form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended September 30, 2009
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 ¨
|
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 October 20,
2009
|
Common
Stock, $0.01 par value
|
28,857,861
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
|
|
|
|
TABLE
OF CONTENTS
|
|
|
Page
|
|
PART
I – FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements.
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
December 31, 2008
|
2
|
|
Condensed
Consolidated Statements of Operations for the three and nine months ended
September 30, 2009 (Unaudited) and 2008 (Unaudited).
|
3
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 (Unaudited) and 2008 (Unaudited).
|
4
|
|
Notes
to Condensed Consolidated Financial Statements
(Unaudited).
|
5
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
15
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
29
|
Item
4.
|
Controls
and Procedures.
|
29
|
Item
4T.
|
Controls
and Procedures.
|
29
|
Item
5.
|
Other
Information
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings.
|
30
|
Item
1A.
|
Risk
Factors.
|
30
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
36
|
Item
3.
|
Defaults
Upon Senior Securities.
|
36
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
36
|
Item
5.
|
Other
Information.
|
36
|
Item
6.
|
Exhibits.
|
37
|
|
Signatures
|
38
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Balance Sheets
|
September
30, 2009 (Unaudited) and December 31, 2008
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2009
|
|
December
31, 2008
|
Assets:
|
|
|
|
|
|
|
|
Real
estate assets:
|
|
|
|
|
|
|
Land
|
|
|
|
$ 243,147
|
|
$ 240,426
|
|
Buildings
and improvements
|
|
2,262,685
|
|
2,198,063
|
|
Furniture,
fixtures and equipment
|
|
72,585
|
|
65,540
|
|
Capital
improvements in progress
|
|
10,386
|
|
25,268
|
|
|
|
|
|
|
2,588,803
|
|
2,529,297
|
|
Less
accumulated depreciation
|
|
(763,949)
|
|
(694,054)
|
|
|
|
|
|
|
1,824,854
|
|
1,835,243
|
|
|
|
|
|
|
|
|
|
|
Land
held for future development
|
|
1,306
|
|
1,306
|
|
Commercial
properties, net
|
|
|
8,764
|
|
7,958
|
|
Investments
in real estate joint ventures
|
|
8,805
|
|
6,824
|
|
|
Real
estate assets, net
|
|
|
1,843,729
|
|
1,851,331
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
16,489
|
|
9,426
|
Restricted
cash
|
|
|
1,101
|
|
414
|
Deferred
financing costs, net
|
|
|
13,943
|
|
15,681
|
Other
assets
|
|
|
19,311
|
|
16,840
|
Goodwill
|
|
|
|
4,106
|
|
4,106
|
Assets
held for sale
|
|
|
13,193
|
|
24,157
|
|
|
Total
assets
|
|
|
$ 1,911,872
|
|
$ 1,921,955
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity:
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
$ 1,314,157
|
|
$ 1,323,056
|
|
Accounts
payable
|
|
|
1,175
|
|
1,234
|
|
Fair
market value of interest rate swaps
|
|
58,981
|
|
76,961
|
|
Accrued
expenses and other liabilities
|
|
76,459
|
|
66,982
|
|
Security
deposits
|
|
|
8,758
|
|
8,705
|
|
Liabilities
associated with assets held for sale
|
|
304
|
|
595
|
|
|
Total
liabilities
|
|
|
1,459,834
|
|
1,477,533
|
|
|
|
|
|
|
|
|
|
Redeemable
stock
|
|
|
2,523
|
|
1,805
|
|
|
|
|
|
|
|
|
|
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;
|
|
|
|
|
|
|
28,835,783
and 28,224,708 shares issued and outstanding at
|
|
|
|
|
|
|
September
30, 2009, and December 31, 2008, respectively (1)
|
|
288
|
|
282
|
|
Additional
paid-in capital
|
|
|
979,260
|
|
954,127
|
|
Accumulated
distributions in excess of net income
|
|
(499,040)
|
|
(464,617)
|
|
Accumulated
other comprehensive income
|
|
(55,090)
|
|
(72,885)
|
|
|
Total
Mid-America Apartment Communities, Inc. shareholders'
equity
|
|
425,480
|
|
416,969
|
|
Noncontrolling
interest
|
|
|
24,035
|
|
25,648
|
|
|
Total
Equity
|
|
|
449,515
|
|
442,617
|
|
|
Total
liabilities and equity
|
|
$ 1,911,872
|
|
$ 1,921,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30, 2009 and December 31,
2008,
|
|
are
55,900 and 48,579, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
|
|
|
|
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Statements of Operations
|
Three
and nine months ended September 30, 2009 (Unaudited) and 2008
(Unaudited)
|
(Dollars
in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Operating
revenues:
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ 89,903
|
|
$ 89,344
|
|
$ 268,910
|
|
$ 263,218
|
|
Other
property revenues
|
|
4,543
|
|
4,390
|
|
13,442
|
|
12,612
|
|
Total
property revenues
|
|
94,446
|
|
93,734
|
|
282,352
|
|
275,830
|
|
Management
fee income
|
|
78
|
|
58
|
|
205
|
|
147
|
|
Total
operating revenues
|
|
94,524
|
|
93,792
|
|
282,557
|
|
275,977
|
Property
operating expenses:
|
|
|
|
|
|
|
|
|
|
Personnel
|
|
12,244
|
|
12,021
|
|
35,570
|
|
34,623
|
|
Building
repairs and maintenance
|
|
4,310
|
|
4,158
|
|
10,409
|
|
10,526
|
|
Real
estate taxes and insurance
|
|
11,368
|
|
11,265
|
|
34,411
|
|
34,087
|
|
Utilities
|
|
6,135
|
|
6,196
|
|
16,874
|
|
16,247
|
|
Landscaping
|
|
2,451
|
|
2,287
|
|
7,245
|
|
6,840
|
|
Other
operating
|
|
5,154
|
|
5,034
|
|
14,177
|
|
13,430
|
|
Depreciation
|
|
23,913
|
|
22,559
|
|
71,316
|
|
66,545
|
|
Total
property operating expenses
|
|
65,575
|
|
63,520
|
|
190,002
|
|
182,298
|
Acquisition
expenses
|
|
30
|
|
-
|
|
139
|
|
-
|
Property
management expenses
|
|
4,007
|
|
4,230
|
|
12,751
|
|
12,875
|
General
and administrative expenses
|
|
3,163
|
|
2,996
|
|
8,306
|
|
8,747
|
Income
from continuing operations before non-operating items
|
21,749
|
|
23,046
|
|
71,359
|
|
72,057
|
Interest
and other non-property income
|
|
161
|
|
115
|
|
309
|
|
339
|
Interest
expense
|
|
(14,371)
|
|
(15,039)
|
|
(43,072)
|
|
(46,279)
|
Loss
on debt extinguishment
|
|
(2)
|
|
(3)
|
|
(140)
|
|
(3)
|
Amortization
of deferred financing costs
|
|
(587)
|
|
(586)
|
|
(1,781)
|
|
(1,700)
|
Net
casualty loss and other settlement proceeds
|
|
(109)
|
|
(1,131)
|
|
(253)
|
|
(587)
|
Gain
(loss) on sale of non-depreciable assets
|
|
1
|
|
-
|
|
1
|
|
(3)
|
Income
from continuing operations before
|
|
|
|
|
|
|
|
|
|
loss
from real estate joint ventures
|
|
6,842
|
|
6,402
|
|
26,423
|
|
23,824
|
Loss
from real estate joint ventures
|
|
(288)
|
|
(274)
|
|
(640)
|
|
(556)
|
Income
from continuing operations
|
|
6,554
|
|
6,128
|
|
25,783
|
|
23,268
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
Income
from discontinued operations before gain (loss) on sale
|
311
|
|
386
|
|
1,058
|
|
734
|
|
Gain
(loss) on sale of discontinued operations
|
|
13
|
|
-
|
|
2,600
|
|
(120)
|
Consolidated
net income
|
|
6,878
|
|
6,514
|
|
29,441
|
|
23,882
|
|
Net
income attributable to noncontrolling interests
|
|
260
|
|
321
|
|
1,536
|
|
1,366
|
Net
income attributable to Mid-America Apartment Communities,
Inc.
|
6,618
|
|
6,193
|
|
27,905
|
|
22,516
|
Preferred
dividend distributions
|
|
3,216
|
|
3,216
|
|
9,649
|
|
9,649
|
Net
income available for common shareholders
|
|
$ 3,402
|
|
$ 2,977
|
|
$ 18,256
|
|
$ 12,867
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
Basic
|
|
28,364
|
|
27,474
|
|
28,186
|
|
26,570
|
|
Effect
of dilutive securities
|
|
77
|
|
123
|
|
6
|
|
151
|
|
Diluted
|
|
28,441
|
|
27,597
|
|
28,192
|
|
26,721
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available for common shareholders
|
|
$ 3,402
|
|
$ 2,977
|
|
$ 18,256
|
|
$ 12,867
|
Discontinued
property operations
|
|
(324)
|
|
(386)
|
|
(3,658)
|
|
(614)
|
Income
from continuing operations available for common
shareholders
|
$ 3,078
|
|
$ 2,591
|
|
$ 14,598
|
|
$ 12,253
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.11
|
|
$ 0.09
|
|
$ 0.51
|
|
$ 0.46
|
|
Discontinued
property operations
|
|
0.01
|
|
0.02
|
|
0.13
|
|
0.02
|
|
Net
income available for common shareholders
|
|
$ 0.12
|
|
$ 0.11
|
|
$ 0.64
|
|
$ 0.48
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
available
for common shareholders
|
|
$ 0.11
|
|
$ 0.09
|
|
$ 0.51
|
|
$ 0.46
|
|
Discontinued
property operations
|
|
0.01
|
|
0.02
|
|
0.13
|
|
0.02
|
|
Net
income available for common shareholders
|
|
$ 0.12
|
|
$ 0.11
|
|
$ 0.64
|
|
$ 0.48
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ 0.615
|
|
$ 0.615
|
|
$ 1.845
|
|
$ 1.845
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
Mid-America
Apartment Communities, Inc.
|
Condensed
Consolidated Statements of Cash Flows
|
Nine
Months Ended September 30, 2009 (Unaudited) and 2008
(Unaudited)
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Consolidated
net income
|
|
$ |
29,441 |
|
|
$ |
23,882 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of deferred financing costs
|
|
|
73,097 |
|
|
|
68,073 |
|
Stock
compensation expense
|
|
|
939 |
|
|
|
704 |
|
Stock
issued to employee stock ownership plan
|
|
|
- |
|
|
|
743 |
|
Compensation
expense/redeemable stock issued
|
|
|
253 |
|
|
|
323 |
|
Amortization
of debt premium
|
|
|
(270 |
) |
|
|
(1,320 |
) |
Loss
from investments in real estate joint ventures
|
|
|
640 |
|
|
|
594 |
|
Loss
on debt extinguishment
|
|
|
140 |
|
|
|
3 |
|
Ineffectiveness
of derivative contracts
|
|
|
685 |
|
|
|
189 |
|
(Gain)
loss on sale of non-depreciable assets
|
|
|
(1 |
) |
|
|
3 |
|
(Gain)
loss on sale of discontinued operations
|
|
|
(2,600 |
) |
|
|
120 |
|
Gains
on disposition within real estate joint ventures
|
|
|
- |
|
|
|
(38 |
) |
Net
casualty loss and other settlement proceeds
|
|
|
253 |
|
|
|
587 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(626 |
) |
|
|
(614 |
) |
Other
assets
|
|
|
(616 |
) |
|
|
2,070 |
|
Accounts
payable
|
|
|
(63 |
) |
|
|
1,381 |
|
Accrued
expenses and other
|
|
|
6,431 |
|
|
|
9,196 |
|
Security
deposits
|
|
|
(32 |
) |
|
|
610 |
|
Net
cash provided by operating activities
|
|
|
107,671 |
|
|
|
106,506 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of real estate and other assets
|
|
|
(17,949 |
) |
|
|
(156,088 |
) |
Improvements
to existing real estate assets
|
|
|
(30,911 |
) |
|
|
(29,484 |
) |
Renovations
to existing real estate assets
|
|
|
(6,004 |
) |
|
|
(14,402 |
) |
Development
|
|
|
(5,340 |
) |
|
|
(19,075 |
) |
Distributions
from real estate joint ventures
|
|
|
108 |
|
|
|
1 |
|
Contributions
to real estate joint ventures
|
|
|
(2,729 |
) |
|
|
(7,352 |
) |
Proceeds
from disposition of real estate assets
|
|
|
14,372 |
|
|
|
1,371 |
|
Net
cash used in investing activities
|
|
|
(48,453 |
) |
|
|
(225,029 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
change in credit lines
|
|
|
35,694 |
|
|
|
177,150 |
|
Principal
payments on notes payable
|
|
|
(44,323 |
) |
|
|
(84,250 |
) |
Payment
of deferred financing costs
|
|
|
(1,933 |
) |
|
|
(2,182 |
) |
Repurchase
of common stock
|
|
|
(833 |
) |
|
|
(644 |
) |
Proceeds
from issuances of common shares and units
|
|
|
25,329 |
|
|
|
117,885 |
|
Distributions
to noncontrolling interests
|
|
|
(4,604 |
) |
|
|
(4,740 |
) |
Dividends
paid on common shares
|
|
|
(51,836 |
) |
|
|
(48,570 |
) |
Dividends
paid on preferred shares
|
|
|
(9,649 |
) |
|
|
(9,649 |
) |
Net
cash (used in) provided by financing activities
|
|
|
(52,155 |
) |
|
|
145,000 |
|
Net
increase in cash and cash equivalents
|
|
|
7,063 |
|
|
|
26,477 |
|
Cash
and cash equivalents, beginning of period
|
|
|
9,426 |
|
|
|
17,192 |
|
Cash
and cash equivalents, end of period
|
|
$ |
16,489 |
|
|
$ |
43,669 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
41,054 |
|
|
$ |
47,223 |
|
Supplemental
disclosure of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accrued
construction in progress
|
|
$ |
2,476 |
|
|
$ |
4,917 |
|
Interest
capitalized
|
|
$ |
173 |
|
|
$ |
596 |
|
Marked-to-market
adjustment on derivative instruments
|
|
$ |
18,229 |
|
|
$ |
(2,818 |
) |
Reclass
of redeemable stock from equity to liabilities
|
|
$ |
- |
|
|
$ |
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial
statements.
|
Mid-America
Apartment Communities, Inc.
Notes
to Condensed Consolidated Financial Statements
September
30, 2009 (Unaudited) and 2008 (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
September 30, 2009, we owned or owned interests in a total of 145 multifamily
apartment communities comprising 42,687 apartments located in 13 states,
including two communities comprising 626 apartments owned through our joint
venture, Mid-America Multifamily Fund I, LLC, one community comprising 294
apartments owned through our joint venture, Mid-America Multifamily Fund II,
LLC, one community comprising 440 apartments identified as held for sale, and
two existing communities with expansion development phases comprising 340
apartments. An additional 45 apartments have been identified for and begun
construction at one of our development properties, but have not been included in
the total above as none of the units had been delivered as of September 30,
2009.
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, 2008 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 and nine month periods
ended September 30, 2009 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 24, 2009 as updated by our
Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 29, 2009.
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
September 30, 2009, we owned or had an ownership interest in 145 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. We have
also determined that all of our communities have similar economic
characteristics and also meet the other criteria which permit the communities to
be aggregated into one reportable segment, which is the acquisition and
operation of the multifamily communities owned.
3. Comprehensive
Income and Equity
Total
comprehensive income, equity and their components for the nine month periods
ended September 30, 2009, and 2008, 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, 2008
|
|
$ 442,617
|
|
|
|
$ 62
|
|
$ 282
|
|
$ 954,127
|
|
$ (464,617)
|
|
$ (72,885)
|
|
$ 25,648
|
Equity
Activity Excluding Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
and registration of common shares
|
|
25,286
|
|
|
|
|
|
6
|
|
25,280
|
|
|
|
|
|
|
|
Shares
repurchased and retired
|
|
(833)
|
|
|
|
|
|
|
|
(833)
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
45
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
Shares
issued in exchange for units
|
|
-
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
(196)
|
|
Redeemable
stock fair market value
|
|
(464)
|
|
|
|
|
|
|
|
|
|
(464)
|
|
|
|
|
|
Adjustment
for Noncontrolling Interest Ownership in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
partnership
|
|
-
|
|
|
|
|
|
|
|
(521)
|
|
|
|
|
|
521
|
|
Amortization
of unearned compensation
|
|
966
|
|
|
|
|
|
|
|
966
|
|
|
|
|
|
|
|
Dividends
on common stock ($0.615 per share)
|
|
(52,215)
|
|
|
|
|
|
|
|
|
|
(52,215)
|
|
|
|
-
|
|
Dividends
on noncontrolling interest units ($0.615 per unit)
|
(4,593)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,593)
|
|
Dividends
on preferred stock
|
|
(9,649)
|
|
|
|
|
|
|
|
|
|
(9,649)
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
29,441
|
|
29,441
|
|
|
|
|
|
|
|
27,905
|
|
|
|
1,536
|
|
Other
comprehensive income -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative
instruments (cash flow hedges)
|
|
18,914
|
|
18,914
|
|
|
|
|
|
|
|
|
|
17,795
|
|
1,119
|
|
Comprehensive
income
|
|
48,355
|
|
48,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
BALANCE SEPTEMBER 30, 2009
|
|
$ 449,515
|
|
|
|
$ 62
|
|
$ 288
|
|
$ 979,260
|
|
$ (499,040)
|
|
$ (55,090)
|
|
$ 24,035
|
|
|
|
|
|
|
|
|
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, 2007
|
|
$
429,824
|
|
|
|
$ 62
|
|
$ 257
|
|
$ 832,511
|
|
$ (414,966)
|
|
$ (15,664)
|
|
$ 27,624
|
Equity
Activity Excluding Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
and registration of common shares
|
|
118,513
|
|
|
|
|
|
23
|
|
118,490
|
|
|
|
|
|
|
|
Shares
repurchased and retired
|
|
(644)
|
|
|
|
|
|
|
|
(644)
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
1,849
|
|
|
|
|
|
|
|
1,849
|
|
|
|
|
|
|
|
Stock
issued to employee stock ownership plan
|
|
743
|
|
|
|
|
|
|
|
743
|
|
|
|
|
|
|
|
Shares
issued in exchange for units
|
|
-
|
|
|
|
|
|
|
|
198
|
|
-
|
|
|
|
(198)
|
|
Shares
issued in exchange for redeemable stock
|
|
413
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
Redeemable
stock fair market value
|
|
(232)
|
|
|
|
|
|
|
|
|
|
(232)
|
|
|
|
|
|
Adjustment
for Noncontrolling Interest Ownership in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
partnership
|
|
-
|
|
|
|
|
|
|
|
(6,302)
|
|
|
|
|
|
6,302
|
|
Amortization
of unearned compensation
|
|
665
|
|
|
|
|
|
|
|
665
|
|
|
|
|
|
|
|
Dividends
on common stock ($0.615 per share)
|
|
(50,089)
|
|
|
|
|
|
|
|
|
|
(50,089)
|
|
|
|
-
|
|
Dividends
on noncontrolling interest units ($0.615 per unit)
|
(4,729)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,729)
|
|
Redemption
of preferred stock
|
|
-
|
|
|
|
|
|
|
|
-
|
|
-
|
|
|
|
|
|
Dividends
on preferred stock
|
|
(9,649)
|
|
|
|
|
|
|
|
|
|
(9,649)
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
23,882
|
|
23,882
|
|
|
|
|
|
|
|
22,516
|
|
|
|
1,366
|
|
Other
comprehensive income -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
derivative
instruments (cash flow hedges)
|
|
(2,721)
|
|
(2,721)
|
|
|
|
|
|
|
|
|
|
(2,376)
|
|
(345)
|
|
Comprehensive
income
|
|
21,161
|
|
21,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
BALANCE SEPTEMBER 30, 2008
|
|
$
507,825
|
|
|
|
$ 62
|
|
$ 280
|
|
$
947,923
|
|
$ (452,420)
|
|
$ (18,040)
|
|
$ 30,020
|
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
January 15, 2009, we sold the Woodstream apartments, a 304-unit community
located in Greensboro, North Carolina.
On May
12, 2009, we sold the Riverhills apartments, a 96-unit community located in
Grenada, Mississippi.
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. Throughout the remainder of 2008,
we purchased four of the 19 units that had been sold as condominiums. On January
16, 2009, February 18, 2009, May 11, 2009 and July 22, 2009, we purchased one
additional unit each. On July 28, 2009, we purchased two additional Village Oaks
units.
On June
12, 2009, we purchased the Sky View Ranch apartments, a 232-unit community
located in Gilbert, Arizona, a suburb of Phoenix.
In June
2009, Mid-America established Mid-America Multifamily Fund II, LLC, or Fund II,
a joint venture with private equity. On July 24, 2009, Fund II made its first
acquisition and purchased the 294-unit Ansley Village apartments in Macon,
Georgia.
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. The Woodstream apartments were subsequently sold on January 15, 2009,
and the Riverhills apartments were sold on May 12, 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 and nine month
periods ended September 30, 2009 and 2008, (dollars in thousands):
|
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Revenues
|
|
|
|
|
|
|
|
|
|
Rental
revenues
|
|
$ 728
|
|
$ 1,356
|
|
$ 2,480
|
|
$ 4,019
|
|
Other
revenues
|
|
48
|
|
73
|
|
101
|
|
203
|
|
Total
revenues
|
|
776
|
|
1,429
|
|
2,581
|
|
4,222
|
Expenses
|
|
|
|
|
|
|
|
|
|
Property
operating expenses
|
|
449
|
|
896
|
|
1,465
|
|
2,400
|
|
Depreciation
|
|
-
|
|
4
|
|
-
|
|
706
|
|
Interest
expense
|
|
16
|
|
143
|
|
58
|
|
382
|
|
Total
expense
|
|
465
|
|
1,043
|
|
1,523
|
|
3,488
|
Income
from discontinued operations before
|
|
|
|
|
|
|
|
|
|
gain
on sale
|
|
311
|
|
386
|
|
1,058
|
|
734
|
Gain
(loss) on sale of discontinued operations
|
13
|
|
-
|
|
2,600
|
|
(120)
|
Income
from discontinued operations
|
|
$ 324
|
|
$ 386
|
|
$ 3,658
|
|
$ 614
|
7. Share
and Unit Information
On
September 30, 2009, 28,835,783 common shares and 2,386,188 operating partnership
units were outstanding, representing a total of 31,221,971 shares and units.
Additionally, Mid-America had outstanding options for the purchase of 23,507
shares of common stock at September 30, 2009, of which 14,348 were
anti-dilutive. At September 30, 2008, 28,089,334 common shares and 2,406,411
operating partnership units were outstanding, representing a total of 30,495,745
shares and units. Additionally, Mid-America had outstanding options for the
purchase of 26,182 shares of common stock at September 30, 2008, of which 13,525
were anti-dilutive.
During
August and September of 2009, we issued a total of 591,000 shares of common
stock through at-the-market offerings or negotiated transactions for net
proceeds of $24.6 million under our existing controlled equity offering
program.
8. 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 September 30, 2009 and December 31, 2008, total $147
million and $148 million, respectively, and have estimated fair values of $141
million and $142 million (excluding prepayment penalties), respectively, based
upon interest rates available for the issuance of debt with similar terms and
remaining maturities as of September 30, 2009 and December 31, 2008. The
carrying value of variable rate notes payable (excluding the effect of interest
rate swap and cap agreements) at September 30, 2009 and December 31, 2008, total
$1,167 million and $1,175 million, respectively, and have estimated fair values
of $1,054 million and $1,078 million (excluding prepayment penalties),
respectively, based upon interest rates available for the issuance of debt with
similar terms and remaining maturities as of September 30, 2009 and December 31,
2008.
In the
normal course of business, we use certain derivative financial instruments to
manage, or hedge, the interest rate risk associated with our variable rate debt
or to hedge anticipated future debt transactions to manage well-defined interest
rate risk associated with the transaction.
We do not
use derivative financial instruments for speculative or trading
purposes. Further, we have a policy of entering into contracts with
major financial institutions based upon their credit rating and other
factors. When viewed in conjunction with the underlying and
offsetting exposure that the derivatives are designated to hedge, we have not
sustained any material loss from those instruments nor do we anticipate any
material adverse effect on our net income attributable to Mid-America Apartment
Communities, Inc. or financial position in the future from the use of
derivatives.
We
utilize derivative financial instruments that can be designated as cash flow
hedges and which are expected to be highly effective in reducing the interest
rate risk exposure that they are designed to hedge. This
effectiveness is essential for qualifying for hedge
accounting. Instruments that meet the criteria qualifying for hedge
accounting treatment are formally designated as hedging instruments at the
inception of the derivative contract. We formally document all
relationships between hedging instruments and hedged items, as well as our
risk-management objective and strategy for undertaking the hedge transaction.
This process includes linking all derivatives that are designated as cash flow
hedges to specific assets and liabilities on the balance sheet or forecasted
transactions. We also formally assess, both at the inception of the
hedging relationship and on an ongoing basis, whether the derivatives used are
highly effective in offsetting changes in cash flows of hedged
items. When it is determined that a derivative has ceased to be a
highly effective hedge, we discontinue hedge accounting
prospectively.
All of
our derivative financial instruments are reported at fair value, are represented
on the consolidated balance sheet within Other assets, Fair market value of
interest rate swaps, and Accrued expenses and other liabilities, and are
characterized as cash flow hedges. These transactions hedge the future cash
flows of debt transactions through interest rate swaps that convert variable
payments to fixed payments and interest rate caps that limit the exposure to
rising interest rates. As of September 30, 2009, we have entered into
34 interest rate swaps and 16 interest rate caps with a total notional balance
of $883.2 million and $147.3 million, respectively. As of
September 30, 2009, and December 31, 2008, we recorded a liability for
derivatives of approximately $63.0 million and $78.4 million, respectively, to
Fair market value of interest rate swaps on the consolidated balance
sheet. We also recorded approximately $2.1 million and $0.1 million
as of September 30, 2009 and December 31, 2008, respectively, to Other assets on
the consolidated balance sheets. The table below presents our assets
and liabilities measured at fair value on a recurring basis as of September 30,
2009 and December 31, 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Values of Derivative Instruments on the Condensed Consolidated Balance
Sheets as of
|
September
30, 2009 and December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Derivatives
|
|
Liability
Derivatives
|
|
|
|
September
30, 2009
|
|
December
31, 2008
|
|
September
30, 2009
|
|
December
31, 2008
|
|
|
|
(dollars
in thousands) |
|
(dollars
in thousands) |
|
(dollars
in thousands) |
|
(dollars
in thousands)
|
|
Derivatives
designated as hedging instruments
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
|
Fair
Value |
|
Balance
Sheet Location
|
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Interest
rate contracts
|
|
Other
assets
|
|
$ |
2,129 |
|
Other
assets
|
|
$ |
51 |
|
Fair
Market Value of Interest Rate Swaps & Accrued expenses and other
liabilities
|
|
$ |
63,022 |
|
Fair
Market Value of Interest Rate Swaps & Accrued expenses and other
liabilities
|
|
$ |
78,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives designated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
hedging instruments
|
|
|
|
$ |
2,129 |
|
|
|
$ |
51 |
|
|
|
$ |
63,022 |
|
|
|
$ |
78,440 |
|
The
unrealized gains/losses in the fair value of these hedging instruments are
reported on the balance sheet with a corresponding adjustment to Accumulated
other comprehensive income, with any ineffective portion of the hedging
transactions reclassified to earnings. As of September 30, 2009, and 2008, the
year-to-date ineffective portion of the hedging transactions reclassified to
earnings was a $744,000 increase, and a $97,000 increase, respectively, to
interest expense. The current year increase to interest expense
consisted of $151,000 attributable to 2009 interest rate and fair value
fluctuations and a $593,000 reclassification from other comprehensive income to
interest expense. The reclassification resulted from the reversal of
prior period realized gains between the derivative instrument and the hedged
debt transaction. The table below presents our financial performance
of assets and liabilities measured at fair value on a recurring basis for the
nine months ended September 30, 2009.
The
Effect of Derivative Instruments on the Consolidated Statements of
Operations
|
for
the Nine Months Ended September 30, 2009 and 2008 (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
Derivatives
in Cash Flow Hedging Relationships
|
Amount
of Gain or (Loss) Recognized in OCI on Derivative (Effective
Portion)
|
Location
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Amount
of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective
Portion)
|
Location
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
Amount
of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion
and Amount Excluded from Effectiveness Testing)
|
|
9/30/2009
|
9/30/2008
|
|
9/30/2009
|
9/30/2008
|
|
9/30/2009
|
9/30/2008
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
$ 19,783
|
$ (4,921)
|
Interest
Expense
|
$ (22,600)
|
$ (7,736)
|
Interest
Expense
|
$ (635)
|
$ (57)
|
|
|
|
|
|
|
|
|
|
Total
|
$ 19,783
|
$ (4,921)
|
|
$ (22,600)
|
$ (7,736)
|
|
$ (635)
|
$ (57)
|
If it
becomes probable that the underlying hedged forecasted debt transactions will
not occur, or if a derivative contract no longer qualifies for hedge accounting
or is terminated, all future changes in the fair value of the derivative
contract are marked-to-market with changes in value included in net income for
each period until the derivative instrument matures, is settled, or is
re-designated. If the hedged forecasted debt transaction becomes
probable of not occurring, amounts previously deferred in accumulated other
comprehensive income will immediately be reclassified to net income. If the
hedged forecasted debt transaction remains probable to occur, these same
previously deferred amounts will be amortized over the remaining hedged
forecasted debt transactions.
As of
September 30, 2009, the aggregate fair value of all derivative instruments with
credit-risk-related contingent features that are in a liability position is
$61.7 million. Certain of our derivative contracts are credit
enhanced by either FNMA or Freddie Mac. These derivative instrument
contracts require that our credit enhancing party maintain credit ratings above
a certain level. If the credit rating of the credit enhancing party
were to fall below these levels, it would trigger additional collateral to be
deposited with the counterparty up to 100 percent of the liability position of
the derivative contracts. As of September 30, 2009, the total maximum liability
was $61.7 million of which our credit enhancing parties would be responsible for
posting up to $35.6 million and we would be responsible for posting up to $26.1
million. If our credit enhancing parties are unwilling or unable to post their
portion, we could be required to post the full collateral amount. Both FNMA and
Freddie Mac are currently rated Aaa by Moody’s and AAA by S&P. The following
table summarizes the credit ratings that would trigger the credit-risk-related
contingent features, along with the combined amount that would be required to
post under each credit rating scenario, if triggered, as of September 30,
2009.
As
of September 30, 2009
|
|
|
|
|
|
|
Credit
Rating
|
|
Required
|
|
Moody's
|
|
S&P
|
|
Collateral
|
|
Aaa
|
|
AAA
|
|
$ |
- |
|
Aa1
|
|
AA+
|
|
$ |
- |
|
Aa2
|
|
AA
|
|
$ |
- |
|
Aa3
|
|
AA-
|
|
$ |
- |
|
A1 |
|
A+ |
|
$ |
(3,757,305 |
) |
A2 |
|
A |
|
$ |
(8,585,151 |
) |
A3 |
|
A- |
|
$ |
(51,934,692 |
) |
Baa1
|
|
BBB+
|
|
$ |
(61,689,787 |
) |
Certain
of our derivative contracts contain a cross default provision under which a
default under certain of our other indebtedness in excess of a threshold amount
causes an event of default under the agreement. Threshold amounts
range from $1 million to $75 million. As of September 30, 2009, the
fair value of derivatives containing cross default provisions was in a liability
position of $16.8 million. Following an event of default, a
termination event may occur, and we would be required to settle our obligations
under the agreements at their termination value of $17.6 million as of September
30, 2009. 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.
In
accordance with accounting standards for determining fair values, we have
determined that the majority of the inputs used to value our derivatives fall
within Level 2 of the fair value hierarchy. However, we have
determined that the credit valuation adjustments associated with our derivatives
utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate
the likelihood of our own default as well as the default of our counterparties.
As of September 30, 2009, we have assessed the significance of the impact of the
credit valuation adjustments on the overall valuation of our derivative
positions and have determined that the credit valuation adjustments are
significant to the overall valuation of our derivatives. As a result,
we have determined that our derivative valuations in their entirety are
classified in Level 3 of the fair value hierarchy.
The table
below presents Mid-America’s assets and liabilities measured at fair value on a
recurring basis as of September 30, 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 September 30,
2009
(dollars
in thousands)
|
|
|
Quoted
Prices in
|
|
|
|
|
|
|
|
|
|
Active
Markets
|
|
Significant
|
|
|
|
|
|
|
|
for
Identical
|
|
Other
|
|
Significant
|
|
Balance
at
|
|
|
|
Assets
and
|
|
Observable
|
|
Unobservable
|
|
September
30,
|
|
|
|
Liabilities
(Level 1)
|
|
Inputs
(Level 2)
|
|
Inputs
(Level 3)
|
|
2009
|
Assets
|
|
|
|
|
|
|
|
|
Derivative
financial
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ -
|
|
$ -
|
|
$ 2,129
|
|
$ 2,129
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative
financial
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ -
|
|
$ -
|
|
$ 63,022
|
|
$ 63,022
|
The table
below presents a reconciliation of the beginning and ending balances of assets
and liabilities having fair value measurements based on significant unobservable
inputs (Level 3).
Changes
in Level 3 Assets/(Liabilities) Measured at Fair Value on a Recurring Basis at
September 30, 2009
(dollars
in thousands)
|
|
|
|
|
|
|
Total
Realized and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gain or (Loss)
|
|
Included
in Other
|
|
Purchases,
|
|
Net
Transfers
|
|
|
|
|
|
Balance
at
|
|
Included
in
|
|
Comprehensive
|
|
Issuances
and
|
|
In
and/or Out
|
|
Balance
at
|
|
|
|
12/31/2008
|
|
Income
|
|
Income
|
|
Settlements
|
|
of
Level 3
|
|
9/30/2009
|
Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ (78,389)
|
|
$ (23,282)
|
|
$ 39,023
|
|
$ 1,755
|
|
$ -
|
|
$ (60,893)
|
Changes
in Level 3 Assets/(Liabilities) Measured at Fair Value on a Recurring
Basis
for
the period July 1, 2009 to September 30, 2009
(dollars
in thousands)
|
|
|
|
|
|
|
Total
Realized and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
Gains
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gain or (Loss)
|
|
Included
in Other
|
|
Purchases,
|
|
Net
Transfers
|
|
|
|
|
|
Balance
at
|
|
Included
in
|
|
Comprehensive
|
|
Issuances
and
|
|
In
and/or Out
|
|
Balance
at
|
|
|
|
6/30/2009
|
|
Income
|
|
Income
|
|
Settlements
|
|
of
Level 3
|
|
9/30/2009
|
Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instruments
|
|
$ (56,291)
|
|
$ (8,753)
|
|
$ 3,176
|
|
$ 975
|
|
$ -
|
|
$ (60,893)
|
Of the
instruments for which Mid-America utilized significant Level 3 inputs to
determine fair value and that were still held by Mid-America at September 30,
2009, the unrealized gain for the nine months ended September 30, 2009 was $38.9
million. The fair value of these instruments are reported on the balance sheet
in Other assets, Fair market value of interest rate swaps, and Accrued expenses
and other liabilities, with a corresponding adjustment for the unrealized
gains/losses to Accumulated other comprehensive income, with any ineffective
portion of the hedging transactions reclassified to interest expense. We use
three major banks to provide approximately 80% of our swaps, JP Morgan Chase,
Royal Bank of Canada, and Deutsche Bank, all of which have high investment grade
ratings from Moody’s and S&P. Our interest rate swaps with JP
Morgan Chase, Royal Bank of Canada, and Deutsche Bank had liability positions on
our Condensed Consolidated Balance Sheets of $6.0 million, $21.5 million and
$23.7 million, respectively, as of September 30, 2009.
Both
observable and unobservable inputs may be used to determine the fair value of
positions that Mid-America has classified within the Level 3 category. As a
result, the unrealized gains and losses for assets and liabilities within the
Level 3 category presented in the tables above may include changes in fair value
that were attributable to both observable and unobservable inputs.
The fair
value estimates presented herein are based on information available to
management as of September 30, 2009, and 2008. These estimates are
not necessarily indicative of the amounts Mid-America could ultimately
realize.
9. 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
September 2006, the FASB issued ASC 820 which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. ASC 820 was effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. ASC 820-10-65-1
delays the effective date of ASC 820 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. For these items, the
effective date was for fiscal years beginning after November 15, 2008. We
adopted ASC 820 effective January 1, 2008 and ASC 820-10-65-1 effective January
1, 2009. The adoption did not have a material impact on our consolidated
financial condition or results of operations taken as a whole.
On
December 4, 2007, the FASB revised ASC 805, Business Combinations. The
ASC 805 revision significantly changes the accounting for business combinations.
The ASC 805 revision requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. The ASC 805 revision changes the accounting
treatment for certain specific items, including acquisition costs, which will
generally be expensed as incurred. This could have a material impact on the way
we account for property acquisitions and therefore will have a material impact
on our financial statements. The ASC 805 revision applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We adopted the ASC 805 revision effective January 1, 2009, and
the expensed acquisition costs increased general and administrative expenses by
$30,000 and $139,000 for the three and nine months ended September 30, 2009,
respectively. The increased expenses did not change earnings per
share.
On
December 4, 2007, the FASB issued ASC 810-10-65, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51. ASC 810-10-65 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this standard requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest is included in
consolidated net income on the face of the income statement. The standard
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. This has impacted our financial statement
presentation by requiring the interests in the operating partnership not owned
by the company (noncontrolling interests) be presented as a component of equity
in the company’s consolidated financial statements and income contributable to
the noncontrolling interests be a component of net income. ASC 810-10-65 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We adopted ASC 810-10-65
effective January 1, 2009 and the retrospective presentation increased total
equity by $30,471,000 at December 31, 2008. The adoption did not change basic or
diluted earnings per share for common share holders and its effect on net income
and income from continuing operations is as follows:
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Increase
in:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$250
|
|
$305
|
|
$1,456
|
|
$1,288
|
|
Net
income
|
$260
|
|
$321
|
|
$1,536
|
|
$1,366
|
On March
19, 2008, the FASB issued ASC 815-10-65, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133.
ASC 815-10-65 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how an entity uses
derivative instruments and how derivative instruments and related hedged items
are accounted for under accounting standards for derivative instruments and
hedging activities, and how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash
flows. ASC 815-10-65 is effective for fiscal years and interim periods
beginning after November 15, 2008. We adopted ASC 815-10-65 effective
January 1, 2009, and the required disclosures are included in Note 8 to the
consolidated financial statements.
In June
2008, the FASB issued ASC 260-10-65, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
to clarify that unvested share-based awards containing nonforfeitable rights to
dividends are participating securities and, therefore, need to be included in
the earnings allocation in computing earnings per share, or EPS, under the
two-class method of computing earnings per share. ASC 260-10-65 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior period EPS data presented
are to be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this standard. We adopted ASC 260-10-65 effective January 1,
2009 and it had a minor impact on our number of shares. The change in our
number of shares decreased net income available for common shareholders by $0.01
per share for the nine months ended September 30, 2009 and did not change net
income available for common shareholders per share for any other
period.
In
September 2008, the FASB ratified ASC 820-10-65-3, Issuer’s Accounting for Liabilities
Measured at Fair Value with a Third-Party Credit Enhancement. This
accounting standard requires that the measurement of liabilities with
inseparable, third-party credit enhancements carried at or disclosed at fair
value on a recurring basis exclude the effect of the credit
enhancement. ASC 820-10-65-3 was effective on a prospective basis in
the first reporting period beginning on or after December 15, 2008. We adopted
this accounting standard effective January 1, 2009. This accounting
standard removed the effect of the agency credit enhancements from our
calculation of the fair value of our derivative instruments and materially
increased the value represented on the balance sheet. The impact of ASC
820-10-65-3 on our financial position upon adoption was approximately a $2.0
million increase to the fair value of our derivative instruments.
In April
2008, the FASB issued ASC 825-10-65-1, Interim Disclosures About Fair
Market Value of Financial Instruments. ASC 825-10-65-1 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 consolidated financial
statements.
In May
2009, the FASB issued ASC 855-10, Subsequent Events, which
establishes the general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued. ASC 855-10 is effective for interim and financial periods
ending after June 15, 2009. Adoption of this standard did not have a material
impact on our consolidated financial condition or results of operations taken as
a whole. For the quarter ended September 30, 2009, we have considered subsequent
events through November 5, 2009, which is the date our consolidated financial
statements were filed with the Securities and Exchange Commission on Form
10-Q.
In June
2008, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
No. 46(R), or Statement 167. Statement 167 amends events which 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. Statement 167 is effective for annual
reporting periods beginning after November 15, 2009 and earlier application is
prohibited. Management does not believe that the adoption of Statement 167 will
have a material impact on our consolidated financial condition or results of
operations taken as a whole.
10. Subsequent
Events
On
October 9, 2009, we purchased the Park Crest at Innisbrook apartments, a
432-unit community located in Palm Harbor, Florida, a suburb of
Tampa.
On August
27, 2008, we purchased 215 units of the 234-unit Village Oaks apartments located
in Temple Terrace, Florida, a suburb of Tampa. Throughout the remainder of 2008,
we purchased four of the 19 units which had been sold as condominiums. During
the first nine months of 2009 we purchased six more units. Subsequent to the
nine months ended September 30, 2009, but prior to the filing of this quarterly
report on Form 10-Q with the Securities and Exchange Commission, we purchased
one additional unit.
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 Report 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;
|
·
|
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, at present operating under the
conservatorship of the United States Government;
and
|
·
|
inability
to meet loan covenants.
|
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.
Mid-America
records 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 evaluates its
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 compares 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, the
relationship between the hedging instrument and the hedged item must be highly
effective. While our calculation of hedge effectiveness contains some subjective
determinations, the historical correlation of the hedging instruments and the
underlying hedge are measured by us before entering into the hedging
relationship and have been found to be highly correlated.
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. See Note 8 of the Consolidated Financial
Statements.
Overview
of the Three Months Ended September 30, 2009
As
anticipated, weaker demand for apartment housing caused our same store revenues
to drop by approximately $1.4 million in the third quarter of 2009 from the
third quarter of 2008 as we reduced pricing on new leases to maintain occupancy.
Our same store expenses in the second quarter of 2009 decreased by approximately
$471,000 from the same quarter a year ago as we continued to capitalize on
operating efficiencies from improved new asset management programs and lower
resident turnover, and benefited from a decrease in real estate taxes resulting
from reduced negotiated assessments and successful appeals.
Our same
store portfolio consists of those properties in our portfolio which have been
held and were stabilized for at least 12 months. Communities not included in the
same store portfolio would include acquisitions within the last 12 months,
communities being developed or in lease-up, and communities undergoing extensive
renovations.
We also
experienced a decrease in interest expense during the third quarter of 2009 from
the third quarter of 2008, due both to a decrease in our average borrowings and
the continued favorable interest rate environment.
The
following is a discussion of the consolidated financial condition and results of
operations of Mid-America for the three and nine month periods ended September
30, 2009. 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 September 30, 2009 to the Three Months Ended September
30, 2008
Property
revenues for the three months ended September 30, 2009 were approximately $94.4
million, an increase of $0.7 million from the three months ended September 30,
2008 due to (i) a $1.6 million increase in property revenues from the four
properties acquired since the second quarter of 2008, and (ii) a $0.7 million
increase in property revenues from our development and lease-up communities.
These increases were partially offset by a $1.6 million decrease in property
revenues from all other communities. The decrease in property revenues from all
other communities was generated primarily by our same store portfolio and was
driven by a 2.9% decrease in average effective rent per unit in the third
quarter of 2009 from the third quarter of 2008.
Property
operating expenses include costs for property personnel, property 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 September 30, 2009 were approximately $41.7 million, an
increase of approximately $0.7 million from the three months ended September 30,
2008 due primarily to increases in property operating expenses of (i) $0.8
million from the four properties acquired since the second quarter of 2008, and
(ii) $0.2 million from our development and lease-up communities. These increases
were partially offset by a decrease in property operating expense of $0.3
million from all other communities. The decrease in property operating expenses
from all other communities was generated primarily by our same store portfolio
and was driven by a reduction in turnover expenses resulting from moveouts which
decreased 5.5% and a 3.4% decrease in real estate taxes resulting from reduced
negotiated assessments and successful appeals of 2008 values.
Depreciation
expense for the three months ended September 30, 2009 was approximately $23.9
million, an increase of approximately $1.4 million from the three months ended
September 30, 2008 primarily due to the increases in depreciation expense of (i)
$0.7 million from the four properties acquired since the second quarter of 2008,
(ii) $0.2 million from our development and lease-up communities, and (iii) $0.9
million from all other communities. Increases of depreciation expense from all
other communities resulted from asset additions made during the normal course of
business. These increases were partially offset by a decrease in depreciation
expense of $0.4 million from the expiration of the amortization of intangible
lease assets of leases of previously acquired communities.
Property
management expenses for the three months ended September 30, 2009 were
approximately $4.0 million, a slight decrease from the $4.2 million of property
management expenses in the third quarter of 2008, primarily related to a
decrease in realized franchise and excise tax obligations. General and
administrative expenses increased slightly from $3.0 million for the third
quarter of 2008 to $3.2 million for the third quarter of 2009, primarily as a
result of increased incentive bonuses.
Interest
expense for the three months ended September 30, 2009 was approximately $14.4
million, a decrease of $0.7 million from the three months ended September 30,
2008. The decrease was primarily related to the decrease in our average cost of
debt from 4.69% to 4.35% over the same period, along with a drop in our average
debt outstanding from the three months ended September 30, 2008 to the three
months ended September 30, 2009 of approximately $9.2 million.
In the
three months ended September 30, 2008, we experienced $1.1 million of net
casualty losses, $0.9 million of which was related to Hurricane Ike. In the
three months ended September 30, 2009, we booked approximately $0.1 million of
net casualty losses.
Primarily
as a result of the foregoing, net income attributable to Mid-America Apartment
Communities, Inc. increased by approximately $0.4 million in the three months
ended September 30, 2009 from the three months ended September 30,
2008.
Comparison
of the Nine Months Ended September 30, 2009 to the Nine Months Ended September
30, 2008
Property
revenues for the nine months ended September 30, 2009 were approximately $282.4
million, an increase of $6.5 million from the nine months ended September 30,
2008 due to (i) a $7.6 million increase in property revenues from the six
properties acquired during 2008 and 2009, and (ii) a $1.9 million increase in
property revenues from our development and lease-up communities. These increases
were partially offset by a $3.0 million decrease in property revenues from all
other communities. The decrease in property revenues from all other communities
was generated primarily by our same store portfolio and was driven by a 1.5%
decrease in average effective rent per unit in the first nine months of 2009
from the first nine months of 2008.
Property
operating expenses include costs for property personnel, property bonuses,
building repairs and maintenance, real estate taxes and insurance, utilities,
landscaping and other property related costs. Property operating expenses for
the nine months ended September 30, 2009 were approximately $118.7 million, an
increase of approximately $2.9 million from the nine months ended September 30,
2008 due primarily to increases in property operating expenses of (i) $3.0
million from the six properties acquired during 2008 and 2009, and (ii) $0.8
million from our development and lease-up communities. These increases were
partially offset by a decrease in property operating expense of $0.9 million
from all other communities. The decrease in property operating expenses from all
other communities was generated primarily by our same store portfolio and was
driven by decreases in incentive bonuses, real estate taxes resulting from
reduced negotiated assessments and successful appeals of 2008 values and reduced
insurance rates.
Depreciation
expense for the nine months ended September 30, 2009 was approximately $71.3
million, an increase of approximately $4.8 million from the nine months ended
September 30, 2008 primarily due to the increases in depreciation expense of (i)
$2.2 million from the six properties acquired during 2008 and 2009, (ii) $0.6
million from our development and lease-up communities, and (iii) $2.7 million
from all other communities. Increases of depreciation expense from all other
communities resulted from asset additions made during the normal course of
business. These increases were partially offset by a decrease in depreciation
expense of $0.7 million from the expiration of the amortization of intangible
lease assets of previously acquired communities.
Property
management expenses for the nine months ended September 30, 2009 were
approximately $12.8 million, a slight decrease from the $12.9 million of
property management expenses in the first nine months of 2008. General and
administrative expenses decreased by approximately $0.4 million over this same
period to $8.3 million, partially related to lower employee
incentives.
Interest
expense for the nine months ended September 30, 2009 was approximately $43.1
million, a decrease of $3.2 million from the nine months ended September 30,
2008. The decrease was primarily related to the decrease in our average cost of
debt from 4.89% to 4.35% over the same period. This decrease in
interest expense was partially offset by an increase in our average debt
outstanding of approximately $25.3 million from the nine months ended September
30, 2008 to the nine months ended September 30, 2009. Interest expense during
the nine months ended September 30, 2009 was also increased by $593,000 related
to a reclassification from other comprehensive income resulting from the
reversal of prior period realized gains between derivative instruments and their
hedged debt transactions.
In the
nine months ended September 30, 2009, we benefited from gains of approximately
$2.6 million due to the sale of two properties. No properties were sold during
2008.
Primarily
as a result of the foregoing, net income attributable to Mid-America Apartment
Communities, Inc. increased by approximately $5.4 million in the nine months
ended September 30, 2009 from the nine months ended September 30,
2008.
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 and nine month periods
ended September 30, 2009, and 2008 (dollars and shares in
thousands):
[
|
|
|
Three
months
|
|
Nine
months
|
|
|
|
ended
September 30,
|
|
ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Net
income attributable to Mid-America Apartment Communities,
Inc.
|
$ 6,618
|
|
$ 6,193
|
|
$ 27,905
|
|
$ 22,516
|
Depreciation
of real estate assets
|
|
23,419
|
|
22,123
|
|
69,832
|
|
65,388
|
Net
casualty loss and other settlement proceeds
|
|
109
|
|
1,131
|
|
253
|
|
587
|
Gains
on dispositions within real estate joint ventures
|
|
-
|
|
-
|
|
-
|
|
(38)
|
Depreciation
of real estate assets of discontinued operations
|
|
-
|
|
4
|
|
-
|
|
706
|
(Gains)
loss on sales of discontinued operations
|
|
(13)
|
|
-
|
|
(2,600)
|
|
120
|
Depreciation
of real estate assets of real estate joint ventures
|
|
241
|
|
281
|
|
690
|
|
651
|
Preferred
dividend distribution
|
|
(3,216)
|
|
(3,216)
|
|
(9,649)
|
|
(9,649)
|
Net
income attributable to noncontrolling interests
|
|
260
|
|
321
|
|
1,536
|
|
1,366
|
Funds
from operations
|
|
$ 27,418
|
|
$ 26,837
|
|
$ 87,967
|
|
$ 81,647
|
FFO for
the three and nine month periods ended September 30, 2009 increased primarily as
the result of recently acquired properties and reduced interest expense as
discussed above in Results of Operations.
Trends
During
the first three quarters of 2009, rental demand for apartments was weaker in
most of our markets when compared to the first three quarters of 2008. One of
the primary drivers of apartment demand is job formation, and the job losses
across our markets impacted apartment demand and pricing. However, relative job
losses to date in 2009 for our markets combined were less than the national
average.
An
important part of our portfolio strategy is to maintain a broad diversity of
markets across the south east and south west regions 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 primary and select secondary markets, has tended to perform well
in “up” cycles as well as weather “down” cycles better. At the end of the third
quarter, we were invested in over 48 separate markets, with 58% of our gross
assets in primary markets and 42% of our gross assets in select secondary
markets.
Partially
mitigating the severe job losses has been lower resident turnover, primarily due
to fewer move-outs from buying homes. The primary reason that our
residents leave us is to buy a house. In 2009, we have seen both the
number and the percent of total move-outs due to home buying drop as compared to
2008. According to the Census Bureau, homeownership increased from 65% to over
69% of households over ten years ending in 2005. This increase, representing
approximately five million households, 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
benefited on the supply side, as the lack of available financing for new
apartment construction resulted in relatively few new apartments entering the
market as new competition. 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 continue over the next few
quarters.
Our focus
in the quarter was on sustaining occupancy as we entered what we think will
continue to be a weaker leasing market for several quarters. By focusing on
aggressive efforts to build and sustain traffic, and pricing aggressively, we
were largely successful at this, as our same store occupancy ended the third
quarter at its highest quarter end level since 2007.
Overall
same store revenues weakened 1.7% compared to the same quarter a year ago. Of
our primary markets, South Florida was strongest with revenues declining 0.1% on
a same store basis, while Phoenix was weakest with same store revenues declining
9.4%. Of our secondary markets, Spartanburg, South Carolina was strongest,
growing same store revenues 3.9% over the same quarter a year ago, while
Brunswick, Georgia was our weakest secondary market with revenues declining
11.0% from the same quarter a year ago.
We
believe that the decline in same store revenue will be temporary as we began to
see a stabilization in pricing during the third quarter of 2009, and that
revenue growth should resume after the economic growth returns and, most
importantly, when job growth recommences which some economists project could be
as soon as the middle to latter part of 2010. 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 it
seems likely that we will continue to face weak economic growth as a result of
reduced liquidity in the economy throughout 2009 and into the first half of
2010, 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. Revenue opportunities in ancillary services
(such as re-selling cable television and internet access), 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 quarter ended September 30, 2009 we continued to have the benefit of lower
interest rates resulting from an improved market for Fannie Mae and Freddie Mac
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. We expect
this to continue for the remainder of 2009, and as a result, we are forecasting
a continuation of favorable interest rates for the balance of 2009.
Liquidity
and Capital Resources
Net cash
flow provided by operating activities increased from $106.5 million for the
first nine months of 2008 to $107.7 million for the first nine months of
2009.
Net cash
used in investing activities was approximately $48.5 million during the first
nine months of 2009 compared to $225.0 million during the first nine months of
2008, mainly related to acquisition and disposition activity. In the first nine
months of 2008, we had cash outflows of $156.1 million, mainly related to five
wholly owned acquisitions and $7.4 million, mainly related to our share of two
acquisitions purchased by Mid-America Multifamily Fund I, LLC, or Fund I, one of
our joint ventures. This compares to cash outflows of approximately $17.9
million in the first nine months of 2009, mainly related to the purchase of one
wholly owned property and six individual units of a previous acquisition, and
$2.7 million mainly related to our share of an acquisition purchased by
Mid-America Multifamily Fund II, LLC, or Fund II, our other joint venture. In
the first nine months of 2009, we received a total of approximately $14.4
million from the sale of two properties. No dispositions were made in 2008. We
also spent approximately $13.7 million more on development communities during
the first nine months of 2008 than in the same period of 2009.
Net cash
used in financing activities was approximately $52.2 million for the first nine
months of 2009, compared to net cash provided by financing activities of
approximately $145.0 million during the first nine months of 2008. During the
first nine months of 2008, we received proceeds of approximately $98.6 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. During the first nine
months of 2009, we received proceeds of approximately $24.6 million through our
CEO. During the first nine months of 2008, Mid-America increased our borrowings
under our credit lines by approximately $177.2 million, primarily to partially
finance the five wholly-owned acquisitions made during that time period. During
the comparable period in 2009, Mid-America increased our borrowings by $35.7
million through our credit facilities, primarily to partially finance the single
wholly-owned acquisition made during that period.
The
weighted average interest rate at September 30, 2009 for the $1.3 billion of
debt outstanding was 4.5%, compared to the weighted average interest rate of
5.0% on $1.4 billion of debt outstanding at September 30, 2008. 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.
At
September 30, 2009, 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 Federal
Home Loan Mortgage Corporation, or Freddie Mac, and a $50 million bank facility
with a syndicated group. Together, these credit facilities provided a total line
capacity of $1.4 billion and collateralized availability to borrow of nearly all
of the $1.4 billion at September 30, 2009. We had total borrowings outstanding
under these credit facilities of $1.2 billion at September 30,
2009.
Approximately
70% of our outstanding obligations at September 30, 2009 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 September 30, 2009. We
had total borrowings outstanding under the FNMA Facilities of approximately $920
million at September 30, 2009. 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 0.17% over the life of the FNMA Facilities, plus a credit
enhancement fee of 0.49% to 0.795%. We have seen more volatility in the spread
between the DMBS and three-month LIBOR since late 2007 than was historically
prevalent. While we feel 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. On October
1, 2009 the spread below three-month LIBOR was 0.09%.
Approximately
23% of our outstanding obligations at September 30, 2009 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 $296 million was collateralized and available to borrow
at September 30, 2009. We had total borrowings outstanding under the Freddie Mac
Facilities of approximately $296 million at September 30, 2009. 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 0.41% below LIBOR. On October 1, 2009 the
spread was 0.16% 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 September 30, 2009 (in
thousands):
|
|
|
|
Line
|
|
Amount
|
|
Amount
|
|
|
|
|
Limit
|
|
Collateralized |
|
Borrowed
|
FNMA
Credit Facilities
|
|
$ 1,044,429
|
|
$ 1,044,429
|
|
$ 919,833
|
Freddie
Mac Credit Facilities
|
|
300,000
|
|
296,404
|
|
296,404
|
Regions
Credit Facility
|
|
50,000
|
|
48,375
|
|
880
|
Other
Borrowings
|
|
97,040
|
|
97,040
|
|
97,040
|
|
|
Total
Debt
|
|
$
1,491,469
|
|
$ 1,486,248
|
|
$
1,314,157
|
As of
September 30, 2009, we had entered into interest rate swaps totaling a notional
amount of $883 million. To date, these swaps have proven to be highly effective
hedges. We had also entered into interest rate cap agreements totaling a
notional amount of approximately $147 million as of September 30,
2009. See Note 8 of the Consolidated Financial
Statements.
The
following schedule outlines our variable versus fixed rate debt, including the
impact of interest rate swaps and caps, outstanding as of September 30, 2009 (in
thousands):
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Years
to
|
|
|
|
|
|
|
|
|
Principal
|
|
Contract
|
|
Effective
|
|
|
|
|
|
|
Balance
|
|
Maturity
|
|
Rate
|
Conventional
- Fixed Rate or Swapped (1)
|
|
$ 992,435
|
|
3.5
|
|
5.5%
|
Tax-free
- Fixed Rate or Swapped (1)
|
|
37,570
|
|
7.5
|
|
4.7%
|
Conventional
- Variable Rate (2)
|
|
|
136,866
|
|
4.8
|
|
1.1%
|
Conventional
- Variable Rate - Capped (3)
|
|
82,936
|
|
5.4
|
|
0.8%
|
Tax-free
- Variable Rate - Capped (3)
|
|
64,350
|
|
2.4
|
|
1.2%
|
|
|
|
|
Total
Debt Outstanding
|
|
$
1,314,157
|
|
3.9
|
|
4.5%
|
|
|
|
|
|
|
|
|
|
|
|
(1) Maturities
on existing swapped balances are calculated using the life of the
underlying variable debt.
|
(2) Includes
a $15 million mortgage with an imbedded cap at 7%.
|
|
|
|
(3) 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 September 30, 2009 (in thousands):
|
|
Line
Limit
|
|
|
|
|
|
|
Credit
Facilities
|
|
|
|
|
|
|
Fannie
Mae
|
|
Freddie
Mac
|
|
Regions
|
|
Other
|
|
Total
|
2009
|
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
2010
|
|
-
|
|
-
|
|
50,000
|
|
-
|
|
50,000
|
2011
|
|
80,000
|
|
100,000
|
|
-
|
|
-
|
|
180,000
|
2012
|
|
80,000
|
|
-
|
|
-
|
|
-
|
|
80,000
|
2013
|
|
203,193
|
|
-
|
|
-
|
|
-
|
|
203,193
|
2014
|
|
321,236
|
|
200,000
|
|
-
|
|
18,521
|
|
539,757
|
2015
|
|
120,000
|
|
-
|
|
-
|
|
53,052
|
|
173,052
|
Thereafter
|
|
240,000
|
|
-
|
|
-
|
|
25,467
|
|
265,467
|
Total
|
|
$ 1,044,429
|
|
$ 300,000
|
|
$ 50,000
|
|
$ 97,040
|
|
$
1,491,469
|
The
following schedule outlines the interest rate maturities of our outstanding
interest rate swap agreements and fixed rate debt as of September 30, 2009 (in
thousands):
|
|
|
Swap
Balances
|
|
|
|
Temporary
|
|
Total
|
|
|
|
|
|
SIFMA
|
|
Fixed
Rate
|
|
Fixed
Rate
|
|
|
|
Contract
|
|
|
|
LIBOR
|
|
(formerly
BMA) |
|
Balances
|
|
Balances
(1)
|
|
Balance
|
|
Rate
|
|
2009
|
|
$ -
|
|
$ -
|
|
$
-
|
|
$ 65,000
|
|
$ 65,000
|
|
7.7%
|
|
2010
|
|
140,000
|
|
8,365
|
|
-
|
|
-
|
|
148,365
|
|
5.7%
|
|
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
|
|
-
|
|
18,521
|
|
-
|
|
162,521
|
|
5.7%
|
|
2015
|
|
75,000
|
|
-
|
|
37,852
|
|
-
|
|
112,852
|
|
5.6%
|
|
Thereafter
|
|
-
|
|
-
|
|
25,467
|
|
-
|
|
25,467
|
|
5.6%
|
|
Total
|
|
$ 857,000
|
|
$ 26,165
|
|
$ 81,840
|
|
$ 65,000
|
|
$
1,030,005
|
|
5.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents
a $65 million fixed rate FNMA borrowing that converts to a variable rate
on November 1, 2009.
|
During
the first nine months of 2008, we sold 1,855,300 shares of common stock through
a continuous equity offering program generating net proceeds of approximately
$98.6 million. During the same time period in 2009, we sold 591,000 shares of
common stock, generating $24.6 million in net proceeds through the continuous
equity offering program.
During
the first nine months of 2008, Mid-America offered an average 1.5% discount for
our Dividend and Distribution Reinvestment and Share Purchase Plan, or DRSPP,
and issued approximately 388,000 shares of common stock through the direct stock
purchase feature of this plan, generating approximately $19.5 million in
proceeds. During the first nine months of 2009, we did not offer a discount
through our DRSPP. Approximately 970 shares of common stock were issued through
the direct stock purchase feature of this plan during the first nine months of
2009, generating approximately $33,000 in proceeds.
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, which has pledged
$200 billion of preferred equity to each agency. The Agencies provided credit
enhancement for approximately $1.2 billion of our outstanding debt as of
September 30, 2009. The Federal Housing Finance Agency, or FHFA, is the
appointed conservator of the Agencies, and in a press release dated September
12, 2008, stated that “business will continue as usual at the Enterprises during
the conservatorship – this applies to both their single family and multifamily
businesses. FHFA recognizes the importance of all aspects of the Enterprises’
multifamily businesses … for a healthy secondary market and housing
affordability. In particular, support for multifamily housing finance is central
to the Enterprises’ public purpose… As conservator, FHFA expects each Enterprise
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 effectiveness. Prudential Mortgage Capital, a delegated
underwriting and servicing 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
nine months ended September 30, 2009, our net cash provided by operating
activities was in excess of covering funding improvements to existing real
estate assets, distributions to noncontrolling interests, and dividends paid on
common and preferred shares by approximately $10.7 million, as compared to $14.1
million for the same period in 2008. 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 September 30, 2009, (dollars in
thousands):
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
(1)
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
Long-Term
Debt
(2)
|
|
$ |
524 |
|
|
$ |
2,707 |
|
|
$ |
178,333 |
|
|
$ |
82,036 |
|
|
$ |
161,039 |
|
|
$ |
889,518 |
|
|
$ |
1,314,157 |
|
Fixed
Rate or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swapped
Interest (3)
|
|
|
12,627 |
|
|
|
43,120 |
|
|
|
35,404 |
|
|
|
26,395 |
|
|
|
18,911 |
|
|
|
29,076 |
|
|
|
165,533 |
|
Operating
Lease
|
|
|
4 |
|
|
|
16 |
|
|
|
16 |
|
|
|
9 |
|
|
|
- |
|
|
|
- |
|
|
|
45 |
|
Total
|
|
$ |
13,155 |
|
|
$ |
45,843 |
|
|
$ |
213,753 |
|
|
$ |
108,440 |
|
|
$ |
179,950 |
|
|
$ |
918,594 |
|
|
$ |
1,479,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
September 30, 2009 and 2008, 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, 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 September 30, 2009, Mid-America
Multifamily Fund I, LLC owned two properties but did not expect to acquire any
additional communities. Mid-America Multifamily Fund II, LLC, 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 September 30, 2009, Mid-America
Multifamily Fund II, LLC owned one property. 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 14 in our 2008 Annual Report on Form
10-K filed on February 24, 2009 as updated by our Periodic Report on Form 8-K
filed with the Securities and Exchange Commission on May 29, 2009.
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
September 2006, the FASB issued ASC 820, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. ASC 820 was effective for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. ASC 820-10-65-1
delays the effective date of ASC 820 for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis. For these items, the
effective date was for fiscal years beginning after November 15, 2008. We
adopted ASC 820 effective January 1, 2008 and ASC 820-10-65-1 effective January
1, 2009. The adoption did not have a material impact on our consolidated
financial condition or results of operations taken as a whole.
On
December 4, 2007, the FASB revised ASC 805, Business Combinations. The
ASC 805 revision significantly changes the accounting for business combinations.
The ASC 805 revision requires an acquiring entity to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions. The ASC 805 revision changes the accounting
treatment for certain specific items, including acquisition costs, which will
generally be expensed as incurred. This could have a material impact on the way
we account for property acquisitions and therefore will have a material impact
on our financial statements. The ASC 805 revision applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. We adopted the ASC 805 revision effective January 1, 2009, and
the expensed acquisition costs increased general and administrative expenses by
$30,000 and $139,000 for the three and nine months ended September 30, 2009,
respectively. The increased expenses did not change earnings per
share.
On
December 4, 2007, the FASB issued ASC 810-10-65, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No.
51. ASC 810-10-65 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this standard requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest is included in
consolidated net income on the face of the income statement. The standard
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. This has impacted our financial statement
presentation by requiring the interests in the operating partnership not owned
by the company (noncontrolling interests) be presented as a component of equity
in the company’s consolidated financial statements and income contributable to
the noncontrolling interests be a component of net income. ASC 810-10-65 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. We adopted ASC 810-10-65
effective January 1, 2009 and the retrospective presentation increased total
equity by $30,471,000 at December 31, 2008. The adoption did not change basic or
diluted earnings per share for common share holders and its effect on net income
and income from continuing operations is as follows (dollars in
thousands):
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Increase
in:
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$250
|
|
$305
|
|
$1,456
|
|
$1,288
|
|
Net
income
|
$260
|
|
$321
|
|
$1,536
|
|
$1,366
|
On March
19, 2008, the FASB issued ASC 815-10-65, Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133.
ASC 815-10-65 enhances required disclosures regarding derivatives and hedging
activities, including enhanced disclosures regarding how an entity uses
derivative instruments and how derivative instruments and related hedged items
are accounted for under accounting standards for derivative instruments and
hedging activities, and how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash
flows. ASC 815-10-65 is effective for fiscal years and interim periods
beginning after November 15, 2008. We adopted ASC 815-10-65 effective
January 1, 2009, and the required disclosures are included in Note 8 to the
consolidated financial statements.
In June
2008, the FASB issued ASC 260-10-65, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
to clarify that unvested share-based awards containing nonforfeitable rights to
dividends are participating securities and, therefore, need to be included in
the earnings allocation in computing earnings per share, or EPS, under the
two-class method of computing earnings per share. ASC 260-10-65 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior period EPS data presented
are to be adjusted retrospectively (including interim financial statements,
summaries of earnings, and selected financial data) to conform with the
provisions of this standard. We adopted ASC 260-10-65 effective January 1,
2009 and it had a minor impact on our number of shares. The change in our
number of shares decreased net income available for common shareholders by $0.01
per share for the nine months ended September 30, 2009 and did not change net
income available for common shareholders per share for any other
period.
In
September 2008, the FASB ratified ASC 820-10-65-3, Issuer’s Accounting for Liabilities
Measured at Fair Value with a Third-Party Credit Enhancement. This
accounting standard requires that the measurement of liabilities with
inseparable, third-party credit enhancements carried at or disclosed at fair
value on a recurring basis exclude the effect of the credit
enhancement. ASC 820-10-65-3 was effective on a prospective basis in
the first reporting period beginning on or after December 15, 2008. We adopted
this accounting standard effective January 1, 2009. This accounting
standard removed the effect of the agency credit enhancements from our
calculation of the fair value of our derivative instruments and materially
increased the value represented on the balance sheet. The impact of ASC
820-10-65-3 on our financial position upon adoption was approximately a $2.0
million increase to the fair value of our derivative instruments.
In April
2008, the FASB issued ASC 825-10-65-1, Interim Disclosures About Fair
Market Value of Financial Instruments. ASC 825-10-65-1 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 consolidated financial
statements.
In May
2009, the FASB issued ASC 855-10, Subsequent Events, which
establishes the general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued. ASC 855-10 is effective for interim and financial periods
ending after June 15, 2009. Adoption of this standard did not have a material
impact on our consolidated financial condition or results of operations taken as
a whole. For the quarter ended September 30, 2009, we have considered subsequent
events through November 5, 2009, which is the date our consolidated financial
statements were filed with the Securities and Exchange Commission on Form
10-Q.
In June
2008, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation
No. 46(R), or Statement 167. Statement 167 amends events which 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. Statement 167 is effective for annual
reporting periods beginning after November 15, 2009 and earlier application is
prohibited. Management does not believe that the adoption of Statement 167 will
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 2008 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 September 30,
2009 (the end of the period covered by this Quarterly Report on Form
10-Q).
Changes
in Internal Controls
During
the three months ended September 30, 2009, 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.
On November
5, 2009, we entered into a Controlled Equity Offering Sales Agreement (the
“Agreement”) with Cantor Fitzgerald & Co., as sales agent, for the purpose
of selling shares of its common stock, par value $0.01 per share, in
at-the-market offerings or negotiated transactions. In accordance
with the terms of the Agreement, we may issue and sell up to 4,000,000
shares of our common stock, from time to time, in at-the-market offerings
or negotiated transactions through Cantor Fitzgerald & Co. Cantor
Fitzgerald & Co. will be entitled to compensation not to exceed 2% of
the gross sales price per share for any shares of common stock sold under the
Agreement.
The
Agreement has been filed as Exhibit 10.1 to this Quarterly Report and is
incorporated herein by reference.
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.
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 common dividends 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;
|
·
|
job
losses resulting from further declines in economic
activity;
|
·
|
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 FNMA 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);
|
·
|
weakness
in the overall economy which lowers job growth and the associated demand
for apartment housing; and
|
·
|
the
relative illiquidity of real estate
investments.
|
At times,
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 September 30, 2009, 93% 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 payments to us by our
swap counterparties) and the actual interest rate we pay through the Fannie Mae
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 swaps 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.
Our
credit facilities with FNMA and Freddie Mac expire 2011 – 2018, and we
anticipate that replacement facilities will be at a higher cost and have less
attractive terms.
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 $200 billion of preferred equity each to FNMA and
Freddie Mac, and placed them in conservatorship through the end of 2009. The
Treasury Department has recently increased FNMA and Freddie Mac’s portfolio
limitation to $900 billion, which at present is required to be reduced on a
phased basis beginning in 2010. 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 recently 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 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 value 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
September 30, 2009, we had total debt outstanding of $1.3 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 approximately 60% 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 September 30, 2009, 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 September 30, 2009. 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
effectiveness. In our experience, the FNMA DMBS rate has historically averaged
17 basis points below three-month LIBOR, and the Freddie Mac Reference Bill rate
has averaged 41 basis points below the associated LIBOR rate, but in the past
two years the spreads increased significantly before recently contracting closer
to more normal levels, and have been more volatile than we have historically
seen. 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, resulting in
material changes to our consolidated statements of operations and balance sheet,
and potentially cause a breach with one of our debt covenants.
The
difference in interest rates between the DMBS and Reference Bill rates and
three-month LIBOR, which is a component of the ineffectiveness of the
LIBOR-based swaps, flows through interest expense in the current period, and
together with the recognized ineffectiveness (which is also an adjustment to
current period interest expense), reduces the effectiveness of the
swaps.
We also
rely on the credit of the counterparties that provide swaps to hedge the
interest rate risk on our credit facilities. We use three major banks to provide
nearly 80% of our swaps, JP Morgan Chase, Royal Bank of Canada, and Deutsche
Bank, all of which have high investment grade ratings from Moody’s and S&P.
In the event that one of our swap providers should suffer a significant
downgrade of its credit rating or fail, our swaps may become ineffective, in
which case the value of the swap 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
September 30, 2009, effectively $137 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 which are variable rate facilities. At
September 30, 2009, 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 September 30, 2009. 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 earthquake 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 (of 145 total) 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:
·
|
will
consider the transfer to be null and
void;
|
·
|
will
not reflect the transaction on our
books;
|
·
|
may
institute legal action to enjoin the
transaction;
|
·
|
will
not pay dividends or other distributions with respect to those
shares;
|
·
|
will
not recognize any voting rights for those
shares;
|
·
|
will
consider the shares held in trust for our benefit;
and
|
·
|
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:
|
1.
|
the
price you paid for the shares; or
|
2.
|
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.
|
If you acquire shares in violation of
the limits on ownership described above:
·
|
you
may lose your power to dispose of the
shares;
|
·
|
you
may not recognize profit from the sale of such shares if the market price
of the shares increases; and
|
·
|
you
may be required to recognize a loss from the sale of such shares if the
market price decreases.
|
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.
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 which may not otherwise be present in our
direct investments such as:
·
|
the
potential inability of our joint venture partner to
perform;
|
·
|
the
joint venture partner may have economic or business interests or goals
which are inconsistent with or adverse to
ours;
|
·
|
the
joint venture partner may take actions contrary to our requests or
instructions or contrary to our objectives or policies;
and
|
·
|
the
joint venturers may not be able to agree on matters relating to the
property they jointly own.
|
Although
each joint owner will have a right of first refusal to purchase the other
owner’s interest, in the event a sale is desired, the joint owner may not have
sufficient resources to exercise such right of first refusal.
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:
·
|
85%
of ordinary income for that year;
|
·
|
95%
of capital gain net income for that year;
and
|
·
|
100%
of undistributed taxable income from prior
years.
|
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. Submission
of Matters to a Vote of Security Holders.
None.
Item
5. Other
Information.
None.
Item
6. Exhibits.
(a)
|
The
following exhibits are filed as part of this
report.
|
Exhibit
Number
|
Exhibit
Description
|
10.1
|
Sales
Agreement between the Registrant and Cantor Fitzgerald & Co., dated
November 5, 2009
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
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
|
32.2
|
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
|
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.
|
MID-AMERICA
APARTMENT COMMUNITIES, INC.
|
|
|
Date:
November 5, 2009
|
/s/Simon
R.C. Wadsworth
|
|
Simon
R.C. Wadsworth
|
|
Executive
Vice President and Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|