10-K 1 d18659_10k.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]    
   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005
 
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
(State or other jurisdiction of
incorporation or organization)
               
62-1543819
(I.R.S. Employer Identification No.)
 
6584 POPLAR AVENUE, SUITE 300
MEMPHIS, TENNESSEE
(Address of principal executive offices)
               
38138
(Zip Code)
 

(901) 682-6600
(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
          Name of each exchange
on which registered
Common Stock, par value $.01 per share
               
New York Stock Exchange
Series F Cumulative Redeemable Preferred Stock, par value $.01 per share
Series H Cumulative Redeemable Preferred Stock, par value $.01 per share
               
New York Stock Exchange
New York Stock Exchange
 

Securities registered pursuant to Section 12(g) of the Act: [None]

Indicate by check mark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   [X] Yes  [  ] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. [  ]Yes    [X] No

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 the filing requirements for the past 90 days. [X] Yes   [  ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [X]

Accelerated filer   [  ]

Non-accelerated filer [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ] Yes   [X] No

As of June 30, 2005, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $917,646,240, based on the closing sale price as reported on the New York Stock Exchange.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class
          Outstanding at February 10, 2006
Common Stock, $.01 par value per share
               
22,174,518 shares
 

DOCUMENTS INCORPORATED BY REFERENCE

Document
          Parts Into Which Incorporated
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2006
               
Part III
 


MID-AMERICA APARTMENT COMMUNITIES, INC.
TABLE OF CONTENTS

Item
         
 		      Page
 
               
PART I
                    
1.
               
Business
           2    
1A.
               
Risk Factors
           7    
1B.
               
Unresolved Staff Comments
           10    
2.
               
Properties
           10    
3.
               
Legal Proceedings
           16    
4.
               
Submission of Matters to Vote of Security Holders
           16    
 
 
               
PART II
                    
 
5.
               
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
           16    
6.
               
Selected Financial Data
           18    
7.
               
Management’s Discussion and Analysis of Financial Condition and Results of Operations
           20    
7A.
               
Quantitative and Qualitative Disclosures About Market Risk
           31    
8.
               
Financial Statements and Supplementary Data
           32    
9.
               
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
           32    
9A.
               
Controls and Procedures
           32    
9B.
               
Other Information
           33    
 
 
               
PART III
                    
 
10.
               
Directors and Executive Officers of the Registrant
           34    
11.
               
Executive Compensation
           34    
12.
               
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
           34    
13.
               
Certain Relationships and Related Transactions
           34    
14.
               
Principal Accountant Fees and Services
           34    
 
 
               
PART IV
                    
 
15.
               
Exhibits, Financial Statement Schedules
           35    
 

PART I

ITEM 1.  BUSINESS

WEBSITE ACCESS OF REGISTRANT’S REPORTS

The Company files annual and periodic reports with the Securities and Exchange Commission. All filings made by the Company with the SEC may be copied or read at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC as the Company does. The website is http://www.sec.gov.

Additionally, a copy of this Annual Report on Form 10-K, along with the Company’s Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to the aforementioned filings, are available on the Company’s website free of charge. The filings can be found on the Investor Relations page under SEC Filings. The Company’s website also contains its Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the committees of the Board of Directors. These items can also be found on the Investor Relations page under Company Info and Governance. The Company’s website address is www.maac.net. Reference to the Company’s website does not constitute incorporation by reference of the information contained on the site and should not be considered part of this document. All of the aforementioned materials may also be obtained free of charge by contacting the Investor Relations Department at Mid-America Apartment Communities, Inc., 6584 Poplar Avenue, Suite 300, Memphis, TN 38138.

OVERVIEW OF THE COMPANY

Founded in 1994, Mid-America Apartment Communities, Inc. (the “Company”) is a Memphis, Tennessee-based self-administered and self-managed umbrella partnership real estate investment trust (“REIT”) that focuses on acquiring, owning and operating apartment communities. As of December 31, 2005, the Company owned 100% of 131 properties representing 37,705 apartment units. The Company has from time to time participated in various joint ventures including, as of December 31, 2005, a joint venture with Crow Holdings, Mid-America CH/Realty II LP, (the “Crow JV”). The Crow JV owned one property with 522 apartment units at December 31, 2005. The Company has a 33.33% ownership interest in the Crow JV and is paid a management fee of 4% of revenues from the property owned by the Crow JV. In total, the Company owned or had an ownership interest in 132 properties with 38,227 apartment units at December 31, 2005.

The Company’s business is conducted principally through Mid-America Apartments, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership, holding 234,017 common units of partnership interest (“Common Units”) comprising a 1% general partnership interest in the Operating Partnership as of December 31, 2005. The Company’s wholly-owned qualified REIT subsidiary, MAC II of Delaware, Inc., a Delaware corporation, is a limited partner in the Operating Partnership and, as of December 31, 2005, held 20,496,954 Common Units, or 87.59% of all outstanding Common Units.

The Company operated apartment communities in 12 states in 2005, employing 1,148 full time and 97 part time employees at December 31, 2005.

OPERATING PHILOSOPHY

The Company’s primary objectives are to protect and grow existing property values to maintain a stable and increasing cash flow that will fund its dividend through all parts of the real estate investment cycle and create new shareholder value by growing the Company in a disciplined manner. The Company focuses on growing shareholder value through operating its existing investments and, when accretive to cash flow and shareholder value, through new investments.

INVESTMENT FOCUS.    The Company’s primary investment focus is on apartment communities in the Southeastern United States. Between 1994 and 1997, the Company grew largely through the acquisition and redevelopment of existing communities. Between 1998 and 2002, its concentration was on development of new communities. The Company’s present focus is on the acquisition of properties that it believes can be

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repositioned with appropriate use of capital and its operating management skills. The Company is currently focusing on increasing its investment in properties in larger and faster growing markets within its current geographic area, and intends to do this through acquiring apartment communities with the potential for above average growth. On a small scale, the Company is beginning to develop expansions at existing communities. The Company will continue its established process of selling mature assets, and will adapt its investment focus to opportunities and markets.

HIGH QUALITY ASSETS.    The Company strives to maintain its assets in excellent condition, believing that continuous maintenance will lead to higher long-run returns on investment. It believes that being recognized by civic and industry trade organizations for the high quality of its properties, landscaping, and property management will lead to higher rents and profitability and further supports the high quality of its properties and operations. The Company periodically and selectively sells assets to ensure that its portfolio consists primarily of high quality, well-located properties within its market area.

DIVERSIFIED MARKET FOCUS.    The Company believes the stability of its cash flow is enhanced and it will generate higher risk adjusted cash flow returns, with lower volatility, through its diversified strategy of investments over large, middle and small-tier markets throughout the southeastern United States.

INTENSIVE MANAGEMENT FOCUS.    The Company strongly emphasizes on-site property management. Particular attention is paid to opportunities to increase rents, raise average occupancy rates, and control costs. Property managers, area managers and regional managers are given the responsibility for monitoring market trends and the discretion to react to such trends. The Company, as part of its intense management focus, has established a number of training programs to produce highly competent property managers, leasing consultants and service technicians who work on-site at the Company’s apartment communities (the “Communities”) to generate the highest possible income from the Company’s assets. At December 31, 2005, the Company employed approximately 103 Certified Apartment Managers, a designation established by the National Apartment Association which provides training for on-site manager professionals. The Company has enhanced its focus on asset management over the last several years by increasing regional staffing in the areas of maintenance, capital improvement oversight, landscaping, marketing and pricing management.

DECENTRALIZED OPERATIONAL STRUCTURE.    The Company operates in a decentralized manner. Management believes that its decentralized operating structure capitalizes on specific market knowledge, provides greater personal accountability than a centralized structure and is beneficial in the acquisition and redevelopment processes. To support this decentralized operational structure, senior and executive management, along with various asset management functions, are proactively involved in supporting and reviewing property management through extensive reporting processes and frequent on-site visitations. In 2004, the Company completed the installation of the property and accounting modules of a new web-based property management system that increased the amount of information shared between senior and executive management and the properties on a real time basis, improving the support provided to on-site property operations. In 2005, the Company made significant improvements to its operating platform and expects these enhancements will help capture more operating efficiencies, continue to support effective expense control and provide for various expanded revenue management practices.

PROACTIVE BALANCE SHEET AND PORTFOLIO MANAGEMENT

The Company focuses on improving the value of each share of the Company’s common stock. It routinely evaluates each asset and sells those that no longer fit its strategy. The Company makes new investments and issues new equity when management believes it can add to value per share. In the past, the Company has sold assets to fund share repurchases when, in management’s view, shareholder value would be enhanced.

STRATEGIES

The Company seeks to increase operating cash flow and earnings per share to maximize shareholder value through a balanced strategy of internal and external growth.

OPERATING GROWTH STRATEGY.    Management’s goal is to maximize the Company’s return on investment in each Community by increasing rental rates and reducing operating expenses while maintaining high occupancy levels. The steps taken to meet these objectives include:

3


•  
   providing real-time information through technology innovations; such as the implementation of the Company’s new web-based property management system that shares information between properties and management;

•  
   empowering the Company’s property managers to adjust rents in response to local market conditions and to concentrate resident turnover during peak rental demand months;

•  
   developing new ancillary income programs aimed at offering new services to residents, including telephone, cable, and internet access, on which the Company generates fee and commission income;

•  
   implementing programs to control expenses through investment in cost-saving initiatives, such as the installation of individual apartment unit water and utility meters in certain Communities;

•  
   analyzing individual asset productivity performances to identify best practices and improvement areas;

•  
   proactively maintaining the physical condition of each property;

•  
   improving the “curb appeal” of the Communities through extensive landscaping and exterior improvements and repositioning Communities from time to time to maintain market leadership positions;

•  
   compensating employees through performance-based compensation and stock ownership programs;

•  
   maintaining a hands-on management style and “flat” organizational structure that emphasizes senior management’s continued close contact with the market and employees;

•  
   selling or exchanging underperforming assets and repurchasing or issuing shares of common and preferred stock when cost of capital and asset values permit;

•  
   aggressively managing lease expirations to align with peak leasing traffic patterns and to maximize productivity of property staffing; and

•  
   allocating additional capital, including capital for selective interior improvements, where the investment will generate the highest returns for the Company.

JOINT VENTURE STRATEGY.    One of the Company’s strategies is to co-invest with private capital partners in joint venture opportunities from time to time to the extent the Company believes that a joint venture will enable it to obtain a higher return on its investment through management and other fees, which leverage the Company’s skills in acquiring, repositioning, redeveloping and managing multifamily investments. In addition, the joint venture investment strategy can provide a platform for creating more capital diversification and lower investment risk for the Company. The Company is currently invested in a joint venture with Crow Holdings that was established in early 2004.

DISPOSITION STRATEGY.    The Company from time to time disposes of mature assets, defined as those apartment communities that no longer meet the Company’s investment criteria and long-term strategic objectives. Typically, the Company selects assets for disposition that do not meet its present investment criteria including estimated future return on investment, location, market, potential for growth, and capital needs. The Company may from time to time also dispose of assets for which the Company receives an offer meeting or exceeding its return on investment criteria even though those assets may not meet the disposition criteria disclosed above.

4


The following Communities were sold during 2005:

Property
          Location
      Number
of Units
      Date Sold
100% Owned Properties:
                                                                      
Eastview
               
Memphis, TN
           432         
April 1, 2005
Joint Venture Properties:
                                                                      
Seasons at Green Oaks (1)
               
Grand Prairie, TX (Dallas metro)
           300         
May 31, 2005
Preston Hills (1)
               
Buford, GA (Atlanta metro)
           464         
June 16, 2005
 
               
 
           1,196                       
 

(1)
   Properties were owned by Mid-America/CH Realty LP which ceased to operate in 2005 following the disposition of these properties.

ACQUISITION STRATEGY. One of the Company’s growth strategies is to acquire and redevelop apartment communities that meet its investment criteria and focus as discussed above. The Company has extensive experience and research-based skills in the acquisition and repositioning of multifamily properties. In addition, the Company will acquire newly built and developed properties that can be purchased on a favorable pricing basis. The Company will continue to evaluate opportunities that arise, and will utilize this strategy to increase the number of properties in strong and growing markets in the Southeast.

The following Communities were purchased during 2005:

Property
          Location
      Number
of Units
      Date Purchased
100% Owned Properties:
                                                                      
Lake Lanier Club
               
Gainesville, GA
           657         
February 18, 2005
Waterford Forest
               
Cary, NC
           384         
July 6, 2005
Boulder Ridge
               
Roanoke, TX
           478         
July 8, 2005
 
               
 
           1,519                       
 

DEVELOPMENT STRATEGY.    In late 1997, the Company’s emphasis shifted from acquisitions to development because of its belief that under then-current market conditions, such development would generate higher quality assets and higher long-term investment returns. In 1999, management decided to exit the construction and development business upon completion of the Company’s existing development pipeline after determining that market conditions were changing, making it unlikely that future proposed projects would meet the Company’s profitability targets over the next few years. In 2002, the Company completed the $300 million construction program of high quality apartments.

At December 31, 2005, the Company had no properties in development.

In 2006, the Company plans to begin some expansion development projects at existing communities on adjacent land currently owned by the Company. The Company does not currently intend to return to development in a significant way, preferring to capture accretive new growth through opportunistically acquiring new properties.

COMMON AND PREFERRED STOCK

The Company continuously reviews opportunities for lowering its cost of capital, and increasing value per share. The Company evaluates opportunities to repurchase stock when it believes that its stock price is below the value of its assets and accordingly repurchased common stock, funded by asset sales, between 1999 and 2001. The Company also looks for opportunities where it can acquire or develop communities, selectively funded or partially funded by stock sales, when it will add to shareholder value and the investment return is projected to substantially exceed its cost of capital. The Company will also opportunistically seek to lower its cost of capital through refinancing preferred stock as it did in 2003.

5


On May 26, 2005, the Company gave the required one-year notice to redeem all of the issued and outstanding 8 5/8% Series G Cumulative Redeemable Preferred Stock shares on May 26, 2006, at a total redemption price of $10 million.

SHARE REPURCHASE PROGRAM

In 1999, the Company’s Board of Directors approved an increase in the number of shares of the Company’s common stock authorized to be repurchased to 4 million shares. As of December 31, 2005, the Company had repurchased a total of approximately 1.86 million shares (8% of the shares of common stock and Common Units outstanding as of the beginning of the repurchase program). From time to time, the Company intends to sell assets based on its disposition strategy outlined in this Annual Report and use the proceeds to repurchase shares when it believes that shareholder value is enhanced. Factors affecting this determination include the share price, asset dispositions and pricing, financing agreements and rates of return of alternative investments. No shares were repurchased from 2002 through 2005 under this plan.

COMPETITION

All of the Company’s Communities are located in areas that include other apartment communities. Occupancy and rental rates are affected by the number of competitive apartment communities in a particular area. The owners of competing apartment communities may have greater resources than the Company, and the managers of these communities may have more experience than the Company’s management. Moreover, single-family rental housing, manufactured housing, condominiums and the new and existing home markets provide housing alternatives to potential residents of apartment communities.

Apartment communities compete on the basis of monthly rent, discounts, and facilities offered such as apartment size and amenities, and apartment community amenities, including recreational facilities, resident services, and physical property condition. The Company makes capital improvements to both the Communities and individual apartments on a regular basis in order to maintain a competitive position in each individual market.

ENVIRONMENTAL MATTERS

As part of the acquisition process, the Company obtains environmental studies on all of its Communities from various outside environmental engineering firms. The purpose of these studies is to identify potential sources of contamination at the Communities and to assess the status of environmental regulatory compliance. These studies generally include historical reviews of the Communities, reviews of certain public records, preliminary investigations of the sites and surrounding properties, visual inspection for the presence of asbestos, PCBs and underground storage tanks and the preparation and issuance of written reports. Depending on the results of these studies, more invasive procedures, such as soil sampling or ground water analysis, will be performed to investigate potential sources of contamination. These studies must be satisfactorily completed before the Company takes ownership of an acquisition property, however, no assurance can be given that the studies identify all significant environmental problems.

Under various Federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on properties. Such laws often impose such liability without regard to whether the owner caused or knew of the presence of hazardous or toxic substances and whether or not the storage of such substances was in violation of a resident’s lease. Furthermore, the cost of remediation and removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral.

The Company is aware of environmental concerns specifically relating to potential issues resulting from mold in residential properties and has in place an active management and preventive maintenance program that includes procedures specifically related to mold. The Company has established a policy requiring residents to sign a mold addendum to lease. The Company has also purchased a $2 million insurance policy that covers remediation and exposure to mold. The current policy expires in 2007 but is renewable at that time. The Company, therefore, believes that its exposure to this issue is limited and controlled.

6


The environmental studies received by the Company have not revealed any material environmental liabilities. The Company is not aware of any existing conditions that would currently be considered an environmental liability. Nevertheless, it is possible that the studies do not reveal all environmental liabilities or that there are material environmental liabilities of which the Company is unaware. Moreover, no assurance can be given concerning future laws, ordinances or regulations, or the potential introduction of hazardous or toxic substances by neighboring properties or residents.

The Company believes that its Communities are in compliance in all material respects with all applicable Federal, state and local ordinances and regulations regarding hazardous or toxic substances and other environmental matters.

RECENT DEVELOPMENTS

DISTRIBUTION.    In January 2006, the Company announced a quarterly distribution to common shareholders of $0.595 per share, which was paid on January 31, 2006.

In February 2006, the Company announced a monthly distribution to its Series F Cumulative Redeemable Preferred Stock shareholders of $0.1927 per share, which is payable on March 15, 2006.

ACQUISITIONS.    On January 19, 2006, the Company acquired the Preserve at Brier Creek apartments in Raleigh, NC with 250 units.

ITEM 1A.  RISK FACTORS

The Company’s ability to generate sufficient cash flow in order to pay common dividends to its shareholders depends on its 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 the Company’s properties may be insufficient because of factors which are beyond the Company’s control. Such events or conditions could include:

•  
   competition from other apartment communities;

•  
   overbuilding of new apartment units or oversupply of available apartment units in the Company’s markets, which might adversely affect apartment occupancy or rental rates and/or require rent concessions in order to lease apartment units;

•  
   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;

•  
   the Company’s 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;

•  
   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 the Company’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, the Company relies on external funding sources to fully fund the payment of distributions to shareholders and its capital investment program (including its existing property expansion developments). While the Company has sufficient liquidity to permit distributions at current rates through additional borrowings if necessary, any significant and sustained deterioration in operations could result in the Company’s financial resources being insufficient to pay distributions to shareholders at the current rate, in which event the Company would be required to reduce the distribution rate. Any decline in the Company’s

7



funds from operations could adversely affect the Company’s ability to make distributions to its shareholders or to meet its loan covenants and could have a material adverse effect on the Company’s stock price.

Debt Level, Refinancing and Loan Covenant Risk May Adversely Affect Financial Condition and Operating Results

At December 31, 2005, the Company had total debt outstanding of $1.14 billion. Payments of principal and interest on borrowings may leave the Company with insufficient cash resources to operate the Communities or pay distributions that are required to be paid in order for the Company to maintain its qualification as a REIT. The Company currently intends to limit its total debt to approximately 60% of the undepreciated book value of its assets, although the Company’s charter and bylaws do not limit its debt levels. Circumstances may cause the Company to exceed that target from time to time. As of December 31, 2005, the Company’s ratio of debt to undepreciated book value was approximately 56%. The Company’s Board of Directors can modify this policy at any time which could allow the Company to become more highly leveraged and decrease its ability to make distributions to its shareholders. In addition, the Company must repay its debt upon maturity, and the inability to access debt or equity capital at attractive rates could adversely affect the Company’s financial condition and/or its funds from operations. The Company relies on Fannie Mae and Freddie Mac (the “Agencies”) for the majority of its debt financing and has agreements with the Agencies and with other lenders that require it to comply with certain covenants. The breach of any one of these covenants would place the Company in default with its lenders and may have serious consequences on the operations of the Company.

Variable Interest Rates May Adversely Affect Funds from Operations

At December 31, 2005, effectively $173 million of the Company’s debt bore interest at a variable rate and was not hedged by interest rate swaps or caps. An additional $25 million also bore interest at a variable rate at December 31, 2005, but was hedged by an interest rate swap that became operative in February 2006. The Company 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 the Company’s funds from operations and the amounts available to pay distributions to shareholders. The Company’s $950 million secured credit facilities with Prudential Mortgage Capital, credit enhanced by Fannie Mae, are predominately floating rate facilities. The Company also has a $100 million credit facility with Freddie Mac which is a variable rate facility. At December 31, 2005, a total of $907.8 million was outstanding under these facilities. These facilities represent the majority of the variable interest rates the Company was exposed to at December 31, 2005. 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, the Company will be exposed to the risks of varying interest rates.

Issuances of Additional Debt or Equity May Adversely Impact Our Financial Condition

Our capital requirements depend on numerous factors, including the occupancy rates of our apartment properties, dividend payment rates to our shareholders, development and capital expenditures, costs of operations and potential acquisitions. The Company cannot accurately predict the timing and amount of our capital requirements. If our capital requirements vary materially from our plans, the Company may require additional financing sooner than anticipated. Accordingly, the Company 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

Because the Company has substantial real estate holdings, the cost of real estate taxes and insuring its 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 the Company. If the costs associated with real estate taxes and insurance should rise, the Company’s financial condition could be negatively impacted and the Company’s ability to pay its dividend could be affected.

8


Losses from Catastrophes May Exceed Our Insurance Coverage

The Company carries comprehensive liability and property insurance on our properties, which the Company believes is of the type and amount customarily obtained on real property assets. The Company intends to obtain similar coverage for properties the Company acquires in the future. However, some losses, generally of a catastrophic nature, such as losses from floods, hurricanes or earthquakes, may be subject to limitations. The Company exercises its 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 the Company suffers a substantial loss, its 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.

New Acquisitions May Fail to Perform as Expected and Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies

The Company intends to actively acquire and improve multifamily properties for rental operations. The Company may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position. Additionally, to grow successfully, the Company must be able to apply our experience in managing our existing portfolio of apartment communities to a larger number of properties. The Company 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.

The Company May Not Be Able To Sell Properties When Appropriate

Real estate investments are relatively illiquid and generally cannot be sold quickly. The Company may not be able to change our portfolio promptly in response to economic or other conditions. 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.

Failure to Qualify as a REIT Would Cause The Company to be Taxed as a Corporation

If the Company fails to qualify as a REIT for federal income tax purposes, the Company 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 the Company fails to qualify as a REIT, the Company 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, the Company 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. The Company 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.

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 property. 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

9



owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site. All of our properties have been the subject of environmental assessments completed by qualified independent environmental consultant companies. These environmental assessments have not revealed, nor is the Company 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 four 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. The Company cannot be assured that existing environmental assessments of our properties reveal all environmental liabilities, that any prior owner of any of our properties did not create a material environmental condition not known to the Company, 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 the Company to modify our existing properties. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require the Company to add other structural features that increase our construction costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on the Company with respect to improved access by disabled persons. The Company cannot ascertain the costs of compliance with these laws, which may be substantial.

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.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

The Company seeks to acquire apartment communities located in the southeastern United States and Texas that are primarily appealing to middle income residents with the potential for above average growth and return on investment. Approximately 75% of the Company’s apartment units are located in Georgia, Florida, Tennessee and Texas markets. The Company’s strategic focus is to provide its residents high quality apartment units in attractive community settings, characterized by extensive landscaping and attention to aesthetic detail. The Company utilizes its experience and expertise in maintenance, landscaping, marketing and management to effectively reposition many of the apartment communities it acquires to raise occupancy levels and per unit average rents.

The following table sets forth certain historical information for the Communities the Company owned or maintained an ownership interest in, including the property containing 522 apartment units owned by the Crow JV, at December 31, 2005:

10



  		        
  		     Encumbrances at
December 31, 2005
     
Property
          Location
      Year
Completed
      Year
Management
Commenced
      Number
of Units
      Approximate
Rentable
Area
(Square
Footage)
      Average
Unit
Size
(Square
Footage)
      Monthly
Rent per
Unit at
December 31,
2005
      Average
Occupancy
Percent at
December 31,
2005
      Mortgage
Principal
(000’s)
      Interest
Rate
      Maturity
Date
100% Owned
                                                                                                                                                                                                                                     
Eagle Ridge
              
Birmingham, AL
          1986               1998               200               181,400              907            $ 680.96              98.00 %          $ —(1 )             (1 )             (1 )  
Abbington Place
              
Huntsville, AL
          1987               1998               152               162,792              1,071           $ 544.02              94.08 %          $ —(1 )             (1 )             (1 )  
Paddock Club Huntsville
              
Huntsville, AL
          1989/98              1997               392               414,736              1,058           $ 652.48              92.86 %          $ —(1 )             (1 )             (1 )  
Paddock Club Montgomery
              
Montgomery, AL
          1999               1998               208               230,880              1,110           $ 727.06              96.63 %          $ —(1 )             (1 )             (1 )  
 
              
 
                                          952               989,808              1,040           $ 657.44              94.96 %          $ —                                            
Calais Forest
              
Little Rock, AR
          1987               1994               260               195,000              750            $ 620.32              95.77 %          $ —(1 )             (1 )             (1 )  
Napa Valley
              
Little Rock, AR
          1984               1996               240               183,120              763            $ 614.65              93.33 %          $ —(1 )             (1 )             (1 )  
Westside Creek I
              
Little Rock, AR
          1984               1997               142               147,964              1,042           $ 697.20              97.18 %          $ —(1 )             (1 )             (1 )  
Westside Creek II
              
Little Rock, AR
          1986               1997               166               172,972              1,042           $ 656.78              93.37 %          $ 4,518              8.760 %             10/1/2006   
 
              
 
                                          808               699,056              865            $ 639.64              94.80 %          $ 4,518                                           
Tiffany Oaks
              
Altamonte Springs, FL
          1985               1996               288               234,144              813            $ 689.29              99.31 %          $ —(1 )             (1 )             (1 )  
Marsh Oaks
              
Atlantic Beach, FL
          1986               1995               120               93,240              777            $ 670.99              90.00 %          $ —(1 )             (1 )             (1 )  
Indigo Point
              
Brandon, FL
          1989               2000               240               194,640              811            $ 745.85              99.17 %          $ —(4 )             (4 )             (4 )  
Paddock Club Brandon
              
Brandon, FL
          1997/99              1997               440               516,120              1,173           $ 902.12              93.86 %          $ —(2 )             (2 )             (2 )  
Preserve at Coral Square
              
Coral Springs, FL
          1996               2004               480               528,480              1,101           $ 1,077.05              99.58 %          $ 32,203              4.170 %             9/28/2008   
Anatole
              
Daytona Beach, FL
          1986               1995               208               149,136              717            $ 683.30              100.00 %          $ 7,000 (10)             3.901%(10 )             10/15/2032 (10)  
Paddock Club Gainesville
              
Gainesville, FL
          1999               1998               264               293,040              1,110           $ 851.40              97.73 %          $ —(2 )             (2 )             (2 )  
Cooper’s Hawk
              
Jacksonville, FL
          1987               1995               208               218,400              1,050           $ 792.96              98.08 %          $ —(6 )             (6 )             (6 )  
Hunter’s Ridge at Deerwood
              
Jacksonville, FL
          1987               1997               336               295,008              878            $ 739.86              97.62 %          $ —(7 )             (7 )             (7 )  
Lakeside
              
Jacksonville, FL
          1985               1996               416               344,032              827            $ 731.94              95.19 %          $ —(1 )             (1 )             (1 )  
Lighthouse Court
              
Jacksonville, FL
          2003               2003               501               556,110              1,110           $ 937.75              91.42 %          $ —(1 )             (1 )             (1 )  
Paddock Club Jacksonville
              
Jacksonville, FL
          1989/96              1997               440               475,200              1,080           $ 817.07              98.18 %          $ —(1 )             (1 )             (1 )  
Paddock Club Mandarin
              
Jacksonville, FL
          1998               1998               288               330,336              1,147           $ 860.65              96.88 %          $ —(2 )             (2 )             (2 )  
St. Augustine
              
Jacksonville, FL
          1987               1995               400               304,400              761            $ 649.29              98.00 %          $ —(6 )             (6 )             (6 )  
Woodbridge at the Lake
              
Jacksonville, FL
          1985               1994               188               166,004              883            $ 709.99              94.68 %          $ —(2 )             (2 )             (2 )  
Woodhollow
              
Jacksonville, FL
          1986               1997               450               342,000              760            $ 722.42              97.56 %          $ —(1 )             (1 )             (1 )  
Paddock Club Lakeland
              
Lakeland, FL
          1988/90              1997               464               505,296              1,089           $ 740.28              96.34 %          $ —(1 )             (1 )             (1 )  
Savannahs at James Landing
              
Melbourne, FL
          1990               1995               256               238,592              932            $ 712.99              99.61 %          $ —(6 )             (6 )             (6 )  
Paddock Park Ocala
              
Ocala, FL
          1986/88              1997               480               485,280              1,011           $ 750.25              94.58 %          $ 6,805 (2)(3)             3.771%(2)(3 )             10/15/2032 (2)(3)  
Paddock Club Panama City
              
Panama City, FL
          2000               1998               254               283,972              1,118           $ 894.52              98.43 %          $ —(2 )             (2 )             (2 )  
Paddock Club Tallahassee
              
Tallahassee, FL
          1990/95              1997               304               329,232              1,083           $ 791.39              92.76 %          $ —(2 )             (2 )             (2 )  
Belmere
              
Tampa, FL
          1984               1994               210               202,440              964            $ 740.17              98.57 %          $ —(1 )             (1 )             (1 )  
Links at Carrollwood
              
Tampa, FL
          1980               1998               230               214,820              934            $ 770.88              99.57 %          $ —(1 )             (1 )             (1 )  
 
              
 
                                          7,465              7,299,922              978            $ 795.58              96.70 %          $ 46,008                                           
High Ridge
              
Athens, GA
          1987               1997               160               186,560              1,166           $ 696.93              96.88 %          $ —(1 )             (1 )             (1 )  
Bradford Pointe
              
Augusta, GA
          1986               1997               192               156,288              814            $ 627.08              90.63 %          $ 4,760              4.192 %             6/1/2028   
Shenandoah Ridge
              
Augusta, GA
          1982               1994               272               222,768              819            $ 574.98              95.59 %          $ —(1 )             (1 )             (1 )  
Westbury Creek
              
Augusta, GA
          1984               1997               120               107,040              892            $ 640.87              95.83 %          $ 3,480 (15)             4.612%(15 )             5/15/2033 (15)  
Fountain Lake
              
Brunswick, GA
          1983               1997               110               129,800              1,180           $ 740.11              95.45 %          $ —(5 )             (5 )             (5 )  
Park Walk
              
College Park, GA
          1985               1997               124               112,716              909            $ 623.50              94.35 %          $ —(1 )             (1 )             (1 )  
Whisperwood
              
Columbus, GA
          1980/82/84/86/98              1997               1,008              1,220,688              1,211           $ 737.04              91.96 %          $ —(1 )             (1 )             (1 )  
Willow Creek
              
Columbus, GA
          1971/77              1997               285               246,810              866            $ 555.93              91.23 %          $ —(1 )             (1 )             (1 )  
Terraces at Fieldstone
              
Conyers, GA
          1999               1998               316               351,076              1,111           $ 768.83              96.20 %          $ —(1 )             (1 )             (1 )  
Prescott
              
Duluth, GA
          2001               2004               384               370,176              964            $ 775.65              97.66 %          $ —(8 )             (8 )             (8 )  

11



  		        
  		     Encumbrances at
December 31, 2005
     
Property
          Location
      Year
Completed
      Year
Management
Commenced
      Number
of Units
      Approximate
Rentable
Area
(Square
Footage)
      Average
Unit
Size
(Square
Footage)
      Monthly
Rent per
Unit at
December 31,
2005
      Average
Occupancy
Percent at
December 31,
2005
      Mortgage
Principal
(000’s)
      Interest
Rate
      Maturity
Date
Lanier
              
Gainesville, GA
          1998               2005               344               395,944              1,151           $ 790.92              95.64 %          $ 20,686              5.250 %             3/1/2014   
Lake Club
              
Gainesville, GA
          2001               2005               313               359,950              1,150           $ 731.77              91.69 %          $ —(8 )                                          
Whispering Pines
              
LaGrange, GA
          1982/84              1997               216               223,128              1,033           $ 558.58              92.59 %          $ —(5 )             (5 )             (5 )  
Westbury Springs
              
Lilburn, GA
          1983               1997               150               137,700              918            $ 662.29              98.67 %          $ —(1 )             (1 )             (1 )  
Austin Chase
              
Macon, GA
          1996               1997               256               292,864              1,144           $ 704.75              92.58 %          $ —(7 )             (7 )             (7 )  
The Vistas
              
Macon, GA
          1985               1997               144               153,792              1,068           $ 614.20              95.14 %          $ —(1 )             (1 )             (1 )  
Walden Run
              
McDonough, GA
          1997               1998               240               271,200              1,130           $ 703.08              91.25 %          $ —(1 )             (1 )             (1 )  
Georgetown Grove
              
Savannah, GA
          1997               1998               220               239,800              1,090           $ 805.60              97.27 %          $ 10,102              7.750 %             7/1/2037   
Wildwood
              
Thomasville, GA
          1980/84              1997               216               223,128              1,033           $ 577.98              98.15 %          $ —(1 )             (1 )             (1 )  
Hidden Lake
              
Union City, GA
          1985/87              1997               320               342,400              1,070           $ 672.63              95.00 %          $ —(1 )             (1 )             (1 )  
Three Oaks
              
Valdosta, GA
          1983/84              1997               240               247,920              1,033           $ 611.81              92.92 %          $ —(1 )             (1 )             (1 )  
Huntington Chase
              
Warner Robins, GA
          1997               2000               200               218,400              1,092           $ 681.04              94.00 %          $ 8,891              6.850 %             11/1/2008   
Southland Station
              
Warner Robins, GA
          1987/90              1997               304               354,768              1,167           $ 668.80              96.38 %          $ —(1 )             (1 )             (1 )  
Terraces at Townelake
              
Woodstock, GA
          1999               1998               502               575,794              1,147           $ 714.29              91.04 %          $ —(1 )             (1 )             (1 )  
 
              
 
                                          6,636              7,140,710              1,076           $ 691.24              94.03 %          $ 47,919                                           
Fairways at Hartland
              
Bowling Green, KY
          1996               1997               240               251,280              1,047           $ 648.96              94.58 %          $ —(1 )             (1 )             (1 )  
Paddock Club Florence
              
Florence, KY
          1994               1997               200               207,000              1,035           $ 719.04              92.50 %          $ 9,600              5.875 %             1/1/2044   
Grand Reserve Lexington
              
Lexington, KY
          2000               1999               370               432,530              1,169           $ 843.35              89.19 %          $ —(1 )             (1 )             (1 )  
Lakepointe
              
Lexington, KY
          1986               1994               118               90,624              768            $ 620.02              92.37 %          $ —(1 )             (1 )             (1 )  
Mansion, The
              
Lexington, KY
          1989               1994               184               138,736              754            $ 620.32              91.85 %          $ —(1 )             (1 )             (1 )  
Village, The
              
Lexington, KY
          1989               1994               252               182,700              725            $ 601.86              94.05 %          $ —(1 )             (1 )             (1 )  
Stonemill Village
              
Louisville, KY
          1985               1994               384               324,096              844            $ 596.24              88.28 %          $ —(1 )             (1 )             (1 )  
 
              
 
                                          1,748              1,626,966              931            $ 674.78              91.30 %          $ 9,600                                           
Riverhills
              
Grenada, MS
          1972               1985               96               81,984              854            $ 409.44              98.96 %          $ —(1 )             (1 )             (1 )  
Crosswinds
              
Jackson, MS
          1988/90              1996               360               443,160              1,231           $ 686.38              99.17 %          $ —(1 )             (1 )             (1 )  
Pear Orchard
              
Jackson, MS
          1985               1994               389               338,430              870            $ 639.64              97.17 %          $ —(1 )             (1 )             (1 )  
Reflection Pointe
              
Jackson, MS
          1986               1988               296               254,856              861            $ 656.04              95.95 %          $ 5,880 (11)             3.821%(11 )             5/15/2031 (11)  
Somerset
              
Jackson, MS
          1981               1995               144               126,864              881            $ 594.37              88.19 %          $ —(1 )             (1 )             (1 )  
Woodridge
              
Jackson, MS
          1987               1988               192               175,104              912            $ 580.87              96.88 %          $ —(1 )             (1 )             (1 )  
Lakeshore Landing
              
Ridgeland, MS
          1974               1994               196               171,108              873            $ 602.82              95.92 %          $ —(1 )             (1 )             (1 )  
Savannah Creek
              
Southaven, MS
          1989               1996               204               237,048              1,162           $ 682.32              97.06 %          $ —(1 )             (1 )             (1 )  
Sutton Place
              
Southaven, MS
          1991               1996               253               268,686              1,062           $ 667.91              86.96 %          $ —(1 )             (1 )             (1 )  
 
              
 
                                          2,130              2,097,240              985            $ 635.14              95.45 %          $ 5,880                                           
Hermitage at Beechtree
              
Cary, NC
          1988               1997               194               169,750              875            $ 614.03              96.39 %          $ —(1 )             (1 )             (1 )  
Waterford Forest
              
Cary, NC
          1996               2005               384               344,448              897            $ 609.20              94.01 %          $ —(8 )             (8 )             (8 )  
Woodstream
              
Greensboro, NC
          1983               1994               304               217,056              714            $ 544.73              90.79 %          $ —(1 )             (1 )             (1 )  
Corners, The
              
Winston-Salem, NC
          1982               1993               240               173,520              723            $ 558.59              95.00 %          $ —(2 )             (2 )             (2 )  
 
              
 
                                          1,122              904,774              806            $ 581.74              93.76 %          $ —                                            
Fairways at Royal Oak
              
Cincinnati, OH
          1988               1994