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 June 30, 2008
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from ______ to ______
Commission File Number:
1-12762
MID-AMERICA APARTMENT
COMMUNITIES, INC.
(Exact
name of registrant as specified in its charter)
TENNESSEE
|
62-1543819
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
6584
POPLAR AVENUE, SUITE 300
|
|
MEMPHIS,
TENNESSEE
|
38138
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(901)
682-6600
(Registrant's
telephone number, including area code)
N/A
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
þ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of “accelerated filer,” “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act
Large
accelerated filer þ
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
Reporting Company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes þ No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
|
Number
of Shares Outstanding
|
Class
|
at July 15,
2008
|
Common
Stock, $0.01 par value
|
27,498,199
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
|
|
|
|
TABLE
OF CONTENTS
|
|
|
Page
|
|
PART
I – FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December
31, 2007
|
2
|
|
Condensed
Consolidated Statements of Operations for the three and six months ended
June 30, 2008, and 2007 (Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
2008, and 2007 (Unaudited)
|
4
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
5
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
23
|
Item
4.
|
Controls
and Procedures
|
24
|
Item
4T.
|
Controls
and Procedures
|
24
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
24
|
Item
1A.
|
Risk
Factors
|
24
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
30
|
Item
3.
|
Defaults
Upon Senior Securities
|
30
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
30
|
Item
5.
|
Other
Information
|
31
|
Item
6.
|
Exhibits
|
31
|
|
Signatures
|
32
|
Mid-America Apartment Communities, Inc.
|
Condensed
Consolidated Balance Sheets
|
June
30, 2008 (Unaudited) and December 31, 2007
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2008
|
|
December
31, 2007
|
Assets:
|
|
|
|
|
|
|
|
Real
estate assets:
|
|
|
|
|
|
|
Land
|
|
|
|
$ 222,669
|
|
$ 214,743
|
|
Buildings
and improvements
|
|
2,113,992
|
|
2,044,380
|
|
Furniture,
fixtures and equipment
|
|
60,694
|
|
55,602
|
|
Capital
improvements in progress
|
|
32,938
|
|
12,886
|
|
|
|
|
|
|
2,430,293
|
|
2,327,611
|
|
Less
accumulated depreciation
|
|
(660,053)
|
|
(616,364)
|
|
|
|
|
|
|
1,770,240
|
|
1,711,247
|
|
|
|
|
|
|
|
|
|
|
Land
held for future development
|
|
2,300
|
|
2,360
|
|
Commercial
properties, net
|
|
|
7,910
|
|
6,778
|
|
Investments
in and advances to real estate joint ventures
|
|
6,745
|
|
168
|
|
|
Real
estate assets, net
|
|
|
1,787,195
|
|
1,720,553
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
9,977
|
|
17,192
|
Restricted
cash
|
|
|
3,833
|
|
3,724
|
Deferred
financing costs, net
|
|
|
15,698
|
|
15,219
|
Other
assets
|
|
|
20,554
|
|
23,028
|
Goodwill
|
|
|
|
4,106
|
|
4,106
|
|
|
Total
assets
|
|
|
$ 1,841,363
|
|
$ 1,783,822
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
$ 1,243,827
|
|
$ 1,264,620
|
|
Accounts
payable
|
|
|
1,552
|
|
1,099
|
|
Accrued
expenses and other liabilities
|
|
85,499
|
|
77,252
|
|
Security
deposits
|
|
|
8,851
|
|
8,453
|
|
|
Total
liabilities
|
|
|
1,339,729
|
|
1,351,424
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
31,481
|
|
28,868
|
|
|
|
|
|
|
|
|
|
Redeemable
stock
|
|
|
2,238
|
|
2,574
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value per share, 20,000,000 shares
authorized,
|
|
|
|
|
|
$166,863
or $25 per share liquidation preference;
|
|
|
|
|
|
|
8.30%
Series H Cumulative Redeemable Preferred Stock, 6,200,000
|
|
|
|
|
|
|
|
shares
authorized, 6,200,000 shares issued and outstanding
|
|
62
|
|
62
|
|
Common
stock, $0.01 par value per share, 50,000,000 shares
authorized;
|
|
|
|
|
|
|
27,482,974
and 25,718,880 shares issued and outstanding at
|
|
|
|
|
|
|
June
30, 2008, and December 31, 2007, respectively (1)
|
|
274
|
|
257
|
|
Additional
paid-in capital
|
|
|
920,762
|
|
832,511
|
|
Accumulated
distributions in excess of net income
|
|
(438,251)
|
|
(414,966)
|
|
Accumulated
other comprehensive income
|
|
(14,932)
|
|
(16,908)
|
|
|
Total
shareholders' equity
|
|
467,915
|
|
400,956
|
|
|
Total
liabilities and shareholders' equity
|
|
$ 1,841,363
|
|
$ 1,783,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Number
of shares issued and outstanding represent total shares of common stock
regardless of classification on the
|
|
consolidated
balance sheet. The number of shares classified as redeemable stock on the
consolidated balance sheet
|
|
for
June 30, 2008 and December 31, 2007, are 43,847 and 60,212,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Statements of Operations
|
Three
and six months ended June 30, 2008, and 2007
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ 88,608
|
|
$ 82,875
|
|
$ 176,537
|
|
$ 164,087
|
|
Other
property revenues
|
|
4,165
|
|
3,904
|
|
8,352
|
|
7,649
|
|
Total
property revenues
|
|
92,773
|
|
86,779
|
|
184,889
|
|
171,736
|
|
Management
fee income
|
|
61
|
|
-
|
|
89
|
|
34
|
|
Total
operating revenues
|
|
92,834
|
|
86,779
|
|
184,978
|
|
171,770
|
Property
operating expenses:
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
11,578
|
|
10,472
|
|
22,826
|
|
20,486
|
|
Building
repairs and maintenance
|
|
3,548
|
|
3,188
|
|
6,661
|
|
6,244
|
|
Real
estate taxes and insurance
|
|
11,726
|
|
11,624
|
|
23,167
|
|
22,722
|
|
Utilities
|
|
5,050
|
|
4,761
|
|
10,214
|
|
9,548
|
|
Landscaping
|
|
2,420
|
|
2,296
|
|
4,863
|
|
4,568
|
|
Other
operating
|
|
4,358
|
|
4,128
|
|
8,565
|
|
7,847
|
|
Depreciation
|
|
22,420
|
|
21,108
|
|
44,688
|
|
42,396
|
|
Total
property operating expenses
|
|
61,100
|
|
57,577
|
|
120,984
|
|
113,811
|
Property
management expenses
|
|
4,387
|
|
4,380
|
|
8,645
|
|
8,793
|
General
and administrative expenses
|
|
2,831
|
|
2,556
|
|
5,751
|
|
5,228
|
Income
from continuing operations before non-operating items
|
24,516
|
|
22,266
|
|
49,598
|
|
43,938
|
Interest
and other non-property income
|
|
116
|
|
51
|
|
224
|
|
145
|
Interest
expense
|
|
(15,145)
|
|
(16,034)
|
|
(31,479)
|
|
(32,048)
|
Loss
on debt extinguishment
|
|
-
|
|
(52)
|
|
-
|
|
(52)
|
Amortization
of deferred financing costs
|
|
(486)
|
|
(574)
|
|
(1,114)
|
|
(1,135)
|
Incentive
fees from real estate joint ventures
|
|
-
|
|
-
|
|
-
|
|
1,019
|
Net
gains on insurance and other settlement proceeds
|
|
416
|
|
332
|
|
544
|
|
842
|
Gain
(loss) on sale of non-depreciable assets
|
|
-
|
|
226
|
|
(3)
|
|
226
|
Income
from continuing operations before minority interest and
|
9,417
|
|
6,215
|
|
17,770
|
|
12,935
|
|
investments
in real estate joint ventures
|
|
|
|
|
|
|
|
|
Minority
interest in operating partnership income
|
|
(513)
|
|
(763)
|
|
(1,045)
|
|
(1,801)
|
(Loss)
gains from real estate joint ventures
|
|
(199)
|
|
(51)
|
|
(282)
|
|
5,329
|
Income
from continuing operations
|
|
8,705
|
|
5,401
|
|
16,443
|
|
16,463
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before gain on sale
|
-
|
|
274
|
|
-
|
|
536
|
|
(Loss)
gains on sale of discontinued operations
|
|
(61)
|
|
3,443
|
|
(120)
|
|
3,443
|
Net
income
|
|
8,644
|
|
9,118
|
|
16,323
|
|
20,442
|
Preferred
dividend distributions
|
|
3,217
|
|
3,490
|
|
6,433
|
|
6,981
|
Net
income available for common shareholders
|
|
$ 5,427
|
|
$ 5,628
|
|
$ 9,890
|
|
$ 13,461
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
26,599
|
|
25,288
|
|
26,113
|
|
25,188
|
|
Effect
of dilutive stock options
|
|
128
|
|
176
|
|
129
|
|
189
|
|
Diluted
|
|
26,727
|
|
25,464
|
|
26,242
|
|
25,377
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available for common shareholders
|
|
$ 5,427
|
|
$ 5,628
|
|
$ 9,890
|
|
$ 13,461
|
Discontinued
property operations
|
|
61
|
|
(3,717)
|
|
120
|
|
(3,979)
|
Income
from continuing operations available for common
shareholders
|
$ 5,488
|
|
$ 1,911
|
|
$ 10,010
|
|
$ 9,482
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.20
|
|
$ 0.07
|
|
$ 0.38
|
|
$ 0.37
|
|
Discontinued
property operations
|
|
-
|
|
0.15
|
|
-
|
|
0.16
|
|
Net
income available for common shareholders
|
|
$ 0.20
|
|
$ 0.22
|
|
$ 0.38
|
|
$ 0.53
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.20
|
|
$ 0.07
|
|
$ 0.38
|
|
$ 0.37
|
|
Discontinued
property operations
|
|
-
|
|
0.15
|
|
-
|
|
0.16
|
|
Net
income available for common shareholders
|
|
$ 0.20
|
|
$ 0.22
|
|
$ 0.38
|
|
$ 0.53
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ 0.615
|
|
$ 0.605
|
|
$ 1.230
|
|
$ 1.210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
|
Consolidated
Statements of Cash Flows
|
Six
Months Ended June 30, 2008 and 2007
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$ 16,323
|
|
$ 20,442
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
Income
from discontinued operations before asset impairment,
settlement
|
|
|
|
|
|
|
|
proceeds
and gain on sale
|
|
-
|
|
(536)
|
|
|
Depreciation
and amortization of deferred financing costs
|
|
45,802
|
|
43,531
|
|
|
Stock
compensation expense
|
|
380
|
|
490
|
|
|
Stock
issued to employee stock ownership plan
|
|
495
|
|
440
|
|
|
Redeemable
stock issued
|
|
221
|
|
184
|
|
|
Amortization
of debt premium
|
|
(887)
|
|
(1,018)
|
|
|
Loss
from investments in real estate joint ventures
|
|
320
|
|
58
|
|
|
Minority
interest in operating partnership income
|
|
1,045
|
|
1,801
|
|
|
Loss
on debt extinguishment
|
|
-
|
|
52
|
|
|
Derivative
interest expense
|
|
167
|
|
98
|
|
|
Loss
(gain) on sale of non-depreciable assets
|
|
3
|
|
(226)
|
|
|
Loss
(gain) on sale of discontinued operations
|
|
120
|
|
(3,443)
|
|
|
Gains
on disposition within real estate joint ventures
|
|
(38)
|
|
(5,387)
|
|
|
Incentive
fees from real estate joint ventures
|
|
-
|
|
(1,019)
|
|
|
Net
gains on insurance and other settlement proceeds
|
|
(544)
|
|
(842)
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
(109)
|
|
(4)
|
|
|
|
Other
assets
|
|
7,143
|
|
5,479
|
|
|
|
Accounts
payable
|
|
453
|
|
(2,124)
|
|
|
|
Accrued
expenses and other
|
|
3
|
|
226
|
|
|
|
Security
deposits
|
|
398
|
|
652
|
|
|
Net
cash provided by operating activities
|
|
71,295
|
|
58,854
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Purchases
of real estate and other assets
|
|
(58,293)
|
|
(35,225)
|
|
|
Improvements
to existing real estate assets
|
|
(18,182)
|
|
(13,923)
|
|
|
Renovations
to existing real estate assets
|
|
(8,873)
|
|
(4,709)
|
|
|
Development
|
|
(13,492)
|
|
(9,950)
|
|
|
Distributions
from real estate joint ventures
|
|
1
|
|
9,855
|
|
|
Contributions
to real estate joint ventures
|
|
(6,913)
|
|
(98)
|
|
|
Proceeds
from disposition of real estate assets
|
|
857
|
|
13,778
|
|
|
Net
cash used in investing activities
|
|
(104,895)
|
|
(40,272)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Net
change in credit lines
|
|
3,887
|
|
11,572
|
|
|
Principal
payments on notes payable
|
|
(23,793)
|
|
(11,333)
|
|
|
Payment
of deferred financing costs
|
|
(1,593)
|
|
(1,298)
|
|
|
Repurchase
of common stock
|
|
(474)
|
|
(123)
|
|
|
Proceeds
from issuances of common shares and units
|
|
89,715
|
|
21,906
|
|
|
Distributions
to unitholders
|
|
(3,166)
|
|
(3,012)
|
|
|
Dividends
paid on common shares
|
|
(31,758)
|
|
(30,566)
|
|
|
Dividends
paid on preferred shares
|
|
(6,433)
|
|
(6,981)
|
|
|
Net
cash provided by (used in) financing activities
|
|
26,385
|
|
(19,835)
|
|
|
Net
decrease in cash and cash equivalents
|
|
(7,215)
|
|
(1,253)
|
Cash
and cash equivalents, beginning of period
|
|
17,192
|
|
5,545
|
Cash
and cash equivalents, end of period
|
|
$ 9,977
|
|
$ 4,292
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
Interest
paid
|
|
$ 31,334
|
|
$ 33,809
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
Interest
capitalized
|
|
$ 328
|
|
$ 520
|
Marked-to-market
adjustment on derivative instruments
|
|
$ 1,976
|
|
$ 6,945
|
Reclass
of preferred stock from equity to liabilities
|
|
$
-
|
|
$ 442
|
Reclass
of redeemable stock from equity to liabilities
|
|
$ 475
|
|
$ -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated financial
statements.
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
Notes
to Condensed Consolidated Financial Statements
June
30, 2008, and 2007 (Unaudited)
1. Consolidation
and Basis of Presentation
Mid-America
Apartment Communities, Inc. is a self-administered real estate investment trust,
or REIT, that owns, acquires, renovates, develops and manages apartment
communities in the Sunbelt region of the United States. As of June 30, 2008, we
owned or owned interests in 142 multifamily apartment communities comprising
41,633 apartments located in 13 states, including 2 communities comprising 626
apartments owned through our joint venture, Mid-America Multifamily Fund I, LLC,
and 2 development communities in varying stages of lease-up. None of these
communities were classified as held for sale as of June 30, 2008. In addition,
we had 124 apartments under development and not yet in lease-up adjacent to one
of our existing communities.
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the management of Mid-America Apartment Communities, Inc. in
accordance with U.S. generally accepted accounting principles for interim
financial information and applicable rules and regulations of the Securities and
Exchange Commission and our accounting policies in effect as of December 31,
2007 as set forth in our annual consolidated financial statements, as of such
date. The accompanying unaudited condensed consolidated financial statements
include the accounts of Mid-America Apartment Communities, Inc. and its
subsidiaries, including Mid-America Apartments, L.P. (the “Operating
Partnership”) (collectively, “Mid-America”). 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 six month periods ended June 30, 2008 are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with our audited financial statements
and notes thereto included in Mid-America’s Annual Report on Form 10-K for the
year ended December 31, 2007.
The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the dates of the financial
statements and the amounts of revenues and expenses during the reporting
periods. Actual amounts realized or paid could differ from those
estimates.
2. Segment
Information
As of
June 30, 2008, Mid-America owned or had an ownership interest in 142 multifamily
apartment communities in 13 different states from which it derives all
significant sources of earnings and operating cash flows. Our operational
structure is organized on a decentralized basis, with individual property
managers having overall responsibility and authority regarding the operations of
their respective properties. Each property manager individually monitors
local, market and submarket trends in rental rates, occupancy percentages,
and operating costs. Property managers are given the on-site responsibility and
discretion to react to such trends in the best interest of Mid-America. Our
chief operating decision maker evaluates the performance of each individual
property based on its contribution to net operating income in order to ensure
that the individual property continues to meet our return criteria and long-term
investment goals. We define each of our multifamily communities as an individual
operating segment. We have also determined that all of our communities have
similar economic characteristics and also meet the other criteria which permit
the communities to be aggregated into one reportable segment, which is the
acquisition and operation of the multifamily communities owned.
3. Comprehensive
Income
Total
comprehensive income and its components for the three and six month periods
ended June 30, 2008, and 2007 were as follows (dollars in
thousands):
|
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ 8,644
|
|
$ 9,118
|
|
$ 16,323
|
|
$ 20,442
|
Marked-to-market
adjustment
|
|
|
|
|
|
|
|
|
|
on
derivative instruments
|
|
27,556
|
|
9,871
|
|
1,976
|
|
6,945
|
Total
comprehensive income
|
|
$ 36,200
|
|
$ 18,989
|
|
$ 18,299
|
|
$ 27,387
|
|
|
|
|
|
|
|
|
|
|
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. Real
Estate Acquisitions
On
September 14, 2007, Mid-America entered into an option contract to purchase the
Cascade at Fall Creek apartments, a 246-unit community being built next to our
Chalet at Fall Creek apartments in Humble, Texas, a suburb of Houston. Among
other provisions, the contract required certain construction completion levels
for purchase. On January 10, 2008, the provisions of the contract were met and
Mid-America acquired the Cascade at Fall Creek apartment community.
On
January 17, 2008, Mid-America Multifamily Fund I, LLC, or Fund I, our joint
venture with institutional capital, acquired the Milstead Village apartments, a
310-unit community located in Kennesaw, Georgia, a suburb of Atlanta. This was
the first acquisition made by Fund I.
On March
27, 2008, Fund I acquired a second property, the Greenwood Forest apartments, a
316-unit community located in Greenwood Forest, Texas, a suburb of
Houston.
On May
21, 2008, Mid-America purchased the Providence at Brier Creek apartments, a
313-unit community located in Raleigh, NC.
5. Discontinued
Operations
As part
of Mid-America’s disposition strategy to selectively dispose of mature assets
that no longer meet our investment criteria and long-term strategic objectives,
in April 2006, we entered into an agreement to list the 184-unit Gleneagles
apartments and the 200-unit Hickory Farm apartments both located in Memphis,
Tennessee, for sale. Both of these communities were subsequently sold on May 3,
2007. Also in line with this strategy, in March 2007, we entered into an
agreement to list the 144-unit Somerset apartments and the 192-unit
Woodridge apartments both located in Jackson, Mississippi, for sale. Both of
these communities were subsequently sold on July 16, 2007. In accordance with
Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, or Statement No.
144, these
communities are considered discontinued operations in the accompanying condensed
consolidated financial statements.
The
following is a summary of discontinued operations for the three and six month
periods ended June 30, 2008, and 2007, (dollars in thousands):
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ -
|
|
$ 786
|
|
$ -
|
|
$ 1,962
|
|
Other
revenues
|
|
-
|
|
46
|
|
-
|
|
113
|
|
Total
revenues
|
|
-
|
|
832
|
|
-
|
|
2,075
|
Expenses
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
-
|
|
436
|
|
-
|
|
1,103
|
|
Depreciation
|
|
-
|
|
(1)
|
|
-
|
|
132
|
|
Interest
expense
|
|
-
|
|
123
|
|
-
|
|
304
|
|
Total
expense
|
|
-
|
|
558
|
|
-
|
|
1,539
|
Income
from discontinued operations before
|
|
|
|
|
|
|
|
|
|
gain
on sale and settlement proceeds
|
|
-
|
|
274
|
|
-
|
|
536
|
(Loss)
gain on sale of discontinued operations
|
|
(61)
|
(1)
|
3,443
|
|
(120)
|
(1)
|
3,443
|
Income
from discontinued operations
|
|
$ (61)
|
|
$ 3,717
|
|
$ (120)
|
|
$ 3,979
|
|
|
|
|
|
|
|
|
|
|
(1) Amount
represents adjustment related to final expenses from a disposition of real
estate assets in
a prior period.
|
Subsequent
to June 30, 2008, Mid-America entered into contracts to market the following
communities for sale: River Trace in Memphis, TN, Riverhills in Grenada, MS,
Woodstream in Greensboro, NC and Westbury Springs in Lilburn, GA. As a result,
these communities will be classified as held for sale beginning in July 2008, in
accordance with Statement No. 144.
6. Share
and Unit Information
On June
30, 2008, 27,482,974 common shares and 2,406,411 operating partnership units
were outstanding, representing a total of 29,889,385 shares and units.
Additionally, Mid-America had outstanding options for the purchase of 94,688
shares of common stock at June 30, 2008, of which 42,957 were anti-dilutive. At
June 30, 2007, 25,511,314 common shares and 2,482,593 operating partnership
units were outstanding, representing a total of 27,993,907 shares and units.
Additionally, Mid-America had outstanding options for the purchase of 144,620
shares of common stock at June 30, 2007, of which 64,477 were
anti-dilutive.
During
the three-month period ended June 30, 2008, we issued 1,182,300 shares of common
stock through at-the-market offerings or negotiated transactions and received
net proceeds of $64.0 million under an existing controlled equity offering
program. For the first six months of 2008, we issued a total of 1,482,300 shares
of common stock for net proceeds of $79.5 million through this program, which
exhausted the authorized shares in the sales agreement.
Subsequent
to June 30, 2008, Mid-America entered into a second controlled equity offering
sales agreement with similar terms authorizing the sale of up to 1,350,000
shares of common stock. As of the filing of this Form 10-Q, no shares have been
sold under the new agreement.
7. Derivative
Financial Instruments
In the
normal course of business, Mid-America uses certain derivative financial
instruments to manage, or hedge, the interest rate risk associated with our
variable rate debt or to hedge anticipated future debt transactions to manage
well-defined interest rate risk associated with the transaction.
We do not
use derivative financial instruments for speculative or trading purposes.
Further, Mid-America has a policy of entering into contracts with major
financial institutions based upon their credit rating and other
factors. When viewed in conjunction with the underlying and
offsetting exposure that the derivatives are designated to hedge, Mid-America
has not sustained any material loss from those instruments nor do we anticipate
any material adverse effect on our net income or financial position in the
future from the use of derivatives.
Mid-America
requires that derivative financial instruments designated as cash flow hedges be
effective in reducing the interest rate risk exposure that they are designated
to hedge. This effectiveness is essential for qualifying for hedge accounting.
Instruments that meet the hedging criteria are formally designated as hedging
instruments at the inception of the derivative contract. We formally document
all relationships between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking the hedge transaction.
This process includes linking all derivatives that are designated as fair value
or cash flow hedges to specific assets and liabilities on the balance sheet or
to specific firm commitments or forecasted transactions. We also formally
assess, both at the inception of the hedging relationship and on an ongoing
basis, whether the derivatives used are highly effective in offsetting changes
in cash flows of hedged items. When it is determined that a derivative has
ceased to be a highly effective hedge, Mid-America discontinues hedge accounting
prospectively.
All of
our derivative financial instruments are reported at fair value, are represented
on the balance sheet, and are characterized as cash flow hedges. These
transactions hedge the future cash flows of debt transactions through interest
rate swaps that convert variable payments to fixed payments and interest rate
caps that limit the exposure to rising interest rates. The unrealized
gains/losses in the fair value of these hedging instruments are reported on the
balance sheet with a corresponding adjustment to accumulated other comprehensive
income, with any ineffective portion of the hedging transactions reclassified to
earnings. As of June 30, 2008, and 2007, the ineffective portion of the hedging
transactions reclassified to earnings was a $114,000 increase, and a $69,000
increase, respectively, to interest expense.
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
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 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.
Statement
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, Statement 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
Currently,
Mid-America uses certain derivative financial instruments to manage its interest
rate risk. The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each
derivative. The
fair values of interest rate swaps are determined using the market standard
methodology of netting the discounted future fixed cash payments and the
discounted expected variable cash receipts. The variable cash receipts are
based on an expectation of future interest rates (forward curves) derived from
observable market interest rate curves.
The fair
values of interest rate options are determined using the market standard
methodology of discounting the future expected cash receipts that would
occur if variable interest rates rise above the strike rate of the caps.
The variable interest rates used in the calculation of projected receipts on the
cap are based on an expectation of future interest rates derived from observable
market interest rate curves and volatilities. To comply with the
provisions of Statement 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of
netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads, to evaluate the likelihood of
default by itself and its counterparties. As of June 30, 2008, the
Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are significant to the overall
valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 3 of
the fair value hierarchy.
The
table below presents the Company’s assets and liabilities measured at fair value
on a recurring basis as of June 30, 2008, aggregated by the level in the fair
value hierarchy within which those measurements fall.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at June 30,
2008
(dollars
in thousands)
|
|
|
Quoted
Prices in
|
|
Significant
|
|
|
|
|
|
|
|
Active
Markets
|
|
Other
|
|
Significant
|
|
|
|
|
|
for
Identical
|
|
Observable
|
|
Unobservable
|
|
Balance
at
|
|
|
|
Assets
and Liabilities
|
|
Inputs
|
|
Inputs
|
|
June
30,
|
|
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
2008
|
Assets
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
$ -
|
|
$ -
|
|
$ 2,192
|
|
$ 2,192
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
$ -
|
|
$ -
|
|
$ 16,559
|
|
$ 16,559
|
The table
below presents a reconciliation of the beginning and ending balances of assets
and liabilities having fair value measurements based on significant unobservable
inputs (Level 3).
Changes
in Level 3 Assets/(Liabilities) Measured at Fair Value on a Recurring
Basis
for
the Six Months Ended June 30, 2008
(dollars
in thousands)
|
|
|
|
|
|
|
Total
Realized and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gains
|
|
Included
in Other
|
|
Purchases,
|
|
Net
Transfers
|
|
|
|
|
|
Balance
at
|
|
Included
in
|
|
Comprehensive
|
|
Issuances
and
|
|
In
and/or Out
|
|
Balance
at
|
|
|
|
12/31/2007
|
|
Income
|
|
Income
|
|
Settlements
|
|
of
Level 3
|
|
6/30/2008
|
Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ (15,976)
|
|
$ 134
|
|
$ (537)
|
|
$ 2,012
|
|
$ -
|
|
$ (14,367)
|
Changes
in Level 3 Assets/(Liabilities) Measured at Fair Value on a Recurring
Basis
for
the period April 1, 2008 to June 30, 2008
(dollars
in thousands)
|
|
|
|
|
|
|
Total
Realized and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gains
|
|
Included
in Other
|
|
Purchases,
|
|
Net
Transfers
|
|
|
|
|
|
Balance
at
|
|
Included
in
|
|
Comprehensive
|
|
Issuances
and
|
|
In
and/or Out
|
|
Balance
at
|
|
|
|
3/31/2008
|
|
Income
|
|
Income
|
|
Settlements
|
|
of
Level 3
|
|
6/30/2008
|
Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ (41,744)
|
|
$ (54)
|
|
$ 26,238
|
|
$ 1,193
|
|
$ -
|
|
$ (14,367)
|
Of the
instruments for which the Company utilized significant Level 3 inputs to
determine fair value and that were still held
by the Company at June 30, 2008, the unrealized loss for the six months ended
June 30, 2008 was $537,000. The fair value of these instruments are
reported on the balance sheet in Other Assets and Accrued Expenses and Other
Liabilities with a corresponding adjustment for the unrealized gains/losses to
accumulated other comprehensive income, with any ineffective portion of the
hedging transactions reclassified to interest expense.
Both
observable and unobservable inputs may be used to determine the fair value of
positions that the Company has classified within the Level 3 category. As a
result, the unrealized gains and losses for assets and liabilities within the
Level 3 category presented in the tables above may include changes in fair value
that were attributable to both observable and unobservable inputs.
8. Recent
Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 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. FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement
157, or FSP 157-2, delays the effective date of Statement 157 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. For these items, the effective date will be for fiscal years
beginning after November 15, 2008. Mid-America adopted Statement 157
effective January 1, 2008. Management does not believe the adoption has had or
will have a material impact on our consolidated financial condition or results
of operations taken as a whole.
On
December 4, 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations, or
Statement 141R. Statement 141R will significantly change the accounting for
business combinations. Under Statement 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions.
Statement 141R will change the accounting treatment for certain specific items,
including acquisition costs which will generally be expensed as
incurred. This will have a material impact on the way Mid-America
accounts for property acquisitions and therefore will have a material impact on
Mid-America’s financial statements. Statement 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
On
December 4, 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51, or
Statement 160. Statement 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. This will impact the financial
statement presentation of Mid-America by requiring the minority interests in the
operating partnership to be presented as a non-controlling interest as a
component of equity. Statement 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.
On March
19, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133,
or Statement 161. Statement 161 enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how an entity uses derivative instruments and how
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, and how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. Statement 161 is effective for
fiscal years and interim periods beginning after November 15, 2008.
9. Subsequent
Events
Held
for Sale
In July
2008, Mid-America entered into marketing contracts to list four communities for
sale: River Trace in Memphis, TN, Riverhills in Grenada, MS, Woodstream in
Greensboro, NC and Westbury Springs in Lilburn, GA. As a result, these
communities will be classified as held for sale beginning in July
2008.
Share
and Unit Information
On July
3, 2008, Mid-America entered into a controlled equity offering sales agreement
with Cantor Fitzgerald & Co. to sell up to 1,350,000 shares of Mid-America’s
common stock, from time-to-time in at-the-market offerings or negotiated
transactions. At the time of the filing of this Form 10-Q, no shares had been
sold through this agreement.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes appearing elsewhere in this
report. Historical results and trends which might appear in the
condensed consolidated financial statements should not be interpreted as being
indicative of future operations.
Forward
Looking Statements
We
consider portions of this Report to be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, with respect to our expectations for future
periods. Forward looking statements do not discuss historical fact, but instead
include statements related to expectations, projections, intentions or other
items related to the future. Such forward-looking statements include,
without limitation, statements concerning property acquisitions and
dispositions, development activity and capital expenditures, capital raising
activities, rent growth, occupancy, and rental expense growth. Words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
and variations of such words and similar expressions are intended to identify
such forward-looking statements. Such statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements to be materially different from the results of
operations or plans expressed or implied by such forward-looking statements.
Such factors include, among other things, unanticipated adverse business
developments affecting us, or our properties, adverse changes in the real estate
markets and general and local economies and business conditions. Although we
believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and therefore
such forward-looking statements included in this report may not 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 us or any other person that the
results or conditions described in such statements or our objectives and plans
will be achieved.
The
following factors, among others, could cause our future results to differ
materially from those expressed in the forward-looking statements:
·
|
inability
to generate sufficient cash flows due to market conditions, changes in
supply and/or demand, competition, uninsured losses, changes in tax and
housing laws, or other factors,
|
·
|
inability
to acquire funding through the capital
markets,
|
·
|
inability
to pay required distributions to maintain REIT status due to required debt
payments,
|
·
|
changes
in variable interest rates,
|
·
|
loss
of hedge accounting treatment for interest rate swaps due to volatility in
the financial markets,
|
·
|
unexpected
capital needs,
|
·
|
significant
disruption in the credit markets, including the inability of Fannie Mae
and Freddie Mac to continue as major suppliers of debt financing for
multi-family housing and for
Mid-America,
|
·
|
increasing
real estate taxes and insurance
costs,
|
·
|
losses
from catastrophes in excess of our insurance
coverage
|
·
|
inability
to meet loan covenants,
|
·
|
inability
to attract and retain qualified
personnel,
|
·
|
failure
of new acquisitions to achieve anticipated results or be efficiently
integrated into Mid-America,
|
·
|
inability
to timely dispose of assets,
|
·
|
potential
liability for environmental
contamination,
|
·
|
litigation
and compliance costs associated with laws requiring access for disabled
persons,
|
·
|
inability
of a joint venture to perform as
expected,
|
·
|
the
imposition of federal taxes if we fail to qualify as a REIT under the
Internal Revenue Code in any taxable year or foregone opportunities to
ensure REIT status,
|
These
factors, among others, are set forth below in Part II, Item 1A. Risk Factors. We
encourage investors to review these risks factors.
Critical
Accounting Policies and Estimates
The
following discussion and analysis of financial condition and results of
operations are based upon Mid-America’s condensed consolidated financial
statements, and the notes thereto, which have been prepared in accordance with
U.S. generally accepted accounting principles, or GAAP. The preparation of these
condensed consolidated financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts and disclosures in
the condensed consolidated financial statements. On an ongoing basis, we
evaluate our estimates and assumptions based upon historical experience and
various other factors and circumstances. We believe that our estimates and
assumptions are reasonable under the circumstances; however, actual results may
differ from these estimates and assumptions.
We
believe that the estimates and assumptions listed below are most important to
the portrayal of our financial condition and results of operations because they
require the greatest subjective determinations and form the basis of accounting
policies deemed to be most critical. These critical accounting policies include
revenue recognition, capitalization of expenditures and depreciation of assets,
impairment of long-lived assets, including goodwill, and fair value of
derivative financial instruments.
Revenue
Recognition
Mid-America
leases multifamily residential apartments under operating leases primarily with
terms of one year or less. Rental revenues are
recognized using a method that represents a straight-line basis over the term of
the lease and other revenues are recorded when earned.
We record
all gains and losses on sales of real estate in accordance with Statement No.
66, Accounting for Sales of
Real Estate.
Capitalization
of expenditures and depreciation of assets
Mid-America
carries real estate assets at 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, 3 to 5 years for computers and
software, and 1 year for acquired leases, 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
Mid-America in order to elevate the condition of the property to Mid-America’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 and Statement No.
34, Capitalization of Interest
Cost.
Impairment
of long-lived assets, including goodwill
Mid-America
accounts for long-lived assets in accordance with the provisions of Statement
No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, or Statement 144, and
evaluates its goodwill for impairment under Statement No. 142, Goodwill and Other Intangible
Assets, or Statement 142. Mid-America evaluates goodwill for impairment
on an annual basis in Mid-America’s fiscal fourth quarter, or sooner if a
goodwill impairment indicator is identified. Mid-America periodically evaluates
long-lived assets, including investments in real estate and goodwill, for
indicators that would suggest that the carrying amount of the assets may not be
recoverable. The judgments regarding the existence of such indicators are based
on factors such as operating performance, market conditions, and legal
factors.
In
accordance with Statement 144, long-lived assets, such as real estate assets,
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
In
accordance with Statement 142, 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, Mid-America
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. Mid-America 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
Mid-America
utilizes certain derivative financial instruments, primarily interest rate swaps
and caps, during the normal course of business to manage, or hedge, the interest
rate risk associated with Mid-America’s variable rate debt or as hedges in
anticipation of future debt transactions to manage well-defined interest rate
risk associated with the transaction.
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 Mid-America’s calculation of hedge effectiveness contains some
subjective determinations, the historical correlation of the hedging instruments
and the underlying hedged item are measured by Mid-America before entering into
the hedging relationship and have been found to be highly
correlated.
Mid-America
measures ineffectiveness using the change in the variable cash flows method for
each reporting period 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.
On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
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
applies to reported balances that are required or permitted to be measured at
fair value under existing accounting pronouncements; accordingly, the standard
does not require any new fair value measurements of reported
balances.
Statement
157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering market
participant assumptions in fair value measurements, Statement 157 establishes a
fair value hierarchy that distinguishes between market participant assumptions
based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that the Company has the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
The
valuation of our derivative financial instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative. The fair values of
interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash payments and the discounted expected
variable cash receipts. The variable cash receipts are based on an
expectation of future interest rates (forward curves) derived from observable
market interest rate curves. The fair values of interest rate caps are
determined using the market standard methodology of discounting the future
expected cash receipts that would occur if variable interest rates rise above
the strike rate of the caps. The variable interest rates used in the
calculation of projected receipts on the cap are based on an expectation of
future interest rates derived from observable market interest rate curves and
volatilities. To
comply with the provisions of Statement 157, the Company incorporates credit
valuation adjustments to appropriately reflect both its own nonperformance risk
and the respective counterparty’s nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of
netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
Although
the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by itself and its counterparties. As of June 30, 2008, the
Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has
determined that the credit valuation adjustments are significant to the overall
valuation of its derivatives. As a result, the Company has determined
that its derivative valuations in their entirety are classified in Level 3 of
the fair value hierarchy. As of June 30, 2008, the Company had a
total notional amount of $925.4 million in derivative instruments, all of which
had fair values measured using Level 3 inputs. Realized and unrealized losses
did not materially affect our results of operations, liquidity or capital
resources during the second quarter. The Company experienced an
overall increase in fair value of our derivatives due to the fluctuations in the
interest rate market throughout the second quarter. The Company does
not anticipate realizing a significant portion of the current unrealized
loss.
Overview
of the Three Months Ended June 30, 2008
Mid-America’s
operating results for the three months ended June 30, 2008 benefited from
continued improvement in rental revenues at our existing communities and the
addition of six communities purchased during 2007 and 2008.
Mid-America
also benefited from reduced interest expense as the reduction in our average
cost of debt more than offset the increase in our debt outstanding.
The
following is a discussion of the consolidated financial condition and results of
operations of Mid-America for the three and six month periods ended June 30,
2008. 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 June 30, 2008 to the Three Months Ended June 30,
2007
Property
revenues for the three months ended June 30, 2008 were approximately $92.8
million, an increase of approximately $6.0 million from the three months
ended June 30, 2007 due to (i) a $3.9 million increase in property revenues from
the six properties acquired during 2007 and 2008, or the Acquisitions, (ii) a
$0.4 million increase in property revenues from our development communities, and
(iii) a $1.7 million increase in property revenues from all other communities.
The increase in property revenues from all other communities was generated
primarily by our same store portfolio and was driven by a 1.8% increase in
average effective rent per unit in the second quarter of 2008 from the second
quarter of 2007. Communities are moved into our same store portfolio the quarter
after they have been held and were stabilized for at least 12 months.
Communities excluded from the same store portfolio would include recent
acquisitions, communities being developed or in lease-up, communities undergoing
extensive renovations, and communities that have been approved by the Board of
Directors to be sold. The four communities approved for sale as of June 30,
2008, are being excluded from the same store portfolio before they meet the
technical requirements to be classified as discontinued operations under
Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, because during the
three months ended June 30, 2008, management initiated various programs in
preparation for disposing of the communities and therefore felt it was
inappropriate to include the communities in the same store group.
Property
operating expenses include costs for property personnel, property bonuses,
building repairs and maintenance, real estate taxes and insurance, utilities,
landscaping and other property related costs. Property operating expenses for
the three months ended June 30, 2008 were approximately $38.7 million, an
increase of approximately $2.2 million from the three months ended June 30, 2007
due primarily to increases in property operating expenses of (i) $1.6 million
from the Acquisitions, (ii) $0.1 million from our development communities, and
(iii) $0.5 million from all other communities.
Depreciation
expense for the three months ended June 30, 2008 was approximately $22.4
million, an increase of approximately $1.3 million from the three
months ended June 30, 2007 primarily due to the increases in depreciation
expense of (i) $1.2 million from the Acquisitions, (ii) $0.1 million from
our development communities, and (iii) $0.4 million 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 decrease in depreciation expense of $0.4 million from the
expiration of the amortization of fair market value of leases of communities
previously acquired by Mid-America.
Property
management expenses for the three months ended June 30, 2008 remained relatively
flat at approximately $4.4 million from the same level for the second quarter of
2007. General and administrative expenses increased by approximately $0.3
million over this same period mainly as a result of increased
headcount.
Interest
expense for the three months ended June 30, 2008 was approximately $15.1
million, a decrease of $0.9 million, from the three months ended June 30, 2007
primarily due to a decrease in our average borrowing cost from 5.51% for the
second quarter of 2007 to 4.81% for the second quarter of 2008.
In the
three months ended June 30, 2007, Mid-America benefited from gains totaling
approximately $3.7 million due to the sale of two properties and some land. No
properties were sold during the second quarter of 2008.
Primarily
as a result of the foregoing, net income decreased by approximately $0.5 million
in the second quarter of 2008 from the second quarter of 2007.
Comparison
of the Six Months Ended June 30, 2008 to the Six Months Ended June 30,
2007
Property
revenues for the six months ended June 30, 2008 were approximately $184.9
million, an increase of approximately $13.2 million from the six months
ended June 30, 2007 due to (i) a $7.7 million increase in property revenues from
the Acquisitions, (ii) an $0.8 million increase in property revenues from our
development communities, and (iii) a $4.7 million increase in property revenues
from all other communities. The increase in property revenues from all other
communities was generated primarily by our same store portfolio and was driven
by increases in average effective rent per unit and a reduction in the rate of
concessions of net potential rent from the first six months of 2007 to the first
six months of 2008.
Property
operating expenses include costs for property personnel, property bonuses,
building repairs and maintenance, real estate taxes and insurance, utilities,
landscaping and other property related costs. Property operating expenses for
the six months ended June 30, 2008 were approximately $76.3 million, an increase
of approximately $4.9 million from the six months ended June 30, 2007 due
primarily to increases in property operating expenses of (i) $3.5 million from
the Acquisitions, (ii) $0.3 million from our development communities, and (iii)
$1.1 million from all other communities.
Depreciation
expense for the six months ended June 30, 2008 was approximately $44.7 million,
an increase of approximately $2.3 million from the six months ended
June 30, 2007 primarily due to the increases in depreciation expense of (i)
$2.4 million from the Acquisitions, (ii) $0.3 million from our development
communities, and (iii) $0.7 million 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 decrease in depreciation expense of $1.1 million from the expiration of the
amortization of fair market value of leases of communities previously acquired
by Mid-America.
Property
management expenses for the six months ended June 30, 2008 were approximately
$8.6 million, a slight decrease of $0.1 million from the six months ended June
30, 2007. General and administrative expenses increased by approximately $0.5
million over this same period mainly as a result of increased
headcount.
Interest
expense for the six months ended June 30, 2008 was approximately $31.5 million,
a decrease of $0.6 million from the six months ended June 30, 2007 primarily due
to a decrease in our average borrowing cost from 5.52% for the first six months
of 2007 to 4.97% for the first six months of 2008.
In the
six months ended June 30, 2007, Mid-America benefited from gains totaling
approximately $10.0 million due to the sale of two properties, the sale of some
land, and the sale of joint venture assets and a resultant incentive fee. No
properties were sold during the first six months of 2008.
Primarily
as a result of the foregoing, net income decreased by approximately $4.1 million
in the first six months of 2008 from the first six months of 2007.
Funds
From Operations and Net Income
Funds
from operations, or FFO, represents net income (computed in accordance with
GAAP), excluding extraordinary items, minority interest in Operating Partnership
income, gains or losses on disposition of real estate assets, plus depreciation
of real estate, and adjustments for joint ventures to reflect FFO on the same
basis. This definition of FFO is in accordance with the National Association of
Real Estate Investment Trust’s, or NAREIT, definition. Disposition of
real estate assets includes sales of discontinued operations as well as proceeds
received from insurance and other settlements from property damage.
In
response to the Securities and Exchange Commission’s Staff Policy Statement
relating to Emerging Issues Task Force Topic D-42 concerning the calculation of
earnings per share for the redemption of preferred stock, we include the amount
charged to retire preferred stock in excess of carrying values in our FFO
calculation.
Mid-America’s
policy is to expense the cost of interior painting, vinyl flooring, and blinds
as incurred for stabilized properties. During the stabilization period,
typically the first 12 months, for acquisition properties, these items are
capitalized as part of the total repositioning program of newly acquired
properties, and thus are not deducted in calculating FFO.
FFO
should not be considered as an alternative to net income or any other GAAP
measurement of performance, as an indicator of operating performance, or as an
alternative to cash flow from operating, investing, and financing activities as
a measure of liquidity. We believe that FFO is helpful to investors in
understanding our operating performance in that such calculation excludes
depreciation expense on real estate assets. We believe that GAAP historical cost
depreciation of real estate assets is generally not correlated with changes in
the value of those assets, whose value does not diminish predictably over time,
as historical cost depreciation implies. Our calculation of FFO may differ from
the methodology for calculating FFO utilized by other REITs and, accordingly,
may not be comparable to such other REITs.
The
following table is a reconciliation of FFO to net income for the three and six
month periods ended June 30, 2008, and 2007 (dollars and shares in
thousands):
|
|
|
Three
months
|
|
Six
months
|
|
|
|
ended
June 30,
|
|
ended
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Net
income
|
|
$ 8,644
|
|
$ 9,118
|
|
$ 16,323
|
|
$ 20,442
|
Depreciation
of real estate assets
|
|
22,006
|
|
20,781
|
|
43,967
|
|
41,752
|
Net
gains on insurance and other settlement proceeds
|
|
(416)
|
|
(332)
|
|
(544)
|
|
(842)
|
Gain
on dispositions within real estate joint ventures
|
|
(38)
|
|
-
|
|
(38)
|
|
(5,387)
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
discontinued
operations
|
|
-
|
|
(1)
|
|
-
|
|
132
|
Loss
(gains) on sale of discontinued operations
|
|
61
|
|
(3,443)
|
|
120
|
|
(3,443)
|
Depreciation
of real estate assets of
|
|
|
|
|
|
|
|
|
|
real
estate joint ventures
|
|
275
|
|
-
|
|
370
|
|
14
|
Preferred
dividend distribution
|
|
(3,217)
|
|
(3,490)
|
|
(6,433)
|
|
(6,981)
|
Minority
interest in operating partnership income
|
|
513
|
|
763
|
|
1,045
|
|
1,801
|
Funds
from operations
|
|
$ 27,828
|
|
$ 23,396
|
|
$ 54,810
|
|
$ 47,488
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares and units:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
29,017
|
|
27,775
|
|
28,535
|
|
27,676
|
|
Diluted
|
|
29,146
|
|
27,951
|
|
28,663
|
|
27,865
|
FFO for
the three and six month periods ended June 30, 2008 increased primarily as the
result of recently acquired properties, improved performance from existing
properties and a decrease in interest expense from the reduction in our cost of
borrowing.
Trends
During
the first half of 2008, rental demand for apartments continued at robust
levels in most of Mid-America’s markets with the notable exception of
Florida, where after several years of good growth, markets were a little weak.
Towards the end of the second quarter, we experienced a modest slow-down in
traffic and a reduction in our rate of revenue growth, which we think is likely
to be due to the slow down in general economic conditions. Our same store
portfolio reported an average effective rent growth of 2.2% over the first half
of 2007. Same store effective rent growth for the second quarter of 2008 was
also up an average of 0.2% over the first quarter of
2008. Exceptional performers were markets in Texas, the Carolinas,
and Tennessee.
Job
formation, which is the primary driver of demand by apartment residents,
continued in most of our markets, but showed signs of slowing towards the end of
the second quarter. On the supply side, new apartment construction continued to
be limited, as in most markets, rents have yet to rise sufficiently to offset
the rapid run-up of costs of new construction over the last five years.
Competition from condominiums reverting back to being rental units, or new
condominiums being converted to rental, was not a major factor in most of our
markets because most of our markets and submarkets have not been primary areas
for condominium development. We have found the same to be true for rental
competition from single family homes. We have avoided committing a significant
amount of capital to markets where most of the excessive inflation in house
prices has occurred. We are seeing significant rental competition from
condominiums and single family houses in only a few submarkets.
The
primary reason that our residents leave us is to buy a house, but we have seen
that reason as a percent of total move-outs drop over the past twelve months.
Analysts point out that homeownership increased from 65% to over 69% of
households over ten years ending 2005, representing approximately 5 million
households, driven primarily by the availability of new mortgage products, many
requiring no down-payment and minimal credit reporting. With a reversion of
mortgage underwriting back to more traditional standards, it is possible that a
long-term correction will occur, and that home ownership may return to more
sustainable levels. This could be quite significant for the apartment business,
and we believe, if this occurs, it could benefit us for several
years.
We
believe that the signs of slower revenue growth and reduced traffic will be
temporary, and that revenue growth should accelerate later in 2009 and 2010. We
believe reduced availability of financing for new apartment construction will
likely limit new apartment supply, and more sustainable credit terms for
residential mortgages should work to favor rental demand at existing
multi-family properties. At the same time, we expect long term demographic
trends, including the growth of prime age groups for rentals, immigration, and
population movement to the southeast and southwest will continue to build
apartment rental demand for Mid-America’s markets.
While it
seems possible that we will face slower economic growth as a result of reduced
liquidity in the economy, we think that the supply of new apartments is not
excessive, and that positive absorption of apartments will occur for most of our
markets for the next two or three years. Should the economy fall into recession,
the limited new supply of apartments and the more controlled competition from
single family housing should lessen the impact.
Liquidity
and Capital Resources
Net cash
flow provided by operating activities increased by approximately $12.4 million
from $58.9 million in the first six months of 2007 to $71.3 million in the first
six months of 2008 mainly as a result of cash from improved existing and new
property operations.
Net cash
used in investing activities increased by approximately $64.6 million during the
first six months of 2008 to $104.9 million from $40.3 million in the first six
months of 2007. In the first six months of 2008, Mid-America spent an additional
$29.9 million on property acquisitions (including joint venture investments)
than in the first six months of 2007. Mid-America also spent an additional $8.4
million over the same time period on improvements and renovations at existing
properties. During the first six months of 2007, Mid-America received $23.6
million related to property dispositions (including joint venture dispositions).
There were no property sales during the first six months of 2008.
The first
six months of 2008 provided $26.4 million from financing activities compared to
$19.8 million used by financing activities in the first six months of 2007, an
increase of $46.2 million. This change was mainly due to the proceeds from the
issuance of common shares through at-the-market offerings or negotiated
transactions under a controlled equity offering program, or CEO. During the
first six months of 2007, we issued a total of 323,700 shares of common stock
and received net proceeds of $18.8 million under the CEO. During the first six
months of 2008, we issued a total of 1,482,300 shares of common stock for net
proceeds $79.5 million which exhausted the authorized shares in the existing
CEO.
Subsequent
to June 30, 2008, Mid-America entered into a second controlled equity offering
sales agreement with similar terms authorizing the sale of up to 1,350,000
shares of common stock. As of the filing of this Form 10-Q, no shares have been
sold under the new agreement.
The
weighted average interest rate at June 30, 2008 for the $1.2 billion of debt
outstanding was 4.9%, compared to the weighted average interest rate of 5.5% on
$1.2 billion of debt outstanding at June 30, 2007. Mid-America utilizes both
conventional and tax exempt debt to help finance its activities. Borrowings are
made through individual property mortgages as well as company-wide secured
credit facilities. We utilize fixed rate borrowings, interest rate swaps and
interest rate caps to manage our current and future interest rate risk. More
details on our borrowings can be found in the schedule presented later in this
section.
At June
30, 2008, Mid-America had secured credit facility relationships with Prudential
Mortgage Capital which are credit enhanced by the Federal National Mortgage
Association, or FNMA, Federal Home Loan Mortgage Corporation, or Freddie MAC,
and a group of banks led by AmSouth Bank. Together, these credit facilities
provided a total line capacity of $1.4 billion and collateralized availability
to borrow of $1.3 billion at June 30, 2008. Mid-America had total borrowings
outstanding under these credit facilities of $1.1 billion at June 30,
2008.
Approximately
71% of Mid-America’s outstanding obligations at June 30, 2008 were borrowed
through facilities with/or credit enhanced by FNMA, also referred to as the FNMA
Facilities. The FNMA Facilities have a combined line limit of $1.0 billion,
practically all of which was collateralized and available to borrow at June 30,
2008. Mid-America had total borrowings outstanding under the FNMA Facilities of
approximately $885 million at June 30, 2008. Various traunches of the FNMA
Facilities mature from 2011 through 2018. The FNMA Facilities provide for both
fixed and variable rate borrowings. The interest rate on the majority of the
variable portion renews every 90 days and is based on the FNMA Discount Mortgage
Backed Security, or DMBS, rate on the date of renewal, which has typically
approximated three-month LIBOR less an average spread of 0.05% - 0.12% over the
life of the FNMA Facilities, plus a credit enhancement fee of 0.49% to
0.795%. While the DMBS continued to trade below three-month LIBOR,
the spread between them increased during the fourth quarter of 2007 and the
first two quarters of 2008 up to a high of 0.73%, with an average for the second
quarter of 2008 of 0.53%. While we feel this recent increase is an anomaly and
believe that this spread will return to more historic levels, Mid-America cannot
forecast when or if the uncertainty and volatility in the market may
change.
Each of
Mid-America’s secured credit facilities is subject to various covenants and
conditions on usage, and is subject to periodic re-evaluation of collateral. If
we were to fail to satisfy a condition to borrowing, the available credit under
one or more of the facilities could not be drawn, which could adversely affect
our liquidity. In the event of a reduction in real estate values the amount of
available credit could be reduced. Moreover, if we were to fail to make a
payment or violate a covenant under a credit facility, after applicable cure
periods, one or more of our lenders could declare a default, accelerate the due
date for repayment of all amounts outstanding and/or foreclose on properties
securing such facilities. Any such event could have a material adverse
effect.
As of
June 30, 2008, Mid-America had entered into interest rate swaps totaling a
notional amount of $778 million. To date, these swaps have proven to be highly
effective hedges. We had also entered into an additional $75 million of forward
interest rate swaps as of June 30, 2008. As of June 30, 2008, Mid-America had
entered interest rate cap agreements totaling a notional amount of approximately
$72 million.
Summary
details of the debt outstanding at June 30, 2008 follows in the table below
(dollars in thousands):
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized
|
|
Balance/
|
|
Average
|
|
Average
|
|
Average
|
|
|
|
|
Line
|
|
Line
|
|
Notional
|
|
Interest
|
|
Rate
|
|
Contract
|
|
|
|
|
Limit
|
|
Availability
|
|
Amount
|
|
Rate
|
|
Maturity
|
|
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMBINED
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate or Swapped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
$ 915,956
|
|
5.5%
|
|
8/8/2012
|
|
8/8/2012
|
|
Tax
Exempt
|
|
|
|
|
|
48,115
|
|
4.5%
|
|
8/4/2015
|
|
8/4/2015
|
|
|
Subtotal
Fixed Rate or Swapped
|
|
|
|
|
|
964,071
|
|
5.5%
|
|
10/2/2012
|
|
10/2/2012
|
Variable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
|
|
|
|
|
|
202,940
|
|
2.9%
|
|
8/28/2008
|
|
4/18/2014
|
|
Tax
Exempt
|
|
|
|
|
|
4,760
|
|
2.6%
|
|
6/30/2008
|
|
6/1/2028
|
|
Conventional
- Capped
|
|
|
|
|
|
17,936
|
|
3.0%
|
|
11/13/2009
|
|
11/13/2009
|
|
Tax
Exempt - Capped
|
|
|
|
|
|
54,120
|
|
2.4%
|
|
1/20/2012
|
|
1/20/2012
|
|
|
Subtotal
Variable Rate
|
|
|
|
|
|
279,756
|
|
2.8%
|
|
8/18/2008
|
|
7/2/2014
|
Total
Combined Debt Outstanding
|
|
|
|
|
|
$
1,243,827
|
|
4.9%
|
|
10/29/2011
|
|
2/22/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNDERLYING
DEBT
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual
Property Mortgages/Bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conventional
Fixed Rate
|
|
|
|
|
|
$ 108,956
|
|
5.1%
|
|
11/8/2014
|
|
11/8/2014
|
|
Tax
Exempt Fixed Rate
|
|
|
|
|
|
11,720
|
|
5.2%
|
|
12/1/2028
|
|
12/1/2028
|
|
Tax
Exempt Variable Rate
|
|
|
|
|
|
4,760
|
|
2.6%
|
|
6/30/2008
|
|
6/1/2028
|
FNMA
Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Free Borrowings
|
|
$ 90,515
|
|
$ 90,515
|
|
90,515
|
|
2.4%
|
|
7/15/2008
|
|
3/1/2014
|
|
Conventional
Borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate Borrowings
|
|
65,000
|
|
65,000
|
|
65,000
|
|
7.7%
|
|
11/30/2009
|
|
11/30/2009
|
|
|
Variable
Rate Borrowings
|
|
888,914
|
|
872,234
|
|
729,318
|
|
2.9%
|
|
8/28/2008
|
|
1/24/2015
|
Subtotal
FNMA Facilities
|
|
1,044,429
|
|
1,027,749
|
|
884,833
|
|
3.2%
|
|
9/26/2008
|
|
8/5/2014
|
Freddie
Mac Credit Facility I
|
|
100,000
|
|
96,404
|
|
96,404
|
|
3.0%
|
|
9/7/2008
|
|
7/1/2011
|
Freddie
Mac Credit Facility II
|
|
200,000
|
|
97,725
|
|
97,725
|
|
2.9%
|
|
8/23/2008
|
|
6/2/2014
|
AmSouth
Credit Facility
|
|
50,000
|
|
44,138
|
|
290
|
|
3.7%
|
|
6/30/2008
|
|
5/24/2010
|
Union
Planters Bank
|
|
|
|
|
|
39,139
|
|
3.6%
|
|
8/31/2008
|
|
4/1/2009
|
Total
Underlying Debt Outstanding
|
|
|
|
|
|
$
1,243,827
|
|
3.4%
|
|
6/12/2009
|
|
5/19/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEDGING
INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
$ 742,000
|
|
5.4%
|
|
7/4/2012
|
|
|
|
SIFMA
indexed
|
|
|
|
|
|
36,395
|
|
4.3%
|
|
4/20/2011
|
|
|
|
Forward
LIBOR indexed
|
|
|
|
|
|
75,000
|
|
4.8%
|
|
1/9/2014
|
|
|
Total
Interest Rate Swaps
|
|
|
|
|
|
$ 853,395
|
|
5.3%
|
|
8/2/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Caps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIBOR
indexed
|
|
|
|
|
|
$ 17,936
|
|
6.2%
|
|
11/13/2009
|
|
|
|
SIFMA
indexed
|
|
|
|
|
|
54,120
|
|
6.0%
|
|
1/20/2012
|
|
|
Total
Interest Rate Caps
|
|
|
|
|
|
$ 72,056
|
|
6.0%
|
|
7/5/2011
|
|
|
Mid-America
believes that it has adequate resources to fund its current operations, annual
refurbishment of its properties, and incremental investment in new apartment
properties. We rely on the efficient operation of the financial markets to
finance debt maturities, and are also heavily reliant on the creditworthiness of
FNMA, which provided credit enhancement for approximately $885 million of our
debt as of June 30, 2008. The interest rate market for FNMA DMBS, which in our
experience is highly correlated with three-month LIBOR interest rates, is also
an important component of our liquidity and interest rate swap effectiveness. In
the event that the FNMA DMBS market becomes less efficient, or the credit of
FNMA becomes impaired, we would seek alternative sources of debt
financing.
For the
six months ended June 30, 2008, Mid-America’s net cash provided by operating
activities was in excess of covering funding improvements to existing real
estate assets, distributions to unitholders, and dividends paid on common and
preferred shares by approximately $11.8 million, as compared to $4.4 million for
the same period in 2007. While Mid-America has sufficient liquidity to permit
distributions at current rates through additional borrowings, if necessary, any
significant deterioration in operations could result in our financial resources
being insufficient to pay distributions to shareholders at the current rate, in
which event we would be required to reduce the distribution rate.
The
following table reflects Mid-America’s total contractual cash obligations which
consists of its long-term debt and operating leases as of June 30, 2008,
(dollars in thousands):
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
(1) |
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Total
|
|
Long-Term
Debt
(2)
|
$ 61,127
|
|
$ 105,871
|
|
$ 2,118
|
|
$ 178,333
|
|
$ 20,665
|
|
$ 875,713
|
|
$ 1,243,827
|
|
Fixed
Rate or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swapped
Interest (3)
|
|
26,380
|
|
45,745
|
|
37,687
|
|
30,420
|
|
22,393
|
|
37,657
|
|
200,282
|
|
Operating
Lease
|
9
|
|
16
|
|
16
|
|
16
|
|
8
|
|
-
|
|
65
|
|
Total |
|
$ 87,516
|
|
$ 151,632
|
|
$ 39,821
|
|
$ 208,769
|
|
$ 43,066
|
|
$ 913,370
|
|
$ 1,444,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Fixed rate and swapped interest are shown in this table. The
average interest rates of variable rate debt are shown in the
preceeding table.
|
(2)
Represents principal payments.
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Swapped interest is subject to the ineffective portion of cash flow hedges
as described in Note 7 to the financial
statements.
|
Off-Balance
Sheet Arrangements
At June
30, 2008, and 2007, Mid-America did not have any relationships with
unconsolidated entities or financial partnerships established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Mid-America’s two joint ventures with Crow Holdings (one
terminated in 2005 and one terminated in 2007) were established to acquire
approximately $200 million of multifamily properties and to enhance
Mid-America’s return on investment through the generation of fee income.
Mid-America Multifamily Fund I, LLC, was established to acquire $500 million of
apartment communities with redevelopment upside offering value creation
opportunity through capital improvements, operating enhancements and
restructuring in-place financing. In addition, Mid-America does not engage in
trading activities involving non-exchange traded contracts. As such, Mid-America
is not materially exposed to any financing, liquidity, market, or credit risk
that could arise if we had engaged in such relationships. Mid-America does not
have any relationships or transactions with persons or entities that derive
benefits from their non-independent relationships with Mid-America or our
related parties other than those disclosed in Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements, Note 14 in our
2007 Annual Report of Form 10-K.
Mid-America’s
investments in our real estate joint ventures are unconsolidated and are
recorded using the equity method as Mid-America does not have a controlling
interest.
Insurance
Mid-America
renegotiated our insurance programs effective July 1, 2008. Management believes
that the property and casualty insurance program in place provides appropriate
insurance coverage for financial protection against insurable risks such that
any insurable loss experienced would not have a significant impact on
Mid-America’s liquidity, financial position or results of operation. Management
expects the renegotiated programs to result in a reduction in annual policy
premiums of approximately $1.3 million when compared to the higher rates
experienced with the July 1, 2007 renewal.
Inflation
Substantially
all of the resident leases at our communities allow, at the time of renewal, for
adjustments in the rent payable hereunder, and thus may enable us to seek rent
increases. Almost all leases are for one year or less. The short-term nature of
these leases generally serves to reduce the risk of the adverse effects of
inflation.
Impact
of Recently Issued Accounting Standards
In
September 2006, the FASB issued Statement No. 157 Fair Value Measurements, or Statement 157.
Statement 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. Statement 157 is
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement
157, or FSP 157-2, delays the effective date of Statement 157 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. For these items, the effective date will be for fiscal years
beginning after November 15, 2008. Mid-America adopted Statement 157
effective January 1, 2008. Management does not believe the adoption has had or
will have a material impact on our consolidated financial condition or results
of operations taken as a whole.
On
December 4, 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations, or
Statement 141R. Statement 141R will significantly change the accounting for
business combinations. Under Statement 141R, an acquiring entity will be
required to recognize all the assets acquired and liabilities assumed in a
transaction at the acquisition-date fair value with limited exceptions.
Statement 141R will change the accounting treatment for certain specific items,
including acquisition costs which will generally be expensed as
incurred. This will have a material impact on the way Mid-America
accounts for property acquisitions and therefore will have a material impact on
Mid-America’s financial statements. Statement 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.
On
December 4, 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51, or
Statement 160. Statement 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. Statement 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. This will impact the financial
statement presentation of Mid-America by requiring the minority interests in the
operating partnership to be presented as a non-controlling interest as a
component of equity. Statement 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008.
On March
19, 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133,
or Statement 161. Statement 161 enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how an entity uses derivative instruments and how
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, and how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. Statement 161 is effective for
fiscal years and interim periods beginning after November 15, 2008.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
We are
exposed to interest rate changes associated with our credit facilities and other
variable rate debt as well as refinancing risk on our fixed rate debt.
Mid-America’s involvement with derivative financial instruments is limited to
managing our exposure to changes in interest rates and we do not expect to use
them for trading or other speculative purposes.
There
have been no material changes in Mid-America’s market risk as disclosed in the
2007 Annual Report on Form 10-K except for the changes as discussed under Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the “Liquidity and Capital Resources” section, which is
incorporated by reference herein.
Item
4. Controls
and Procedures
Management’s
Evaluation of Disclosure Controls and Procedures
The
management of Mid-America, under the supervision and with the participation of
our principal executive and financial officers, has evaluated the effectiveness
of our disclosure controls and procedures in ensuring that the information
required to be disclosed in our filings under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, including
ensuring that such information is accumulated and communicated to Mid-America
management as appropriate to allow timely decisions regarding required
disclosure. Based on such evaluation, our principal executive and financial
officers have concluded that such disclosure controls and procedures were
effective as of June 30, 2008, (the end of the period covered by this Quarterly
Report on Form 10-Q).
Changes
in Internal Controls
During
the three months ended June 30, 2008, there were no changes in Mid-America’s
internal control over financial reporting that materially affected, or that are
reasonably likely to materially affect, Mid-America’s internal control over
financial reporting.
Item
4T. Controls
and Procedures
Not applicable
PART
II – OTHER INFORMATION
Item
1. Legal
Proceedings
None.
Item
1A. Risk Factors
We have
identified the following additional risks and uncertainties that may have a
material adverse effect on our business, financial condition or results of
operations. Investors should carefully consider the risks described
below before making an investment decision. Our business faces
significant risks and the risks described below may not be the only risks we
face. Additional risks not presently known to us or that we currently believe
are immaterial may also significantly impair our business operations. If any of
these risks occur, our business, results of operations or financial condition
could suffer, the market price of our common stock could decline and you could
lose all or part of your investment in our common stock.
We have
marked with an asterisk (*) those risks described below that reflect substantive
changes from the risks described under Part I, Item 1A “Risk Factors” included
in our Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 27, 2008.
Failure
to Generate Sufficient Cash Flows Could Limit our Ability to Pay Distributions
to Shareholders
Mid-America’s
ability to generate sufficient cash flow in order to pay common dividends to our
shareholders depends on our ability to generate funds from operations in excess
of capital expenditure requirements and preferred dividends, and/or to have
access to the markets for debt and equity financing. Funds from operations and
the value of Mid-America’s apartment communities may be insufficient because of
factors which are beyond our control. Such events or conditions could
include:
·
|
competition
from other apartment communities;
|
·
|
overbuilding
of new apartment units or oversupply of available apartment units in
Mid-America’s markets, which might adversely affect apartment occupancy or
rental rates and/or require rent concessions in order to lease apartment
units;
|
·
|
conversion
of condominiums and single family houses to rental
use;
|
·
|
increases
in operating costs (including real estate taxes and insurance premiums)
due to inflation and other factors, which may not be offset by increased
rents;
|
·
|
inability
to rent apartments on favorable economic
terms;
|
·
|
changes
in governmental regulations and the related costs of
compliance;
|
·
|
changes
in tax laws and housing laws including the enactment of rent control laws
or other laws regulating multifamily
housing;
|
·
|
an
uninsured loss, resulting from a catastrophic storm or act of
terrorism;
|
·
|
changes
in interest rate levels and the availability of financing, which could
lead renters to purchase homes (if interest rates decrease and home loans
are more readily available) or increase Mid-America’s acquisition and
operating costs (if interest rates increase and financing is less readily
available);
|
·
|
weakness
in the overall economy which lowers job growth and the associated demand
for apartment housing; and
|
·
|
the
relative illiquidity of real estate
investments.
|
At times,
Mid-America relies on external funding sources to fully fund the payment of
distributions to shareholders and our capital investment program (including our
existing property expansion developments). While Mid-America has sufficient
liquidity to permit distributions at current rates through additional borrowings
if necessary, any significant and sustained deterioration in operations could
result in our financial resources being insufficient to pay distributions to
shareholders at the current rate, in which event Mid-America would be required
to reduce the distribution rate. Any decline in Mid-America’s funds from
operations could adversely affect Mid-America’s ability to make distributions to
our shareholders or to meet our loan covenants and could have a material adverse
effect on
Mid-America’s
stock price.
Mid-America’s
Financing Could be Impacted by Negative Capital Market Conditions *
Recently,
domestic financial markets have experienced unusual volatility and uncertainty.
While this condition has occurred most visibly within the “subprime” mortgage
lending sector of the credit market, liquidity has tightened in overall domestic
financial markets, including the investment grade debt and equity capital
markets. Consequently, there is greater risk that the financial institutions
Mid-America does business with could experience disruptions that would
negatively affect our current financing program. As of June 30, 2008, 87% of our
outstanding debt was provided by or credit enhanced by FNMA and Freddie Mac.
Were FNMA or Freddie Mac to fail, or their ability to lend money or invest in
apartment communities become impaired, we would have to seek alternative sources
of capital.
Debt
Level, Refinancing and Loan Covenant Risk May Adversely Affect Financial
Condition and Operating Results and Our Ability to Maintain Our Status as a REIT
*
At June
30, 2008, Mid-America had total debt outstanding of $1.2 billion. Payments of
principal and interest on borrowings may leave Mid-America with insufficient
cash resources to operate the apartment communities or pay distributions that
are required to be paid in order for Mid-America to maintain our qualification
as a REIT. Mid-America currently intends to limit our total debt to
approximately 60% of the undepreciated book value of our assets, although our
charter and bylaws do not limit our debt levels. Circumstances may cause
Mid-America to exceed that target from time-to-time. As of June 30, 2008,
Mid-America’s ratio of debt to undepreciated book value was approximately 50%.
Mid-America’s Board of Directors can modify this policy at any time which could
allow Mid-America to become more highly leveraged and decrease our ability to
make distributions to our shareholders. In addition, Mid-America must repay its
debt upon maturity, and the inability to access debt or equity capital at
attractive rates could adversely affect Mid-America’s financial condition and/or
our funds from operations. Mid-America relies on FNMA and Freddie Mac, which we
refer to as the agencies, for the majority of our debt financing and has
agreements with the agencies and with other lenders that require us to comply
with certain covenants. The breach of any one of these covenants would place
Mid-America in default with our lenders and may have serious consequences on the
operations of Mid-America.
Variable
Interest Rates May Adversely Affect Funds From Operations*
At June
30, 2008, effectively $208 million of Mid-America’s debt bore interest at a
variable rate and was not hedged by interest rate swaps or caps. Mid-America may
incur additional debt in the future that also bears interest at variable rates.
Variable rate debt creates higher debt service requirements if market interest
rates increase, which would adversely affect Mid-America’s funds from operations
and the amount of cash available to pay distributions to shareholders.
Mid-America’s $1.0 billion secured credit facilities with Prudential Mortgage
Capital, credit enhanced by FNMA, are predominately floating rate facilities.
Mid-America also has credit facilities with Freddie Mac totaling $300 million
which are variable rate facilities. At June 30, 2008, a total of $1.1 billion
was outstanding under these facilities. These facilities represent the majority
of the variable interest rates Mid-America was exposed to at June 30, 2008.
Large portions of the interest rates on these facilities have been hedged by
means of a number of interest rate swaps and caps. Upon the termination of these
swaps and caps, Mid-America will be exposed to the risks of varying interest
rates.
Interest
Rate Hedging may be Ineffective*
Mid-America
relies on the financial markets to refinance debt maturities, and also is
heavily reliant on the creditworthiness of FNMA, which provides credit
enhancement for approximately $885 million of Mid-America’s debt. The interest
rate market for FNMA Discount Mortgage Backed Securities, or DMBS, which in
Mid-America’s experience is highly correlated with three-month LIBOR interest
rates, is also an important component of Mid-America’s liquidity and interest
rate swap effectiveness.
Typically,
for the credit facility we have with FNMA, the DMBS rate has approximated
three-month LIBOR less an average spread of 0.05% - 0.12% over the life of the
facility. We also pay a credit enhancement fee of 0.49% to 0.795%. In September
2007, however, the spread between three-month LIBOR and DMBS increased
significantly, and peaked at 0.73% in May 2008 before dropping back to 0.36% in
July 2008. While we believe that the current market illiquidity is an anomaly
and that this spread will return to more historic levels, Mid-America cannot
forecast when or if the uncertainty and volatility in the market may change.
Continued unusual volatility could cause us to lose hedge accounting treatment
for our interest rate swaps, resulting in material changes to our consolidated
statements of operations and balance sheets, and potentially cause a breach with
one of our debt covenants.
Issuances
of Additional Debt or Equity May Adversely Impact Our Financial
Condition
Our
capital requirements depend on numerous factors, including the occupancy and
turnover rates of our apartment communities, development and capital
expenditures, costs of operations and potential acquisitions. Mid-America cannot
accurately predict the timing and amount of our capital requirements. If our
capital requirements vary materially from our plans, Mid-America may require
additional financing sooner than anticipated. Accordingly, Mid-America could
become more leveraged, resulting in increased risk of default on our obligations
and in an increase in our debt service requirements, both of which could
adversely affect our financial condition and ability to access debt and equity
capital markets in the future.
Increasing
Real Estate Taxes and Insurance Costs May Negatively Impact Financial
Condition
As a
result of Mid-America’s substantial real estate holdings, the cost of real
estate taxes and insuring its apartment communities is a significant component
of expense. Real estate taxes and insurance premiums are subject to significant
increases and fluctuations which can be widely outside of the control of
Mid-America. If the costs associated with real estate taxes and insurance should
rise, Mid-America’s financial condition could be negatively impacted and
Mid-America’s ability to pay our dividend could be affected.
Losses
from Catastrophes May Exceed Our Insurance Coverage
Mid-America
carries comprehensive liability and property insurance on our communities, and
intends to obtain similar coverage for communities we acquire in the future.
Some losses, generally of a catastrophic nature, such as losses from floods,
hurricanes or earthquakes, are subject to limitations, and thus may be
uninsured. Mid-America exercises our discretion in determining amounts, coverage
limits and deductibility provisions of insurance, with a view to maintaining
appropriate insurance on our investments at a reasonable cost and on suitable
terms. If Mid-America suffers a substantial loss, our insurance coverage may not
be sufficient to pay the full current market value or current replacement value
of our lost investment. Inflation, changes in building codes and ordinances,
environmental considerations and other factors also might make it infeasible to
use insurance proceeds to replace a property after it has been damaged or
destroyed.
Property
Insurance Limits May be Inadequate and Deductibles May be Excessive in the Event
of a Catastrophic Loss or a Series of Major Losses, and May Cause a Breach of a
Loan Covenant
Mid-America
has a significant proportion of our 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 Mid-America pay significant deductibles as well as
additional amounts above the per occurrence limit of Mid-America’s insurance for
these risks. Mid-America may then be judged to have breached one or more of our
loan covenants, and any of the foregoing events could have a material adverse
effect on Mid-America’s assets, financial condition, and results of
operation.
Mid-America
is dependent on Key Personnel
Our
success depends in part on our ability to attract and retain the services of
executive officers and other personnel. There is substantial competition for
qualified personnel in the real estate industry and the loss of several of our
key personnel could have an adverse effect on us.
New
Acquisitions May Fail to Perform as Expected and Failure to Integrate Acquired
Communities and New Personnel Could Create Inefficiencies
Mid-America
intends to actively acquire and improve multifamily communities for rental
operations. Mid-America may underestimate the costs necessary to bring an
acquired community up to standards established for our intended market position.
Additionally, to grow successfully, Mid-America must be able to apply our
experience in managing our existing portfolio of apartment communities to a
larger number of properties. Mid-America must also be able to integrate new
management and operations personnel as our organization grows in size and
complexity. Failures in either area will result in inefficiencies that could
adversely affect our overall profitability.
Mid-America
May Not Be Able To Sell Communities When Appropriate
Real
estate investments are relatively illiquid and generally cannot be sold quickly.
Mid-America may not be able to change our portfolio promptly in response to
economic or other conditions. Further, Mid-America owns seven communities (of
142 total) which are subject to restrictions on sale, and are required to be
exchanged through a 1031b tax-free exchange, unless Mid-America pays the tax
liability of the contributing partners. This inability to respond promptly to
changes in the performance of our investments could adversely affect our
financial condition and ability to make distributions to our security
holders.
Environmental
Problems are Possible and Can be Costly
Federal,
state and local laws and regulations relating to the protection of the
environment may require a current or previous owner or operator of real estate
to investigate and clean up hazardous or toxic substances or petroleum product
releases at such community. The owner or operator may have to pay a governmental
entity or third parties for property damage and for investigation and clean-up
costs incurred by such parties in connection with the contamination. These laws
typically impose clean-up responsibility and liability without regard to whether
the owner or operator knew of or caused the presence of the contaminants. Even
if more than one person may have been responsible for the contamination each
person covered by the environmental laws may be held responsible for all of the
clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination emanating from that site. All of our communities have been the
subject of environmental assessments completed by qualified independent
environmental consultant companies. These environmental assessments have not
revealed, nor is Mid-America aware of, any environmental liability that our
management believes would have a material adverse effect on our business,
results of operations, financial condition or liquidity. Over the past several
years, there have been an increasing number of lawsuits against owners and
managers of multifamily properties alleging personal injury and property damage
caused by the presence of mold in residential real estate.
Some of
these lawsuits have resulted in substantial monetary judgments or settlements.
Mid-America cannot be assured that existing environmental assessments of our
communities reveal all environmental liabilities, that any prior owner of any of
our properties did not create a material environmental condition not known to
Mid-America, or that a material environmental condition does not otherwise
exist.
Compliance
or Failure to Comply with Laws Requiring Access to Our Properties by Disabled
Persons Could Result in Substantial Cost
The
Americans with Disabilities Act, the Fair Housing Act of 1988 and other federal,
state and local laws generally require that public accommodations be made
accessible to disabled persons. Noncompliance could result in the imposition of
fines by the government or the award of damages to private litigants. These laws
may require Mid-America to modify our existing communities. These laws may also
restrict renovations by requiring improved access to such buildings by disabled
persons or may require Mid-America to add other structural features that
increase our construction costs. Legislation or regulations adopted in the
future may impose further burdens or restrictions on Mid-America with respect to
improved access by disabled persons. Mid-America cannot ascertain the costs of
compliance with these laws, which may be substantial.
Our
Ownership Limit Restricts the Transferability of Our Capital Stock
Our
charter limits ownership of our capital stock by any single shareholder to 9.9%
of the value of all outstanding shares of our capital stock, both common and
preferred. The charter also prohibits anyone from buying shares if the purchase
would result in our losing REIT status. This could happen if a share transaction
results in fewer than 100 persons owning all of our shares or in five or fewer
persons, applying certain broad attribution rules of the Internal Revenue Code
of 1986, as amended, or the Code, owning 50% or more of our shares. If you
acquire shares in excess of the ownership limit or in violation of the ownership
requirements of the Code for REITs, we:
·
|
will
consider the transfer to be null and
void;
|
·
|
will
not reflect the transaction on our
books;
|
·
|
may
institute legal action to enjoin the
transaction;
|
·
|
will
not pay dividends or other distributions with respect to those
shares;
|
·
|
will
not recognize any voting rights for those
shares;
|
·
|
will
consider the shares held in trust for our benefit;
and
|
·
|
will
either direct you to sell the shares and turn over any profit to us, or we
will redeem the shares. If we redeem the shares, you will be paid a price
equal to the lesser of:
|
1.
|
the
price you paid for the shares; or
|
2.
|
the
average of the last reported sales prices on the New York Stock Exchange
on the ten trading days immediately preceding the date fixed for
redemption by our Board of
Directors.
|
If you
acquire shares in violation of the limits on ownership described
above:
·
|
you
may lose your power to dispose of the
shares;
|
·
|
you
may not recognize profit from the sale of such shares if the market price
of the shares increases; and
|
·
|
you
may be required to recognize a loss from the sale of such shares if the
market price decreases.
|
Provisions
of Our Charter and Tennessee Law May Limit the Ability of a Third Party to
Acquire Control of Us
Ownership Limit
The 9.9%
ownership limit discussed above may have the effect of precluding acquisition of
control of us by a third party without the consent of our Board of
Directors.
Preferred Stock
Our
charter authorizes our Board of Directors to issue up to 20,000,000 shares of
preferred stock. The Board of Directors may establish the preferences and rights
of any preferred shares issued. The issuance of preferred stock could have the
effect of delaying or preventing someone from taking control of us, even if a
change in control were in our shareholders’ best interests. Currently, we have
6,200,000 shares of 8.30% Series H Cumulative Redeemable Preferred Stock issued
and outstanding.
Tennessee Anti-Takeover
Statutes
As a
Tennessee corporation, we are subject to various legislative acts, which impose
restrictions on and require compliance with procedures designed to protect
shareholders against unfair or coercive mergers and acquisitions. These statutes
may delay or prevent offers to acquire us and increase the difficulty of
consummating any such offers, even if our acquisition would be in our
shareholders’ best interests.
Our
Investments in Joint Ventures May Involve Risks
Investments
in joint ventures may involve risks which may not otherwise be present in our
direct investments such as:
·
|
the
potential inability of our joint venture partner to
perform;
|
·
|
the
joint venture partner may have economic or business interests or goals
which are inconsistent with or adverse to
ours;
|
·
|
the
joint venture partner may take actions contrary to our requests or
instructions or contrary to our objectives or policies;
and
|
·
|
the
joint venturers may not be able to agree on matters relating to the
property they jointly own.
|
Although
each joint owner will have a right of first refusal to purchase the other
owner’s interest, in the event a sale is desired, the joint owner may not have
sufficient resources to exercise such right of first refusal.
Failure
to Qualify as a REIT Would Cause Mid-America to be Taxed as a
Corporation
If
Mid-America fails to qualify as a REIT for federal income tax purposes,
Mid-America will be taxed as a corporation. The Internal Revenue Service may
challenge our qualification as a REIT for prior years, and new legislation,
regulations, administrative interpretations or court decisions may change the
tax laws with respect to qualification as a REIT or the federal tax consequences
of such qualification. For any taxable year that Mid-America fails to qualify as
a REIT, Mid-America would be subject to federal income tax on our taxable income
at corporate rates, plus any applicable alternative minimum tax. In addition,
unless entitled to relief under applicable statutory provisions, Mid-America
would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce our net earnings available for investment or distribution to shareholders
because of the additional tax liability for the year or years involved. In
addition, distributions would no longer qualify for the dividends paid deduction
nor be required to be made in order to preserve REIT status. Mid-America might
be required to borrow funds or to liquidate some of our investments to pay any
applicable tax resulting from our failure to qualify as a REIT.
Failure
to Make Required Distributions Would Subject Mid-America to Income
Taxation
In order
to qualify as a REIT, each year Mid-America 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
Mid-America 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, Mid-America 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 Mid-America 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 Mid-America to Forgo Otherwise Attractive
Opportunities or Engage in Marginal Investment Opportunities
To
qualify as a REIT for federal income tax purposes, Mid-America 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 Mid-America’s stock. In order to meet these tests, Mid-America may
be required to forgo attractive business or investment opportunities or engage
in marginal investment opportunities. Thus, compliance with the REIT
requirements may hinder Mid-America’s ability to operate solely on the basis of
maximizing profits.
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
The
annual meeting of the shareholders of Mid-America was held on May 20,
2008.
Shareholders
approved an amendment to Mid-America’s charter to move to annual elections of
directors by a majority of votes entitled to be cast. Shares on the proposal
were voted as follows:
For:
|
23,582,330
|
Against:
|
229,621
|
Abstain:
|
33,510
|
Nominees
H. Eric Bolton, Jr., Alan B. Graf, Jr., Ralph Horn and Philip W. Norwood were
elected to serve as directors by a plurality of votes cast at the meeting.
Shares on this proposal were voted as follows:
|
For
|
Withheld
|
H.
Eric Bolton, Jr.
|
23,513,478
|
331,992
|
Alan
B. Graf, Jr.
|
23,632,286
|
213,184
|
Ralph
Horn
|
23,134,856
|
710,614
|
Philip
W. Norwood
|
23,626,005
|
219,465
|
Ernst
& Young LLP was ratified as Mid-America’s independent registered public
accounting firm for the 2008 fiscal year by a majority of the shares represented
at the meeting. Shares on this proposal were voted as follows:
For:
|
23,750,000
|
Against:
|
79,283
|
Abstain:
|
16,182
|
Item
5. Other
Information
None.
Item
6. Exhibits
(a)
|
The
following exhibits are filed as part of this
report.
|
Exhibit
Number
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
Signatures
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
|
|
|
Date: July
31, 2008
|
By:
/s/Simon R.C. Wadsworth
|
|
Simon
R.C. Wadsworth
|
|
Executive
Vice President and
|
|
Chief
Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|