Mid-America Apartment Communities
Annual Report 2000

Plain-text annual report

Annual Report 2000 Mid-America Apartment Communities, Inc. IN THE PAST FEW YEARS, THE DOT-COMS DISTRACTED many investors from a proven truth on which this country’s economic prosperity has long been built: hard work, discipline and sound principles lead to solid, steady growth in intrinsic value and real cash flow. Here at Mid-America Apartment Communities, we never lost sight of our original goal – to provide a solid true return by increasing intrinsic share value coupled with a safe, growing cash dividend. By steadily building an award-winning portfolio, maintaining that portfolio to the highest standards, and creating a sense of community for resident customers and employee associates alike, Mid-America has succeeded in bringing sound investment home – year after year. Trends come and go, but sound investments built on the founda- tion of a solid true return will be standing long after the latest fads have run their course. With a true return of 18.9 percent compounded annually since our initial public offering in 1994, Mid-America brings sound investment home for investors who benefit from our 24 years of unbroken success in the apartment business. Letter to Our Shareholders 2 Bringing Sound Investment Home 6 Questions and Answers 12 Financial Statements 16 Independent Auditors’ Report 19 Investor Information 20 Officers and Directors 20 Independent Awards and Recognition 21 Contents Bringing Sound Investment Home Award-winning Communities in HighGrowth Markets P R O P E R T Y L O C A T I O N S D E V E L O P M E N T S I T E S T R A I N I N G C E N T E R S 3 4 , 0 2 5 A P A R T M E N T S I N 13 S T A T E S (including 413 units still under development) The largest portion of Mid-America’s portfolio (70 percent of our units) is held in Tennessee, Texas, Georgia and Florida, giving us more properties in accelerating markets than any apart- ment REIT in the nation, according to one independent analyst. Geographical dispersement and equal positioning in large, medium and small markets protect your investment from threats in any given geographical market, and our apartments are more predictable and secure than other real estate classes. T E N N E S S E E Mid-America’s holdings are diversified throughout the state, benefiting from strong demographic trends in each of its home state markets: Memphis, Nashville, Chattanooga and Jackson. T E X A S We have concentrated our ownership in and near Texas’ three prospering growth areas — Dallas, Austin and Houston, currently some of our stronger markets. G E O RG I A An excellent diversity of communities throughout the state, from the high growth suburban areas of the Atlanta metro, to the solid mid-sized cities (Savannah, Macon, Columbus, Augusta), to several steady smaller cities (Valdosta, Brunswick, Thomasville, LaGrange). F L O R I D A We are growing and thriving in most of the strong market areas of Florida, including Jacksonville, Tampa, Tallahassee, Orlando, Daytona Beach, Melbourne and others. T E X A S Austin 4 Dallas Metro 7 Houston Metro 4 V I RG I N I A Hampton A D D I T I O N A L D E V E L O P M E N T C O M M U N I T I E S Memphis, TN Nashville, TN T R A I N I N G C E N T E R S Atlanta, GA Dallas, TX Greenville, SC Jacksonville, FL Memphis, TN Nashville, TN E X I S T I N G L O C A T I O N S A L A B A M A Birmingham Huntsville 2 Montgomery A R K A N S A S Little Rock 3 F L O R I D A Daytona Beach Gainesville Jacksonville 9 Lakeland Melbourne Ocala Orlando Panama City Beach Tallahassee Tampa Metro 4 G E O RG I A Athens Atlanta Metro 6 Augusta 3 Brunswick Columbus 2 LaGrange Macon/Warner Robins 4 Savannah St. Simons Island Thomasville Valdosta K E N T U C K Y Bowling Green Florence Lexington 4 Louisville M I S S O U R I St. Louis M I S S I S S I P P I Grenada Jackson 7 Southaven 2 N O RT H C A RO L I N A Greensboro Raleigh Winston-Salem O H I O Cincinnati S O U T H C A RO L I N A Aiken 2 Anderson Charleston Columbia 2 Greenville 5 Spartanburg T E N N E S S E E Chattanooga 4 Jackson 5 Memphis 10 Nashville Metro 3 The Paddock Club in Panama City Beach, Florida F I N A N C I A L H I G H L I G H T S Dollars in thousands, except property and per share data Total revenues Property operating expenses (excluding depreciation and amortization) Net income Funds from operations Funds from operations per share (Basic) Dividends per share Weighted average common shares, diluted Weighted average shares and units, diluted Real estate owned, at cost Investment in real estate joint venture Total debt Shareholders’ equity and minority interest Market capitalization (shares and units) Number of properties with ownership interest Number of apartment units with ownership interest Years Ended December 31 1998 $ 215,543 1999 $ 226,322 2000 224,640 $ 79,917 26,757 63,939 2.95 2.20 18,770 21,764 1,434,733 — 753,427 578,710 $ 670,123 129 33,831 84,885 33,572 59,714 2.76 2.30 18,808 21,817 1,396,743 8,054 744,238 519,944 $ 639,095 129 33,901 83,446 29,787 57,456 2.80 2.32 17,597 20,551 1,430,378 7,630 781,089 485,376 634,903 124 33,612 $ FUNDS FROM OPERATIONS PER SHARE – BASIC (SINCE IPO) DIVIDEND PER COMMON SHARE INTRINSIC VALUE GROWTH $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $2.50 $2.00 $1.50 $1.00 $0.50 $30 $25 $20 $15 $10 $5 94 00 96 00 Mid-America shareholders currently enjoy an annual dividend rate of $2.34 per share. VALUE AT IPO VALUE AT DEC. 31, 2000 True return of 18.9% since IPO (value growth plus cash dividend paid) Pictured on the cover: Grande View in Nashville, Tennessee T O O U R S H A R E H O L D E R S The first year of the new century was a year of great progress for Mid-America who was unable to deliver on their promises with a proven one. Water submetering continues Apartment Communities (MAA-NYSE). We near completion of the $300 million new devel- to repay our major investment handsomely; we received almost $3 million in water cost opment pipeline which began in 1998. As each new unit is “stabilized”1 we add to both reimbursements in 2000, to grow yet again in 2001. share value and earnings. Independent estimates of our value, which we believe to be conser- Since late 1999, we have repurchased more than 1.8 million of our common shares at vative, are typically 10 to 20 percent above where our shares are now trading. an average price well below the underlying intrinsic value of each share (as measured by both • 1,147 new units brought on line for leasing; nearing full production • Necessary funding in place for all remaining new development • Sold 1,902 units; part of proceeds used to repurchase shares, adding value • Portfolio quality outstanding, judged independently • Further strengthened high dividend safety FAD2 and FFO3 each resumed their ourselves and independent analysts). Repurchases will growth (per share for 2000: FAD $2.19; continue for as long as we are able to (a) sell assets FFO $2.80). As each new unit is completed, at attractive prices and (b) use the proceeds to buy its interest cost is expensed, thus pressuring stock at a significant discount to its intrinsic value. short-term earnings until the unit is leased. Our dividend is safe, well protected, and has • Exposure to floating rate debt variability reduced to modest level That was the primary reason for the slight grown each year. Our balance sheet is strong and • Continued rapid growth of ancillary revenue single-year (1999) earnings reduction induced becoming ever more so. Great strides were made in by the most concentrated output of new 2000, as detailed in this report. We fixed the interest development. In large part we have avoided the dangers of overbuilding, sharply curtailing rate on almost 90 percent of our debt (overall average new development two years ago, now with only $17 million remaining to be finished in 2001. rate now only 7.1 percent), effectively eliminating Our primary southeastern and south central markets continue to be among the largest most of our exposure to interest rate variability From left, George E. Cates, Chairman and CEO; H. Eric Bolton Jr., President and COO; and Simon R. job generators in the country, and job formations are the main driver of apartment demand. while simultaneously increasing portfolio man- C. Wadsworth, Executive Vice President and CFO. Occupancy averaged a solid 94.8 percent for the entire year. This was accomplished despite agement flexibility. growing market pressures from a mild excess of new supply over underlying demand. Recurrent capital spending for normal ongoing needs is stable and predictable, The general, long range demand for apartments is unusually good. “Echo Boomers” continuing at about $400 per unit per year. Our portfolio is in top condition – attested to – the children of Baby Boomers – are arriving at that age where they find their first places independently, as we continue to win more third party awards and recognition for portfolio to live; apartments will be the No. 1 probability for most. The prospects are excellent for excellence than do other apartment REITs. As we added $300 million of newly developed good and strengthening demand for our apartment homes during the coming decade. We units since 1998 while selling $195 million of existing units, the average age of our assets is are well positioned to take full advantage of this fine prospect. now about 11.1 years, among the newest in the apartment REIT business4. Another testament Ancillary income growth and the innovative use of technology (with no Mid-America to our prudent use of capital: return on assets (ROA) at 8.8 percent was once again above capital at risk) continue as a large, growing part of our strategy. Ancillary income grew by our peer average. 50 percent in 2000 and the prospect for continuing long-term strength in this area is very Our strategic target is to provide a true return5 compounding in the mid-teens, a good – although 2001 is expected to be relatively quiet as we replace a broadband provider doubling of investment each five years, by increasing the underlying intrinsic value of each 2 3 share6 coupled with a solid and growing cash dividend. We continue to do so. Since our initial success in meeting those objectives. Insider purchases continued again in 2000, with insiders public offering (IPO) in 1994, our true return has compounded at 18.9 percent annually. as a group now owning 16 percent of company equity. For the past five years, true return slipped below target to 11 percent, for a good and temporary A key component of our succession plan, previously announced, is that Eric Bolton reason: as we added the $300 million of new development, there was an inescapable period becomes CEO in September 2001. George Cates will remain as Chairman of the Board. of about three years (construction, pre-leasing and marketing, and steady move to unit This succession has been long planned and is in keeping with our commitment to bringing occupancy) in which that major investment did not yet add to share value or cash flow. sound investment home. DIVERSIFIED PORTFOLIO 2% 15% 19% 28% 36% Southeast (excluding Florida) East Florida Texas and Arkansas Ohio and Missouri We are now arriving at the stage in which we capture both the value Your company is in fine shape. Our dividend is secure, and has grown each year. The and the cash flow from the development pipeline. As a consequence, underlying intrinsic, real value, of each share is well above our market price, and rising. Our and by plan, we expect our true return to accelerate to target levels. strategy is sound and producing its intended results. Perhaps the public market is beginning With the same proviso about new development’s interim to acknowledge these strengths and accomplishments; MAA’s overall market return for 2001 impact for the past three years as noted above, other measures of year to date, at this writing, is near the top of our 11-company peer group. In the meantime our strategy’s success have also been acceptable. FAD growth plus and as we await greater recognition of the created value and cash flow, we can continue to dividend yield per share has compounded 14 percent since IPO and enjoy a solid true return, of which the majority is hard cash. 12 percent for the latest five years. FFO growth plus dividend yield per share has compounded 13 percent annually since IPO and 11 percent for the past five years. Our market return (change in MAA market price plus dividends, commonly referred to as “over- George E. Cates H. Eric Bolton Jr. C H A I R M A N A N D P R E S I D E N T A N D C H I E F E X E C U T I V E O F F I C E R C H I E F O P E R AT I N G O F F I C E R all return”) was 9.9 percent for 2000 and 7 percent compounded annually for the latest five years. Our true return continues to go largely unrewarded in the public market place. Open Arms served 131 families (for 8,372 nights) by providing fully furnished apart- ment homes for family members amidst extended medical crisis. Coupled with an extensive array of other community service activities, Mid-America was recognized by Multifamily Executive magazine in 2000 with its National Community Service Award, as America’s No. 1 real estate company in providing community service. Your distinguished independent directors (listed on page 20) provide sustained excellence, commitment, and constructive leadership on your behalf. There can be no finer board in our industry. Their unrelenting focus on increasing intrinsic share value and assur- ing the growth and safety of our dividend is fundamental to our continuing progress and 1 Construction completed, and leased to 90+ percent occupancy 2 FAD is Funds Available for Distribution, a reasonable proxy for cash flow. FAD is computed by deducting recurring capital costs from FFO. 3 FFO is Funds From Operations: Net Income before gain or losses on real estate sales, minority interest in operating partnership income and extraordinary items, plus depreciation and amortization related to real estate assets. 4 Throughout this report, “business” or “peers” refers to our peer group – those 11 apartment REITs which, like ourselves, own and manage 25,000 or more units. Five of these companies have the majority of their units in the southeastern U.S. and Texas, as do we – we refer to them as our “regional peers”. 5 “True return” is the compounded growth in intrinsic value per share plus cash dividend paid. 6 Two predominant ways of doing so are “NAV” (net asset value) and “NPV” (net present value, which we believe gives a truer picture). 4 5 B R I N G I N G S O U N D I N V E S T M E N T H O M E The Paddock Club in Panama City Beach, Florida Mid-America Apartment Communities brings sound invest- ment home with a portfolio that includes the largest proportion of properties in accelerating markets of any apartment REIT in the nation, according to one independent analyst. Over the last few years, we have continuously and significantly increased the quality of our port- folio as we sold hundreds of older units and replaced them with newly developed apartment homes. At 11.1 years, Mid- America’s average portfolio age is among the newest in the business. We continue to add new units ($300 million in the past three years) while each year selling or exchanging properties where the assurance of continued success is waning, just as we have done each year for many years. GREAT PL ACES TO LIVE Mid-America owns or has substantial ownership interest in 34,025 quality apartment units throughout the southeast, south central and Texas, including 413 units remaining in the development pipeline. These are not just apart- ment units – they are communities. Our mission is “Creating Great Places to Live”. We strive to offer locations, basics and amenities that will attract prospective customers interested in making our apartments their home. Quality architectural features add to the overall atmos- phere and appeal of Mid-America communities. Award-winning landscaping creates a garden-like ambience. As an investor, you are assured that your investment is not only sound, but also one you can feel good about. Mid-America owns and manages apartments that you would gladly recommend to friends and family – and that’s something we’re proud of. DAY-TO-DAY INVOLVEMENT We understand that good location and beautiful curb appeal are the initial attraction for our prospective customers, but we take Our high quality portfolio con- tinues to earn more independent awards and recognition than other apartment REITs. Reinvestment in our communities, including our commitment to superior landscaping, contributes to portfolio excellence. We antic- ipate recurring capital spend- ing to stabilize at $400 per unit, with no pressure to increase. Favorable asset sales are also facilitated by the choice condition of our properties. our commitment to solid assets and great places to live one step further. As a skilled and experienced practitioner now in our third decade, Mid-America realizes the importance of quality management and personal involvement in our apartment communities to increase value and retention. While it may be the location and curb appeal that initially attract our customers, it is our ongoing maintenance and the extra amenities we offer that encourage their extended stay with us, thus reducing our unit turnover costs. Mid-America’s apartment communities are beautifully de- signed and maintained. Our pro- fessionals are among the best in the business, and we stand behind our maintenance policies so strongly that we offer our residents a Move- In Satisfaction Guarantee and a 24-Hour Maintenance Guarantee. If a new resident is not completely satisfied with management, main- tenance or landscape care, they may notify management within 30 days of their move-in and their application fee and deposit will be refunded. Likewise, if at any time we fail to satisfy a routine mainte- nance request within 24 hours, we will credit the resident’s rent for each day the problem remains un- resolved. Guarantees like that are extremely rare in our industry and serve to attract discerning customers. The hard, intelligent work of our professional staff consistently wins independent, third party awards for Mid-America commu- nities. As one of many examples, in 2000 we were named Property Management Company of the Year in Lexington, Ky. Other awards and recognition are summarized on page 21. These, the latest in a long list of such recognition for Mid-America, represent the con- tinuation of unequalled independ- ent recognition for portfolio and management excellence among apartment REITs. THE VALUE OF PEOPLE Our residents can become part of a true community at Mid- America. We strive to care for them in ways not matched by others. When ready to purchase a home (the No. 1 reason that our customers leave us), residents who have been with us for at least three years may earn $1,000+ of down payment assistance through our First Down program. The resident loyalty and reduced turnover gained far offsets the program’s cost...a win-win for our customers and our owners. Excellence of our profes- sional staff is the core reason for our successes of the past 24 years. We value highly their contributions in causing this success, and do all that we can to attract and keep the best in the business. By offering attractive benefits and great work- ing conditions, we empower our employees to take a personal inter- est in their jobs and the apartment communities they manage. Our internal training staff directs state- 6 7 of-the-art seminars and creates videos and online, interactive courses in our regional training centers, as well as at the commu- nities themselves. This assures a more personalized approach to each employee’s increasing skill levels, and is one of the reasons for our steady productivity uptrend. “Creating Great Places to Live” extends beyond the borders of the apartment communities where our residents live and our associates work. Involvement with the sur- rounding, larger community makes us better neighbors and increases the sense of home and family with- in each apartment community. That is one reason we created Open Arms, a program in which we pro- vide housing and care to families in medical crisis and distress, who require long-term medical treatment at great distances from their homes. Fully furnished apartments, tele- phone and television are provided without charge to qualifying fami- lies. Each caring Mid-America property staff gives comfort to those in need at such time of crisis in their lives. Local hospitals coop- erate with Open Arms by supplying referrals of families. Neighboring businesses, churches and individuals often provide groceries and other help. What began as our sole cor- porate charity has emerged as an industry leading service. In 2000, 31 Open Arms homes located in 25 cities and 12 states helped 131 families. This program is one of the many reasons we were awarded the National Community Service Award for 2000 from Multifamily Executive magazine. An investment in Mid-America is more than finan- cially sound – it is an investment that touches peoples’ lives in a positive way, bringing home the principles that are the foundation of great communities and great businesses. SOLID FINANCIAL STRATEGY Our financial strategy focus- es on increasing the underlying intrinsic value of each share while also providing a safe, growing cash dividend. Capital spending is managed in a disciplined manner, contributing to the underlying strength of our award-winning portfolio. The superior condition of each property also helps to facil- itate property sales at attractive prices when that becomes appro- priate. Overall, Mid-America can be characterized as strong, safe and solid. Our high dividend yield and sound prospects for intrinsic value growth, coupled with the moderate risk demonstrated by our long years of unbroken success, provide investors with a reasonably predictable, true return (growth in intrinsic value per share, plus cash dividend paid) in the mid- teens. Mid-America stock repre- sents solid value. With a geographically diverse portfolio in traditionally stable, high job formation markets (presently including the country’s top two), we are poised to take advantage of the Echo Boom demographics – the probable and highly favorable impact of the children of the Baby Boom gen- eration as they now come of age and seek quality service and amenities in rental homes. Mid- America’s award-winning apartment communities are ready to meet their needs and high expectations and should benefit from this demographic probability in the coming decade. Our $300 million new development pipeline, mostly put in place in 1998-2000, nears completion and is beginning to contribute significantly to our underlying intrinsic value per share. As these new developments steadily move toward “stabilization” (90+ percent occupancy), our balance sheet gains further flexibility and earnings grow from the contri- bution of each new unit leased. Construction should be complete on all but one of our new develop- ment communities by late summer, 2001. We foresee modest but accel- erating up ticks in FFO per share throughout 2001 and beyond as the pipeline becomes steadily more productive. No areas have shown sus- tained job growth over long decades as much as our primary southeast, south central and Texas markets. A buy-side analyst reported recent- ly that Mid-America has a larger proportion of its portfolio in accelerating (improving) markets than does any other apartment REIT. Geographical dispersion and balanced positioning in markets with large (2+ million), medium (1-2 million) and small (typically 500,000-750,000) populations spread risk and cushion our invest- ments from threats in any given geographical market. Apartments are also more predictable and Our $300 million new develop- ment pipeline nears completion. Units now leasing include Grand Reserve, Lexington, Ky.; The Reserve at Dexter Lake Phase II, Memphis, Tenn.; Kenwood Club, Katy, Texas; and Grande View, Nashville, Tenn. With steadily increasing stabilization, we continue to gain consider- ably more balance sheet flexi- bility while adding to share value. Terraces at Towne Lake in Atlanta, Georgia 8 9 growth. Our forward-thinking yet conservative approach to technol- ogy saved us the loss of any capital for these services, while adding materially to FFO per share in 2000. CONTINUING THE TRADITION In late 2001, Mid-America will see a change of command. H. Eric Bolton Jr., long-time president and chief operating officer will succeed George E. Cates as chief executive officer. This succession has been long planned and is in keeping with our commitment to bringing sound investment home. Eric understands and has contri- buted materially to the fundamental principles and culture which guide us. He will lead the company to continued, growing success. He has played a key role in making Mid-America what it is today and will continue and expand the tradition of leadership that Mid- America’s customers, associates and owners expect. ANCILL ARY INCOME We also focus intensely on ancillary income growth, which has doubled annually for the last three years and was up 50 percent in 2000. Our ability to provide more services and features relative to the competition provides us important advantages. Not only are resident offerings expanded, but internal processes and systems also benefit, increasing productivity and profit. An example is the huge gain from our investment in water submeters. At year-end 2000, we had 21,880 submetered units and earned $2.8+ million in water cost reimbursements, 34 percent above 1999. An additional 6,207 units will be added to this vitally impor- tant program in 2001. We also offer attractive packages for phone and cable access, adding to our already solid operating margins with little or no capital investment. Arrangements were complet- ed in early 2000 with an established supplier of broadband services to provide a full scope of Internet services throughout our portfolio. We earned 3.8¢ per share of fees and revenue participation in 2000 with no capital outlay. By year end, however, we determined that our technology provider was unable to fulfill their commitment and the agreement was terminated. A replacement arrangement has already been announced. Though slowed for now, ancillary income should continue its rapid long-term Grand Reserve in Lexington, Kentucky stable than other real estate classes, adding to the safety of our shares and dividends. FLEXIBLE OPERATING TACTICS Our strategy focuses on the best tactics at any given time in the real estate cycle. We remain flexible in order to take full advan- tage of optimum opportunities at any point. Mid-America was the first REIT to acquire another pub- licly traded REIT. We acquired properties aggressively when such acquisitions added to share value and earnings; subsequently, we were among the first to de-empha- size acquisitions when that tactic had run its productive course. When new development opportu- nities were abundant, we added $300 million of new apartments which should now add significantly to intrinsic share value. Solid devel- opment opportunities later waned and we consequently reduced development, trimming develop- ment and construction overhead by over $5 million in the process. We were among the earliest to implement a significant share repur- chase program, adding materially to share value, with over 1.8 million shares repurchased since late 1999. At $1.4 billion of total market capitalization, the company is big enough and sufficiently concen- trated to take full advantage of quantity purchasing opportunities, yet small enough to retain flexibility and ample upside potential. Size for its own sake is not and has never been a company objective. With our conservatively managed balance sheet, structured to assure ample coverage of all obligations, we have the capacity to execute attractive opportunities which fulfill our strat- egy. We are not obliged to sell assets to fund new development and are capable of implementing those opportunities that best fulfill our overall objectives...steady growth in both intrinsic share value and cash flow. Providing extra touches helps assure that Mid-America will continue as a premier operator and a fundamentally sound investment. Our apartment com- munities are beautifully de- signed and landscaped to our award-winning standards. Architectural amenities add to the quality and value of our communities as “Great Places to Live.” And unique mainte- nance and move-in satisfaction guarantees contribute to resi- dent customer retention. 10 11 Q U E S T I O N S & A N S W E R S M I D - A M E R I C A’ S S E N I O R E X E C U T I V E T E A M A N S W E R S K E Y Q U E S T I O N S Q: Is the current dividend level safe? A: Yes – and growing more so with each day. The cash flow coverage of our dividend is ample and steadily increasing. Each newly developed unit, when leased and occupied, adds cash flow and earnings growth. Each common share repurchased at a significant discount to underlying intrinsic value (a) removes its dividend payout obligation and (b) increases both value and earnings per share of the remaining shares. Strategic, profitable property sales in the normal course of business provide further cash for our general funding needs. Dividend coverage is sound and growing ever stronger. Q: What earnings growth do you expect in the near future? Its primary sources? A: FFO per share growth should return to its historic and sustainable norm (around 4 to 5 percent annually) over the next two or three years as new development “stabilizes” (see footnote, page 5). When coupled with our large and rising dividend, our overall true return should continue to average solidly in the mid-teens. We correctly saw the new development peak and profitably downsized development and exited construction, capturing value and reducing overhead significantly in the process. Most developers now face large and growing risks. By contrast, most of our growth over the next two or three years will come internally from the steady, relatively predictable, and assured growth of cash flow and value from our existing 33,612 units, and from the new value and cash flow being added steadily from the nearly completed development pipeline now coming into full production. Q: Comment on recent same store performance and prospects for the future. What overall conditions do you expect in your markets? Q: Is your financial leverage too high? What impact will the current economic envi- ronment and volatile interest rate markets have on the risk of your business? A: We believe that our leverage (the proportion of our total capital which is debt) is at the appropriate level. Debt is only 53 percent of the total value of our company, far below the traditional real estate norm of 80 to 90 percent debt. Preferred stock adds an additional 12 percent fixed obligation. Total fixed obligations are only 65 percent of our total capital- ization and require only 56 percent of our available cash flow, both very safe levels. The median leverage of our peer REITs is 55 percent, even including the development oriented REITs which are generally required by lenders to maintain lower leverage to compensate for the increased risks of development. We have steadily reduced the portion of debt bearing variable interest rates, now down to only 12 percent of our total debt, significantly reducing our interest rate risk exposure. Q: How has the year 2000 reduction in capital outlays for the core portfolio affected asset quality? Is there any pressure for increased capital spending? A: By having systematically maintained our portfolio to the highest standards – foremost in our industry with independent recognition of excellence each year – we have no pressures out of the ordinary to spend capital. Further, our average asset age has remained almost con- stant for the past year at 11.1 years as we have added new units while selling older properties (the capital needs of newer properties are very modest). Our portfolio is in its best condition ever, with no pressures to increase capital spending for the foreseeable future. Yet another indication of high asset quality is that our average rentals represent typically about 30 percent of disposable household income in our markets, in line with the comparable figure for other top end portfolios throughout America. Q: Growing intrinsic value and true return continue to go unrewarded by the public A: Over the long haul, we expect that our southeast, south central and Texas regions markets. What tactics can you employ to unlock this value? will continue to contain, as for many years, the country’s strongest apartment markets. Apartment demand is tied to jobs – existing and created – and those areas remain the coun- try’s strongest (and not as prone to booms and busts as are some urban coastal markets). It’s easier to build new product in our region; long term, that’s another regional advantage since the cost of living is kept at far more attractive levels than in dense urban areas and anti-development parts of the country. We’re amidst a period now in which new supply is growing slightly faster than demand, resulting in tougher apartment market conditions, which no one can avoid entirely. Even so, our performance remains above the norms in our chosen markets. We foresee revenue growth between 2.5 to 3.0 percent for 2001 with expense growth slightly higher (due primarily to pressures from real estate taxes, casualty and health/hospitalization insurance, and marketing expenses) at around 3.5 percent, for overall NOI (net operating income) growth between 2.0 to 2.5 percent. A: Of course, the only thing that we can directly control is the creation of that true return. We have added steadily to intrinsic value per share, accelerating now that the develop- ment pipeline is reaching completion. Tactically, the best way to capture our value presently is to sell assets whenever we can do so at attractive prices, and when, as now, we can also re- purchase our own shares materially below their intrinsic value. We continue such transactions whenever we are reasonably assured that the dynamics of both sides of this transaction will add to the underlying value of each share. At this writing, we have resumed share repurchase during the first quarter of 2001. 12 13 Q: What do you see as the company’s major focus going forward? A: First, continuing a strong focus on steadily growing earnings from our productive property portfolio. Our highly productive new development pipeline will be fully contributing on a stabilized basis by early 2002. Our portfolio of properties is in excellent physical condition and is poised to continue to generate steady core earnings growth. Job growth and apartment demand in our southeast, south central and Texas markets are expected to remain strong and grow and we are comfortable over the long haul with our commitment to this part of the country. Over the next couple of years we expect a good environment for recycling and harvesting some of the capital appreciation from our existing investments. Both independently and with potential joint venture partners, we expect to opportunistically deploy capital via our core competency – redeveloping apartment properties to create new value. And we will of course capture value for our owners through share repurchases so long as the market continues to under-price our stock. Q: What impact will the completion of your development pipeline, expected early next year, have on your business? How has the development performed? A: Upon its completion, and using traditional real estate valuation methodology, we will have added significantly to the value of the company – nowhere yet reflected either in our financials or by the public markets. As the pipeline is completed and “stabilized” (see footnote, page 5), cash flow, FFO and FAD (see footnote, page 5) all increase, and we gain considerable flexibility in both the asset management of our portfolio and the financial management of our balance sheet. These benefits increase throughout 2000 and beyond. We expect the development pipeline to deliver a 9.5 to 10 percent yield once “stabi- lized”, slightly below original plan but still quite satisfactory. We would have met our targets except for a relatively modest increase above budgeted construction cost, and marketing and concession costs which materially exceeded plan as several target markets became overbuilt. All in all: with very few exceptions, we would have invested the $300 million just as we did, since problems were inherently short term in nature (and now virtually entirely behind us) and the long term value capture was our primary long term strategic objective – and is being achieved. Q: How do you expect the early 2001 termination of your agreement with a high- speed Internet provider to affect your business and your residents? What now are your plans for providing this service? A: Unlike many apartment REITs, we placed none of our capital at risk on unproven technologies. In fact, we earned over $700,000 of cash fees from our would-be provider before they became unable to deliver the promised services. Part of our strategy is to offer a broad range of high speed Internet-related services to our resident customers – without plac- ing our capital at risk – and we expect to fulfill that strategy. We recently announced a highly qualified replacement provider for about two-thirds of our portfolio, and will not rest until we’re able to offer these services to all of our customers. We earned about 3.8¢ per share from the terminated provider in 2000. We do not expect to replace that revenue during 2001, but it should begin to rebuild in 2001. Despite this temporary setback, ancillary income revenue – a key strategic objective – should continue its rapid progress, though at a slower pace than the 50 percent growth of 2000. Q: In a recession economy, what strengths will sustain the company and could position it to take advantage of economic and real estate cycles? A: We are prone to neither booms nor busts, tending to be stable in both good and bad times. In fact, some of our best years have come amidst recessions, as operating cost pressures and resident turnover loss (to home buying) materially lessened. We’ve weathered all sorts of cyclical and recessionary challenges in our 24 years in the business, with no financial default of any sort and with unbroken progress. We’re able to find ample opportunity for increasing share value and growth amidst all kinds of conditions; we expect to continue to be able to do so for a long time to come. 14 15 C O N S O L I D AT E D B A L A N C E S H E E T S C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S Dollars in thousands A S S E T S Real estate assets: Land Buildings and improvements Furniture, fixtures and equipment Construction in progress Less accumulated depreciation Land held for future development Commercial properties, net Investment in and advances to real estate joint venture Real estate assets, net Cash and cash equivalents Restricted cash Deferred financing costs, net Other assets Total assets L I A B I L I T I E S A N D S H A R E H O L D E R S ’ E Q U I T Y Liabilities: Notes payable Accounts payable Accrued expenses and other liabilities Security deposits Deferred gain on disposition of properties Total liabilities and deferred gain Minority interest Shareholders’ equity: Preferred stock, $.01 par value, 20,000,000 shares authorized, $173,470,750 or $25 per share liquidation preference: 2,000,000 shares at 9.5% Series A Cumulative 1,938,830 shares at 8.875% Series B Cumulative 2,000,000 shares at 9.375% Series C Cumulative 1,000,000 shares at 9.5% Series E Cumulative Common stock, $.01 par value authorized 50,000,000 shares; issued 17,506,968 and 17,971,960 shares at December 31, 2000 and 1999, respectively Additional paid-in capital Other Accumulated distributions in excess of net income Treasury stock at cost, 355,900 shares at December 31, 1999 Total shareholders’ equity Total liabilities and shareholders’ equity December 31 2000 1999 $ 124,867 1,231,603 29,094 28,523 1,414,087 (183,652) 1,230,435 1,366 5,044 7,630 1,244,475 16,095 17,472 9,700 16,029 $1,303,771 $ 781,089 1,740 26,589 4,611 4,366 818,395 $ 119,823 1,172,780 28,238 58,840 1,379,681 (146,611) 1,233,070 1,710 5,217 8,054 1,248,051 14,092 12,537 10,272 13,871 $1,298,823 $ 744,238 2,122 23,199 4,739 4,581 778,879 51,383 56,060 20 19 20 10 20 19 20 10 175 551,809 (1,171) (116,889) — 433,993 $1,303,771 180 562,547 (1,053) (89,869) (7,990) 463,884 $1,298,823 Dollars in thousands, except per share data Revenues: Rental revenues Other property revenues Total property revenues Interest and other income Management and development income, net Equity in loss of real estate joint venture Total revenues Expenses: Property operating expenses: Personnel Building repairs and maintenance Real estate taxes and insurance Utilities Landscaping Other operating Depreciation and amortization General and administrative Interest expense Amortization of deferred financing costs Total expenses Income before gain on dispositions, minority interest in operating partnership income and extraordinary items Gain on dispositions, net Income before minority interest in operating partnership income and extraordinary items Minority interest in operating partnership income Income before extraordinary items Extraordinary items – loss on early extinguishment of debt Net income Dividends on preferred shares Net income available for common shareholders Basic (in thousands): Years Ended December 31 2000 1999 1998 $ 219,039 3,493 222,532 1,526 739 (157) 224,640 24,268 9,701 25,021 7,635 6,027 10,794 51,844 135,290 14,826 50,736 2,758 203,610 21,030 11,587 32,617 2,626 29,991 (204) 29,787 16,114 $ 13,673 $221,342 2,872 224,214 1,388 751 (31) 226,322 25,239 10,107 24,561 9,119 5,634 10,225 49,903 134,788 14,479 48,302 2,854 200,423 25,899 10,237 36,136 2,497 33,639 (67) 33,572 16,114 $ 17,458 $210,256 2,583 212,839 863 1,841 — 215,543 24,053 10,030 22,459 9,376 5,009 8,990 46,021 125,938 11,960 45,704 2,348 185,950 29,593 408 30,001 2,254 27,747 (990) 26,757 11,430 $ 15,327 Average common shares outstanding 17,544 18,784 18,725 Basic earnings per share: Net income available per common share before extraordinary items Extraordinary items Net income available per common share Diluted (in thousands): Average common shares outstanding Effect of dilutive stock options Average dilutive common shares outstanding Diluted earnings per share: Net income available per common share before extraordinary items Extraordinary items Net income available per common share $ $ 0.79 (0.01) 0.78 17,544 53 17,597 $ $ 0.79 (0.01) 0.78 $ $ $ $ 0.93 — 0.93 18,784 24 18,808 0.93 — 0.93 $ $ 0.87 (0.05) 0.82 18,725 45 18,770 $ $ 0.87 (0.05) 0.82 16 17 S E L E C T E D F I N A N C I A L D ATA I N D E P E N D E N T AU D I T O R S ’ R E P O R T Dollars in thousands, except per share data 2000 Years Ended December 31 1999 1998 1997 1996 T H E B O A R D O F D I R E C T O R S A N D S H A R E H O L D E R S M I D - A M E R I C A A P A R T M E N T C O M M U N I T I E S , I N C . We have audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of Mid-America Apartment Communities, Inc. and subsidiaries (the “Company”) as of December 31, 2000, and 1999, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2000 (not presented herein); and in our report dated February 23, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated financial statements is fairly stated, in all material respects, in relation to the consolidated financial statements from which it has been derived. Memphis, Tennessee February 23, 2001 K P M G L L P Operating Data: Total revenues Expenses: Property expenses Depreciation and amortization General and administrative Interest Amortization of deferred financing costs Gain on disposition of properties Income before minority interest in operating partnership income and extraordinary items Minority interest in operating partnership income Extraordinary items – loss on early extinguishment of debt Net income Preferred dividends Net income available for common shareholders Per Share Data: Basic and diluted: $ 224,640 $ 226,322 $ 215,543 $ 139,116 $ 111,882 83,446 51,844 14,826 50,736 2,758 11,587 84,885 49,903 14,479 48,302 2,854 10,237 79,917 46,021 11,960 45,704 2,348 408 52,404 27,737 6,602 28,943 888 — 42,570 21,443 6,154 25,766 661 2,185 32,617 36,136 30,001 22,542 17,473 (2,626) (2,497) (2,254) (2,693) (3,213) (204) 29,787 16,114 (67) 33,572 16,114 (990) 26,757 11,430 (8,622) 11,227 5,252 — 14,260 990 $ 13,673 $ 17,458 $ 15,327 $ 5,975 $ 13,270 Before extraordinary items Extraordinary items Net income available per common share Dividends declared $ $ $ 0.79 (0.01) 0.78 2.325 $ $ $ 0.93 $ — 0.87 $ (0.05) 1.05 (0.62) 0.93 $ 2.305 $ 0.82 $ 2.225 $ 0.43 2.155 $ $ $ 1.21 — 1.21 2.065 Balance Sheet Data: Real estate owned, at cost Real estate owned, net Total assets Total debt Minority interest Shareholders’ equity Weighted average common shares (000’s): $ 1,430,378 $ 1,244,475 $ 1,303,771 781,089 $ 51,383 $ 433,993 $ $1,396,743 $1,434,733 $1,211,693 $1,248,051 $1,315,368 $1,134,704 $1,298,823 $1,366,427 $1,193,870 $ 632,213 $ 753,427 $ 744,238 62,865 $ 56,060 $ $ 517,299 $ 461,300 $ 463,884 61,441 $ $ 641,893 $ 592,335 $ 611,199 $ 315,239 $ 39,238 $ 241,384 Basic Diluted 17,544 17,597 18,784 18,808 18,725 18,770 13,892 13,955 10,938 10,983 Other Data (at end of period): Market capitalization (shares and units) $ 634,903 $ 639,095 $ 670,123 $ 710,175 Number of properties, including $ 436,739 ownership interest 124 129 129 116 73 Number of apartment units, including ownership interest 33,612 33,901 33,831 30,579 19,280 18 19 I N V E S T O R I N F O R M AT I O N I N D E P E N D E N T AWA R D S A N D R E C O G N I T I O N C O R P O R AT E H E A D Q U A RT E R S Mid-America Apartment Communities, Inc. 6584 Poplar Avenue, Suite 300 Memphis, TN 38138 (901) 682-6600 I N T E R N E T W E B A D D R E S S www.maac.net A N N U A L S H A R E H O L D E R S M E E T I N G Mid-America Apartment Communities, Inc. will hold its 2001 annual meeting of shareholders on Monday, June 4th, at 4:00 p.m. at the clubhouse at The Reserve at Dexter Lake, Memphis, TN. A N N U A L R E P O RT A N D F O R M 10- K A copy of Mid-America’s Annual Report and Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission will be sent without charge upon written request to the corporate headquarters address, attention Investor Relations, and is available on the Internet at www.maac.net. T R A N S F E R A G E N T A N D R E G I S T R A R First Union National Bank, Nashville, TN I N D E P E N D E N T A U D I T O R S K P M G L L P , Memphis, TN G E N E R A L C O U N S E L Bass, Berry & Sims, Memphis, TN S T O C K L I S T I N G A N D C O M M O N S T O C K P R I C E Mid-America’s common stock is traded on the New York Stock Exchange under the stock symbol MAA. Its Cumulative Preferred Stock is under the symbols MAA Pr A, MAA Pr B, and MAA Pr C. On March 15, 2001, there were approximately 13,500 shareholders of Mid-America Common Stock. Sales Prices Fiscal 2000 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal 1999 First Quarter Second Quarter Third Quarter Fourth Quarter High $23.375 $24.500 $24.875 $23.875 High $24.125 $25.000 $23.125 $23.063 Low $22.000 $22.375 $23.000 $21.250 Low $20.875 $21.188 $21.000 $21.438 Dividends Declared $0.580 $0.580 $0.580 $0.580 Declared $0.575 $0.575 $0.575 $0.575 C O R P O R AT E C H A R I T Y Open Arms Foundation E X E C U T I V E O F F I C E R S (also serve on Board of Directors) George E. Cates C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R H. Eric Bolton Jr. P R E S I D E N T A N D C H I E F O P E R AT I N G O F F I C E R Simon R.C. Wadsworth E X E C U T I V E V I C E P R E S I D E N T A N D C H I E F F I N A N C I A L O F F I C E R I N D E P E N D E N T B O A R D O F D I R E C T O R S O. Mason Hawkins (since October 1993) C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R S O U T H E A S T E R N A S S E T M A N A G E M E N T, I N C. Robert F. Fogelman (since July 1994) P R E S I D E N T F O G E L M A N I N V E S T M E N T C O M PA N Y John F. Flournoy (since November 1997) C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R F L O U R N O Y D E V E L O P M E N T C O M PA N Y John S. Grinalds (since November 1997) P R E S I D E N T T H E C I TA D E L Ralph Horn (since April 1998) C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R F I R S T T E N N E S S E E N AT I O N A L C O R P. Michael S. Starnes (since July 1998) C H A I R M A N A N D C H I E F E X E C U T I V E O F F I C E R M. S. C A R R I E R S , I N C . S I H P M E M / E V I T A E R C E U D R E P Y B D E C U D O R P D N A D E N G I S E D M I D - A M E R I C A C O R P O R AT E Property Management Company of the Year, Lexington, KY; Community Service Award, 1st Place (national), Multifamily Executive magazine; Best Management Company, Jacksonville, FL M I D - A M E R I C A L A N D S C A P E WREG-TV; “Mid-South Gardens” excel- lence; Tennessee Urban Forestry Award O P E N A R M S F O U N D AT I O N Nominee: Best of Memphis Volunteer Awards A B B I N G T O N P L A C E H U N T S V I L L E , A L Beautification Award, City of Huntsville T H E A D VA N TA G E S J A C K S O N , M S Beautification Excellence, 3rd Place, Mississippi Multifamily Council (MMFC) AU S T I N C H A S E M A C O N , G A Beautification Award, Macon-Bibb Beautiful Commission B A L C O N E S W O O D S AU S T I N , T X Property of the Year, Finalist B R E N T W O O D D OW N S N A S H V I L L E , T N 1st Place Beautification Award, Nashville Apartment Association (NAA) C E D A R M I L L M E M P H I S , T N Beautification Award, Older Conventional; Memphis Apartment Association (MAA), 2nd Place T H E C R O S S I N G S M E M P H I S , T N Best Small Property, City Beautiful Commission C R O S S W I N D S J A C K S O N , M S Beautification runnerup, MMFC (7-14 years) FA I RWAY S AT H A RT L A N D B OW L I N G G R E E N , K Y City Beautification Award G L E N E A G L E S M E M P H I S , T N 1st Place Beautification Award, Southeast Memphis Betterment Association G R A N D R E S E RV E L E X I N G T O N L E X I N G T O N , K Y Kentucky Derby Beautification Award G R E E N B R O O K M E M P H I S , T N Renovations Award, Memphis City Beautiful H I D D E N L A K E U N I O N C I T Y, G A Top 1,000 High Performing Multifamily Properties, Union City (Atlanta metro), GA, Secretary of Housing & Urban Development; Clean & Beautiful Award, City of Union City, GA H I G H L A N D R I D G E G R E E N V I L L E , S C Clean & Beautiful Award, Clark County; 1st Place Beautification Award, Upper State (SC) Apartment Association (USAA) K I R B Y S TAT I O N M E M P H I S , T N Best Large Property, City Beautiful Commission L A K E P O I N T E L E X I N G T O N , K Y Triple Crown Award; Keeneland Award for Excellence, Lexington (KY) Apartment Association (LAA); Crown Excellence Award; Best Lead Service Technician, LAA; Beautification Award L A N E AT TOW N E C R O S S I N G M E S QU I T E , T X City Beautiful Award; 1st Place Beautifi- cation Award, City of Mesquite L I N C O L N O N T H E G R E E N M E M P H I S , T N 1st Place, Beautification Award, MAA T H E M A N S I O N L E X I N G T O N , K Y Triple Crown Award; Beautification Award, Best Overall Team Award; LAA N A PA VA L L E Y L I T T L E RO C K , A R City Beautiful Award T H E PA D D O C K C L U B B R A N D O N , F L Community of the Year, Brandon, FL, Bay Area Apartment Association T H E PA D D O C K C L U B C O L U M B I A , S C 2nd Place; Best New Property, USAA; Crown Excellence Award; Top Property Supervisor, Support Manager T H E PA D D O C K C L U B H U N T S V I L L E , A L Beautification Award, City of Huntsville Honor Roll (5 consecutive years) T H E PA D D O C K C L U B L A K E L A N D , F L 1st Place Beautification Award, City of Lakeland T H E PA D D O C K C L U B PA N A M A C I T Y, F L Best New Property, Chamber of Commerce PA D D O C K PA R K O C A L A , F L Best Apartment Community, Star Banner PA R K AT H AY W O O D G R E E N V I L L E , S C 1st Place Floral Design, USAA PA R K AT H E R M I TA G E N A S H V I L L E , T N 2nd Place Beautification Award, NAA PA R K E S TAT E M E M P H I S , T N City Beautiful Award (apartments), Memphis City Beautiful Commission PA R K P L A C E S PA RTA N B U R G , S C 1st Place, Beautification Award, USAA P E A R O R C H A R D J A C K S O N , M S Beautification Excellence, 1st Place, and Runnerup Beautification Award (15-24 years), MMFC R E F L E C T I O N P O I N T E J A C K S O N , M S Beautification Excellence, 2nd Place; 1st Place Beautification Award (7-14 years) and Special Award, Best Community Entrance Overall; MS Multifamily Council Honorable Mention: Jackson; MMFC R E S E RV E AT D E X T E R L A K E M E M P H I S , T N Beautification Award, New Large Conventional; Memphis Apartment Association, 2nd Place R U N AWAY B AY M T. P L E A S A N T, S C Alhambra Applauds, Mt. Pleasant Garden Club S O M E R S E T J A C K S O N , M S MS Multifamily Council Honorable Mention, Jackson S P R I N G C R E E K G R E E N V I L L E , S C 2nd Place, Beautification Award, USAA S T O N E M I L L V I L L A G E L O U I S V I L L E , K Y Beautification Award, Beautification League, Louisville and Jefferson County; Outstanding Landscaping Maintenance (3 years) S U T TO N P L A C E S O U T H AV E N , M S Community Pride Award, Top of Mississippi, MS Chamber of Commerce TA N G L E W O O D A N D E R S O N , S C 2nd Place Beautification Award, USAA T E R R A C E S AT TOW N E L A K E W O O D S TO C K , G A Beautification Award, (Best of the Best), TowneLaker Magazine, Reader’s Choice; Apartment Community Development, (Best of the Best), TowneLaker Magazine, Reader’s Choice TOW N S H I P H A M P TO N , VA Best On Site Landscaping, Peninsula Apartment Council T H E V I L L A G E L E X I N G T O N , K Y Keeneland Beautification Award; Keeneland Award for Excellence, LAA T H E V I S TA S M A C O N , G A Beautification Award, Bibb Beautiful Commission W H I S P E R I N G O A K S L I T T L E RO C K , A R Landscaping Award, City of Little Rock W H I S P E RW O O D C O L U M B U S , G A Best Apartment Community, Reader’s Choice Award (6th consecutive year), Columbus Ledger Enquirer W I L D W O O D T H O M A S V I L L E , G A Best of Thomas & Grady Counties, Reader’s Choice Awards: Thomasville Times-Enterprise W I L L I A M S B U R G V I L L A G E J A C K S O N , T N Mayor’s Civic Pride Award, Jackson City Beautiful Commission; Best Property, City Beautiful Award W O O D R I D G E J A C K S O N , M S Beautification Excellence, Honorable Mention and 1st Place Beautification Award, MMFC (15-24 years) 20 6 5 8 4 P O P L A R A V E N U E , S U I T E 3 0 0 • M E M P H I S , T N 3 8 1 3 8 • 9 0 1 - 6 8 2 - 6 6 0 0 w w w . m a a c . n e t 

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