Mid-America Apartment Communities, Inc.

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Mid-America Apartment Communities, Inc.

6584 Poplar Avenue, Suite 300
Memphis, Tennessee 38138
U.S.A.
Telephone: (901) 682-6600
Fax: (901) 682-6667
Web site: http://www.maac.net

Public Company
Incorporated: 1993
Employees: 1,255
Sales: $297.5 million (2005)
Stock Exchanges: New York
Ticker Symbol: MAA
NAIC: 525930 Real Estate Investment Trusts

Mid-America Apartment Communities, Inc., is a New York Stock Exchange–listed real estate investment trust (REIT) that focuses on suburban apartment complexes located in 13 states, mostly in the Sun Belt: Alabama, Arizona, Arkansas, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Ohio, Tennessee, Texas, and Virginia. The portfolio of the Memphis, Tennessee-based company includes more than 130 multifamily communities and over 40,000 individual apartments, mostly garden-style units that appeal to the largest segment of the rental market. To provide predictable, strong results for its shareholders, Mid-America has pursued a strategy to spread its investments across a variety of small, medium, and large markets, as well as both stable and high-growth markets. Because markets experience different supply and demand cycles, the company is thus able to even out its performance, realizing a consistent level of cash flow to provide investors with a degree of security and predictability. Also contributing to the company's success is the reputation of Mid-America for taking a hands-on approach and maintaining the high quality of its properties, over the years resulting in numerous third-party awards.

FOUNDING OF PREDECESSOR COMPANY: 1977

Mid-America grew out of the apartment management business of The Cates Company, founded by George E. Cates in Memphis. Born in Burlington, North Carolina, Cates earned a degree in industrial engineering in 1959 from the Georgia Institute of Technology (Georgia Tech). He then went to work for a Procter & Gamble unit, Buckeye Cellulose, for 11 years, holding a number of engineering, manufacturing, and sales positions. In 1970 he attended a real estate conference where he said he "discovered" the apartment business. In that same year he left Procter & Gamble to become the general manager of Walk Jones and Francis Mah Inc., a Memphis-based engineering and architectural firm that developed apartment complexes. In 1977 he struck out on his own, forming The Cates Company to serve as an apartment management firm. At the outset it was just a one-man operation overseeing a single property with 252 units.

Cates grew his business at a steady clip over the next 16 years, becoming a fully integrated owner and manager of apartment complexes. By the end of 1993 he employed 175 people to manage 22 properties in four states, in all containing some 5,600 apartments. It was at this point that Cates, Memphis apartment developer Robert Fogelman, and other investors formed Mid-America Apartment Communities Inc. to carry on the business of The Cates Company under the rubric of a REIT, an investment vehicle that was quickly gaining in popularity.

Originally created by Congress in 1960, REITs were designed like mutual funds, a way for small investors to become involved in real estate. REITs could be taken public and their shares traded just like stock, but unlike public companies, REITs were required by law to pay out at least 95 percent of their taxable income to shareholders each year, a provision that hampered REITs' ability to raise funds internally. As a result, during their first 25 years of existence REITs were only allowed to own real estate and third parties had to be contracted to manage the properties, a situation that diminished the use of REITs as an investment vehicle. The Tax Reform Act of 1986 had a dramatic impact on the nature of real estate investment, however, leading to a greater used of REITs. In brief, tax shelter schemes that had drained potential investments were shut down by the new regulations, which limited interest and depreciation deductions. As a result, taxpayers could no longer accumulate paper losses in order to lower their tax liabilities. The act also permitted REITs to provide customary services for properties, in effect allowing the trusts to operate and manage the properties they owned. Despite these favorable changes, REITs were still not fully utilized in the latter half of the 1980s because the banks, insurance companies, pension funds, and foreign investors (especially the Japanese) made money readily available for real estate investments. However, easy money led to overbuilding and a glutted marketplace, resulting in an inevitable shakeout in the marketplace.

FORMATION OF MID-AMERICA: 1993

With real estate of all stripes available at distressed prices in the early 1990s REITs finally became an attractive mainstream investment option. For many real estate firms, converting to REITs allowed them to escape massive levels of debt and to recapitalize. As a result, dozens of real estate companies began to go public in 1993, staking out their claims on different segments of the market. Mid-America was formed to acquire, develop, market, and manage upper-end suburban apartment complexes. Because it employed an umbrella partnership arrangement, it was considered an "UPREIT." After its incorporation in September 1993, Mid-America was taken public in February 1994 and the assets of The Cates Company were acquired.

Mid-America wasted little time in expanding its portfolio, concentrating on acquisitions in second-tier Sun Belt markets, such as Little Rock, Arkansas; Louisville, Kentucky; Jacksonville, Florida; Columbus, South Carolina; and Jackson, Mississippi. By the end of 1994 the REIT added 32 communities containing more than 8,500 apartments, making Mid-America one of the six largest apartment REITs and the fastest growing REIT in the country. When the first year came to a close, the company reported revenues of $51.2 million and net income of nearly $7 million.

In June 1995 Mid-America used some of its stock, valued at $57.8 million, to acquire Omaha, Nebraska-based America First REIT Inc. Thus, in one stroke Mid-America added 12 apartment complexes with more than 3,200 units located in the Southeast and Southwest. The company's portfolio topped 15,000 apartments spread across 11 states. Three further communities picked up through acquisitions and the opening of a company developed project, The Woods at Post House in Jackson, Tennessee, increased that number to more than 18,000 units in 70 apartment communities. Mid-America also bolstered its balance sheet by increasing the occupancy rate of its properties from 92.8 percent to 95.4 percent while also achieving a monthly rental increase of 6.2 percent. When 1995 came to a close, as a result, total revenues increased to $95 million and net income topped $9.8 million.

COMPANY PERSPECTIVES

Our mission is to "Exceed Expectations" of our residents, employees and shareholders. And we're doing that every day.

Management was wary of growing too quickly, however. In 1996 Mid-America adjusted its portfolio, selling three of its apartment communities with a total of 724 units, netting $17.1 million. At the same time the company spent $66.3 million to acquire six new communities containing 1,760 units. Moreover, Mid-America invested $2.8 million to construct new units and another $10.7 million on the upgrading of properties. To help fund these expenses, the company raised $50 million in an October initial public offering (IPO). Aside from the sheer number of properties and units, Mid-America was also very much focused on improving operating efficiency and making sure that the properties met a high standard. Management's success in this regard was reflected by the awards Mid-America properties received in Cincinnati; Nashville; Lexington, Kentucky; and Jackson, Tennessee. Investors were also pleased with the REIT's performance in 1996, when Mid-America posted revenues of $118.9 million and net income of $14.3 million. Its 9.6 percent return on assets was tops in its peer group and well above the 8.9 percent peer group average.

One area in which management believed Mid-America was lacking was its capability to develop new apartment communities. This was rectified in 1997 with the $424 million acquisition of Flournoy Development Co., a Columbus, Georgia-based private developer of apartment buildings that also focused on growth-oriented midsize markets. As a result, Mid-America added nearly 9,900 apartments in 35 properties that Flournoy either owned or partially owned. Flournoy had another 1,500 units under construction and hundreds more in the pipeline, and also managed another 5,000 apartments in 41 properties on a contract basis. All told, Mid-America owned more than $1.1 billion in real estate, nearly twice as much as the year before. Moreover, it owned Flournoy Development Company and Flournoy Construction Company, allowing Mid-America complete control over new projects, from development and construction to leasing and management. Because the Flournoy deal was completed late in the year it did not have much impact on the bottom line in 1997. For the year, Mid-America recorded revenues of $139.1 million and net income dropped to $6 million, due primarily to the early retirement of $8.6 million in debt.

The effects of the Flournoy acquisition were more evident in 1998 when revenues jumped to $215.5 million and net income improved to $26.8 million. The company remained cautious about overexpansion, content to digest the Flournoy assets in 1998 and limit itself to a pair of acquisitions that netted 316 apartment units in 1998. At the same time it launched a $300 million apartment development program in 1998 to add 4,400 new units.

Because the price of Mid-America shares was far less than what management considered its intrinsic value, in large measure the result of a "dot-com" fixation on Wall Street, the company in 1999 launched a stock repurchasing plan in 1999, funded in large part by a significant sale of property assets, totaling $136 million over the course of the year. Reflecting their faith in the company, Mid-America insiders were also active in snapping up shares at what they considered to be bargain prices, bringing insider ownership to 15 percent, one of the highest levels in the industry.

As Mid-America entered the new century it was well positioned to enjoy the benefits of a development pipeline that was launched in the wake of the Flournoy acquisition. While 1,902 units were sold in the continued effort to repurchase shares, another 1,147 new units were made available for leasing. When the year came to a close revenues totaled $224.6 million and net income was $29.8 million.

RETIREMENT OF CATES: 2002

A changing of the guard took place in 2001 when 45-year-old E. Eric Bolton, Jr., succeeded George Cates as chief executive officer as part of a formal succession plan approved by the board of directors in 1997. A graduate of the University of Memphis, where he earned an undergraduate degree in accounting and a master's of business administration, Bolton cut his teeth in the real estate industry in Dallas working with the Trammell Crow Company, where he ultimately became chief financial officer for Trammell Crow Asset Management. Prior to that he worked for several years in the commercial banking industry. Bolton joined Mid-America soon after the REIT's IPO in 1994, and three years later was named the company's president and chief operating officer. In September 2002 he would also succeed Cates as Mid-America's chairman. Cates, who turned 65, retired, although he stayed on as a member of the board of directors.

KEY DATES

1993:: Company is formed as a real estate investment trust (REIT).
1994:: Initial public offering of stock is completed.
1995:: America First REIT is acquired.
1997:: Flournoy Development Company is acquired.
2002:: Founder George E. Cates retires.

In 2001 the company began building the final 244 units of the 1998 development program, which had commandeered all of the company's capital. Mid-America was well positioned to enjoy the fruits of its labor, and Wall Street began to take notice, bidding up the company's stock price in 2001. As a result, Mid-America finally eased up on its stock repurchasing plan. Revenues approached $233 million in 2001 and net income totaled $28.7 million. Market conditions hurt the demand for apartments in 2002 and 2003, resulting in little growth in revenues and a dip in net income to $16.1 million in 2002 and a slight rebound to $20.2 million in 2003. Nevertheless, Mid-America was able to invest $252 million in 2003 to buy out the interests of Blackstone Realty Advisors in a joint venture.

Demand for apartment housing picked up in 2004, and net income improved to $25.2 million in what was a very good year for Mid-America, which also added about $200 million in high-quality properties to its portfolio. Another $100 million worth of properties were then added in 2005, and three construction projects were set to begin development in 2006. With revenues approaching the $300 million mark and funds from operations reaching a record $3.20 per common share in 2005, Mid-America was well positioned to take advantage of conditions that favored the apartment sector, including the entry of the "echo boom" generation into the workforce that was expected to stimulate the demand for apartments, especially in the high-growth Sun Belt states where Mid-America focused its attention and had forged a solid reputation.

Ed Dinger