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
|
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.
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.
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.
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.
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 |
|
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.
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. 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.
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.
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.
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 |
|
|
|
- |
|
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.
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.
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.
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.
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.
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.
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 occupancy as compared
to the same period last year. However, one of the primary drivers of
apartment demand is job formation, and the job losses that have occurred across
the nation and our markets have continued to impact apartment demand and
pricing.
An
important part of our portfolio strategy is to maintain a broad diversity of
markets across the Sunbelt region of the United States. The diversity of markets
tends to mitigate exposure to economic issues in any one geographic market or
area. We have found that a well diversified portfolio, including both large and
select secondary markets, has tended to perform well in “up” cycles as well as
weather “down” cycles better. At the end of the three months ended March 31,
2010, we were invested in over 48 separate markets, with 59% of our gross assets
in large markets and 41% of our gross assets in select secondary
markets.
We have
continued to see lower resident turnover, significantly impacted by fewer
move-outs from buying homes. A primary reason that our residents
leave us is to buy a house. In the three months ended March 31, 2010,
we saw the number of total move-outs due to home buying drop almost 8% compared
to the same period of 2009. According to the Census Bureau,
homeownership increased from 65% to 69% of households over the ten years ending
2005. Despite the tightened credit market, in the three months ended March 31,
2010 the home ownership rate was still around 67%. The increase from
historical levels was driven primarily by the availability of new mortgage
products, many requiring no down-payment and minimal credit ratings. With a
reversion of mortgage underwriting back to more traditional standards, it is
possible that a long-term correction will occur, and that home ownership may
return to more sustainable levels. This could be quite significant for the
apartment business, and we believe, if this occurs, it could benefit us for
several years.
We also
continue to benefit on the supply side. Supply declined in 2009 and
continues to run well below historical new supply delivery averages. Competition
from condominiums reverting back to rental units, or new condominiums being
converted to rental, was not a major factor in our markets because most of our
markets and submarkets have not been primary areas for condominium development.
We have found the same to be true for rental competition from single family
homes. We have avoided committing a significant amount of capital to markets
where most of the excessive inflation in house prices has occurred. We saw
significant rental competition from condominiums and/or single family houses in
only a few submarkets. We expect this relative new supply compression
to be an even larger factor over the next several quarters as supply is expected
to contract even further.
Our focus
during the three months ended March 31, 2010 was on building on the strong
occupancy performance we captured in the three months ended December 31, 2009 as
we operated in a weakened employment market. By focusing our efforts on reducing
turnover, we were largely successful at this, as our same store occupancy at
March 31, 2010 was 120 basis points higher than at March 31, 2009 and increased
140 basis points from December 31, 2009.
Overall
same store revenues decreased 0.2% for the three months ended March 31, 2010
from the three months ended March 31, 2009. This included an increase of $1.3
million due to a new bulk cable program. Without the impact of this new program,
same store revenues decreased 1.7% over this period. We believe that the decline
in same store revenue will continue through 2010, primarily due to the impact of
lower rents on leases signed in the latter half of 2009. However, revenue growth
should resume after the economic growth returns and, most importantly, when
sustainable job growth resumes. We also believe reduced availability of
financing for new apartment construction will likely limit new apartment supply,
and more sustainable credit terms for residential mortgages should work to favor
rental demand at existing multi-family properties. At the same time, we expect
long-term demographic trends, including the growth of prime age groups for
rentals, immigration, and population movement to the southeast and southwest
will continue to build apartment rental demand for our markets.
While
expected continued weak employment growth is expected to keep new demand
subdued, we think that the supply of new apartments is not excessive, and that
positive absorption of apartments will return for most of our markets later in
2010. Should the economy fall into a deeper recession, the limited new supply of
apartments and the more disciplined mortgage financing for single family home
buying should lessen the impact.
We
continue to develop improved products, operating systems and procedures that
enable us to capture more revenues. The continued roll-out of
ancillary services (such as re-selling cable television), improved collections,
and utility reimbursements enable us to capture increased revenue dollars. We
also actively work on improving processes and products to reduce expenses, such
as new web-sites and internet access for our residents that enable them to
transact their business with us more simply and effectively.
During
the three months ended March 31, 2010, we continued to have the benefit of lower
interest rates resulting from an improved market for Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation debt
securities. Much of this was due to government action to improve
liquidity in the credit markets, and resulted in a lower cost of debt for
us. Short term interest rates continue to be at historically low
levels, and as a result, we are forecasting a continuation of favorable interest
rates in the near term with the expectation of rising rates as the economy
improves.
Liquidity
and Capital Resources
Net cash
flow provided by operating activities decreased from $32.0 million for the three
months ended March 31, 2009 to $25.1 million for the three months ended March
31, 2010. This change was a result of various items including changes in cash
flows associated with the timing of interest payments and capital improvements
in progress.
Net cash
used in investing activities was approximately $2.9 million during the three
months ended March 31, 2009 compared to net cash provided by investing
activities of approximately $31.5 million during the three months ended March
31, 2010, mainly related to disposition activity. In the three months ended
March 31, 2009, we had cash inflows of $11.3 million, mainly related to the
disposition of the Woodstream apartments. This compares to net cash inflows of
approximately $41.1 million in the three months ended March 31, 2010, mainly
related to the contribution of Legacy at Western Oaks to Mid-America Multifamily
Fund II, LLC, one of our joint ventures. We also spent approximately $4.3
million more on development and renovations during the three months ended March
31, 2009 than in the same period of 2010.
Net cash
provided by financing activities was approximately $9.2 million for the three
months ended March 31, 2009, compared to net cash used in financing
activities of approximately $38.1 million during the three months ended March
31, 2010. During the three months ended March 31, 2010, we received proceeds of
approximately $29.9 million from the issuance of shares of common stock through
our continuous equity offering program, or CEO, which we use for general
corporate business, including paying down loans and partially financing
acquisitions. We made no issuances through the CEO during the three months ended
March 31, 2009. During the three months ended March 31, 2010, we decreased
our borrowings under our credit lines by approximately $60 million. During the
comparable period in 2009, we increased our borrowings by $31.8 million through
our credit facilities primarily to provide the cash to pay off a $38.3 million
mortgage that matured April 1, 2009.
The
weighted average interest rate at March 31, 2010 for the $1.4 billion of debt
outstanding was 4.0%, compared to the weighted average interest rate of 4.5% on
$1.4 billion of debt outstanding at March 31, 2009. We utilize both conventional
and tax exempt debt to help finance our activities. Borrowings are made through
individual property mortgages as well as company-wide secured credit facilities.
We utilize fixed rate borrowings, interest rate swaps and interest rate caps to
manage our current and future interest rate risk. More details on our borrowings
can be found in the schedules presented later in this section.
On March
31, 2010, we refinanced a $50 million bank facility with a syndicate of banks
led by Regions Bank that was scheduled to mature on May 24, 2010. The facility
was replaced with a $50 million bank facility with similar features with the
same banks. The facility has a contract maturity date of March 31, 2012 with the
option to extend the term for one year.
At March
31, 2010, we had secured credit facility relationships with Prudential Mortgage
Capital, which are credit enhanced by the Federal National Mortgage Association,
or FNMA, Financial Federal, which are credit enhanced by the Federal Home Loan
Mortgage Corporation, or Freddie Mac, and the $50 million bank facility with a
syndicate of banks. Together, these credit facilities provided a total line
capacity of $1.4 billion with all but $3.1 million collateralized and available
to borrow at March 31, 2010. We had total borrowings outstanding under these
credit facilities of $1.2 billion at March 31, 2010.
Approximately
70% of our outstanding obligations at March 31, 2010 were borrowed through
facilities with/or credit enhanced by FNMA, also referred to as the FNMA
Facilities. The FNMA Facilities have a combined line limit of $1.0 billion, all
of which was collateralized and available to borrow at March 31, 2010. We had
total borrowings outstanding under the FNMA Facilities of approximately $0.9
billion at March 31, 2010. Various traunches of the FNMA Facilities mature from
2011 through 2018. The FNMA Facilities provide for both fixed and variable rate
borrowings. The interest rate on the majority of the variable portion is based
on the FNMA Discount Mortgage Backed Security, or DMBS, rate which are
credit-enhanced by FNMA and are typically sold every 90 days by Prudential
Mortgage Capital at interest rates approximating three-month LIBOR less a spread
that has averaged 0.16% over the life of the FNMA Facilities, plus a credit
enhancement fee of 0.49% to 0.67%. We have seen more volatility in the spread
between the DMBS and three-month LIBOR since late 2007 than was historically
prevalent. While we believe this recent volatility is an anomaly and believe
that this spread will return to more historic levels, we cannot forecast when or
if the uncertainty and volatility in the market may change.
Approximately
22% of our outstanding obligations at March 31, 2010 were borrowed through
facilities with/or credit enhanced by Freddie Mac, also referred to as the
Freddie Mac Facilities. The Freddie Mac Facilities have a combined line limit of
$300 million, of which $298 million was collateralized and available to borrow
at March 31, 2010. We had total borrowings outstanding under the Freddie Mac
Facilities of approximately $298 million at March 31, 2010. The Freddie Mac
facilities mature in 2011 and 2014. The interest rate on the Freddie Mac
Facilities renews every 30 or 90 days and is based on the Freddie Mac Reference
Bill Rate on the date of renewal, which has historically approximated the
equivalent 30 or 90-day LIBOR, plus a credit enhancement fee of 0.65% to 0.69%.
The Freddie Mac Reference Bill rate has traded consistently below LIBOR, and the
historical average spread has risen to 0.38% below LIBOR.
Each of
our secured credit facilities is subject to various covenants and conditions on
usage, and is subject to periodic re-evaluation of collateral. If we were to
fail to satisfy a condition to borrowing, the available credit under one or more
of the facilities could not be drawn, which could adversely affect our
liquidity. In the event of a reduction in real estate values the amount of
available credit could be reduced. Moreover, if we were to fail to make a
payment or violate a covenant under a credit facility, after applicable cure
periods, one or more of our lenders could declare a default, accelerate the due
date for repayment of all amounts outstanding and/or foreclose on properties
securing such facilities. Any such event could have a material adverse
effect.
The
following schedule details the line limits, collateralized availability and the
outstanding balances of our various borrowings as of March 31, 2010 (in
thousands):
|
|
Line
|
|
|
Amount
|
|
|
Amount
|
|
|
|
Limit
|
|
|
Collateralized
|
|
|
Borrowed
|
|
FNMA
Credit Facilities
|
|
$ |
1,044,429 |
|
|
$ |
1,044,429 |
|
|
$ |
944,833 |
|
Freddie
Mac Credit Facilities
|
|
|
300,000 |
|
|
|
298,247 |
|
|
|
298,247 |
|
Regions
Credit Facility
|
|
|
50,000 |
|
|
|
48,675 |
|
|
|
- |
|
Other
Borrowings
|
|
|
115,653 |
|
|
|
115,653 |
|
|
|
115,653 |
|
Total
Debt
|
|
$ |
1,510,082 |
|
|
$ |
1,507,004 |
|
|
$ |
1,358,733 |
|
As of
March 31, 2010, we had entered into interest rate swaps totaling a notional
amount of $843 million. To date, these swaps have proven to be highly effective
hedges. We also entered into interest rate cap agreements totaling a notional
amount of approximately $222 million as of March 31, 2010. Four major banks
provide over 93% of our derivative fair value, all of which have high investment
grade ratings from Moody’s and S&P.
The
following schedule outlines our variable versus fixed rate debt, including the
impact of interest rate swaps and caps, outstanding as of March 31, 2010 (in
thousands):
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Years to
|
|
|
|
|
|
|
Principal
|
|
|
Contract
|
|
|
Effective
|
|
|
|
Balance
|
|
|
Maturity
|
|
|
Rate
|
|
Conventional
- Fixed Rate or Swapped
|
|
$ |
906,213 |
|
|
|
3.3 |
|
|
|
5.4 |
% |
Tax-free
- Fixed Rate or Swapped
|
|
|
37,405 |
|
|
|
6.9 |
|
|
|
4.7 |
% |
Conventional
- Variable Rate
(1)
|
|
|
192,829 |
|
|
|
4.3 |
|
|
|
1.0 |
% |
Conventional
- Variable Rate - Capped (2)
|
|
|
157,936 |
|
|
|
6.2 |
|
|
|
0.8 |
% |
Tax-free
- Variable Rate - Capped (2)
|
|
|
64,350 |
|
|
|
1.9 |
|
|
|
1.1 |
% |
Total
Debt Outstanding
|
|
$ |
1,358,733 |
|
|
|
3.7 |
|
|
|
4.0 |
% |
(1) Includes
a $15 million mortgage with an imbedded cap at a 7% rate.
(2) When
the capped rates are not reached, the average rate represents the rate on the
underlying variable debt.
The
following schedule outlines the contractual maturity dates of our outstanding
debt as of March 31, 2010 (in thousands):
|
|
Line Limit
|
|
|
|
|
|
|
|
|
|
Credit Facilities
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
|
Freddie Mac
|
|
|
Regions
|
|
|
Other
|
|
|
Total
|
|
2010
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
2011
|
|
|
80,000 |
|
|
|
100,000 |
|
|
|
- |
|
|
|
- |
|
|
|
180,000 |
|
2012
|
|
|
80,000 |
|
|
|
- |
|
|
|
50,000 |
|
|
|
- |
|
|
|
130,000 |
|
2013
|
|
|
203,193 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
203,193 |
|
2014
|
|
|
321,236 |
|
|
|
200,000 |
|
|
|
- |
|
|
|
18,203 |
|
|
|
539,439 |
|
2015
|
|
|
120,000 |
|
|
|
- |
|
|
|
- |
|
|
|
52,729 |
|
|
|
172,729 |
|
Thereafter
|
|
|
240,000 |
|
|
|
- |
|
|
|
- |
|
|
|
44,721 |
|
|
|
284,721 |
|
Total
|
|
$ |
1,044,429 |
|
|
$ |
300,000 |
|
|
$ |
50,000 |
|
|
$ |
115,653 |
|
|
$ |
1,510,082 |
|
The
following schedule outlines the interest rate maturities of our outstanding
interest rate swap agreements and fixed rate debt as of March 31, 2010 (in
thousands):
|
|
Swap Balances
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
SIFMA
|
|
|
Fixed Rate
|
|
|
|
|
|
Contract
|
|
|
|
LIBOR
|
|
|
(formerly BMA)
|
|
|
Balances
|
|
|
Balance
|
|
|
Rate
|
|
2010
|
|
$ |
100,000 |
|
|
$ |
8,365 |
|
|
$ |
- |
|
|
$ |
108,365 |
|
|
|
5.8 |
% |
2011
|
|
|
158,000 |
|
|
|
- |
|
|
|
- |
|
|
|
158,000 |
|
|
|
5.2 |
% |
2012
|
|
|
150,000 |
|
|
|
17,800 |
|
|
|
- |
|
|
|
167,800 |
|
|
|
5.1 |
% |
2013
|
|
|
190,000 |
|
|
|
- |
|
|
|
- |
|
|
|
190,000 |
|
|
|
5.2 |
% |
2014
|
|
|
144,000 |
|
|
|
- |
|
|
|
18,203 |
|
|
|
162,203 |
|
|
|
5.7 |
% |
2015
|
|
|
75,000 |
|
|
|
- |
|
|
|
37,529 |
|
|
|
112,529 |
|
|
|
5.6 |
% |
Thereafter
|
|
|
- |
|
|
|
- |
|
|
|
44,721 |
|
|
|
44,721 |
|
|
|
5.6 |
% |
Total
|
|
$ |
817,000 |
|
|
$ |
26,165 |
|
|
$ |
100,453 |
|
|
$ |
943,618 |
|
|
|
5.4 |
% |
During
the three months ended March 31, 2010, we sold 571,000 shares of common stock
through a continuous equity offering program generating net proceeds of
approximately $29.9 million. We did not make any sales through this program
during the three months ended March 31, 2009.
We
believe that we have adequate resources to fund our current operations, annual
refurbishment of our properties, and incremental investment in new apartment
properties. We rely on the efficient operation of the financial markets to
finance debt maturities, and on FNMA and Freddie Mac, or the Agencies, who have
now been placed into conservatorship by the U.S. Government, and whose
securities are now implicitly Government-guaranteed. The Agencies provide credit
enhancement for approximately $1.2 billion of our outstanding debt as of March
31, 2010. The Federal Housing Finance Agency, or FHFA, which was appointed
conservator of the Agencies, recognizes the importance of multifamily housing
finance for healthy secondary market and housing affordability, and expects FNMA
and Freddie Mac to continue underwriting and financing sound multifamily
business.
The
interest rate markets for FNMA DMBS and Freddie Mac Reference Bills, which in
our experience are highly liquid and highly correlated with three-month LIBOR
interest rates, are also an important component of our liquidity and interest
rate swap and cap effectiveness. Prudential Mortgage Capital, a DUS
lender for Fannie Mae, markets 90-day Fannie Mae Discount Mortgage Backed
Securities monthly, and is obligated to advance funds to us at DMBS rates plus a
credit spread under the terms of the credit agreements between Prudential and
us. Financial Federal, a Freddie Mac Program Plus Lender and Servicer, is
obligated to advance funds under the terms of credit agreements between
Financial Federal and us.
For the
three months ended March 31, 2010, our net cash provided by operating
activities was short of covering funding improvements to existing real estate
assets, distributions to unitholders, and dividends paid on common and preferred
shares by approximately $5.9 million, as compared to being in excess by $1.5
million for the three months ended March 31, 2009. While we have sufficient
liquidity to permit distributions at current rates through additional
borrowings, if necessary, any significant deterioration in operations could
result in our financial resources being insufficient to pay distributions to
shareholders at the current rate, in which event we would be required to reduce
the distribution rate.
The
following table reflects our total contractual cash obligations which consist of
our long-term debt and operating leases as of March 31, 2010, (dollars in
thousands):
Contractual
Obligations
(1)
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
Total
|
|
Long-Term Debt
(2)
|
|
$ |
1,464 |
|
|
$ |
181,929 |
|
|
$ |
82,236 |
|
|
$ |
171,038 |
|
|
$ |
536,792 |
|
|
$ |
385,274 |
|
|
$ |
1,358,733 |
|
Fixed
Rate or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swapped Interest (3)
|
|
|
34,338 |
|
|
|
38,855 |
|
|
|
29,835 |
|
|
|
22,342 |
|
|
|
13,159 |
|
|
|
29,712 |
|
|
|
168,241 |
|
Operating
Lease
|
|
|
13 |
|
|
|
18 |
|
|
|
10 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41 |
|
Total
|
|
$ |
35,815 |
|
|
$ |
220,802 |
|
|
$ |
112,081 |
|
|
$ |
193,380 |
|
|
$ |
549,951 |
|
|
$ |
414,986 |
|
|
$ |
1,527,015 |
|
(1) Fixed
rate and swapped interest are shown in this table. The average interest rates of
variable rate debt are shown in preceeding tables.
(2)
Represents principal payments.
(3)
Swapped interest is subject to the ineffective portion of cash flow hedges as
described in Note 8 to the financial statements.
Off-Balance
Sheet Arrangements
At March
31, 2010, and 2009, we did not have any relationships with unconsolidated
entities or financial partnerships established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Mid-America Multifamily Fund I, LLC, one of our joint ventures, was
established to acquire $500 million of apartment communities with redevelopment
upside offering value creation opportunity through capital improvements,
operating enhancements and restructuring in-place financing. As of March 31,
2010, Mid-America Multifamily Fund I, LLC owned two properties but does not
expect to acquire any additional communities. Mid-America Multifamily Fund II,
LLC, our other joint venture, was established to acquire $250 million of
apartment communities with redevelopment upside offering value creation
opportunity through capital improvements, operating enhancements and
restructuring in-place financing. As of March 31, 2010, Mid-America Multifamily
Fund II, LLC, or Fund II, owned two properties. In addition, we do not engage in
trading activities involving non-exchange traded contracts. As such, we are not
materially exposed to any financing, liquidity, market, or credit risk that
could arise if we had engaged in such relationships. We do not have any
relationships or transactions with persons or entities that derive benefits from
their non-independent relationships with us or our related parties other than
those disclosed in Item 8. Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements, Note 13 in our 2009 Annual Report on Form
10-K filed on February 25, 2010.
Our
investments in our real estate joint ventures are unconsolidated and are
recorded using the equity method as we do not have a controlling
interest.
Insurance
We
renegotiated our insurance programs effective July 1, 2009. We believe that the
property and casualty insurance program in place provides appropriate insurance
coverage for financial protection against insurable risks such that any
insurable loss experienced that can be reasonably anticipated would not have a
significant impact on our liquidity, financial position or results of
operation.
Inflation
Substantially
all of the resident leases at our communities allow, at the time of renewal, for
adjustments in the rent payable hereunder, and thus may enable us to seek rent
increases. Almost all leases are for one year or less. The short-term nature of
these leases generally serves to reduce the risk of the adverse effects of
inflation.
Impact
of Recently Issued Accounting Standards
In 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.
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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
We are
exposed to interest rate changes associated with our credit facilities and other
variable rate debt as well as refinancing risk on our fixed rate debt. Our
involvement with derivative financial instruments is limited to managing our
exposure to changes in interest rates and we do not expect to use them for
trading or other speculative purposes.
There
have been no material changes in our market risk as disclosed in the 2009 Annual
Report on Form 10-K except for the changes as discussed under Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under the “Liquidity and Capital Resources” section, which is
incorporated by reference herein.
Item
4. Controls and Procedures.
Management’s
Evaluation of Disclosure Controls and Procedures
Our
management, under the supervision and with the participation of our principal
executive and financial officers, has evaluated the effectiveness of our
disclosure controls and procedures in ensuring that the information required to
be disclosed in our filings under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, including ensuring
that such information is accumulated and communicated to our management as
appropriate to allow timely decisions regarding required disclosure. Based on
such evaluation, our principal executive and financial officers have concluded
that such disclosure controls and procedures were effective as of March 31, 2010
(the end of the period covered by this Quarterly Report on Form
10-Q).
Changes
in Internal Controls
During
the three months ended March 31, 2010, there were no changes in our internal
control over financial reporting that materially affected, or that are
reasonably likely to materially affect, our internal control over financial
reporting.
Item
4T. Controls and Procedures.
Not
applicable
Item
5. Other Information.
Not
applicable
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors.
We have
identified the following additional risks and uncertainties that may have a
material adverse effect on our business, financial condition or results of
operations. Investors should carefully consider the risks described
below before making an investment decision. Our business faces
significant risks and the risks described below may not be the only risks we
face. Additional risks not presently known to us or that we currently believe
are immaterial may also significantly impair our business operations. If any of
these risks occur, our business, results of operations or financial condition
could suffer, the market price of our common stock could decline and you could
lose all or part of your investment in our common stock.
Economic
slowdown in the United States and the related downturn in the housing and real
estate markets have adversely affected and may continue to adversely affect our
financial condition and results of operations
There has
been a significant decline in economic growth, both in the United States and
globally, in the second half of 2008 and through the beginning of 2010. The
trends in both the real estate industry and the broader United States economy
continue to be unfavorable and continue to adversely affect our revenues. The
weakened economy and related reduction in spending, falling home prices and
mounting job losses, together with the price volatility, dislocations and
liquidity disruptions in the financial and credit markets could, among other
things, impede the ability of our tenants and other parties with which we
conduct business to perform their contractual obligations, which could lead to
an increase in defaults by our tenants and other contracting parties, which
could adversely affect our revenues. Furthermore, our ability to lease our
properties at favorable rates, or at all, is adversely affected by the increase
in supply and deterioration in the multifamily market and is dependent upon the
overall level of spending in the economy, which is adversely affected by, among
other things, job losses and unemployment levels, recession, personal debt
levels, the downturn in the housing market, stock market volatility and
uncertainty about the future. With regard to our ability to lease our
multifamily properties, the increasing rental of excess for-sale condominiums
and single family homes, which increases the supply of multifamily units and
housing alternatives, may further reduce our ability to lease our multifamily
units and further depress rental rates in certain markets. We cannot predict how
long demand and other factors in the real estate market will remain unfavorable,
but if the markets remain weak or deteriorate further, our ability to lease our
properties, our ability to increase or maintain rental rates in certain markets
may continue to weaken during 2010.
Failure
to generate sufficient cash flows could limit our ability to pay distributions
to shareholders
Our
ability to generate sufficient cash flow in order to pay distributions to our
shareholders depends on our ability to generate funds from operations in excess
of capital expenditure requirements and/or to have access to the markets for
debt and equity financing. Funds from operations and the value of our apartment
communities may be insufficient because of factors which are beyond our control.
Such events or conditions could include:
|
·
|
competition
from other apartment communities;
|
|
·
|
overbuilding
of new apartment units or oversupply of available apartment units in our
markets, which might adversely affect apartment occupancy or rental rates
and/or require rent concessions in order to lease apartment
units;
|
|
·
|
conversion
of condominiums and single family houses to rental
use;
|
|
·
|
weakness
in the overall economy which lowers job growth and the associated demand
for apartment housing;
|
|
·
|
increases
in operating costs (including real estate taxes and insurance premiums)
due to inflation and other factors, which may not be offset by increased
rents;
|
|
·
|
inability
to initially, or subsequently after lease terminations, rent apartments on
favorable economic terms;
|
|
·
|
changes
in governmental regulations and the related costs of
compliance;
|
|
·
|
changes
in laws including, but not limited to, tax laws and housing laws including
the enactment of rent control laws or other laws regulating multifamily
housing;
|
|
·
|
withdrawal
of Government support of apartment financing through its financial backing
of the Federal National Mortgage Association, or FNMA, or the Federal Home
Loan Mortgage Corporation, or Freddie
Mac;
|
|
·
|
an
uninsured loss, including those resulting from a catastrophic storm,
earthquake, or act of terrorism;
|
|
·
|
changes
in interest rate levels and the availability of financing, borrower credit
standards, and down-payment requirements which could lead renters to
purchase homes (if interest rates decrease and home loans are more readily
available) or increase our acquisition and operating costs (if interest
rates increase and financing is less readily available);
and
|
|
·
|
the
relative illiquidity of real estate
investments.
|
At times,
we rely on external funding sources to fully fund the payment of distributions
to shareholders and our capital investment program (including our existing
property expansion developments). While we have sufficient liquidity to permit
distributions at current rates through additional borrowings if necessary, any
significant and sustained deterioration in operations could result in our
financial resources being insufficient to pay distributions to shareholders at
the current rate, in which event we would be required to reduce the distribution
rate. Any decline in our funds from operations could adversely affect our
ability to make distributions to our shareholders or to meet our loan covenants
and could have a material adverse effect on our stock price.
Our
financing could be impacted by negative capital market conditions
Recently,
domestic financial markets have experienced unusual volatility and uncertainty.
Liquidity has tightened in financial markets, including the investment grade
debt, the CMBS, commercial paper, and equity capital markets. A large majority
of apartment financing, and as of March 31, 2010, 91% of our outstanding debt,
is provided by or credit-enhanced by FNMA and Freddie Mac, which are now under
the conservatorship of the U.S. Government. We have seen an increase in the
volatility of short term interest rates and changes in historic relationships
between LIBOR (which is the basis for the majority of the payments to us by our
swap counterparties) and the actual interest rate we pay through the FNMA
Discount Mortgage Backed Security, or DMBS, and the Freddie Mac Reference Bill
programs, which we believe to be temporary. This creates a risk that our
interest expense will fluctuate to a greater extent than it has in the past, and
it makes forecasting more difficult. Were our credit arrangements with
Prudential Mortgage Capital, credit-enhanced by FNMA, or with Financial Federal,
credit-enhanced by Freddie Mac, to fail, or their ability to lend money to
finance apartment communities to become impaired, we would have to seek
alternative sources of capital, which might not be available on terms acceptable
to us, if at all. In addition, any such event would most likely cause our
interest costs to rise. This could also cause our interest rate swaps
and caps to become ineffective, triggering a default in one or more of our
credit agreements. If any of the foregoing events were to occur it could have a
material adverse affect on our business, financial condition and
prospects.
Various
traunches of our credit facilities with FNMA and Freddie Mac mature from 2011
through 2018, and we anticipate that replacement facilities will be at a higher
cost and have less attractive terms, if available at all.
A
change in U.S. government policy with regard to FNMA and Freddie Mac could
seriously impact our financial condition
The U.S.
government has committed preferred equity to FNMA and Freddie Mac, placing them
in conservatorship and the Treasury Department increased FNMA and Freddie Mac’s
portfolio caps which are required to be reduced over time. Through expansion of
their off-balance sheet lending products (which form the large majority of our
borrowing), we believe that FNMA and Freddie Mac balance sheet limitations will
not restrict their support of lending to the multifamily industry and to us in
particular. Statements supporting their involvement in apartment lending by the
heads of multifamily lending of FNMA, Freddie Mac, and their regulator have been
reiterated. Should this support change, it would have a material adverse affect
on both us and the multifamily industry, and we would seek alternative sources
of funding. This could jeopardize the effectiveness of our interest rate swaps,
require us to post collateral up to the value of the interest rate swaps, and
either of these occurrences could potentially cause a breach in one or more of
our loan covenants, and through reduced loan availability, impact the value of
multifamily assets, which could impair the value of our
properties.
A
change in the value of our assets could cause us to experience a cash shortfall,
be in default of our loan covenants, or incur a charge for the impairment of
assets
We borrow
on a secured basis from FNMA, Freddie Mac, and Regions Bank. A significant
reduction in the value of our assets could require us to post additional
collateral. While we believe that we have significant excess collateral and
capacity, future asset values are uncertain. If we were unable to meet a request
to add collateral to a credit facility, this would have a material adverse
affect on our liquidity and our ability to meet our loan covenants. We may
determine that the value of an individual asset, or group of assets, was
irrevocably impaired, and that we may need to record a charge to write-down the
value of the asset to reflect its current value.
Debt
level, refinancing and loan covenant risk may adversely affect our financial
condition and operating results and our ability to maintain our status as a
REIT
At March
31, 2010, we had total debt outstanding of $1.4 billion. Payments of principal
and interest on borrowings may leave us with insufficient cash resources to
operate the apartment communities or pay distributions that are required to be
paid in order for us to maintain our qualification as a REIT. We currently
intend to limit our total debt to a range of approximately 45% to 55% of the
undepreciated book value of our assets, although our charter and bylaws do not
limit our debt levels. Circumstances may cause us to exceed that target from
time-to-time. As of March 31, 2010, our ratio of debt to undepreciated book
value was approximately 49%. Our Board of Directors can modify this policy at
any time, which could allow us to become more highly leveraged and decrease our
ability to make distributions to our shareholders. In addition, we must repay
our debt upon maturity, and the inability to access debt or equity capital at
attractive rates could adversely affect our financial condition and/or our funds
from operations. We rely on FNMA and Freddie Mac, which we refer to as the
Agencies, for the majority of our debt financing and have agreements with the
Agencies and with other lenders that require us to comply with certain
covenants, including maintaining adequate collateral that is subject to
revaluation quarterly. The breach of any one of these covenants would place us
in default with our lenders and may have serious consequences on our
operations.
Interest
rate hedging may be ineffective
We rely
on the financial markets to refinance debt maturities, and also are heavily
reliant on the Agencies, which provide credit or credit enhancement for
approximately $1.2 billion of our outstanding debt as of March 31, 2010. The
debt is provided under the terms of credit facilities with Prudential Mortgage
Capital (credit-enhanced by FNMA) and Financial Federal (credit-enhanced by
Freddie Mac). We pay fees to the credit facility providers and the Agencies plus
interest which is based on the FNMA DMBS rate, and the Freddie Mac Reference
Bill Rate. The Agencies have been placed into conservatorship by the U.S.
Government (under the supervision of the Federal Housing Finance Agency), which
has committed $200 billion of capital to each, if needed.
The
interest rate market for the FNMA DMBS rate and the Freddie Mac Reference Bill
Rate, both of which have been highly correlated with LIBOR interest rates, are
also an important component of our liquidity and interest rate swap and cap
effectiveness. In our experience, the FNMA DMBS rate has historically averaged
16 basis points below three-month LIBOR, and the Freddie Mac Reference Bill rate
has averaged 38 basis points below the associated LIBOR rate, but in the past 31
months the spreads increased significantly and have been more volatile than we
have historically seen before recently contracting closer to more normal levels.
We believe that the current market illiquidity is an anomaly and that the
spreads and the volatility will return to more stable historic levels, but we
cannot forecast when or if the uncertainty and volatility in the market may
change. Continued unusual volatility over a period of time could cause us to
lose hedge accounting treatment for our interest rate swaps and caps, resulting
in material changes to our consolidated statements of operations and balance
sheet, and potentially cause a breach with one of our debt
covenants.
Fluctuations
in interest rate spreads between the DMBS and Reference Bill rates and
three-month LIBOR causes ineffectiveness to flow through interest expense in the
current period if in an overhedged position, and together with the unrecognized
ineffectiveness, reduces the effectiveness of the swaps and caps.
We also
rely on the credit of the counterparties that provide swaps and caps to hedge
the interest rate risk on our credit facilities. We use four major banks to
provide over 93% of our derivative fair value, all of which have high investment
grade ratings from Moody’s and S&P. In the event that one of our derivative
providers should suffer a significant downgrade of its credit rating or fail,
our swaps or caps may become ineffective, in which case the value of the swap or
cap would be adjusted to value in the current period, possibly causing a
substantial loss sufficient to cause a breach with one of our debt
covenants.
One
or more interest rate swap or cap counterparties could default, causing us
significant financial exposure
We enter
into interest rate swap and interest rate cap agreements only with
counterparties that are highly rated (generally, AA- or above by Standard &
Poors, or Aa3 or above by Moody’s). We also try to diversify our risk amongst
several counterparties. In the event one or more of these counterparties were to
go into liquidation or to experience a significant rating downgrade, this could
cause us to liquidate the interest rate swap, or lose the interest rate
protection of an interest rate cap. Liquidation of an interest rate swap could
cause us to be required to pay the swap counter party the net present value of
the swap, which may represent a significant current period cash charge, possibly
sufficient to cause us to breach one or more loan covenants.
Variable
interest rates may adversely affect funds from operations
At March
31, 2010, effectively $193 million of our debt bore interest at a variable rate
and was not hedged by interest rate swaps or caps. We may incur additional debt
in the future that also bears interest at variable rates. Variable rate debt
creates higher debt service requirements if market interest rates increase,
which would adversely affect our funds from operations and the amount of cash
available to pay distributions to shareholders. Our $1.0 billion secured credit
facilities with Prudential Mortgage Capital, credit enhanced by FNMA, are
predominately floating rate facilities. We also have credit facilities with
Freddie Mac totaling $300 million that are variable rate facilities. At March
31, 2010, a total of $1.2 billion was outstanding under these facilities. These
facilities represent the majority of the variable interest rates we were exposed
to at March 31, 2010. Large portions of the interest rates on these facilities
have been hedged by means of a number of interest rate swaps and caps. Upon the
termination of these swaps and caps, we will be exposed to the risks of varying
interest rates.
Losses
from catastrophes may exceed our insurance coverage
We carry
comprehensive liability and property insurance on our communities, and intend to
obtain similar coverage for communities we acquire in the future. Some losses,
generally of a catastrophic nature, such as losses from floods, hurricanes or
earthquakes, are subject to limitations, and thus may be uninsured. We exercise
our discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate insurance on our
investments at a reasonable cost and on suitable terms. If we suffer a
substantial loss, our insurance coverage may not be sufficient to pay the full
current market value or current replacement value of our lost investment.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it infeasible to use insurance
proceeds to replace a property after it has been damaged or
destroyed.
Increasing
real estate taxes and insurance costs may negatively impact financial
condition
As a
result of our substantial real estate holdings, the cost of real estate taxes
and insuring our apartment communities is a significant component of expense.
Real estate taxes and insurance premiums are subject to significant increases
and fluctuations, which can be widely outside of our control. If the costs
associated with real estate taxes and insurance should rise, our financial
condition could be negatively impacted and our ability to pay our dividend could
be affected.
Property
insurance limits may be inadequate and deductibles may be excessive in the event
of a catastrophic loss or a series of major losses, and may cause a breach of
loan covenants
We have a
significant proportion of our assets in areas exposed to windstorms and to the
New Madrid seismic zone. A major wind or earthquake loss, or series of losses,
could require that we pay significant deductibles as well as additional amounts
above the per occurrence limit of our insurance for these risks. We may then be
judged to have breached one or more of our loan covenants, and any of the
foregoing events could have a material adverse effect on our assets, financial
condition, and results of operation.
Issuances
of additional debt or equity may adversely impact our financial
condition
Our
capital requirements depend on numerous factors, including the occupancy and
turnover rates of our apartment communities, development and capital
expenditures, costs of operations and potential acquisitions. We cannot
accurately predict the timing and amount of our capital requirements. If our
capital requirements vary materially from our plans, we may require additional
financing sooner than anticipated. Accordingly, we could become more leveraged,
resulting in increased risk of default on our obligations and in an increase in
our debt service requirements, both of which could adversely affect our
financial condition and ability to access debt and equity capital markets in the
future.
We
are dependent on key personnel
Our
success depends in part on our ability to attract and retain the services of
executive officers and other personnel. There is substantial competition for
qualified personnel in the real estate industry and the loss of several of our
key personnel could have an adverse effect on us.
New
acquisitions may fail to perform as expected and failure to integrate acquired
communities and new personnel could create inefficiencies
We intend
to actively acquire and improve multifamily communities for rental operations.
We may underestimate the costs necessary to bring an acquired community up to
standards established for our intended market position. Additionally, to grow
successfully, we must be able to apply our experience in managing our existing
portfolio of apartment communities to a larger number of properties. We must
also be able to integrate new management and operations personnel as our
organization grows in size and complexity. Failures in either area will result
in inefficiencies that could adversely affect our overall
profitability.
We
may not be able to sell communities when appropriate
Real
estate investments are relatively illiquid and generally cannot be sold quickly.
We may not be able to change our portfolio promptly in response to economic or
other conditions. Further, we own seven communities, which are subject to
restrictions on sale and are required to be exchanged through a 1031b tax-free
exchange, unless we pay the tax liability of the contributing partners. This
inability to respond promptly to changes in the performance of our investments
could adversely affect our financial condition and ability to make distributions
to our security holders.
Environmental
problems are possible and can be costly
Federal,
state and local laws and regulations relating to the protection of the
environment may require a current or previous owner or operator of real estate
to investigate and clean up hazardous or toxic substances or petroleum product
releases at such community. The owner or operator may have to pay a governmental
entity or third parties for property damage and for investigation and clean-up
costs incurred by such parties in connection with the contamination. These laws
typically impose clean-up responsibility and liability without regard to whether
the owner or operator knew of or caused the presence of the contaminants. Even
if more than one person may have been responsible for the contamination each
person covered by the environmental laws may be held responsible for all of the
clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination emanating from that site. All of our communities have been the
subject of environmental assessments completed by qualified independent
environmental consultant companies. These environmental assessments have not
revealed, nor are we aware of, any environmental liability that we believe would
have a material adverse effect on our business, results of operations, financial
condition or liquidity. Over the past several years, there have been an
increasing number of lawsuits against owners and managers of multifamily
properties alleging personal injury and property damage caused by the presence
of mold in residential real estate.
Some of
these lawsuits have resulted in substantial monetary judgments or settlements.
We cannot be assured that existing environmental assessments of our communities
reveal all environmental liabilities, that any prior owner of any of our
properties did not create a material environmental condition not known to us, or
that a material environmental condition does not otherwise
exist.
Our
ownership limit restricts the transferability of our capital stock
Our
charter limits ownership of our capital stock by any single shareholder to 9.9%
of the value of all outstanding shares of our capital stock, both common and
preferred. The charter also prohibits anyone from buying shares if the purchase
would result in our losing REIT status. This could happen if a share transaction
results in fewer than 100 persons owning all of our shares or in five or fewer
persons, applying certain broad attribution rules of the Internal Revenue Code
of 1986, as amended, or the Code, owning 50% or more of our shares. If you
acquire shares in excess of the ownership limit or in violation of the ownership
requirements of the Code for REITs, we:
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will
consider the transfer to be null and
void;
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will
not reflect the transaction on our
books;
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may
institute legal action to enjoin the
transaction;
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will
not pay dividends or other distributions with respect to those
shares;
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will
not recognize any voting rights for those
shares;
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will
consider the shares held in trust for our benefit;
and
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will
either direct you to sell the shares and turn over any profit to us, or we
will redeem the shares. If we redeem the shares, you will be paid a price
equal to the lesser of the price you paid for the shares; or the average
of the last reported sales prices on the New York Stock Exchange on the
ten trading days immediately preceding the date fixed for redemption by
our Board of Directors.
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If you
acquire shares in violation of the limits on ownership described
above:
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you
may lose your power to dispose of the
shares;
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you
may not recognize profit from the sale of such shares if the market price
of the shares increases; and
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you
may be required to recognize a loss from the sale of such shares if the
market price decreases.
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Provisions
of our charter and Tennessee law may limit the ability of a third party to
acquire control of us
Ownership
Limit
The 9.9%
ownership limit discussed above may have the effect of precluding acquisition of
control of us by a third party without the consent of our Board of
Directors.
Preferred
Stock
Our
charter authorizes our Board of Directors to issue up to 20,000,000 shares of
preferred stock. The Board of Directors may establish the preferences and rights
of any preferred shares issued. The issuance of preferred stock could have the
effect of delaying or preventing someone from taking control of us, even if a
change in control were in our shareholders’ best interests. Currently, we have
6,200,000 shares of 8.30% Series H Cumulative Redeemable Preferred Stock issued
and outstanding. On May 3, 2010, we announced a 50% redemption, subject to
rounding of fractional shares, on June 2, 2010 of the 8.30% Series H Cumulative
Redeemable Preferred Stock.
Tennessee
Anti-Takeover Statutes
As a
Tennessee corporation, we are subject to various legislative acts, which impose
restrictions on and require compliance with procedures designed to protect
shareholders against unfair or coercive mergers and acquisitions. These statutes
may delay or prevent offers to acquire us and increase the difficulty of
consummating any such offers, even if our acquisition would be in our
shareholders’ best interests.
Our
investments in joint ventures may involve risks
Investments
in joint ventures may involve risks that may not otherwise be present in our
direct investments such as:
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the
potential inability of our joint venture partner to
perform;
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the
joint venture partner may have economic or business interests or goals
which are inconsistent with or adverse to
ours;
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the
joint venture partner may take actions contrary to our requests or
instructions or contrary to our objectives or policies;
and
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the
joint venturers may not be able to agree on matters relating to the
property they jointly own.
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Although
each joint owner will have a right of first refusal to purchase the other
owner’s interest, in the event a sale is desired, the joint owner may not have
sufficient resources to exercise such right of first refusal.
Market
interest rates and low trading volume may have an adverse effect on the market
value of our common shares
The
market price of shares of a REIT may be affected by the distribution rate on
those shares, as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of our
shares may expect a higher annual distribution rate. Higher interest rates would
not, however, result in more funds for us to distribute and, in fact, would
likely increase our borrowing costs and potentially decrease funds available for
distribution. This could cause the market price of our common shares to go down.
In addition, although our common shares are listed on the New York Stock
Exchange, the daily trading volume of our shares may be lower than the trading
volume for other industries. As a result, our investors who desire to liquidate
substantial holdings may find that they are unable to dispose of their shares in
the market without causing a substantial decline in the market value of the
shares.
Changes
in market conditions or a failure to meet the market’s expectations with regard
to our earnings and cash distributions could adversely affect the market price
of our common shares
We
believe that the market value of a REIT’s equity securities is based primarily
upon the market’s perception of the REIT’s growth potential and its current and
potential future cash distributions, and is secondarily based upon the real
estate market value of the underlying assets. For that reason, our shares may
trade at prices that are higher or lower than the net asset value per share. To
the extent we retain operating cash flow for investment purposes, working
capital reserves or other purposes, these retained funds, while increasing the
value of our underlying assets, may not correspondingly increase the market
price of our common shares. In addition, we are subject to the risk that our
cash flow will be insufficient to pay distributions to our shareholders. Our
failure to meet the market’s expectations with regard to future earnings and
cash distributions would likely adversely affect the market price of our
shares.
The stock
markets, including The New York Stock Exchange, or NYSE, on which we list our
common shares, have experienced significant price and volume fluctuations. As a
result, the market price of our common shares could be similarly volatile, and
investors in our common shares may experience a decrease in the value of their
shares, including decreases unrelated to our operating performance or prospects.
Among the market conditions that may affect the market price of our publicly
traded securities are the following:
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our
financial condition and operating performance and the performance of other
similar companies;
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actual
or anticipated differences in our quarterly operating
results;
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changes
in our revenues or earnings estimates or recommendations by securities
analysts;
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publication
of research reports about us or our industry by securities
analysts;
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additions
and departures of key personnel;
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strategic
decisions by us or our competitors, such as acquisitions, divestments,
spin-offs, joint ventures, strategic investments or changes in business
strategy;
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the
reputation of REITs generally and the reputation of REITs with portfolios
similar to ours;
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the
attractiveness of the securities of REITs in comparison to securities
issued by other entities (including securities issued by other real estate
companies);
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an
increase in market interest rates, which may lead prospective investors to
demand a higher distribution rate in relation to the price paid for our
shares;
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the
passage of legislation or other regulatory developments that adversely
affect us or our industry;
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speculation
in the press or investment
community;
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actions
by institutional shareholders or hedge
funds;
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changes
in accounting principles;
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general
market conditions, including factors unrelated to our
performance.
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In the
past, securities class action litigation has often been instituted against
companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs and divert our management’s
attention and resources.
Failure
to qualify as a REIT would cause us to be taxed as a corporation
If we
failed to qualify as a REIT for federal income tax purposes, we would be taxed
as a corporation. The Internal Revenue Service may challenge our qualification
as a REIT for prior years, and new legislation, regulations, administrative
interpretations or court decisions may change the tax laws with respect to
qualification as a REIT or the federal tax consequences of such qualification.
For any taxable year that we fail to qualify as a REIT, we would be subject to
federal income tax on our taxable income at corporate rates, plus any applicable
alternative minimum tax. In addition, unless entitled to relief under applicable
statutory provisions, we would be disqualified from treatment as a REIT for the
four taxable years following the year during which qualification is lost. This
treatment would reduce our net earnings available for investment or distribution
to shareholders because of the additional tax liability for the year or years
involved. In addition, distributions would no longer qualify for the dividends
paid deduction nor be required to be made in order to preserve REIT status. We
might be required to borrow funds or to liquidate some of our investments to pay
any applicable tax resulting from our failure to qualify as a REIT.
Compliance
or failure to comply with laws requiring access to our properties by disabled
persons could result in substantial cost
The
Americans with Disabilities Act, the Fair Housing Act of 1988 and other federal,
state and local laws generally require that public accommodations be made
accessible to disabled persons. Noncompliance could result in the imposition of
fines by the government or the award of damages to private litigants. These laws
may require us to modify our existing communities. These laws may also restrict
renovations by requiring improved access to such buildings by disabled persons
or may require us to add other structural features that increase our
construction costs. Legislation or regulations adopted in the future may impose
further burdens or restrictions on us with respect to improved access by
disabled persons. We cannot ascertain the costs of compliance with these laws,
which may be substantial.
Failure
to make required distributions would subject us to income taxation
In order
to qualify as a REIT, each year we must distribute to stockholders at least 90%
of our taxable income (determined without regard to the dividend paid deduction
and by excluding net capital gains). To the extent that we satisfy the
distribution requirement, but distribute less than 100% of taxable income, we
will be subject to federal corporate income tax on the undistributed income. In
addition, we will incur a 4% nondeductible excise tax on the amount, if any, by
which our distributions in any year are less than the sum of:
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85%
of ordinary income for that year;
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95%
of capital gain net income for that year;
and
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100%
of undistributed taxable income from prior
years.
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Differences
in timing between the recognition of income and the related cash receipts or the
effect of required debt amortization payments could require us to borrow money
or sell assets to pay out enough of the taxable income to satisfy the
distribution requirement and to avoid corporate income tax and the 4%
nondeductible excise tax in a particular year.
Complying
with REIT requirements may cause us to forgo otherwise attractive opportunities
or engage in marginal investment opportunities
To
qualify as a REIT for federal income tax purposes, we must continually satisfy
tests concerning, among other things, the sources of income, the nature and
diversification of assets, the amounts distributed to shareholders and the
ownership of our stock. In order to meet these tests, we may be required to
forgo attractive business or investment opportunities or engage in marginal
investment opportunities. Thus, compliance with the REIT requirements may hinder
our ability to operate solely on the basis of maximizing profits.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. (Removed and Reserved).
Item
5. Other Information.
None.
Item
6. Exhibits.
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(a)
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The
following exhibits are filed as part of this
report.
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Exhibit
Number
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Exhibit Description
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10.1
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Third
Amended and Restated Master Credit Facility Agreement (MAA II) among
Mid-America Apartment Communities, Inc., Mid-America Apartments, LP and
Prudential Multifamily Mortgage Inc. dated January 4,
2010
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10.2
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Seconded
Amended and Restated Revolving Credit Agreement among Mid-America
Apartment Communities, Inc., Mid-America Apartments, LP, Regions Bank and
Regions Capital Markets dated March 31, 2010
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10.3
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Credit
Agreement by and among Mid-America Apartment Communities, Inc.,
Mid-America Apartments, LP, Mid-America Apartments of Texas, LP and
Financial Federal Savings Bank dated June 1, 2006
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31.1
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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32.1
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Certification
of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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32.2
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Certification
of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
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MID-AMERICA
APARTMENT COMMUNITIES, INC.
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Date:
May 6, 2010
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/s/Albert M. Campbell,
III
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Albert
M. Campbell, III
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Executive
Vice President and Chief Financial Officer
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(Principal
Financial and Accounting
Officer)
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