|
-
|
|
Less:
Stock-based employee
|
|
|
|
|
|
|
|
|
|
|
compensation
expense from
|
|
|
|
|
|
|
|
|
|
|
employee
stock purchase plan discount
|
|
|
|
|
|
9
|
|
|
23
|
|
Less:
Stock-based employee
|
|
|
|
|
|
|
|
|
|
|
compensation
expense determined
|
|
|
|
|
|
|
|
|
|
|
under
fair value method of accounting
|
|
|
|
|
|
26
|
|
|
82
|
|
Pro
forma net income available for
|
|
|
|
|
|
|
|
|
|
|
common
shareholders
|
|
|
|
|
$
|
90
|
|
$
|
5,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding - Basic
|
|
|
|
|
|
21,548
|
|
|
21,278
|
|
Average
common shares outstanding - Diluted
|
|
|
|
|
|
21,844
|
|
|
21,562
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
as reported
|
|
|
|
|
$
|
0.01
|
|
$
|
0.25
|
|
Basic
pro forma
|
|
|
|
|
$
|
0.00
|
|
$
|
0.24
|
|
Diluted
as reported
|
|
|
|
|
$
|
0.01
|
|
$
|
0.25
|
|
Diluted
pro forma
|
|
|
|
|
$
|
0.00
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions:(1)
|
|
|
|
|
|
|
|
|
|
|
Risk
free interest rate
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
Expected
life - Years
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
Expected
volatility
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
Expected
dividends
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
No
grants were issued in the periods
shown.
|
Employee
Stock Purchase Plan
The
Mid-America Apartment Communities, Inc. Employee Stock Purchase Plan (the
“ESPP”) provides a means for employees to purchase common stock of the Company.
The Board of Directors has authorized the issuance of 150,000 shares for
the
plan. The ESPP is administered by the Compensation Committee of the Board
of
Directors who may annually grant options to employees to purchase annually
up to
an aggregate of 15,000 shares of common
stock
at
a price equal to 85% of the market price of the common stock. Shares are
purchased semi-annually on June 30 and December 31. No shares were purchased
during the three months ended September 30, 2006 and 2005. Because it is
not
possible to reasonably estimate fair value at the grant date, the Company
estimates the compensation costs based on intrinsic values updated until
the
date of the settlement. Compensation cost recognized for the three and nine
months ending September 30, 2006 were approximately $12,300 and $36,900,
respectively.
Incentive
Plans Overview and Summary
The
Company’s stock compensation plans consist of the ESPP and a number of
incentives provided to attract and retain independent directors, executive
officers and key employees. Incentives are currently granted under the 2004
Stock Plan which was approved at the May 24, 2004 Annual Meeting of
Shareholders. This plan replaced the 1994 Restricted Stock and Stock Option
Plan
(collectively, the “Plans”) under which no further awards may be granted as of
January 31, 2004. The 1994 Restricted Stock and Stock Option
Plan allowed for the grant of restricted stock and stock options up to a total
of 2.4 million shares. The 2004 Stock Plan allows for the grant of restricted
stock and stock options up to a total of 500,000 shares. The Company believes
that such awards better align the interests of its employees with those of
its
shareholders. Total compensation cost under the Plans was approximately $245,100
and $147,800 for the three months ended September 30, 2006 and 2005,
respectively, and approximately $615,400 and $347,700 for the nine months ended
September 30, 2006 and 2005, respectively. As of September 30, 2006, the total
unrecognized compensation cost related to the Plans was approximately $3.0
million. This cost is expected to be recognized over the weighted average period
of 4.4 years. Information concerning specific grants under the Plans is listed
below.
Options
All
option awards made under the Plans have been granted with the exercise price
equal to the market price on the day of grant. The options vest over five years
of continuous service at a rate of 10%, 10%, 20%, 30% and 30%, and expire 10
years from grant date. Dividends are not paid on unexercised
options.
The
fair
value of each option award is estimated on the grant date using the
Black-Scholes method, which utilizes the assumptions noted in the following
table. Volatility is based on the historical volatility of the Company’s common
stock. Expected life of the option is estimated using historical data to
estimate option exercise and employee termination. The Company uses a U.S.
constant-maturity Treasury close to the same expected life of the option to
represent the risk-free rate. Turnover is based on the historical rate at which
options are exercised. The Company uses its current dividend yield at the time
of grant to estimate the dividend yield over the life of the option. No options
were granted during the periods presented in the following table; therefore,
no
fair value was calculated.
|
|
Three
months ended September 30,
|
|
Nine
months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Volatility
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected
life
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Risk-free
rate
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Dividend
yield
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
A
summary
of option activity under the Plans as of September 30, 2006, and the changes
during the nine months then ended follows:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
Price
|
|
Life
|
|
Value
|
|
Outstanding
at January 1, 2006
|
|
|
398,052
|
|
$
|
24.83
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(123,360
|
)
|
|
24.09
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(7,350
|
)
|
|
26.03
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2006
|
|
|
267,342
|
|
$
|
25.14
|
|
|
3.8
|
|
$
|
7,916,799
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,570
|
)
|
|
23.82
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(13,820
|
)
|
|
25.52
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
246,952
|
|
$
|
25.12
|
|
|
3.7
|
|
$
|
7,563,212
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,500
|
)
|
|
25.61
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
232,452
|
|
$
|
25.09
|
|
|
3.5
|
|
$
|
5,832,955
|
|
Exercisable
at September 30, 2006
|
|
|
160,347
|
|
$
|
24.90
|
|
|
2.6
|
|
$
|
3,992,835
|
|
The
total
intrinsic value of options exercised during the three months ended September
30,
2006 and 2005, was approximately
$461,500 and $332,100, respectively.
The
total intrinsic value of options exercised during the nine months ended
September
30, 2006 and 2005, was approximately $4.4 million and $3.6 million,
respectively. Cash received from the exercise of options for the three and
nine
months ended September 30, 2006, was approximately $371,400 and $3.5
million,
respectively.
Executive
2000 Restricted Stock
In
2000,
the Company issued 10,750 restricted shares of common stock to executive
officers with a grant date fair value of $22.1875 per share. The grant date
fair
value was determined by the closing trading price of the Company’s shares on the
day prior to the date of the grant. These shares vest 10% each over ten years
through 2010. The executive officers have the option to accelerate the vesting
in lieu of bonuses. As of September 30, 2006, no shares have been vested
early.
Recipients receive dividend payments on the shares of restricted stock prior
to
vesting.
A
summary
of the status of the Executive 2000 Restricted Stock nonvested shares as
of
September 30, 2006, and the changes for the nine months ended September 30,
2006, is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
5,375
|
|
$
|
22.19
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
(1,075
|
)
|
$
|
22.19
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
4,300
|
|
$
|
22.19
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
4,300
|
|
$
|
22.19
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
4,300
|
|
$
|
22.19
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $6,000 and $17,900, respectively.
As of September 30, 2006 there was approximately $81,500 of total unrecognized
compensation cost related to nonvested shares granted. This cost is expected
to
be recognized over the weighted average period of 3.4 years. No shares vested
during the three months ended September 30, 2006.
Key
Managers 2002 Restricted Stock
In
2002,
the Company issued 97,881 restricted shares of common stock to key managers
with
a grant date fair value of $25.65 per share. The grant date fair value was
determined by the closing trading price of the Company’s shares on the day prior
to the date of the grant. As a result of three managers leaving the employment
of the Company, as of September 30, 2006, only 81,916 shares remain issued.
These shares will vest 20% a year for five consecutive years beginning in 2007.
Recipients receive dividend payments on the shares of restricted stock prior
to
vesting.
A
summary
of the status of the Key Management 2002 Restricted Stock nonvested shares
as of
September 30, 2006, and the changes for the nine months ended September 30,
2006, is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
86,477
|
|
$
|
25.65
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
86,477
|
|
$
|
25.65
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
(4,561
|
)
|
$
|
25.65
|
|
Nonvested
at June 30, 2006
|
|
|
81,916
|
|
$
|
25.65
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
81,916
|
|
$
|
25.65
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $55,000 and $164,900,
respectively. As of September 30, 2006, there was approximately $1.2 million
of
total unrecognized compensation cost related to nonvested shares granted.
This
cost is expected to be recognized over the weighted average period of 5.3
years.
No shares vested during the three months ended September 30, 2006.
Executive
2005 Restricted Stock
In
2005,
the Company issued 8,852 restricted shares of common stock to executive
management under the 2004 Stock Plan with a grant date fair value of $38.50
per
share. These shares will vest in two equal amounts in 2006 and 2007. Recipients
will receive dividend payments on the shares of restricted stock prior
to
vesting.
A
summary
of the status of the Executive 2005 Restricted Stock nonvested shares as
of
September 30, 2006, and the changes for the nine months ended September
30,
2006, is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
8,852
|
|
$
|
38.50
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
(4,426
|
)
|
$
|
38.50
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
4,426
|
|
$
|
38.50
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
4,426
|
|
$
|
38.50
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
4,426
|
|
$
|
38.50
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $42,600 and $127,800,
respectively. As of September 30, 2006, there was approximately $71,000 of
total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted. This cost is expected to be recognized over the weighted
average period of 0.4 years. No shares vested during the three months ended
September 30, 2006.
Director
2005 Restricted Stock Plan
Beginning
with the 2005 Annual Meeting of Shareholders, non-employee directors elected
to
the Board of Directors receive a grant of $75,000 worth of restricted shares
of
common stock. The shares vest in three equal installments over the director’s
three-year term. To begin the program, non-employee directors not sitting
for
re-election at the 2005 Annual Meeting of Shareholders received a pro-rata
grant
representing the number of years left in their term. In 2005, 8,596 shares
of
restricted stock were granted to non-employee directors with a grant date
fair
value of $40.71 per share. The grant date fair value is determined by the
closing trading price of the Company’s shares on the day prior to the date of
the grant.
A
summary
of the status of the Director Restricted Stock nonvested shares as of September
30, 2006, and the changes for the nine months ended September 30, 2006, is
presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
8,596
|
|
$
|
40.71
|
|
Granted
|
|
|
73
|
|
$
|
56.60
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
(1,228
|
)
|
$
|
40.71
|
|
Nonvested
at March 31, 2006
|
|
|
7,441
|
|
$
|
40.87
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
(3,757
|
)
|
$
|
41.02
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
3,684
|
|
$
|
40.71
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
3,684
|
|
$
|
40.71
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $25,000 and $82,900,
respectively. As of September 30, 2006, there was approximately $113,400
of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted. This cost is expected to be recognized
over
the weighted average period of 0.6 years. No shares vested during the three
months ended September 30, 2006.
Director
2006 Restricted Stock Plan
At
the
2006 Annual Meeting of Shareholders 4,774 shares of restricted stock were
granted to non-employee directors with a grant date fair value of $52.34
per
share. The grant date fair value is determined by the closing trading price
of
the Company’s shares on the day prior to the date of the grant.
A
summary
of the status of the Director Restricted Stock nonvested shares as of September
30, 2006, and the changes for the nine months ended September 30, 2006, is
presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
-
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
-
|
|
|
|
|
Granted
|
|
|
4,774
|
|
$
|
52.34
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
4,774
|
|
$
|
52.34
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
4,774
|
|
$
|
52.34
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $18,800 and $28,300,
respectively. As of September 30, 2006, there was approximately $221,600
of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted. This cost is expected to be recognized
over
the weighted average period of 1.5 years. No shares vested during the three
months ended September 30, 2006.
Key
Managers 2005 Restricted Stock
In
2005,
the Board of Directors adopted the 2005 Key Management Restricted Stock
Plan
(the “2005 Plan”), a long-term incentive program for key managers and executive
officers. The 2005 Plan grants shares of restricted stock based on a sliding
scale of total shareholder return over three 12-month periods ending in
2006,
2007 and 2008. Any restricted stock earned will vest 100% three years after
the
date of the restricted stock issuance. Recipients will receive dividend
payments
on the shares of restricted stock during the restriction periods. There
is no
automatic vesting of the shares. Based
on
the Company’s performance from July 1, 2005, through June 30, 2006, 25,034
restricted shares of common stock were issued to key managers and executive
officers on June 30, 2006.
The
fair
value of the stock award was estimated on the grant date using a Monte
Carlo
simulation with the assumptions noted in the following table. Volatility
is
based on the historical volatility of the Company’s common stock. The expected
term of the 2005 Plan is based on the criteria for the plan and the expected
life of the awards. The Company uses a U.S. constant-maturity Treasury
with the
same term as the expected term of the 2005 Plan to represent the risk-free
rate.
Turnover is based on the historical experience for the key managers and
executive officers. The Company uses its current dividend yield at the
time of
grant to estimate the dividend yield over the life of the plan.
Volatility
|
|
|
17.10
|
%
|
Expected
life in years
|
|
|
3
|
|
Risk-free
rate
|
|
|
3.77
|
%
|
Dividend
yield
|
|
|
5.20
|
%
|
A
summary
of the status of the 2005 Plan nonvested shares as of September 30, 2006,
and
the changes for the nine months ended September 30, 2006, is presented
below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
36,691
|
|
$
|
45.42
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
36,691
|
|
$
|
45.42
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
36,691
|
|
$
|
45.42
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
36,691
|
|
$
|
45.42
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $62,100 and $185,000,
respectively. As of September 30, 2006, there was approximately $1.2 million
of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted. The Company’s policy is to recognize
compensation cost on a straight-line basis over the requisite service period
for
an entire award (rather than each portion of an award). Accordingly, the $1.2
million unrecognized cost will be recognized over the weighted average period
of
4.8 years. No shares vested during the three months ended September 30,
2006.
Long-Term
Performance Based Incentive Plan for Executive Officers
The
Compensation Committee by authorization of the Board of Directors of the Company
submitted the Long-Term Performance Based Incentive Plan for Executive Officers
(the "Long-Term Plan"), which was approved by shareholders on June 2, 2003.
The
Long-Term Plan allows executive management to earn performance units that
convert into shares of restricted stock based on achieving defined total
shareholder investment performance levels. Based on the Company’s performance
from January 1, 2003, through December 31, 2005, 74,894 restricted shares of
common stock were issued to executive management on March 14, 2006. While these
shares of restricted stock will be entitled to dividend payments, they will
not
be transferable or have voting privileges until they vest. Dependent upon the
executive officer’s continued employment with the Company, these shares of
restricted stock will vest 20% annually from 2006 through 2010.
The
fair
value of the stock award was estimated on the grant date using a Monte Carlo
simulation with the assumptions noted in the following table. Volatility is
based on the historical volatility of the Company’s common stock. The expected
term of the Long-Term Plan is based on the criteria for the plan and the
expected life of the awards. The Company uses a U.S. constant-maturity Treasury
for the same term as the expected term of the Long-Term Plan to represent the
risk-free rate. Turnover is based on the historical experience for the key
managers and executive officers. The Company uses its current dividend yield
at
the time of grant to estimate the dividend yield over the life of the plan.
Volatility
|
|
|
6.38
|
%
|
Expected
life in years
|
|
|
3
|
|
Risk-free
rate
|
|
|
1.99
|
%
|
Dividend
yield
|
|
|
9.60
|
%
|
A
summary
of the status of the Long-Term Plan nonvested shares as of September 30,
2006,
and the changes for the nine months ended September 30, 2006, is presented
below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant-Date
|
|
Nonvested
Shares
|
|
Shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2006
|
|
|
75,895
|
|
$
|
34.72
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at March 31, 2006
|
|
|
75,895
|
|
$
|
34.72
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
75,895
|
|
$
|
34.72
|
|
Granted
|
|
|
-
|
|
|
|
|
Vested
|
|
|
-
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
|
Nonvested
at September 30, 2006
|
|
|
75,895
|
|
$
|
34.72
|
|
For
the
three and nine months ended September 30, 2006, compensation costs related
to
the nonvested shares granted was approximately $10,300 and $31,000,
respectively. As of September 30, 2006, there was approximately $176,000 of
total unrecognized compensation cost related to nonvested share-based
compensation arrangements granted. This unrecognized cost will be recognized
over the weighted average period of 4.3 years. No shares vested during the
three
months ended September 30, 2006.
3. COMPREHENSIVE
INCOME
Total
comprehensive income and its components for the three and nine month periods
ended September 30, 2006 and 2005, were as follows (dollars in
thousands):
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,630
|
|
$
|
3,615
|
|
$
|
16,648
|
|
$
|
16,134
|
|
Marked-to-market
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
derivative instruments
|
|
|
(13,634
|
)
|
|
13,721
|
|
|
3,871
|
|
|
16,029
|
|
Total
comprehensive income
|
|
$
|
(8,004
|
)
|
$
|
17,336
|
|
$
|
20,519
|
|
$
|
32,163
|
|
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.
4. DERIVATIVE
FINANCIAL INSTRUMENTS
In
the
normal course of business, the Company uses certain derivative financial
instruments to manage, or hedge, the interest rate risk associated with the
Company’s variable rate debt or as hedges in anticipation of future debt
transactions to manage well-defined interest rate risk associated with the
transaction.
The
Company does not use derivative financial instruments for speculative or
trading
purposes. Further, the Company has a policy of entering into contracts with
major financial institutions based upon their credit rating and other factors.
When viewed in conjunction with the underlying and offsetting exposure that
the
derivatives are designated to hedge, the Company has not sustained any material
loss from those instruments nor does it anticipate any material adverse effect
on its net income or financial position in the future from the use of
derivatives.
The
Company requires that 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 and nine month periods
ended September 30, 2006 and 2005, the ineffective portion of the hedging
transactions was not significant.
5. SHARE
AND UNIT INFORMATION
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, the Company had outstanding options for 232,452 shares of common
stock at September 30, 2006, of which 99,743 were anti-dilutive. At September
30, 2005, 21,748,081 common shares and 2,615,419 operating partnership units
were outstanding, representing a total of 24,363,500 shares and units.
Additionally, the Company had outstanding options for 404,918 shares of common
stock at September 30, 2005, of which 217,782 were anti-dilutive.
6. REAL
ESTATE ACQUISITIONS
On
September 6, 2006, the Company acquired the Reserve at Woodwind Lakes
apartments, a 328-unit community located in Houston, Texas.
On
September 29, 2006, the Company acquired the Talus Ranch and Sansol apartments,
representing a total of 480 units in Phoenix, Arizona. The Company plans
to
operate the two properties as one community.
7. DISCONTINUED
OPERATIONS
As
part
of the Company’s disposition strategy to selectively dispose of mature assets
that
no
longer meet the Company’s investment criteria and long-term strategic
objectives,
as of
March 31, 2005, the Company was in negotiations to sell the Eastview
apartments, a 432-unit community located in Memphis, Tennessee. In accordance
with Statement No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets, (“Statement
144”) the
community was considered held for sale in the accompanying condensed
consolidated financial statements. The sale of the Eastview apartments was
subsequently completed on April 1, 2005.
In
April
2006, the Company 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. In
accordance with Statement 144 these
communities were considered held for sale in the accompanying condensed
consolidated financial statements.
The
following is a summary of discontinued operations for the three and nine
months
ended September 30, 2006, and 2005, (dollars in thousands):
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$
|
597
|
|
$
|
586
|
|
$
|
1,826
|
|
$
|
2,382
|
|
Other
revenues
|
|
|
24
|
|
|
24
|
|
|
75
|
|
|
56
|
|
Total
revenues
|
|
|
621
|
|
|
610
|
|
|
1,901
|
|
|
2,438
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
|
351
|
|
|
476
|
|
|
1,153
|
|
|
2,078
|
|
Interest
expense
|
|
|
109
|
|
|
81
|
|
|
311
|
|
|
213
|
|
Asset
impairment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
243
|
|
Total
expense
|
|
|
460
|
|
|
557
|
|
|
1,464
|
|
|
2,534
|
|
Income
(loss) from discontinued operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain
on sale and settlement proceeds
|
|
|
161
|
|
|
53
|
|
|
437
|
|
|
(96
|
)
|
Net
loss on insurance and other settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
proceeds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Income
(loss) from discontinued operations
|
|
$
|
161
|
|
$
|
53
|
|
$
|
437
|
|
$
|
(121
|
)
|
8. SEGMENT
INFORMATION
At
September 30, 2006, the Company owned or had an ownership interest in 137
multifamily apartment communities, including the apartment communities
owned by
the Company’s joint venture, in 13 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.
9. SUBSEQUENT
EVENTS
On
October 12, 2006, the Company acquired the Oaks at Wilmington Island apartments,
a 306-unit community located in Savannah, Georgia.
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 condensed consolidated financial
statements, and the notes thereto, which have been prepared in accordance
with
U.S. generally accepted accounting principles. The preparation of these
condensed consolidated financial statements requires the Company 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, 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.
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 determinations, 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
The
Company leases multifamily residential apartments under operating leases
primarily with terms of one year or less. Rent
and
other property income is recorded when due from residents and is recognized
monthly as it is earned. Other property income consists primarily of utility
rebillings, other expense reimbursements, and administrative, application
and
other fees charged to residents. Interest, management fees, and all other
sources of income are recognized as earned.
The
Company records all gains and losses on real estate in accordance with Statement
No. 66 Accounting
for Sales of Real Estate.
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, 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 the Company in order to
elevate the condition of the property to the Company’s 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.
Impairment
of long-lived assets, including goodwill
The
Company accounts for long-lived assets in accordance with the provisions
of
Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(“Statement 144”) and evaluates its goodwill for impairment under Statement No.
142, Goodwill
and Other Intangible Assets
(“Statement 142”). The Company evaluates its goodwill for impairment on an
annual basis 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.
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, the Company determines the fair value of a
reporting unit and compares 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. The Company
determines 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
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 Statement No. 133 Accounting
for Derivative Instruments and Hedging Activities,
as
amended, 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. 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 found to be highly
correlated.
The
Company measures 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, 2006
The
Company’s operating results for the three months ended September 30, 2006,
benefited from continued improvement in market conditions, helping the Company
grow occupancy from the prior quarter and increase rental rates at the Company’s
communities. The Company also benefited from the increase in the number of
apartments owned.
|
|
September
30, 2006
|
|
September
30, 2005
|
|
Total
Portfolio (includes partial ownership in joint ventures)
|
|
|
|
|
|
Number
of apartment units
|
|
|
39,987
|
|
|
38,227
|
|
Number
of apartment communities
|
|
|
137
|
|
|
132
|
|
|
|
|
|
|
|
|
|
100%
Owned (excludes partial ownership in joint ventures)
|
|
|
|
|
|
|
|
Number
of apartment units
|
|
|
39,465
|
|
|
37,705
|
|
Number
of apartment communities
|
|
|
136
|
|
|
131
|
|
Average
monthly rent (excluding joint ventures)
|
|
$
|
720
|
|
$
|
691
|
|
Average
physical occupancy (excluding joint ventures)
|
|
|
95.8
|
%
|
|
96.2
|
%
|
Increasing
operating and administrative expenses offset some of the benefit of the revenue
increases.
The
following is a discussion of the consolidated financial condition and results
of
operations of the Company for the three and nine months ended September 30,
2006. 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, 2006 TO THE THREE MONTHS ENDED SEPTEMBER
30, 2005
Property
revenues for the three months ended September 30, 2006, increased by
approximately $7,825,000 from the three months ended September 30, 2005,
due to
(i) a $2,545,000 increase in property revenues from the five properties acquired
in 2006
(the
“2006 Acquisitions”), (ii) a $285,000 increase in property revenues from the two
properties acquired after the first quarter of 2005 (the “Two 2005
Acquisitions”), and (iii) a $4,995,000 increase in property revenues from all
other communities.
The
increase in property revenues from all other communities was generated primarily
by the Company’s same store portfolio and was driven by a 3.6% increase in
average rent per unit and a reduction of concessions from 4.4% to 3.1% from
the
third quarter of 2005 to the third quarter of 2006.
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 September 30, 2006, increased
by
approximately $2,746,000 from the three months ended September 30, 2005,
due
primarily to increases of property operating expenses of (i) $1,240,000 from
the
2006 Acquisitions, (ii) $173,000 from the Two 2005 Acquisitions, and (iii)
$1,333,000 from all other communities. The increase in property operating
expenses from all other communities consisted primarily of the Company’s same
store portfolio and was driven by an increase in insurance expense of $669,000
over the same quarter last year as a result of higher premiums incurred upon
the
Company’s policy renewal on July 1, 2006, and a 7.7% increase in utility rates
as the Company experienced an increase in electricity, natural gas and water
and
sewer prices.
Depreciation
expense increased by approximately $596,000 primarily due to the increases
of
depreciation expense of (i) $322,000
from the 2006
Acquisitions, (ii) $70,000 from the Two 2005 Acquisitions, and (iii) $811,000
from all other communities. Increases of depreciation expense from all other
communities resulted from asset additions made during the normal course of
business. These increases were partially offset by a net decrease in
depreciation expense of (i) $607,000 from the expiration of the amortization
of
fair market value of leases of acquired communities.
Property
management expenses increased by approximately $867,000 from the third quarter
of 2005 to the third quarter of 2006 primarily related to an increase in
personnel incentives and franchise and excise taxes both resulting from improved
property operations. General
and administrative expenses increased by approximately $336,000 over this
same
period. No individual items accounted for any significant amount of the
increase.
Interest
expense increased approximately $254,000 in the three months ended September
30,
2006, from the three months ended September 30, 2005, primarily due to the
increase in the amount of debt outstanding of $1.14 billion at September
30,
2005, to $1.20 billion at September 30, 2006, and the increase in the Company’s
average borrowing cost by 4 basis points from 5.39% over the three months
ended
September 30, 2005, to 5.43% over the three months ended September 30,
2006.
In
the
three months ended September 30, 2005, the Company benefited from a net gain
on
insurance and other settlement proceeds of approximately $874,000 mainly
related
to hurricane related claims.
Primarily
as a result of the foregoing, net income increased by approximately $2,015,000
in the third quarter of 2006 from the third quarter of 2005.
COMPARISON
OF THE NINE MONTHS ENDED SEPTEMBER 30, 2006 TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
Property
revenues for the nine months ended September 30, 2006, increased by
approximately $22,745,000 from the nine months ended September 30, 2005,
due to
(i) a $5,119,000 increase in property revenues from the 2006
Acquisitions, (ii) a $4,966,000 increase in property revenues from the three
properties acquired in 2005 (the “2005 Acquisitions”), and (iii) $12,660,000
increase in property revenues from all other communities.
The
increase in property revenues from all other communities was generated primarily
by the Company’s same store portfolio and was driven by increased average rent
per unit over 2005.
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 nine months ended September 30, 2006, increased
by
approximately $7,053,000 from the nine months ended September 30, 2005, due
primarily to increases of property operating expenses of (i) $2,348,000 from
the
2006 Acquisitions, (ii) $1,816,000 from the 2005 Acquisitions, and (iii)
$2,889,000 from all other communities. The increase in property operating
expenses from all other communities consisted primarily of the Company’s same
store portfolio and was driven by an increase in personnel expense as higher
occupancy in the first two quarters drove overtime and contract labor expenses
above the levels experienced in the prior year and increases in utility rates
as
the Company experienced an increase in electricity, natural gas and water
and
sewer prices in the first nine months of 2006.
Depreciation
expense increased by approximately $2,747,000 primarily due to the increases
of
depreciation expense of (i) $955,000
from the 2006 Acquisitions, (ii) $1,249,000 from the 2005 Acquisitions, and
(iii) $1,652,000 from all other communities. Increases of depreciation expense
from all other communities resulted from asset additions made during the
normal
course of business. These increases were partially offset by a net decrease
in
depreciation expense of (i) $1,109,000 from the expiration of the amortization
of fair market value of leases of acquired communities.
Property
management expenses increased by approximately $1,142,000 from the first
nine
months of 2005 to the first nine months of 2006 primarily related to an increase
in personnel incentives and franchise and excise taxes both resulting from
improved property operations. General
and administrative expenses increased by approximately $1,560,000 over this
same
period partially related to increased salaries and an increase in cash bonuses
earned related to 2005 performance results as determined by the Board of
Directors.
Interest
expense increased approximately $3,715,000 in the nine months ended September
30, 2006, from the nine months ended September 30, 2005, primarily due to
the
increase in the amount of debt outstanding of $1.14 billion at September
30,
2005, to $1.20 billion at September 30, 2006, and the increase in the Company’s
average borrowing cost by 20 basis points from 5.21% over the nine months
ended
September 30, 2005, to 5.41% over the nine months ended September 30,
2006.
In
the
first nine months of 2006, the Company refinanced the debt on four of its
communities primarily to take advantage of the lower interest rate environment.
This resulted in a loss on debt extinguishment of approximately $551,000.
In
the
nine months ended September 30, 2005, the Company benefited from the sale
of two
properties which it 33.33% owned through a joint venture. The sale of these
properties resulted in a gain to the Company of approximately $3,034,000
as well
as an incentive fee of $1,723,000. In this same period, the Company recorded
a
gain of approximately $334,000 from the sale of land.
Primarily
as a result of the foregoing, net income increased by approximately $514,000
in
the first nine months of 2006 from the first nine months of 2005.
FUNDS
FROM OPERATIONS AND NET INCOME
Funds
from operations (“FFO”) represents net income (computed in accordance with U.S.
generally accepted accounting principles, 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”) 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 EITF Topic D-42 concerning the calculation of earnings per share
for
the redemption of preferred stock, the Company has included the amount charged
to retire preferred stock in excess of carrying values in its FFO
calculation.
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 to investors
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 and
nine
months ended September 30, 2006, and 2005 (dollars and shares in
thousands):
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
income
|
|
$
|
5,630
|
|
$
|
3,615
|
|
$
|
16,648
|
|
$
|
16,134
|
|
Depreciation
of real estate assets
|
|
|
19,286
|
|
|
18,682
|
|
|
56,890
|
|
|
54,151
|
|
Net
loss (gain) on insurance and other settlement proceeds
|
|
|
54
|
|
|
(874
|
)
|
|
(171
|
)
|
|
(865
|
)
|
Gain
on dispositions within real estate joint ventures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,034
|
)
|
Net
loss on insurance and other settlement proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25
|
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
|
-
|
|
|
159
|
|
|
160
|
|
|
477
|
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
real
estate joint ventures
|
|
|
118
|
|
|
116
|
|
|
379
|
|
|
363
|
|
Preferred
dividend distribution
|
|
|
(3,491
|
)
|
|
(3,490
|
)
|
|
(10,472
|
)
|
|
(10,838
|
)
|
Minority
interest in operating partnership income
|
|
|
375
|
|
|
91
|
|
|
1,196
|
|
|
1,129
|
|
Funds
from operations
|
|
$
|
21,972
|
|
$
|
18,299
|
|
$
|
64,630
|
|
$
|
57,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
26,491
|
|
|
24,168
|
|
|
25,609
|
|
|
23,907
|
|
Diluted
|
|
|
26,716
|
|
|
24,465
|
|
|
25,835
|
|
|
24,192
|
|
FFO
for
the three and nine months ended September 30, 2006, increased primarily as
the
result of improved property performance.
TRENDS
In
the
third quarter of 2006, property performance continued to show the benefit
of
improving market conditions, which was strong throughout most of the Company’s
markets. Areas that had been weak for several years, especially
Atlanta,
Dallas, and Austin, continued to show improved demand.
The
Company believes that the primary driver of demand by apartment residents
is job
formation, and this continued to show solid momentum in most of the Company’s
larger metro areas. Some of the smaller and mid-size markets in which the
Company operates, such as Jackson, MS, Jacksonville, FL, and Columbus, GA
remained reasonably strong during the market downturn that preceded this
period,
and continued to show solid performance. At the same time, the Company has
noticed that in some of its markets, supply pressures have been surprisingly
muted, and it believes that two factors are at work. In some markets, especially
in Florida, some apartment communities have been taken off the rental market
and
converted to condominiums. Construction and development costs for new apartments
also seem to have risen substantially for a variety of reasons, and this
has
made the economics of building apartments to compete with the Company’s
properties less attractive. Rising interest rates have impacted developers’
costs, and this may also have reduced the amount of competition that we face
from single-family homes. The cooling of housing markets may also have caused
some first time home buyers to delay their purchases.
The
Company faces cost pressures from increasing operating expenses, especially
insurance and real estate tax costs, as well as increasing prices on materials
that it uses in maintaining its apartments.
The
Company believes that this situation of improved demand, a reduced rate of
increase in supply, and reduced competition from single family homes, even
while
somewhat offset by rising expenses, will continue to contribute to better
operating results for the balance of the year.
LIQUIDITY
AND CAPITAL RESOURCES
Net
cash
flow provided by operating activities increased by approximately $835,000 from
$76.3 million in the first nine months of 2005 to $77.2 million in the first
nine months of 2006 primarily resulting from an increase in cash flows from
improved property operations during the first nine months of 2006 over the
same
period in 2005.
Net
cash
used in investing activities increased during the first nine months of 2006
from
the first nine months of 2005 to approximately $193.7 million from $97.5 million
mainly related to the additional $62.1 million of cash used for acquisitions
in
the first nine months of 2006 over 2005. During the first nine months of 2005,
the Company received distributions from its real estate joint ventures of $14.8
million which included the Company’s portion from the sale of two properties in
one of its joint ventures, a payoff to the Company of a mezzanine loan and
an
incentive fee. Distributions from real estate joint ventures for the first
nine
months of 2006 totaled only $208,000.
The
first
nine months of 2006 provided net cash from financing activities of $110.2
million while the first nine months of 2005 provided net cash from financing
activities of $22.1 million. This change was driven by a $76.3 million increase
in proceeds from issuances of common shares over these periods as the Company
raised $59.5 million from a public offering in May 2006. The Company has also
issued approximately $53.5 million of common shares through its direct stock
purchase program through the first nine months of 2006 compared to $23.0 million
in the first nine months of 2005.
The
weighted average interest rate at September 30, 2006, for the $1.20 billion
of
debt outstanding was 5.6% compared to 5.4% on $1.14 billion of debt outstanding
at September 30, 2005. The Company utilizes both conventional and tax exempt
debt to help finance its activities. Borrowings are made through individual
property mortgages and secured credit facilities. The Company utilizes fixed
rate borrowings, interest rate swaps and interest rate caps to manage its
current and future interest rate risk. More details on the Company’s borrowings
can be found in the schedule presented later in this section.
At
September 30, 2006, the Company had secured credit facilities relationships
with
Prudential Mortgage Capital which are credit enhanced by the Federal National
Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“Freddie
MAC”), and a group of banks led by AmSouth Bank. Together, these credit
facilities provided a total borrowing capacity and availability to borrow of
$1.1 billion at September 30, 2006. The Company had total borrowings outstanding
under these credit facilities of $997 million at September 30, 2006.
Approximately
71% of the Company’s outstanding obligations at September 30, 2006, were
borrowed through facilities with/or credit enhanced by FNMA (the “FNMA
Facilities”). The FNMA Facilities have a combined line limit of $950 million,
$947 million of which was available to borrow at September 30, 2006. The Company
had total borrowings outstanding under the FNMA Facilities of $859 million
at
September 30, 2006. 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 (“DMBS”) rate on the
date of renewal, which has typically approximated three-month LIBOR less an
average spread of 0.05% over the life of the FNMA Facilities, plus a credit
enhancement fee of 0.62% to 0.795%.
Each
of
the Company’s secured credit facilities is subject to various covenants and
conditions on usage, and are subject to periodic re-evaluation of collateral.
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. In the event of a reduction in real
estate values the amount of available credit could be reduced. 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.
As
of
September 30, 2006, the Company had interest rate swaps in effect totaling
a
notional amount of $679 million. To date, these swaps have proven to be highly
effective hedges. The Company also had interest rate cap agreements totaling
a
notional amount of approximately $42 million.
Summary
details of the debt outstanding at September 30, 2006, follow in the table
below:
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance/
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
Line
|
|
Line
|
|
Notional
|
|
Interest
|
|
Rate
|
|
Contract
|
|
|
|
Limit
|
|
Availability
|
|
Amount
|
|
Rate
|
|
Maturity
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMBINED
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate or Swapped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
$
|
876,294,192
|
|
|
5.6
|
%
|
|
8/1/2011
|
|
|
8/1/2011
|
|
Tax
Exempt
|
|
|
|
|
|
|
|
|
73,640,000
|
|
|
4.3
|
%
|
|
1/27/2012
|
|
|
1/27/2012
|
|
Subtotal
Fixed Rate or Swapped
|
|
|
|
|
|
|
|
|
949,934,192
|
|
|
5.5
|
%
|
|
8/14/2011
|
|
|
8/14/2011
|
|
Variable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
|
|
|
199,401,963
|
|
|
6.0
|
%
|
|
10/3/2006
|
|
|
8/19/2012
|
|
Tax
Exempt
|
|
|
|
|
|
|
|
|
10,855,004
|
|
|
4.5
|
%
|
|
10/15/2006
|
|
|
5/30/2020
|
|
Conventional
- Capped
|
|
|
|
|
|
|
|
|
17,936,000
|
|
|
5.9
|
%
|
|
11/13/2009
|
|
|
11/13/2009
|
|
Tax
Exempt - Capped
|
|
|
|
|
|
|
|
|
24,090,000
|
|
|
4.4
|
%
|
|
11/25/2009
|
|
|
11/25/2009
|
|
Subtotal
Variable Rate
|
|
|
|
|
|
|
|
|
252,282,967
|
|
|
5.8
|
%
|
|
10/4/2006
|
|
|
3/2/2013
|
|
Total
Combined Debt Outstanding
|
|
|
|
|
|
|
|
$
|
1,202,217,159
|
|
|
5.6
|
%
|
|
8/7/2010
|
|
|
12/11/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNDERLYING
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Property Mortgages/Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
Fixed Rate
|
|
|
|
|
|
|
|
$
|
148,294,192
|
|
|
5.0
|
%
|
|
3/24/2015
|
|
|
3/24/2015
|
|
Tax
Exempt Fixed Rate
|
|
|
|
|
|
|
|
|
12,310,000
|
|
|
5.2
|
%
|
|
12/1/2028
|
|
|
12/1/2028
|
|
Tax
Exempt Variable Rate
|
|
|
|
|
|
|
|
|
4,760,004
|
|
|
4.6
|
%
|
|
10/15/2006
|
|
|
6/1/2028
|
|
FNMA
Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Free Borrowings
|
|
$
|
91,515,000
|
|
$
|
91,515,000
|
|
|
91,515,000
|
|
|
4.4
|
%
|
|
10/15/2006
|
|
|
3/1/2014
|
|
Conventional
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Borrowings
|
|
|
110,000,000
|
|
|
110,000,000
|
|
|
110,000,000
|
|
|
7.2
|
%
|
|
1/10/2009
|
|
|
1/10/2009
|
|
Variable
Rate Borrowings
|
|
|
748,485,000
|
|
|
745,314,000
|
|
|
657,318,000
|
|
|
5.9
|
%
|
|
9/20/2006
|
|
|
5/21/2013
|
|
Subtotal
FNMA Facilities
|
|
|
950,000,000
|
|
|
946,829,000
|
|
|
858,833,000
|
|
|
5.9
|
%
|
|
1/8/2007
|
|
|
11/28/2012
|
|
Freddie
Mac Credit Facility I
|
|
|
100,000,000
|
|
|
96,404,000
|
|
|
96,404,000
|
|
|
5.9
|
%
|
|
12/7/2006
|
|
|
7/1/2011
|
|
Freddie
Mac Credit Facility II
|
|
|
200,000,000
|
|
|
29,825,000
|
|
|
29,825,000
|
|
|
5.7
|
%
|
|
10/31/2006
|
|
|
6/2/2014
|
|
AmSouth
Credit Facility
|
|
|
40,000,000
|
|
|
30,203,438
|
|
|
11,790,963
|
|
|
7.0
|
%
|
|
10/31/2006
|
|
|
5/24/2007
|
|
Union
Planters Bank
|
|
|
|
|
|
|
|
|
40,000,000
|
|
|
6.4
|
%
|
|
10/31/2006
|
|
|
4/1/2009
|
|
Total
Underlying Debt Outstanding
|
|
|
|
|
|
|
|
$
|
1,202,217,159
|
|
|
5.8
|
%
|
|
3/27/2008
|
|
|
3/2/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEDGING
INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
|
|
$
|
618,000,000
|
|
|
5.5
|
%
|
|
1/3/2011
|
|
|
|
|
BMA
indexed
|
|
|
|
|
|
|
|
|
61,330,000
|
|
|
4.1
|
%
|
|
9/10/2008
|
|
|
|
|
Total
Interest Rate Swaps
|
|
|
|
|
|
|
|
$
|
679,330,000
|
|
|
5.4
|
%
|
|
10/18/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
|
|
$
|
17,936,000
|
|
|
6.2
|
%
|
|
11/13/2009
|
|
|
|
|
BMA
indexed
|
|
|
|
|
|
|
|
|
24,090,000
|
|
|
6.0
|
%
|
|
11/25/2009
|
|
|
|
|
Total
Interest Rate Caps
|
|
|
|
|
|
|
|
$
|
42,026,000
|
|
|
6.1
|
%
|
|
11/19/2009
|
|
|
|
|
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
$859 million of the Company’s debt. The interest rate market for FNMA 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
interest rate 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.
For
the
nine months ended September 30, 2006, the Company’s net cash provided by
operating activities was short of funding improvements to existing real estate
assets, distributions to unitholders, and dividends paid on common and preferred
shares by approximately $8.9 million. This compares to excess coverage of
approximately $5.1 million for the same period in 2005. While the Company
has
sufficient liquidity to permit distributions at current rates through additional
borrowings, if necessary, 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.
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, 2006,
(dollars in 000’s):
Contractual
|
|
Payments
Due by Period
|
Obligations
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Thereafter
|
|
Total
|
|
Long-Term
Debt
(1)
|
|
$
|
21,162
|
|
$
|
16,338
|
|
$
|
110,496
|
|
$
|
106,830
|
|
$
|
121,933
|
|
$
|
825,458
|
|
$
|
1,202,217
|
|
Operating
Lease
|
|
|
1
|
|
|
4
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9
|
|
Total
|
|
$
|
21,163
|
|
$
|
16,342
|
|
$
|
110,500
|
|
$
|
106,830
|
|
$
|
121,933
|
|
$
|
825,458
|
|
$
|
1,202,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Represents
principal payments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF-BALANCE
SHEET ARRANGEMENTS
At
September 30, 2006 and 2005, 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
those disclosed in Item 8. Financial Statements and Supplementary Data -
Notes
to Consolidated Financial Statements Note 13 in the Company’s 2005 Annual Report
on Form 10-K.
The
Company’s investment in its real estate joint venture is unconsolidated and is
recorded on the equity method as the Company does not have a controlling
interest.
INSURANCE
Management
believes that the property and casualty insurance program in place provides
appropriate insurance coverage for financial protection against insurable
risks.
The Company renegotiated its insurance programs July 1, 2006, and because
of the
significant reduction in available insurance for windstorm events and resulting
large increase in cost, purchased property insurance with limits reduced
from
prior years. The Company self-insures the first $500,000 of individual property
losses, and, if greater, the first 10% of property losses caused by named
windstorms and earthquakes, with a limit per event of $40 million for windstorm
and earthquake damage. According to the Company’s risk consultant, approximately
20% of the Company’s property value is located in “Wind Tier 1” risk areas
(predominately certain parts of Florida) and 12% in the New Madrid earthquake
risk zone. The Company does not own any direct coastal frontage property.
The
largest loss event from windstorm damage (tornado) the Company has experienced
was $3.9 million in 1999. The Company experienced combined total losses of
$2.2
million from windstorms in 2004 and 2005, with the biggest loss ($1.1 million)
from Hurricane Francis in 2004. The Company’s insurance program is subject to
review by its principal lenders.
INFLATION
Substantially
all of the resident leases at the Company’s communities allow, at the time of
renewal, for adjustments in the rent payable hereunder, 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 2004, the FASB issued Statement No. 153, Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29
(“Statement 153”). Statement 153 was a result of a joint effort by the FASB and
the IASB to improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. Statement 153 amends
APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the entity
are
expected to change significantly as a result of the exchange. Statement 153
is
applied prospectively for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of Statement 153 did
not
have a material impact on the Company’s consolidated financial condition or
results of operations taken as a whole.
In
December 2004, the FASB issued Statement No. 123 (revised December 2004),
Share-Based
Payment
(“Statement 123(R)”). Statement 123(R) replaces FASB Statement No. 123,
Accounting
for Stock-Based Compensation,
and
supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
Statement 123(R) requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of compensation cost will be measured based on the
grant
date fair value of the equity or the liability instruments issued. In addition,
liability awards will be remeasured each reporting period. Compensation cost
will be recognized over the period that an employee provides service in exchange
for the award. Statement 123(R) is effective as of the beginning of the first
annual reporting period that begins after June 15, 2005. The Company adopted
Statement 123(R) effective January 1, 2006, utilizing the modified prospective
transition method. The adoption of Statement 123(R) did not have a material
impact on the Company’s consolidated financial condition or results of
operations taken as a whole.
In
March
2005, the SEC issued SAB 107 to provide public companies additional guidance
in
applying the provisions of Statement 123(R). Among other things, SAB 107
describes the SEC staff's expectations in determining the assumptions that
underlie the fair value estimates and discusses the interaction of Statement
123(R) with certain existing SEC guidance. The guidance is also beneficial
to
users of financial statements in analyzing the information provided under
statement 123(R). SAB 107 was applied upon the adoption of Statement
123(R).
In
March
2005, the FASB issued Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations-an interpretation of FASB Statement
No. 143
(“Interpretation 47”). Interpretation 47 clarifies that the term conditional
asset retirement obligation as used in FASB Statement No. 143, Accounting
for Asset Retirement Obligations,
(“Statement 143”) refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are conditional
on a
future event that may or may not be within the control of the entity.
Interpretation 47 is effective no later than the end of fiscal years ending
after December 15, 2005, (December 31, 2005, for calendar-year enterprises).
Retrospective application for interim financial information is permitted
but is
not required. The adoption of Interpretation 47 did not have a material impact
on the Company's consolidated financial condition or results of operations
taken
as a whole.
In
June
2005, the FASB ratified EITF 04-5: Determining
Whether a General Partner, or the General Partners as a Group, Controls a
Limited Partnership or Similar Entity When the Limited Partners Have Certain
Rights
(“EITF
04-5”). EITF 04-5 provides a framework for determining whether a general partner
is required to consolidate limited partners. The new framework is significantly
different than the guidance in SOP 78-9 and would make it more difficult
for a
general partner to overcome the presumption that it controls the limited
partnership, requiring the limited partner to have substantive “kick-out” or
“participating” rights. Kick-out rights are the right to dissolve or liquidate
the partnership or to otherwise remove the general partner without cause
and
participating rights are the right to effectively participate in significant
decisions made in the ordinary course of the partnership’s business.
EITF
04-5
became effective immediately for all newly formed limited partnerships and
existing limited partnerships which are modified. The guidance will become
effective for existing limited partnerships which are not modified the beginning
of the first reporting period in fiscal years beginning after December 15,
2005.
The adoption of EITF 04-5 did not have a material impact on the Company's
consolidated financial condition or results of operations taken as a
whole.
In
June
2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“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. The Company does not believe the adoption of Interpretation 48 will
have a
material impact on the Company’s consolidated financial condition or results of
operations taken as a whole.
In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(“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. The Company does not believe
the
adoption of Statement 157 will have a material impact on the Company’s
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.
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 2005 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
Company maintains disclosure controls and procedures that are designed to
ensure
that information required to be disclosed in the Company’s filings under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and
forms, and to ensure 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 an unconsolidated entity which is not under
its control. Consequently, the Company’s disclosure controls and procedures with
respect to this entity are necessarily more limited than those it maintains
with
respect to its consolidated subsidiaries.
Our
management, with the participation of our principal executive officer and
financial officers has evaluated 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 Exchange Act. Based on their evaluation as of September
30,
2006, our Chief Executive Officer and Chief Financial Officer have concluded
that the Company’s disclosure controls and procedures were effective as of
September 30, 2006, 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 September 30, 2006, there were no changes in the
Company’s internal control over financial reporting that materially affected, or
that are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk
Factors
In
addition to the risk factors previously disclosed under “Item 1A. Risk Factors”
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2005, the Company is subject to the following risks.
FAILURE
TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT THE COMPANY TO INCOME TAXATION
In
order
to qualify as a REIT, each year the Company must distribute to stockholders
at
least 90% of its REIT taxable income (determined without regard to the dividend
paid deduction and by excluding net capital gains). To the extent that the
Company satisfies the distribution requirement, but distributes less than
100%
of taxable income, it will be subject to federal corporate income tax on
the
undistributed income. In addition, the Company will incur a 4% nondeductible
excise tax on the amount, if any, by which the distributions in any year
are
less than the sum of:
· |
85%
of ordinary income for that year;
|
· |
95%
of capital gain net income for that year; and
|
· |
100%
of undistributed taxable income from prior years.
|
Differences
in timing between the recognition of income and the related cash receipts
or the
effect of required debt amortization payments could require the Company to
borrow money or sell assets to pay out enough of the taxable income to satisfy
the distribution requirement and to avoid corporate income tax and the 4%
nondeductible excise tax in a particular year.
COMPLYING
WITH REIT REQUIREMENTS MAY CAUSE THE COMPANY TO FORGO OTHERWISE ATTRACTIVE
OPPORTUNITIES OR ENGAGE IN MARGINAL INVESTMENT OPPORTUNITIES
To
qualify as a REIT for federal income tax purposes, the Company must continually
satisfy tests concerning, among other things, the sources of income, the
nature
and diversification of assets, the amounts distributed to shareholders and
the
ownership of the Company’s stock. In order to meet these tests, the Company may
be required to forgo attractive business or investment opportunities or engage
in marginal investment opportunities. Thus, compliance with the REIT
requirements may hinder the Company’s ability to operate solely on the basis of
maximizing profits.
THE
TAXATION OF CORPORATE DIVIDENDS MAY ADVERSELY AFFECT THE VALUE OF THE COMPANY’S
STOCK
The
Jobs
and Growth Tax Relief Reconciliation Act of 2003, among other things, generally
reduced to 15% the maximum marginal rate of tax payable by domestic noncorporate
taxpayers on dividends received from a regular C corporation for tax years
2003
through 2008. This reduced tax rate does not apply, however, to dividends
paid
to domestic noncorporate taxpayers by a REIT on its stock, except for certain
limited amounts. Although the earnings of a REIT that are distributed to
its
stockholders are generally subject to less federal income taxation than earnings
of a non-REIT C corporation that are distributed to its stockholders net
of
corporate-level income tax, this legislation could cause domestic noncorporate
investors to view the stock of regular C corporations as more attractive
relative to the stock of a REIT than was the case prior to the enactment
of the
legislation, because the dividends from regular C corporations are now generally
taxed at a lower rate while dividends from REITs are generally taxed at the
same
rate as the domestic noncorporate taxpayer’s ordinary income. The more favorable
tax rates applicable to regular corporate dividends could cause domestic
noncorporate investors to perceive investments in REITs to be relatively
less
attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the stock of REITs,
including the Company’s stock.
PROPERTY
INSURANCE LIMITS MAY BE INADEQUATE AND DEDUCTIBLES MAY BE EXCESSIVE IN THE
EVENT
OF A CATASTOPHIC LOSS OR A SERIES OF MAJOR LOSSES, AND MAY CAUSE A BREACH
OF A
LOAN COVENANT
The
Company has a significant proportion of its assets in areas exposed to
windstorms and to the New Madrid earthquake zone. A major wind or earthquake
loss, or series of losses, could require that the Company pay significant
deductibles as well as additional amounts above the $40 million per occurrence
limit of the Company’s insurance for these risks. The Company may then be judged
to have breached one or more of its loan covenants, and any of the foregoing
events could have a material adverse effect on the Company’s assets, financial
condition, and results of operation.
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
|
3.1
|
Amended
and Restated Charter of Mid-America Apartment Communities, Inc.
dated as
of January 10, 1994, as filed with the Tennessee Secretary of State
on
January 25, 1994 (Filed as Exhibit 3.1 to the Registrant’s Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 and incorporated
herein by reference).
|
3.2
|
Articles
of Amendment to the Charter of Mid-America Apartment Communities,
Inc.
dated as of January 28, 1994, as filed with the Tennessee Secretary
of
State on January 28, 1994 (Filed as Exhibit 3.2 to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 1996
and
incorporated herein by
reference).
|
3.3
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Preferred Stock dated as of October 9, 1996, as filed
with the
Tennessee Secretary of State on October 10, 1996 (Filed as Exhibit
1 to
the Registrant’s Registration Statement on Form 8-A filed with the
Commission on October 11, 1996 and incorporated herein by
reference).
|
3.4
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter dated November 17, 1997, as filed with the Tennessee
Secretary of State on November 18, 1997 (Filed as Exhibit 3.6 to
the
Registrant’s Annual Report on Form 10-K for the fiscal year ended December
31, 1997 and incorporated herein by reference).
|
3.5
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Shares of Preferred Stock dated as of November 17, 1997,
as
filed with the Tennessee Secretary of State on November 18, 1997
(Filed as
Exhibit 4.1 to the Registrant’s Registration Statement on Form 8-A/A filed
with the Commission on November 19, 1997 and incorporated herein
by
reference).
|
3.6
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Shares of Preferred Stock dated as of June 25, 1998,
as filed
with the Tennessee Secretary of State on June 30, 1998 (Filed as
Exhibit
4.3 to the Registrant’s Registration Statement on Form 8-A/A filed with
the Commission on June 26, 1998 and incorporated herein by reference).
|
3.7
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of A
Series of Shares of Preferred Stock dated as of December 24, 1998,
as
filed with the Tennessee Secretary of State on December 30, 1998
(Filed as
Exhibit 3.7 to the Registrant’s Registration Statement on Form S-3/A (File
Number 333-112469) and incorporated herein by
reference).
|
3.8
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Shares of Preferred Stock dated as of October 11, 2002,
as filed
with the Tennessee Secretary of State on October 14, 2002 (Filed
as
Exhibit 4.3 to the Registrant’s Registration Statement on Form 8-A/A filed
with the Commission on October 11, 2002 and incorporated herein
by
reference).
|
3.9
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Shares of Preferred Stock dated as of October 28, 2002,
as filed
with the Tennessee Secretary of State on October 28, 2002 (Filed
as
Exhibit 3.9 to the Registrant’s Registration Statement on Form S-3/A (File
Number 333-112469) and incorporated herein by
reference).
|
3.10
|
Mid-America
Apartment Communities, Inc. Articles of Amendment to the Amended
and
Restated Charter Designating and Fixing the Rights and Preferences
of a
Series of Shares of Preferred Stock dated as of August 7, 2003,
as filed
with the Tennessee Secretary of State on August 7, 2003 (Filed
as Exhibit
3.10 to the Registrant’s Registration Statement on Form S-3/A (File Number
333-112469) and incorporated herein by reference).
|
3.11
|
Bylaws
of Mid-America Apartment Communities, Inc. (Filed as an Exhibit
to the
Registrant’s Registration Statement on Form S-11 (File Number 33-69434)
and incorporated herein by reference).
|
3.12
|
First
Amendment to the Bylaws of Mid-America Apartment Communities, Inc.
dated
May 2, 2006 (Filed as Exhibit 3.12 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006 and incorporated
herein by
reference).
|
4.1
|
Form
of Common Share Certificate (Filed as Exhibit 4.1 to the Registrant’s
Annual Report on Form 10-K for the fiscal year ended December 31,
1997 and
incorporated herein by reference).
|
4.2
|
Form
of 9.5% Series A Cumulative Preferred Stock Certificate (Filed
as Exhibit
2 to the Registrant’s Registration Statement on Form 8-A filed with the
Commission on October 11, 1996 and incorporated herein by
reference).
|
4.3
|
Form
of 8 7/8% Series B Cumulative Preferred Stock Certificate (Filed
as
Exhibit 4.3 to the Registrant’s Registration Statement on Form 8-A/A filed
with the Commission on November 19, 1997 and incorporated herein
by
reference).
|
4.4
|
Form
of 9 3/8% Series C Cumulative Preferred Stock Certificate (Filed
as
Exhibit 4.2 to the Registrant’s Registration Statement on Form 8-A/A filed
with the Commission on June 26, 1998 and incorporated herein by
reference).
|
4.5
|
Form
of 9.5% Series E Cumulative Preferred Stock Certificate (Filed
as Exhibit
4.5 to the Registrant’s Registration Statement on Form S-3/A (File Number
333-112469) and incorporated herein by reference).
|
4.6
|
Form
of 9 ¼% Series F Cumulative Preferred Stock Certificate (Filed as Exhibit
4.2 to the Registrant’s Registration Statement on Form 8-A/A filed with
the Commission on October 11, 2002 and incorporated herein by
reference).
|
4.7
|
Form
of 8.30% Series G Cumulative Preferred Stock Certificate (Filed
as Exhibit
4.7 to the Registrant’s Registration Statement on Form S-3/A (File Number
333-112469) and incorporated herein by reference).
|
4.8
|
Form
of 8.30% Series H Cumulative Preferred Stock Certificate (Filed
as Exhibit
4.8 to the Registrant’s Registration Statement on Form S-3/A (File Number
333-112469) and incorporated herein by reference).
|
10.1†
|
Amendment
for the Non-Qualified Deferred Compensation Plan for Outside Directors
(Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on August 24, 2006 and incorporated herein by
reference).
|
14
|
Code
of Ethics (Filed as Exhibit 14.1 to the Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2003 and incorporated
herein
by reference).
|
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
|
†
Management contract or compensatory plan or
arrangement.
|
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:
November 2, 2006
|
/s/Simon
R.C. Wadsworth
|
|
Simon
R.C. Wadsworth
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|