Attached files
file | filename |
---|---|
EX-31.2 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex31-2.htm |
EX-10.3 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex10-3.htm |
EX-32.1 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex32-1.htm |
EX-10.2 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex10-2.htm |
EX-10.1 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex10-1.htm |
EX-31.1 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex31-1.htm |
EX-32.2 - MID AMERICA APARTMENT COMMUNITIES INC. | v183466_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended March 31, 2010
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from ______ to
______
Commission File Number:
1-12762
MID-AMERICA APARTMENT
COMMUNITIES, INC.
(Exact
name of registrant as specified in its charter)
TENNESSEE
|
62-1543819
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
6584
POPLAR AVENUE, SUITE 300
|
|
MEMPHIS, TENNESSEE
|
38138
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(901)
682-6600
(Registrant's
telephone number, including area code)
N/A
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.
þYes ¨
No
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files).
¨
Yes ¨
No
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definitions of
“accelerated filer,” “large accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act
Large
accelerated filer þ
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
Smaller
Reporting Company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
¨ Yes þ No
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date:
Number
of Shares Outstanding
|
||
Class
|
at April 20,
2010
|
|
Common
Stock, $0.01 par value
|
30,107,239
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
TABLE
OF CONTENTS
Page
|
|||
PART
I – FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements.
|
||
Condensed
Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December
31, 2009
|
2
|
||
Condensed
Consolidated Statements of Operations for the three months ended March 31,
2010 (Unaudited) and 2009 (Unaudited).
|
3
|
||
Condensed
Consolidated Statements of Cash Flows for the three months ended March 31,
2010 (Unaudited) and 2009 (Unaudited).
|
4
|
||
Notes
to Condensed Consolidated Financial Statements
(Unaudited).
|
5
|
||
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
14
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
26
|
|
Item
4.
|
Controls
and Procedures.
|
26
|
|
Item
4T.
|
Controls
and Procedures.
|
26
|
|
PART
II – OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings.
|
27
|
|
Item
1A.
|
Risk
Factors.
|
27
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
35
|
|
Item
3.
|
Defaults
Upon Senior Securities.
|
35
|
|
Item
4.
|
(Removed
and Reserved).
|
35
|
|
Item
5.
|
Other
Information.
|
35
|
|
Item
6.
|
Exhibits.
|
36
|
|
Signatures
|
37
|
1
Condensed
Consolidated Balance Sheets
March
31, 2010 (Unaudited) and December 31, 2009
(Dollars
in thousands, except per share data)
March
31, 2010
|
December
31, 2009
|
|||||||
Assets:
|
||||||||
Real
estate assets:
|
||||||||
Land
|
$ | 251,051 | $ | 255,425 | ||||
Buildings
and improvements
|
2,337,178 | 2,364,918 | ||||||
Furniture,
fixtures and equipment
|
75,851 | 73,975 | ||||||
Capital
improvements in progress
|
8,152 | 10,517 | ||||||
2,672,232 | 2,704,835 | |||||||
Less
accumulated depreciation
|
(812,614 | ) | (788,260 | ) | ||||
1,859,618 | 1,916,575 | |||||||
Land
held for future development
|
1,306 | 1,306 | ||||||
Commercial
properties, net
|
8,200 | 8,721 | ||||||
Investments
in real estate joint ventures
|
14,077 | 8,619 | ||||||
Real
estate assets, net
|
1,883,201 | 1,935,221 | ||||||
Cash
and cash equivalents
|
32,329 | 13,819 | ||||||
Restricted
cash
|
844 | 561 | ||||||
Deferred
financing costs, net
|
13,869 | 13,369 | ||||||
Other
assets
|
21,642 | 19,731 | ||||||
Goodwill
|
4,106 | 4,106 | ||||||
Assets
held for sale
|
- | 19 | ||||||
Total
assets
|
$ | 1,955,991 | $ | 1,986,826 | ||||
Liabilities
and Shareholders' Equity:
|
||||||||
Liabilities:
|
||||||||
Notes
payable
|
$ | 1,358,733 | $ | 1,399,596 | ||||
Accounts
payable
|
1,158 | 1,702 | ||||||
Fair
market value of interest rate swaps
|
52,691 | 51,160 | ||||||
Accrued
expenses and other liabilities
|
65,355 | 69,528 | ||||||
Security
deposits
|
8,842 | 8,789 | ||||||
Liabilities
associated with assets held for sale
|
- | 23 | ||||||
Total
liabilities
|
1,486,779 | 1,530,798 | ||||||
Redeemable
stock
|
2,805 | 2,802 | ||||||
Shareholders'
equity:
|
||||||||
Preferred
stock, $0.01 par value per share, 20,000,000 shares authorized, $155,000
or $25 per share liquidation preference; 8.30% Series H Cumulative
Redeemable Preferred Stock, 6,200,000 shares authorized, 6,200,000 shares
issued and outstanding
|
62 | 62 | ||||||
Common
stock, $0.01 par value per share, 50,000,000 shares authorized; 29,684,303
and 29,095,251 shares issued and outstanding at March 31, 2010 and
December 31, 2009, respectively (1)
|
296 | 290 | ||||||
Additional
paid-in capital
|
1,017,163 | 988,642 | ||||||
Accumulated
distributions in excess of net income
|
(523,298 | ) | (510,993 | ) | ||||
Accumulated
other comprehensive income
|
(50,713 | ) | (47,435 | ) | ||||
Total
Mid-America Apartment Communities, Inc. shareholders'
equity
|
443,510 | 430,566 | ||||||
Noncontrolling
interest
|
22,897 | 22,660 | ||||||
Total
Equity
|
466,407 | 453,226 | ||||||
Total
liabilities and equity
|
$ | 1,955,991 | $ | 1,986,826 |
(1)
|
Number
of shares issued and outstanding represent total shares of common stock
regardless of classification on the consolidated balance sheet. The number
of shares classified as redeemable stock on the consolidated balance sheet
for March 31, 2010 and December 31, 2009 are 54,167 and 58,038,
respectively.
|
See
accompanying notes to consolidated financial statements.
2
Condensed
Consolidated Statements of Operations
Three
months ended March 31, 2010 and 2009
(Dollars
in thousands, except per share data)
Three
months ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
Operating
revenues:
|
||||||||
Rental
revenues
|
$ | 90,308 | $ | 89,198 | ||||
Other
property revenues
|
7,020 | 4,402 | ||||||
Total
property revenues
|
97,328 | 93,600 | ||||||
Management
fee income
|
136 | 64 | ||||||
Total
operating revenues
|
97,464 | 93,664 | ||||||
Property
operating expenses:
|
||||||||
Personnel
|
12,358 | 11,364 | ||||||
Building
repairs and maintenance
|
3,327 | 2,812 | ||||||
Real
estate taxes and insurance
|
11,898 | 11,984 | ||||||
Utilities
|
5,599 | 5,508 | ||||||
Landscaping
|
2,515 | 2,304 | ||||||
Other
operating
|
5,854 | 4,323 | ||||||
Depreciation
|
25,080 | 23,585 | ||||||
Total
property operating expenses
|
66,631 | 61,880 | ||||||
Acquisition
expenses
|
(24 | ) | 2 | |||||
Property
management expenses
|
4,277 | 4,241 | ||||||
General
and administrative expenses
|
2,811 | 2,457 | ||||||
Income
from continuing operations before non-operating items
|
23,769 | 25,084 | ||||||
Interest
and other non-property income
|
315 | 80 | ||||||
Interest
expense
|
(13,891 | ) | (14,229 | ) | ||||
Gain
on debt extinguishment
|
- | 3 | ||||||
Amortization
of deferred financing costs
|
(595 | ) | (606 | ) | ||||
Net
casualty gain (loss) and other settlement proceeds
|
527 | (144 | ) | |||||
Income
from continuing operations before loss from real estate joint
ventures
|
10,125 | 10,188 | ||||||
Loss
from real estate joint ventures
|
(276 | ) | (196 | ) | ||||
Income
from continuing operations
|
9,849 | 9,992 | ||||||
Discontinued
operations:
|
||||||||
Income
from discontinued operations before gain on sale
|
- | 421 | ||||||
Gain
on sale of discontinued operations
|
- | 1,432 | ||||||
Consolidated
net income
|
9,849 | 11,845 | ||||||
Net
income attributable to noncontrolling interests
|
437 | 706 | ||||||
Net
income attributable to Mid-America Apartment Communities,
Inc.
|
9,412 | 11,139 | ||||||
Preferred
dividend distributions
|
3,216 | 3,216 | ||||||
Net
income available for common shareholders
|
$ | 6,196 | $ | 7,923 | ||||
Weighted
average shares outstanding (in thousands):
|
||||||||
Basic
|
29,130 | 28,085 | ||||||
Effect
of dilutive securities
|
74 | 80 | ||||||
Diluted
|
29,204 | 28,165 | ||||||
Net
income available for common shareholders
|
$ | 6,196 | $ | 7,923 | ||||
Discontinued
property operations
|
- | (1,853 | ) | |||||
Income
from continuing operations available for common
shareholders
|
$ | 6,196 | $ | 6,070 | ||||
Earnings
per share - basic:
|
||||||||
Income
from continuing operations available for common
shareholders
|
$ | 0.21 | $ | 0.21 | ||||
Discontinued
property operations
|
- | 0.07 | ||||||
Net
income available for common shareholders
|
$ | 0.21 | $ | 0.28 | ||||
Earnings
per share - diluted:
|
||||||||
Income
from continuing operations available for common
shareholders
|
$ | 0.21 | $ | 0.21 | ||||
Discontinued
property operations
|
- | 0.07 | ||||||
Net
income available for common shareholders
|
$ | 0.21 | $ | 0.28 | ||||
Dividends
declared per common share
|
$ | 0.615 | $ | 0.615 |
See
accompanying notes to consolidated financial statements.
3
Condensed
Consolidated Statements of Cash Flows
Three
Months Ended March 31, 2010 and 2009
(Dollars
in thousands)
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Consolidated
net income
|
$ | 9,849 | $ | 11,845 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization of deferred financing costs
|
25,675 | 24,191 | ||||||
Stock
compensation expense
|
348 | 303 | ||||||
Redeemable
stock issued
|
92 | 84 | ||||||
Amortization
of debt premium
|
(90 | ) | (90 | ) | ||||
Loss
from investments in real estate joint ventures
|
276 | 196 | ||||||
Gain
on debt extinguishment
|
- | (3 | ) | |||||
Derivative
interest expense (income)
|
140 | (396 | ) | |||||
Gain
on sale of discontinued operations
|
- | (1,432 | ) | |||||
Net
casualty (gains) loss and other settlement proceeds
|
(527 | ) | 144 | |||||
Changes
in assets and liabilities:
|
||||||||
Restricted
cash
|
(283 | ) | (288 | ) | ||||
Other
assets
|
(734 | ) | 3,372 | |||||
Accounts
payable
|
(559 | ) | 223 | |||||
Accrued
expenses and other
|
(9,108 | ) | (6,395 | ) | ||||
Security
deposits
|
54 | 233 | ||||||
Net
cash provided by operating activities
|
25,133 | 31,987 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of real estate and other assets
|
(100 | ) | (163 | ) | ||||
Improvements
to existing real estate assets
|
(8,425 | ) | (8,426 | ) | ||||
Renovations
to existing real estate assets
|
(1,247 | ) | (2,332 | ) | ||||
Development
|
- | (3,256 | ) | |||||
Distributions
from real estate joint ventures
|
159 | 44 | ||||||
Contributions
to real estate joint ventures
|
(5,894 | ) | (115 | ) | ||||
Proceeds
from disposition of real estate assets
|
47,007 | 11,337 | ||||||
Net
cash provided by (used in) investing activities
|
31,500 | (2,911 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Net
change in credit lines
|
(60,000 | ) | 31,815 | |||||
Proceeds
from notes payable
|
19,500 | - | ||||||
Principal
payments on notes payable
|
(273 | ) | (535 | ) | ||||
Payment
of deferred financing costs
|
(4,381 | ) | (136 | ) | ||||
Repurchase
of common stock
|
(506 | ) | (220 | ) | ||||
Proceeds
from issuances of common shares and units
|
30,106 | 284 | ||||||
Distributions
to noncontrolling interests
|
(1,467 | ) | (1,561 | ) | ||||
Dividends
paid on common shares
|
(17,886 | ) | (17,267 | ) | ||||
Dividends
paid on preferred shares
|
(3,216 | ) | (3,216 | ) | ||||
Net
cash (used in) provided by financing activities
|
(38,123 | ) | 9,164 | |||||
Net
increase in cash and cash equivalents
|
18,510 | 38,240 | ||||||
Cash
and cash equivalents, beginning of period
|
13,819 | 9,426 | ||||||
Cash
and cash equivalents, end of period
|
$ | 32,329 | $ | 47,666 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Interest
paid
|
$ | 14,186 | $ | 12,682 | ||||
Supplemental
disclosure of noncash investing and financing activities:
|
||||||||
Accrued
construction in progress
|
$ | 5,451 | $ | 5,987 | ||||
Interest
capitalized
|
$ | - | $ | 62 | ||||
Marked-to-market
adjustment on derivative instruments
|
$ | (3,570 | ) | $ | 5,852 | |||
Reclass
of redeemable stock from equity and redeemable stock to
liabilities
|
$ | 273 | $ | - |
See
accompanying notes to consolidated financial statements.
4
Mid-America Apartment Communities, Inc.
Notes
to Condensed Consolidated Financial Statements
March
31, 2010 (Unaudited) and 2009 (Unaudited)
1. Consolidation
and Basis of Presentation
Mid-America
Apartment Communities, Inc., or Mid-America, is a self-administered real estate
investment trust, or REIT, that owns, acquires, renovates, develops and manages
apartment communities in the Sunbelt region of the United States. As of March
31, 2010, we owned or owned interests in a total of 147 multifamily apartment
communities comprising 43,605 apartments located in 13 states, including two
communities comprising 626 apartments owned through our joint venture,
Mid-America Multifamily Fund I, LLC, and two communities comprising 773
apartments owned through our joint venture, Mid-America Multifamily Fund II,
LLC.
The
accompanying unaudited condensed consolidated financial statements have been
prepared by our management in accordance with U.S. generally accepted accounting
principles for interim financial information and applicable rules and
regulations of the Securities and Exchange Commission and our accounting
policies in effect as of December 31, 2009 as set forth in our annual
consolidated financial statements, as of such date. The accompanying unaudited
condensed consolidated financial statements include the accounts of Mid-America
Apartment Communities, Inc. and its subsidiaries, including Mid-America
Apartments, L.P. In our opinion, all adjustments necessary for a fair
presentation of the condensed consolidated financial statements have been
included and all such adjustments were of a normal recurring nature. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The results of operations for the three month period ended March
31, 2010 are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with our
audited financial statements and notes thereto included in our Annual Report on
Form 10-K filed on February 25, 2010.
The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the dates of the financial
statements and the amounts of revenues and expenses during the reporting
periods. Actual amounts realized or paid could differ from those
estimates.
2. Segment
Information
As of
March 31, 2010, we owned or had an ownership interest in 147 multifamily
apartment communities in 13 different states from which we derived all
significant sources of earnings and operating cash flows. Our operational
structure is organized on a decentralized basis with individual property
managers having overall responsibility and authority regarding the operations of
their respective properties. Each property manager individually monitors local,
market and submarket trends in rental rates, occupancy percentages and operating
costs. Property managers are given the on-site responsibility and discretion to
react to such trends in our best interest. Our property management group
evaluates the performance of each individual property based on its contribution
to net operating income in order to ensure that the individual property
continues to meet our return criteria and long-term investment goals. We define
each of our multifamily communities as an individual operating segment. Each
segment on a stand alone basis is less than 10% of the revenues, profit or loss,
and assets of the combined reporting operating segments and meets all of the
aggregation criteria under FASB ASC 280, Fair Value Measurements and
Disclosures, or ASC 280. The operating segments are aggregated into same store
and non-same store communities.
We
evaluate our same store portfolio on the first day of each calendar year.
Generally, the same store portfolio consists of those properties which we have
owned and have been stabilized for at least a full 12 months and have not been
classified as held for sale. This allows us to evaluate full period over period
operating comparisons. The non-same store portfolio consists of all other
communities, which may from time-to time include recent acquisitions,
communities in development or lease-up, or communities that have been classified
as held for sale.
We
utilize net operating income, or NOI, in evaluating the performance of our same
store portfolio. Total NOI represents total property revenues less total
property operating expenses, excluding depreciation, for all properties held
during the period regardless of their status as held for sale. We believe NOI is
a helpful tool in evaluating the operating performance of our segments because
it measures the core operations of property performance by excluding corporate
level expenses and other items not related to property operating
performance.
5
Revenues,
NOI, and assets for each reportable segment for the three month periods ended
March 31, 2010 and 2009, were as follows (dollars in thousands):
Three months ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Same
Store
|
$ | 87,368 | $ | 87,511 | ||||
Non-Same
Store
|
9,960 | 6,089 | ||||||
Total
property revenues
|
97,328 | 93,600 | ||||||
Management
fee income
|
136 | 64 | ||||||
Total
operating revenues
|
$ | 97,464 | $ | 93,664 | ||||
NOI
|
||||||||
Same
Store
|
$ | 50,016 | $ | 51,804 | ||||
Non-Same
Store
|
5,761 | 3,947 | ||||||
Total
NOI
|
55,777 | 55,751 | ||||||
Discontinued
operations NOI included above
|
- | (446 | ) | |||||
Management
fee income
|
136 | 64 | ||||||
Depreciation
|
(25,080 | ) | (23,585 | ) | ||||
Acquisition
expense
|
24 | (2 | ) | |||||
Property
management expense
|
(4,277 | ) | (4,241 | ) | ||||
General
and administrative expense
|
(2,811 | ) | (2,457 | ) | ||||
Interest
and other non-property income
|
315 | 80 | ||||||
Interest
expense
|
(13,891 | ) | (14,229 | ) | ||||
Gain
on debt extinguishment
|
- | 3 | ||||||
Amortization
of deferred financing costs
|
(595 | ) | (606 | ) | ||||
Net
casualty gains (loss) and other settlement proceeds
|
527 | (144 | ) | |||||
Loss
from real estate joint ventures
|
(276 | ) | (196 | ) | ||||
Discontinued
operations
|
- | 1,853 | ||||||
Nest
income attributable to noncontrolling interests
|
(437 | ) | (706 | ) | ||||
Net
income attributable to Mid-America Apartment Communities,
Inc.
|
$ | 9,412 | $ | 11,139 | ||||
Assets
|
||||||||
Same
Store
|
$ | 1,593,034 | $ | 1,635,136 | ||||
Non-Same
Store
|
293,149 | 231,657 | ||||||
Corporate
assets
|
69,808 | 73,022 | ||||||
Total
assets
|
$ | 1,955,991 | $ | 1,939,815 |
6
3. Comprehensive
Income and Equity
Total
comprehensive income, equity and their components for the three month periods
ended March 31, 2010, and 2009, were as follows (dollars in thousands, except
per share and per unit data):
Mid-America Apartment Communities, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||||||||||||||||
Additional
|
Distributions
|
Other
|
||||||||||||||||||||||||||||||
Comprehensive
|
Preferred
|
Common
|
Paid-In
|
in
Excess of
|
Comprehensive
|
Noncontrolling
|
||||||||||||||||||||||||||
Total
|
Income
|
Stock
|
Stock
|
Capital
|
Net
Income
|
Income
(Loss)
|
Interest
|
|||||||||||||||||||||||||
EQUITY
AT DECEMBER 31, 2009
|
$ | 453,226 | $ | 62 | $ | 290 | $ | 988,642 | $ | (510,993 | ) | $ | (47,435 | ) | $ | 22,660 | ||||||||||||||||
Equity
Activity Excluding Comprehensive Income:
|
||||||||||||||||||||||||||||||||
Issuance
and registration of common shares
|
30,094 | 6 | 30,088 | |||||||||||||||||||||||||||||
Shares
repurchased and retired
|
(506 | ) | (506 | ) | ||||||||||||||||||||||||||||
Exercise
of stock options
|
12 | 12 | ||||||||||||||||||||||||||||||
Shares
issued in exchange for units
|
- | 35 | (35 | ) | ||||||||||||||||||||||||||||
Redeemable
stock fair market value
|
(180 | ) | (180 | ) | ||||||||||||||||||||||||||||
Adjustment
for Noncontrolling Interest Ownership in operating
partnership
|
- | (1,452 | ) | 1,452 | ||||||||||||||||||||||||||||
Amortization
of unearned compensation
|
344 | 344 | ||||||||||||||||||||||||||||||
Dividends
on common stock ($0.615 per share)
|
(18,321 | ) | (18,321 | ) | ||||||||||||||||||||||||||||
Dividends
on noncontrolling interest units ($0.615 per unit)
|
(1,465 | ) | (1,465 | ) | ||||||||||||||||||||||||||||
Dividends
on preferred stock
|
(3,216 | ) | (3,216 | ) | ||||||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
Net
income
|
9,849 | 9,849 | 9,412 | 437 | ||||||||||||||||||||||||||||
Other
comprehensive income - derivative instruments (cash flow
hedges)
|
(3,430 | ) | (3,430 | ) | (3,278 | ) | (152 | ) | ||||||||||||||||||||||||
Comprehensive
income
|
6,419 | 6,419 | ||||||||||||||||||||||||||||||
EQUITY
BALANCE MARCH 31, 2010
|
$ | 466,407 | $ | 62 | $ | 296 | $ | 1,017,163 | $ | (523,298 | ) | $ | (50,713 | ) | $ | 22,897 |
Mid-America Apartment Communities, Inc. Shareholders
|
||||||||||||||||||||||||||||||||
Accumulated
|
Accumulated
|
|||||||||||||||||||||||||||||||
Additional
|
Distributions
|
Other
|
||||||||||||||||||||||||||||||
Comprehensive
|
Preferred
|
Common
|
Paid-In
|
in
Excess of
|
Comprehensive
|
Noncontrolling
|
||||||||||||||||||||||||||
Total
|
Income
|
Stock
|
Stock
|
Capital
|
Net
Income
|
Income
(Loss)
|
Interest
|
|||||||||||||||||||||||||
EQUITY
AT DECEMBER 31, 2008
|
$ | 442,617 | $ | 62 | $ | 282 | $ | 954,127 | $ | (464,617 | ) | $ | (72,885 | ) | $ | 25,648 | ||||||||||||||||
Equity
Activity Excluding Comprehensive Income:
|
||||||||||||||||||||||||||||||||
Issuance
and registration of common shares
|
278 | 278 | ||||||||||||||||||||||||||||||
Shares
repurchased and retired
|
(220 | ) | (220 | ) | ||||||||||||||||||||||||||||
Exercise
of stock options
|
10 | 10 | ||||||||||||||||||||||||||||||
Shares
issued in exchange for units
|
- | - | - | |||||||||||||||||||||||||||||
Redeemable
stock fair market value
|
301 | 301 | ||||||||||||||||||||||||||||||
Adjustment
for Noncontrolling Interest Ownership in operating
partnership
|
- | 298 | (298 | ) | ||||||||||||||||||||||||||||
Amortization
of unearned compensation
|
314 | 314 | ||||||||||||||||||||||||||||||
Dividends
on common stock ($0.615 per share)
|
(17,268 | ) | (17,268 | ) | - | |||||||||||||||||||||||||||
Dividends
on noncontrolling interest units ($0.615 per unit)
|
(1,561 | ) | (1,561 | ) | ||||||||||||||||||||||||||||
Dividends
on preferred stock
|
(3,216 | ) | (3,216 | ) | ||||||||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
Net
income
|
11,845 | 11,845 | 11,139 | 706 | ||||||||||||||||||||||||||||
Other
comprehensive income - derivative instruments (cash flow
hedges)
|
5,456 | 5,456 | 5,131 | 325 | ||||||||||||||||||||||||||||
Comprehensive
income
|
17,301 | 17,301 | ||||||||||||||||||||||||||||||
EQUITY
BALANCE MARCH 31, 2009
|
$ | 438,556 | $ | 62 | $ | 282 | $ | 954,807 | $ | (473,661 | ) | $ | (67,754 | ) | $ | 24,820 |
The
marked-to-market adjustment on derivative instruments is based upon the change
of interest rates available for derivative instruments with similar terms and
remaining maturities existing at each balance sheet date.
4. Real
Estate Dispositions
On December 30, 2009, we purchased the
Legacy at Western Oaks apartments, a 479-unit community located in Austin,
Texas. On January 28, 2010, Mid-America Apartments, LP sold Legacy at Western
Oaks to Mid-America Multifamily Fund II, LLC, one of our joint ventures. For tax
purposes, this transaction was considered a contribution.
7
5. Real
Estate Acquisitions
On August
27, 2008, we purchased 215 units of the 234-unit Village Oaks apartments located
in Temple Terrace, Florida, a suburb of Tampa. The remaining 19 units had
previously been sold as condominiums and it is our intent to acquire these units
if and when they become available, and operate them as apartment rentals with
the rest of the community. During the remainder of 2008 and during 2009, we
acquired 11 of the remaining 19 units and on February 18, 2010, we acquired one
additional unit.
6. Discontinued
Operations
As part
of our portfolio strategy to selectively dispose of mature assets that no longer
meet our investment criteria and long-term strategic objectives, in July 2008,
we entered into marketing contracts to list the 440-unit River Trace apartments
in Memphis, Tennessee, the 96-unit Riverhills apartments in Grenada,
Mississippi, and the 304-unit Woodstream apartments in Greensboro, North
Carolina. All of these apartments were subsequently sold during 2009. In
accordance with accounting standards governing the disposal of long lived
assets, all of
these communities are considered discontinued operations in the accompanying
condensed consolidated financial statements.
The
following is a summary of discontinued operations for the three month periods
ended March 31, 2010 and 2009, (dollars in thousands):
Three Months Ended
|
||||||||
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Rental
revenues
|
$ | - | $ | 969 | ||||
Other
revenues
|
- | 37 | ||||||
Total
revenues
|
- | 1,006 | ||||||
Expenses
|
||||||||
Property
operating expenses
|
- | 560 | ||||||
Depreciation
|
- | - | ||||||
Interest
expense
|
- | 25 | ||||||
Total
expense
|
- | 585 | ||||||
Income
from discontinued operations before gain on sale
|
- | 421 | ||||||
Gain
(loss) on sale of discontinued operations
|
- | 1,432 | ||||||
Income
from discontinued operations
|
$ | - | $ | 1,853 |
7. Share
and Unit Information
On March
31, 2010, 29,684,303 common shares and 2,302,504 operating partnership units
were outstanding, representing a total of 31,986,807 shares and units.
Additionally, we had outstanding options for the purchase of 22,382 shares of
common stock at March 31, 2010, of which 11,369 were anti-dilutive. At March 31,
2009, 28,221,253 common shares and 2,403,515 operating partnership units were
outstanding, representing a total of 30,624,768 shares and units. Additionally,
Mid-America had outstanding options for the purchase of 24,882 shares of common
stock at March 31, 2009, of which 21,860 were anti-dilutive.
During
the three months ended March 31, 2010, we issued a total of 571,000 shares of
common stock through at-the-market offerings or negotiated transactions for net
proceeds of $29.9 million under a controlled equity offering
program.
8
8. Derivatives
and Hedging Activities
Risk
Management Objective of Using Derivatives
We are
exposed to certain risk arising from both our business operations and economic
conditions. We principally manage our exposures to a wide variety of
business and operational risks through management of our core business
activities. We manage economic risks, including interest rate, liquidity, and
credit risk primarily by managing the amount, sources, and duration of our debt
funding and the use of derivative financial
instruments. Specifically, we enter into derivative financial
instruments to manage exposures that arise from business activities that result
in the payment of future contractual and forecasted cash amounts, the value of
which are determined by changing interest rates. Our derivative
financial instruments are used to manage differences in the amount, timing, and
duration of our known or expected cash payments principally related to our
borrowings.
Cash
Flow Hedges of Interest Rate Risk
Our
objectives in using interest rate derivatives are to add stability to interest
expense and to manage our exposure to interest rate movements. To accomplish
this objective, we use interest rate swaps and interest rate caps as part of our
interest rate risk management strategy. Interest rate swaps
designated as cash flow hedges involve the receipt of variable amounts from a
counterparty in exchange for us making fixed-rate payments over the life of the
agreements without exchange of the underlying notional amount. Interest
rate caps designated as cash flow hedges involve the receipt of variable amounts
from a counterparty if interest rates rise above the strike rate on the contract
in exchange for an up front premium.
The
effective portion of changes in the fair value of derivatives designated and
that qualify as cash flow hedges is recorded in accumulated other comprehensive
income and is subsequently reclassified into earnings in the period that the
hedged forecasted transaction affects earnings. During the three months ended
March 31, 2010, such derivatives were used to hedge the variable cash flows
associated with existing variable-rate debt. The ineffective portion
of the change in fair value of the derivatives is recognized directly in
earnings. During the three months ended March 31, 2010 and 2009, we recorded
ineffectiveness of $105,000 as an increase to interest expense, and $435,000 as
a decrease to interest expense, respectively, attributable to a mismatch in the
underlying indices of the derivatives and the hedged interest payments made on
our variable-rate debt.
We also
have nine interest rate caps, totaling a notional amount of $56.3
million, where only the changes in intrinsic value are recorded in accumulated
other comprehensive income. Changes in fair value of these interest
rate caps due to changes in time value (e.g. volatility, passage of time, etc.)
are excluded from effectiveness testing and are recognized directly in
earnings. During the three months ended March 31, 2010 and 2009, we
recorded a loss of $31,000 and a gain of $8,000, respectively, due to changes in
the time value of these interest rate caps.
Amounts
reported in accumulated other comprehensive income related to derivatives
designated in qualifying cash flow hedges will be reclassified to interest
expense as interest payments are made on our variable-rate debt. During the next
twelve months, we estimate that an additional $30.8 million will be reclassified
to earnings as an increase to interest expense, which represents the difference
between our fixed interest rate swap payments and the projected variable
interest rate swap payments.
As of
March 31, 2010 we had the following outstanding interest rate derivatives that
were designated as cash flow hedges of interest rate risk:
Interest
Rate Derivatives
|
Number
of Instruments
|
Notional
|
||||||
Interest
Rate Cap
|
19
|
$ | 222,286,000 | |||||
Interest
Rate Swap
|
33
|
$ | 843,165,000 |
Non-designated
Hedges
We do not
use derivatives for trading or speculative purposes and currently do not have
any derivatives that are not designated as qualifying accounting hedges under
ASC 815.
9
Tabular
Disclosure of Fair Values of Derivative Instruments on the Balance
Sheet
The table
below presents the fair value of our derivative financial instruments as well as
their classification on the Condensed Consolidated Balance Sheet as of March 31,
2010 and December 31, 2009, respectively:
Fair
Values of Derivative Instruments on the Condensed Consolidated Balance Sheet as
of
March
31, 2010 and December 31, 2009 (dollars in thousands)
Asset
Derivatives
|
Liability
Derivatives
|
||||||||||||||||||
31-Mar-10
|
31-Dec-09
|
31-Mar-10
|
31-Dec-09
|
||||||||||||||||
Balance
|
Balance
|
||||||||||||||||||
Derivatives
designated as
|
Sheet
|
Sheet
|
|||||||||||||||||
hedging
instruments
|
Location
|
Fair
Value
|
Fair
Value
|
Location
|
Fair
Value
|
Fair
Value
|
|||||||||||||
Fair
market
|
|||||||||||||||||||
value
of
|
|||||||||||||||||||
interest
rate
|
|||||||||||||||||||
Interest
rate contracts
|
Other
assets
|
$ | 4,676 | $ | 3,430 |
swaps
|
$ | 52,691 | $ | 51,160 | |||||||||
Total
derivatives designated as hedging instruments
|
$ | 4,676 | $ | 3,430 | $ | 52,691 | $ | 51,160 |
Tabular
Disclosure of the Effect of Derivative Instruments on the Income
Statement
The
tables below present the effect of our derivative financial instruments on the
Condensed Consolidated Statement of Operations for the three months ended March
31, 2010 and 2009, respectively.
Effect
of Derivative Instruments on the Condensed Consolidated Statement of Operations
for the
Three
Months Ended March 31, 2010 and 2009 (dollars in thousands)
Location of Gain or
|
||||||||||||||||||||||||||
(Loss) Recognized in
|
||||||||||||||||||||||||||
Location of Gain
|
Income on Derivative
|
Amount of Gain or
|
||||||||||||||||||||||||
or (Loss)
|
Amount of Gain or
|
(Ineffective Portion
|
(Loss) Recognized in
|
|||||||||||||||||||||||
Amount of Gain or
|
Reclassified from
|
(Loss) Reclassified
|
and Amount
|
Income on Derivative
|
||||||||||||||||||||||
(Loss) Recognized in
|
Accumulated OCI
|
from Accumulated OCI
|
Excluded from
|
(Ineffective Portion and
|
||||||||||||||||||||||
Derivative
in Cash Flow
|
OCI on Derivative
|
into Income
|
into Income (Effective
|
Effectiveness
|
amount Excluded from
|
|||||||||||||||||||||
Hedging
Relationships
|
(Effective Portion)
|
(Effective Portion)
|
Portion)
|
Testing)
|
Effectiveness Testing)
|
|||||||||||||||||||||
3/31/2010
|
3/31/2009
|
3/31/2010
|
3/31/2009
|
3/31/2010
|
3/31/2009
|
|||||||||||||||||||||
Interest
rate contracts
|
$ | (12,833 | ) | $ | (871 | ) |
Interest
expense
|
$ | (9,402 | ) | $ | (6,327 | ) |
Interest
expense
|
$ | (136 | ) | $ | 443 | |||||||
Total
derivatives in cash flow hedging
relationships
|
$ | (12,833 | ) | $ | (871 | ) | $ | (9,402 | ) | $ | (6,327 | ) | $ | (136 | ) | $ | 443 |
Credit-risk-related
Contingent Features
As of
March 31, 2010, derivatives that were in a net liability position and subject to
credit-risk-related contingent features had a termination value of $56.8
million, which includes accrued interest but excludes any adjustment for
nonperformance risk. These derivatives had a fair value, gross of asset
positions, of $52.7 million at March 31, 2010.
Certain
of our derivative contracts contain a provision where if we default on any of
our indebtedness, including default where repayment of the
indebtedness has not been accelerated by the lender, then we could also be
declared in default on our derivative obligations. As of March 31, 2010, we had
not breached the provisions of these agreements. If we had breached
these provisions, we could have been required to settle our obligations under
the agreements at their termination value of $17.7 million.
10
Certain
of our derivative contracts are credit enhanced by either Federal National
Mortgage Association, or FNMA, and the Federal Home Loan Mortgage Corporation,
or Freddie Mac. These derivative contracts require that our credit
enhancing party maintain credit ratings above a certain level. If our
credit support providers were downgraded below Baa1 by Moody’s or BBB+ by
Standard & Poor’s, or S&P, we may be required to either post 100 percent
collateral or settle the obligations at their termination value of $56.8 million
as of March 31, 2010. Both FNMA and Freddie Mac are currently rated
Aaa by Moody’s and AAA by S&P, and therefore, the provisions of this
agreement have not been breached and no collateral has been posted related to
these agreements as of March 31, 2010.
Although
our derivative contracts are subject to master netting arrangements which serve
as credit mitigants to both us and our counterparties under certain situations,
we do not net our derivative fair values or any existing rights or obligations
to cash collateral on the consolidated balance sheet.
See also
discussions in Item 1. Financial Statements – Notes to Consolidated Financial
Statements, Note 9.
9. Fair
Value Disclosure of Financial Instruments
Cash and
cash equivalents, restricted cash, accounts payable, accrued expenses and other
liabilities and security deposits are carried at amounts which reasonably
approximate their fair value due to their short term nature.
Fixed
rate notes payable at March 31, 2010 and December 31, 2009, total $100 million
and $81 million, respectively, and have estimated fair values of $84 million and
$74 million (excluding prepayment penalties), respectively, based upon interest
rates available for the issuance of debt with similar terms and remaining
maturities as of March 31, 2010 and December 31, 2009. The carrying value of
variable rate notes payable (excluding the effect of interest rate swap and cap
agreements) at March 31, 2010 and December 31, 2009, total $1,258 million and
$1,318 million, respectively, and have estimated fair values of $1,150 million
and $1,193 million (excluding prepayment penalties), respectively, based upon
interest rates available for the issuance of debt with similar terms and
remaining maturities as of March 31, 2010 and December 31, 2009.
On
January 1, 2008, we adopted FASB ASC 820 Fair Value Measurements and
Disclosures,
or ASC
820. ASC 820
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. ASC 820 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.
ASC 820
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability. As a basis for considering market participant
assumptions in fair value measurements, ASC 820 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1
inputs utilize quoted prices (unadjusted) in active markets for identical assets
or liabilities that we have the ability to access. Level 2 inputs are
inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs may include
quoted prices for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and yield curves that
are observable at commonly quoted intervals. Level 3 inputs are unobservable
inputs for the asset or liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market activity. In instances
where the determination of the fair value measurement is based on inputs from
different levels of the fair value hierarchy, the level in the fair value
hierarchy within which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment, and considers factors
specific to the asset or liability.
11
Derivative financial
instruments
Currently,
we use interest rate swaps and interest rate caps (options) to manage its interest
rate risk. The valuation of these
instruments is determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the
period to maturity, and uses observable market-based inputs, including interest
rate curves and implied volatilities. The fair values of interest
rate swaps are determined using the market standard methodology of netting the
discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or
receipts) are based on an expectation of future interest rates (forward curves)
derived from observable market interest rate curves.
The fair
values of interest rate options are determined using the market standard
methodology of discounting the future expected cash receipts that would
occur if variable interest rates rise above the strike rate of the caps.
The variable interest rates used in the calculation of projected receipts on the
cap are based on an expectation of future interest rates derived from observable
market interest rate curves and volatilities.
To comply
with the provisions of ASC 820, we incorporate credit valuation adjustments to
appropriately reflect both our own nonperformance risk and the respective
counterparty’s nonperformance risk in the fair value measurements. In
adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we have considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, mutual
puts, and guarantees.
Although
we have determined that the majority of the inputs used to value our
derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with our derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of
default by ourself and our counterparties. In prior periods, we
classified our derivative valuations within the Level 3 fair value hierarchy
because those valuations contain certain Level 3 inputs (e.g. credit
spreads). At the beginning of the three months ended March 31, 2010,
we determined that the significance of the impact of the credit valuation
adjustments made to our derivative contracts, which determination was based on
the fair value of each individual contract, was not significant to the overall
valuation. As a result, all of our derivatives held as of March 31, 2010
were transferred from Level 3 of the fair value hierarchy to Level 2 at the
beginning of the three months ended March 31, 2010.
The table
below presents a reconciliation of the beginning and ending balances of assets
and liabilities having fair value measurements based on significant other
observable inputs (Level 2) and significant unobservable inputs (Level 3) for
the three months ended March 31, 2010.
Reconciliation
of Level 2 and Level 3 Fair Value Measurements for the
Three
Months Ended March 31, 2010 (dollars in thousands)
Assets
|
Liabilities
|
|||||||||||||||
Level 2
|
Level 3
|
Level 2
|
Level 3
|
|||||||||||||
Beginning
fair value as of 12/31/2009
|
- | 3,430 | - | 51,160 | ||||||||||||
Transfers
in
|
3,430 | - | 51,160 | - | ||||||||||||
Purchase,
issuances and settlements
|
3,286 | - | - | - | ||||||||||||
Transfers
out
|
- | (3,430 | ) | - | (51,160 | ) | ||||||||||
Total
gains/(loss)
|
(2,040 | ) | - | (1,531 | ) | - | ||||||||||
Ending
fair value
|
4,676 | - | 52,691 | - |
12
The table
below presents our assets and liabilities measured at fair value on a recurring
basis as of March 31, 2010 and December 31, 2009, aggregated by the level in the
fair value hierarchy within which those measurements fall.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at March 31,
2010
(dollars
in thousands)
Quoted Prices in
Active Markets
for Identical
Assets and Liabilities
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Balance at
March 31, 2010
|
|||||||||||||
Assets
|
||||||||||||||||
Derivative
financial instruments
|
$ | — | $ | 4,676 | $ | — | $ | 4,676 | ||||||||
Liabilities
|
||||||||||||||||
Derivative
financial instruments
|
$ | — | $ | 52,691 | $ | — | $ | 52,691 |
Assets
and Liabilities Measured at Fair Value on a Recurring Basis at December 31,
2009
(dollars
in thousands)
Quoted Prices in
Active Markets
for Identical
Assets and Liabilities
(Level 1)
|
Significant
Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Balance at
December 31,
2009
|
|||||||||||||
Assets
|
||||||||||||||||
Derivative
financial instruments
|
$ | — | $ | — | $ | 3,430 | $ | 3,430 | ||||||||
Liabilities
|
||||||||||||||||
Derivative
financial instruments
|
$ | — | $ | — | $ | 51,160 | $ | 51,160 |
The fair
value estimates presented herein are based on information available to
management as of March 31, 2010 and December 31, 2009. These
estimates are not necessarily indicative of the amounts we could ultimately
realize. See also discussions in Item 1. Financial Statements – Notes
to Consolidated Financial Statements, Note 8.
10. Recent
Accounting Pronouncements
Impact
of Recently Issued Accounting Standards
In June
2009, the FASB issued ASC 105-10, Generally Accepted Accounting
Principles – Overall, which establishes the FASB
Accounting Standards Codification, or the Codification, as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. generally accepted accounting principles, or
GAAP. Rules and interpretive releases of the Securities and Exchange
Commission, or SEC, under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. The
Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature
not included in the Codification is non-authoritative. The FASB will not
issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates, or ASUs. The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the change(s) in the Codification. We adopted ASC
105-10 effective July 1, 2009 and all references made to FASB guidance
throughout this document have been updated for the
Codification.
13
In April
2008, the FASB issued ASC 825-10-65-1, Interim Disclosures About Fair
Market Value of Financial Instruments, or ASC 825-10-65-1, which extends
the disclosure requirements concerning the fair value of financial instruments
to interim financial statements of publicly traded companies. ASC 825-10-65-1 is
effective for interim financial periods ending after June 15, 2009, and the
required disclosures are included in Note 8 to the condensed consolidated
financial statements.
In June
2008, the FASB issued ASC 810-10-05, Amendments to FASB Interpretation
No. 46(R), or ASC 810-10-05, which amends events that would require
reconsidering whether an entity is a variable interest entity; it amends the
criteria used to determine the primary beneficiary of a variable interest
entity; and it expands disclosures about an enterprise’s involvement in variable
interest entities. ASC 810-10-05 is effective for annual
reporting periods beginning after November 15, 2009 and earlier application is
prohibited. We adopted ASC 810-10-05 effective January 1, 2010. The adoption did
not have a material impact on our consolidated financial condition or results of
operations taken as a whole.
11. Subsequent
Events
8.30%
Series H Cumulative Redeemable Preferred Stock
On May 3,
2010, we announced an approximate 50% redemption, subject to rounding of
fractional shares, of the 6,200,000 outstanding shares of our 8.30% Series H
Cumulative Redeemable Preferred Stock on June 2, 2010. The redemption will be
funded by proceeds raised through common share issuances made through our
controlled equity program.
Real
Estate Acquisitions
On April
30, 2010, we purchased the Broadstone Cypress apartments, a 312-unit community
located in Cypress, Texas, a sub-market of Houston, Texas. We plan to contribute
this community to Mid-America Multifamily Fund II, LLC, one of our joint
ventures.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes appearing elsewhere in this
report. Historical results and trends which might appear in the
condensed consolidated financial statements should not be interpreted as being
indicative of future operations.
Forward
Looking Statements
We
consider this and other sections of this Quarterly Report on Form 10-Q to
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
with respect to our expectations for future periods. Forward looking statements
do not discuss historical fact, but instead include statements related to
expectations, projections, intentions or other items related to the
future. Such forward-looking statements include, without limitation,
statements concerning property acquisitions and dispositions, development and
renovation activity as well as other capital expenditures, capital raising
activities, rent growth, occupancy, and rental expense growth. Words
such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” and variations of such words and similar expressions are intended
to identify such forward-looking statements. Such statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements to be materially different from the
results of operations or plans expressed or implied by such forward-looking
statements. Such factors include, among other things, unanticipated
adverse business developments affecting us, or our properties, adverse changes
in the real estate markets and general and local economies and business
conditions. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore such forward-looking statements
included in this report may not prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by us or any other person that the results or conditions
described in such statements or our objectives and plans will be
achieved.
14
The
following factors, among others, could cause our future results to differ
materially from those expressed in the forward-looking statements:
|
·
|
inability
to generate sufficient cash flows due to market conditions, changes in
supply and/or demand, competition, uninsured losses, changes in tax and
housing laws, or other factors;
|
|
·
|
increasing
real estate taxes and insurance
costs;
|
|
·
|
failure
of new acquisitions to achieve anticipated results or be efficiently
integrated into us;
|
|
·
|
failure
of development communities to lease-up as
anticipated;
|
|
·
|
inability
of a joint venture to perform as
expected;
|
|
·
|
inability
to acquire additional or dispose of existing apartment units on favorable
economic terms;
|
|
·
|
losses
from catastrophes in excess of our insurance
coverage;
|
|
·
|
unexpected
capital needs;
|
|
·
|
inability
to attract and retain qualified
personnel;
|
|
·
|
potential
liability for environmental
contamination;
|
|
·
|
adverse
legislative or regulatory tax
changes;
|
|
·
|
litigation
and compliance costs associated with laws requiring access for disabled
persons;
|
|
·
|
imposition
of federal taxes if we fail to qualify as a REIT under the Internal
Revenue Code in any taxable year or foregone opportunities to ensure REIT
status;
|
|
·
|
inability
to acquire funding through the capital
markets;
|
|
·
|
inability
to pay required distributions to maintain REIT status due to required debt
payments;
|
|
·
|
changes
in interest rate levels, including that of variable rate debt, such as
extensively used by us;
|
|
·
|
loss
of hedge accounting treatment for interest rate swaps and
caps;
|
|
·
|
the
continuation of the good credit of our interest rate swap and cap
providers;
|
|
·
|
the
availability of credit, including mortgage financing, and the liquidity of
the debt markets, including a material deterioration of the financial
condition of the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation;
|
|
·
|
inability
to meet loan covenants; and
|
|
·
|
significant
decline in market value of real estate serving as collateral for mortgage
obligations.
|
Critical
Accounting Policies and Estimates
The
following discussion and analysis of financial condition and results of
operations are based upon our condensed consolidated financial statements, and
the notes thereto, which have been prepared in accordance with U.S. generally
accepted accounting principles, or GAAP. The preparation of these condensed
consolidated financial statements requires us to make a number of estimates and
assumptions that affect the reported amounts and disclosures in the condensed
consolidated financial statements. On an ongoing basis, we evaluate our
estimates and assumptions based upon historical experience and various other
factors and circumstances. We believe that our estimates and assumptions are
reasonable under the circumstances; however, actual results may differ from
these estimates and assumptions.
We
believe that the estimates and assumptions listed below are most important to
the portrayal of our financial condition and results of operations because they
require the greatest subjective determinations and form the basis of accounting
policies deemed to be most critical. These critical accounting policies include
revenue recognition, capitalization of expenditures and depreciation of assets,
impairment of long-lived assets, including goodwill, and fair value of
derivative financial instruments.
15
Revenue
Recognition
We lease
multifamily residential apartments under operating leases primarily with terms
of one year or less. Rental revenues are recognized using a method that
represents a straight-line basis over the term of the lease and other revenues
are recorded when earned.
We record
all gains and losses on real estate in accordance with accounting standards
governing the sale of real estate.
Capitalization
of expenditures and depreciation of assets
We carry
real estate assets at depreciated cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the related assets, which
range from 8 to 40 years for land improvements and buildings, 5 years for
furniture, fixtures, and equipment, 3 to 5 years for computers and software, and
6 months for acquired leases, all of which are subjective determinations.
Repairs and maintenance costs are expensed as incurred while significant
improvements, renovations and replacements are capitalized. The cost to complete
any deferred repairs and maintenance at properties acquired by us in order to
elevate the condition of the property to our standards are capitalized as
incurred.
Development
costs are capitalized in accordance with accounting standards for costs and
initial rental operations of real estate projects and standards for the
capitalization of interest cost.
Impairment
of long-lived assets, including goodwill
We
account for long-lived assets in accordance with the provisions of accounting
standards for the impairment or disposal on long-lived assets and evaluate our
goodwill for impairment under accounting standards for goodwill and other
intangible assets. We evaluate goodwill for impairment on at least an annual
basis, or more frequently if a goodwill impairment indicator is identified. We
periodically evaluate long-lived assets, including investments in real estate
and goodwill, for indicators that would suggest that the carrying amount of the
assets may not be recoverable. The judgments regarding the existence of such
indicators are based on factors such as operating performance, market conditions
and legal factors.
Long-lived
assets, such as real estate assets, equipment and purchased intangibles subject
to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of are separately presented on
the balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell, and are no longer depreciated. The assets and liabilities of
a disposed group classified as held for sale are presented separately in the
appropriate asset and liability sections of the balance sheet.
Goodwill
is tested annually for impairment, and is tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired. An
impairment loss for goodwill is recognized to the extent that the carrying
amount exceeds the asset’s fair value. This determination is made at the
reporting unit level and consists of two steps. First, we determine the fair
value of a reporting unit and compare it to its carrying amount. In the
apartment industry, the primary method used for determining fair value is to
divide annual operating cash flows by an appropriate capitalization rate. We
determine the appropriate capitalization rate by reviewing the prevailing rates
in a property’s market or submarket. Second, if the carrying amount of a
reporting unit exceeds its fair value, an impairment loss is recognized for any
excess of the carrying amount of the reporting unit’s goodwill over the implied
fair value of that goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit in a manner similar to a
purchase price allocation, in accordance accounting standards for business
combinations. The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill.
Fair
value of derivative financial instruments
We
utilize certain derivative financial instruments, primarily interest rate swaps
and caps, during the normal course of business to manage, or hedge, the interest
rate risk associated with our variable rate debt or as hedges in anticipation of
future debt transactions to manage well-defined interest rate risk associated
with the transaction.
16
In order
for a derivative contract to be designated as a hedging instrument, changes in
the hedging instrument must be highly effective at offsetting changes in the
hedged item. The historical correlation of the hedging instruments and the
underlying hedged items are assessed before entering into the hedging
relationship and on a quarterly basis thereafter, and have been found to be
highly effective.
We
measure ineffectiveness using the change in the variable cash flows method for
interest rate swaps and the hypothetical derivative method for interest rate
caps for each reporting period through the term of the hedging instruments. Any
amounts determined to be ineffective are recorded in earnings. The
change in fair value of the interest rate swaps and the intrinsic value or fair
value of caps designated as cash flow hedges are recorded to accumulated other
comprehensive income in the statement of shareholders’ equity.
The
valuation of our derivative financial instruments is determined using widely
accepted valuation techniques including discounted cash flow analysis on the
expected cash flows of each derivative. The fair values of
interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash payments and the discounted expected
variable cash receipts. The variable cash receipts are based on an
expectation of future interest rates (forward curves) derived from observable
market interest rate curves. The fair values of interest rate caps are
determined using the market standard methodology of discounting the future
expected cash receipts that would occur if variable interest rates rise above
the strike rate of the caps. The variable interest rates used in the
calculation of projected receipts on the cap are based on an expectation of
future interest rates derived from observable market interest rate curves and
volatilities. Additionally, we
incorporate credit valuation adjustments to appropriately reflect both our own
nonperformance risk and the respective counterparty’s nonperformance risk in the
fair value measurements. Changes in the fair values of our
derivatives are primarily the result of fluctuations in interest rates. See
Notes 8 and 9 of the accompanying Condensed Consolidated Financial
Statements.
Overview
of the Three Months Ended March 31, 2010
As
anticipated, weaker demand for apartment housing caused our same store revenues
to decrease from the three months ended March 31, 2009 as we continued to absorb
the effects of reducing pricing on new leases in the portfolio to maintain
occupancy. Core same store expenses increased only slightly in the three months
ended March 31, 2010 from the three months ended March 31, 2009, but affecting
both same store revenues and expenses was the introduction of a new bulk cable
program. The new program requires revenues and expenses to be booked separately
on the condensed consolidated financial statements, rather than netted together
in revenues as our previous program allowed, resulting in increased revenue and
expense comparisons over the prior period.
Generally,
the same store portfolio consists of those properties that we have owned and
have been stabilized for at least a full 12 months and have not been classified
as held for sale. This allows us to evaluate full period over period operating
comparisons. Communities not included in the same store portfolio would include
recent acquisitions, communities in development or lease-up, communities
undergoing extensive renovations or communities which have been classified as
held for sale.
We
benefited from acquisitions made during 2009 and the completion and leaseup of
some development communities.
We also
experienced a decrease in interest expense during the three months ended March
31, 2010 compared to the three months ended March 31, 2009, mainly as a result
of a decrease in our average borrowing costs.
The
following is a discussion of our consolidated financial condition and results of
operations for the three month period ended March 31, 2010. This discussion
should be read in conjunction with the condensed consolidated financial
statements appearing elsewhere in this report. These financial statements
include all adjustments, which are, in the opinion of management, necessary to
reflect a fair statement of the results for the interim period presented, and
all such adjustments are of a normal recurring nature.
17
Results
of Operations
Comparison
of the Three Months Ended March 31, 2010 to the Three Months Ended March 31,
2009
Property
revenues for the three months ended March 31, 2010 were approximately $97.3
million, an increase of $3.7 million from the three months ended March 31,
2009 due to (i) a $3.1 million increase in property revenues from the four
properties acquired during 2009, (ii) a $0.5 million increase in property
revenues from our development and lease-up communities, and (iii) a $0.1 million
increase in property revenues from all other communities. All other communities
consists primarily of our same store portfolio which included a $1.3 million
increase due to the introduction of a new bulk cable program. The new program
requires revenues and expenses to be booked separately on the condensed
consolidated financial statements, rather than netted together in revenues as
our previous program allowed.
Property
operating expenses include costs for property personnel, property personnel
bonuses, building repairs and maintenance, real estate taxes and insurance,
utilities, landscaping and other property related costs. Property operating
expenses for the three months ended March 31, 2010 were approximately $41.6
million, an increase of approximately $3.3 million from the three months ended
March 31, 2009 due primarily to increases in property operating expenses of (i)
$1.4 million from the four properties acquired during 2009, (ii) $0.1 million
from our development and lease-up communities, and (iii) $1.8 million from all
other communities. The increase in property operating expenses from all other
communities was generated primarily by our same store portfolio and was driven
by a $1.4 million increase due to the introduction of a new bulk cable program.
The new program requires revenues and expenses to be booked separately on the
condensed consolidated financial statements, rather than netted together in
revenues as our previous program allowed.
Depreciation
expense for the three months ended March 31, 2010 was approximately $25.1
million, an increase of approximately $1.5 million from the three
months ended March 31, 2009 primarily due to the increases in depreciation
expense of (i) $0.8 million from the four properties acquired during 2009,
and (ii) $0.7 million from all other communities. Increases of depreciation
expense from all other communities resulted from asset additions made during the
normal course of business.
Property
management expenses for the three months ended March 31, 2010 were approximately
$4.3 million, a slight increase from the $4.2 million of property management
expenses for the three months ended March 31, 2009. General and administrative
expenses increased from $2.5 million for the three months ended March 31, 2009
to $2.8 million for the three months ended March 31, 2010, primarily as a result
of increased personnel incentives as a result of improved performance and
charitable contributions made during the three months ended March 31, 2010 as
compared to March 31, 2009.
Interest
expense for the three months ended March 31, 2010 was approximately $13.9
million, a decrease of $0.3 million from the three months ended March 31, 2009.
The decrease was primarily related to the decrease in our average cost of debt
from 4.32% to 4.06%. The decrease in our average cost of debt was
only partially offset by an increase in our average debt outstanding from the
three months ended March 31, 2009 to the three months ended March 31, 2010 of
approximately $29.3 million.
For the
three months ended March 31, 2010, we booked approximately $0.5 million of gains
related to settlement proceeds primarily related to the contribution of Legacy
at Western Oaks to Mid-America Multifamily Fund II, LLC, one of our joint
ventures. For the three months ended March 31, 2009, we booked approximately
$1.4 million of gain on sale of discontinued operations primarily related to the
sale of the Woodstream apartments.
Primarily
as a result of the foregoing, net income attributable to Mid-America Apartment
Communities, Inc. decreased by approximately $1.7 million in the three months
ended March 31, 2010 from the three months ended March 31,
2009.
18
Funds
From Operations and Net Income
Funds
from operations, or FFO, represents net income attributable to Mid-America
Apartment Communities, Inc. (computed in accordance with GAAP), excluding
extraordinary items, gains or losses on disposition of real estate assets, plus
depreciation of real estate, and adjustments for joint ventures to reflect FFO
on the same basis. This definition of FFO is in accordance with the National
Association of Real Estate Investment Trust’s, or NAREIT,
definition. Disposition of real estate assets includes sales of
discontinued operations as well as proceeds received from insurance and other
settlements from property damage.
In
response to the Securities and Exchange Commission’s Staff Policy Statement
relating to Emerging Issues Task Force Topic D-42 concerning the calculation of
earnings per share for the redemption of preferred stock, we include the amount
charged to retire preferred stock in excess of carrying values in our FFO
calculation.
Our
policy is to expense the cost of interior painting, vinyl flooring, and blinds
as incurred for stabilized properties. During the stabilization period for
acquisition properties, these items are capitalized as part of the total
repositioning program of newly acquired properties, and thus are not deducted in
calculating FFO.
FFO
should not be considered as an alternative to net income attributable to
Mid-America Apartment Communities, Inc. or any other GAAP measurement of
performance, as an indicator of operating performance, or as an alternative to
cash flow from operating, investing, and financing activities as a measure of
liquidity. We believe that FFO is helpful to investors in understanding our
operating performance in that such calculation excludes depreciation expense on
real estate assets. We believe that GAAP historical cost depreciation of real
estate assets is generally not correlated with changes in the value of those
assets, whose value does not diminish predictably over time, as historical cost
depreciation implies. Our calculation of FFO may differ from the methodology for
calculating FFO utilized by other REITs and, accordingly, may not be comparable
to such other REITs.
The
following table is a reconciliation of FFO to net income attributable to
Mid-America Apartment Communities, Inc. for the three month periods ended March
31, 2010, and 2009 (dollars and shares in thousands):
Three months
|
||||||||
ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Net
income attributable to Mid-America Apartment Communities,
Inc.
|
$ | 9,412 | $ | 11,139 | ||||
Depreciation
of real estate assets
|
24,569 | 23,120 | ||||||
Net
casualty (gain) loss and other settlement proceeds
|
(527 | ) | 144 | |||||
Gains
on sales of discontinued operations
|
- | (1,432 | ) | |||||
Depreciation
of real estate assets of real estate joint ventures
|
402 | 264 | ||||||
Preferred
dividend distribution
|
(3,216 | ) | (3,216 | ) | ||||
Net
income attributable to noncontrolling interests
|
437 | 706 | ||||||
Funds
from operations
|
$ | 31,077 | $ | 30,725 |
FFO for
the three month period ended March 31, 2010 increased primarily as the result of
recently acquired properties and reduced interest expense as discussed above in
Results of Operations.
Trends
During
the three months ended March 31, 2010, rental demand for apartments, while not
yet substantially improved, stabilized somewhat when compared to early
2009. This was evident primarily through higher