XNYS:MAA Mid-America Apartment Communities Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012
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
 
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).
þ 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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
Number of Shares Outstanding at
Class
April 27, 2012
Common Stock, $0.01 par value
40,937,133




MID-AMERICA APARTMENT COMMUNITIES, INC.

TABLE OF CONTENTS

 
 
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 

 
Condensed Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011 (Unaudited)
2

 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited).
3

 
Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 (unaudited) and 2011 (unaudited).
4

 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 (Unaudited) and 2011 (Unaudited).
5

 
Notes to Condensed Consolidated Financial Statements (Unaudited).
6

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
19

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
30

Item 4.
Controls and Procedures.
30

 
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings.
31

Item 1A.
Risk Factors.
31

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
40

Item 3.
Defaults Upon Senior Securities.
40

Item 4.
Mine Safety Disclosures.
40

Item 5.
Other Information.
40

Item 6.
Exhibits.
41

 
Signatures
42


1



MAA
Condensed Consolidated  Balance  Sheets
March 31, 2012 and December 31, 2011
(Unaudited)
(Dollars in thousands, except share data)
 
March 31, 2012
 
December 31, 2011
Assets:
 
 
 
Real estate assets:
 
 
 
Land
$
337,220

 
$
333,846

Buildings and improvements
2,865,981

 
2,879,289

Furniture, fixtures and equipment
93,919

 
92,170

Capital improvements in progress
74,294

 
53,790

 
3,371,414

 
3,359,095

Less accumulated depreciation
(980,036
)
 
(961,724
)
 
2,391,378

 
2,397,371

 
 
 
 
Land held for future development
1,306

 
1,306

Commercial properties, net
8,014

 
8,125

Investments in real estate joint ventures
16,567

 
17,006

Real estate assets, net
2,417,265

 
2,423,808

 
 
 
 
Cash and cash equivalents
41,826

 
57,317

Restricted cash
22,740

 
1,362

Deferred financing costs, net
15,306

 
14,680

Other assets
26,167

 
29,195

Goodwill
4,106

 
4,106

Total assets
$
2,527,410

 
$
2,530,468

 
 
 
 
Liabilities and Shareholders' Equity:
 

 
 

Liabilities:
 

 
 

Secured notes payable
$
1,353,056

 
$
1,514,755

Unsecured notes payable
187,000

 
135,000

Accounts payable
4,001

 
2,091

Fair market value of interest rate swaps
29,360

 
33,095

Accrued expenses and other liabilities
79,437

 
91,718

Security deposits
6,392

 
6,310

Total liabilities
1,659,246

 
1,782,969

 
 
 
 
Redeemable stock
4,446

 
4,037

 
 
 
 
Shareholders' equity:
 

 
 

Common stock, $0.01 par value per share, 50,000,000 shares authorized; 40,940,360 and 38,959,338 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively (1)
409

 
389

Additional paid-in capital
1,491,183

 
1,375,623

Accumulated distributions in excess of net income
(625,266
)
 
(621,833
)
Accumulated other comprehensive losses
(31,800
)
 
(35,848
)
Total MAA shareholders' equity
834,526

 
718,331

Noncontrolling interest
29,192

 
25,131

Total equity
863,718

 
743,462

Total liabilities and equity
$
2,527,410

 
$
2,530,468


(1) 
Number of shares issued and outstanding represent total shares of common stock regardless of classification on the consolidated balance sheet. The number of shares classified as redeemable stock on the consolidated balance sheet for March 31, 2012 and December 31, 2011 are 66,326 and 65,771, respectively.
See accompanying notes to consolidated financial statements.

2



MAA
Condensed Consolidated Statements of Operations
Three months ended March 31, 2012 and 2011
(Unaudited)
(Dollars in thousands, except per share data)
 
Three months ended March 31,
 
2012
 
2011
Operating revenues:
 
 
 
Rental revenues
$
109,617

 
$
95,742

Other property revenues
9,745

 
8,980

Total property revenues
119,362

 
104,722

Management fee income
269

 
223

Total operating revenues
119,631

 
104,945

Property operating expenses:
 

 
 

Personnel
14,500

 
12,821

Building repairs and maintenance
3,928

 
3,255

Real estate taxes and insurance
13,886

 
12,191

Utilities
6,344

 
6,007

Landscaping
2,905

 
2,635

Other operating
8,279

 
7,420

Depreciation and amortization
30,643

 
27,216

Total property operating expenses
80,485

 
71,545

Acquisition (credit) expenses
(634
)
 
219

Property management expenses
5,454

 
5,144

General and administrative expenses
3,447

 
4,610

Income from continuing operations before non-operating items
30,879

 
23,427

Interest and other non-property income
108

 
235

Interest expense
(14,350
)
 
(13,914
)
Gain on debt extinguishment
20

 

Amortization of deferred financing costs
(771
)
 
(715
)
Asset impairment

 

Net casualty loss and other settlement proceeds
(4
)
 
(141
)
Loss on sale of non-depreciable assets

 
(6
)
Income from continuing operations before loss from real estate joint ventures
15,882

 
8,886

Loss from real estate joint ventures
(31
)
 
(245
)
Income from continuing operations
15,851

 
8,641

Discontinued operations:
 

 
 

(Loss) income from discontinued operations before gain on sale
(158
)
 
521

Asset impairment on discontinued operations
(71
)
 

Net casualty loss on insurance and other settlement proceeds on discontinued operations
(54
)
 
(7
)
Gain on sale of discontinued operations
9,500

 

Consolidated net income
25,068

 
9,155

Net income attributable to noncontrolling interests
1,178

 
311

Net income attributable to MAA
23,890

 
8,844

Net income available for common shareholders
$
23,890

 
$
8,844

 
 
 
 
Earnings per common share - basic:
 

 
 

Income from continuing operations available for common shareholders
$
0.37

 
$
0.23

Discontinued property operations
0.23

 
0.02

Net income available for common shareholders
$
0.60

 
$
0.25

 
 
 
 
Earnings per share - diluted:
 

 
 

Income from continuing operations available for common shareholders
$
0.37

 
$
0.23

Discontinued property operations
0.23

 
0.01

Net income available for common shareholders
$
0.60

 
$
0.24

 
 
 
 
Dividends declared per common share
$
0.6600

 
$
0.6275

See accompanying notes to consolidated financial statements.

3




MAA
Condensed Consolidated Statements of Comprehensive Income
Three months ended March 31, 2012 and 2011
 
Three Months Ended March 31,
 
2012
 
2011
Consolidated net income
$
25,068

 
$
9,155

Other comprehensive income:
 
 
 
Unrealized losses from the effective portion of derivative instruments
(1,300
)
 
(176
)
Reclassification adjustment for losses included in net income for the effective portion of derivative instruments
5,548

 
7,637

Total comprehensive income
29,316

 
16,616

Less: comprehensive income attributable to noncontrolling interests
(1,378
)
 
(564
)
Comprehensive income attributable to MAA
$
27,938

 
$
16,052

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 


4




MAA
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2012 and 2011
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Consolidated net income
$
25,068

 
$
9,155

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
31,549

 
28,456

Stock compensation expense
814

 
844

Redeemable stock issued
116

 
97

Amortization of debt premium
(90
)
 
(90
)
Loss from investments in real estate joint ventures
31

 
245

Gain on debt extinguishment
(20
)
 

Derivative interest expense
164

 
47

Loss on sale of non-depreciable assets

 
6

Gain on sale of discontinued operations
(9,500
)
 

Net casualty loss and other settlement proceeds
58

 
148

Changes in assets and liabilities:
 

 
 

Restricted cash
207

 
137

Other assets
2,445

 
(1,470
)
Accounts payable
1,910

 
789

Accrued expenses and other
(14,994
)
 
(6,922
)
Security deposits
82

 
(140
)
Net cash provided by operating activities
37,840

 
31,302

Cash flows from investing activities:
 

 
 

Purchases of real estate and other assets

 
(30,000
)
Improvements to existing real estate assets
(12,221
)
 
(10,295
)
Renovations to existing real estate assets
(2,934
)
 
(2,416
)
Development
(26,745
)
 
(3,569
)
Distributions from real estate joint ventures
459

 
362

Contributions to real estate joint ventures
(51
)
 
(1,369
)
Proceeds from disposition of real estate assets
29,035

 

Funding of escrow for future acquisitions
(21,585
)
 

Net cash used in investing activities
(34,042
)
 
(47,287
)
Cash flows from financing activities:
 

 
 

Net change in credit lines
(158,802
)
 
(70,000
)
Proceeds from notes payable
50,000

 
22,350

Principal payments on notes payable
(807
)
 
(671
)
Payment of deferred financing costs
(1,397
)
 
(420
)
Repurchase of common stock
(1,415
)
 
(1,939
)
Proceeds from issuances of common shares
120,135

 
91,443

Distributions to noncontrolling interests
(1,280
)
 
(1,422
)
Dividends paid on common shares
(25,723
)
 
(22,076
)
Net cash (used in) provided by financing activities
(19,289
)
 
17,265

Net (decrease) increase in cash and cash equivalents
(15,491
)
 
1,280

Cash and cash equivalents, beginning of period
57,317

 
45,942

Cash and cash equivalents, end of period
$
41,826

 
$
47,222

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
16,911

 
$
13,518

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Conversion of units to shares of common stock
$
28

 
$
2,071

Accrued construction in progress
$
10,027

 
$
7,467

Interest capitalized
$
638

 
$
167

Marked-to-market adjustment on derivative instruments
$
4,084

 
$
7,414

Reclassification of  redeemable stock to liabilities
$

 
$
151


See accompanying notes to consolidated financial statements.

5



MAA
Notes to Condensed Consolidated Financial Statements
March 31, 2012 and 2011
(Unaudited)

1.           Consolidation and Basis of Presentation and Significant Accounting Policies

Consolidation and Basis of Presentation

Mid-America Apartment Communities, Inc., or we, or MAA, is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops and manages apartment communities in the Sunbelt region of the United States. As of March 31, 2012, we owned or owned interests in a total of 167 multifamily apartment communities comprising 48,685 apartments located in 13 states, including two communities comprising 626 apartments owned through our joint venture, Mid-America Multifamily Fund I, LLC, and five communities comprising 1,635 apartments owned through our joint venture, Mid-America Multifamily Fund II, LLC. In addition, we also had three development communities and a second phase to an existing community under construction totaling 1,020 units as of March 31, 2012. A total of 148 units for the development projects were completed as of March 31, 2012, and therefore have been included in the totals above. Three of our properties include retail components with approximately 81,000 square feet of gross leasable area.

The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with United States generally accepted accounting principles, or GAAP, for interim financial information and applicable rules and regulations of the Securities and Exchange Commission, or the SEC, and our accounting policies as set forth in our December 31, 2011 annual consolidated financial statements. The accompanying unaudited condensed consolidated financial statements include our accounts and those of our 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 except for an approximately $655 thousand out of period adjustment related to the capitalization of land acquisition costs. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three month period ended March 31, 2012 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 with the SEC on February 24, 2012.

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.

Earnings per Common Share

Basic earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of shares outstanding during the period.  All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two class method of computing basic earnings per share. Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis with our diluted earnings per share being the more dilutive of the treasury stock or two class methods.  Operating partnership units are included in dilutive earnings per share calculations when they are dilutive to earnings per share. For the three month periods ended March 31, 2012 and 2011, our basic earnings per share is computed using the two class method and our diluted earnings per share is computed using the more dilutive of the treasury stock method or two class method as follows:

6



(dollars and shares in thousands, except per share amounts)
Three months ended March 31,
 
 
2012
 
2011
 
Shares Outstanding
 
 
 
 
Weighted average common shares - basic
39,505

 
35,706

 
Weighted average partnership units outstanding

(1) 
2,101


Effect of dilutive securities
102

 
97

 
Weighted average common shares - diluted
39,607

 
37,904

 
 
 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

 
Net income available for common shareholders
$
23,890

 
$
8,844

 
Net income allocated to unvested restricted shares
(28
)
 
(9
)
 
Net income available for common shareholders, adjusted
$
23,862

 
$
8,835

 
 
 
 
 
 
Weighted average common shares - basic
39,505

 
35,706

 
Earnings per share - basic
$
0.60

 
$
0.25

 
 
 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

 
Net income available for common shareholders
$
23,890

 
$
8,844

 
Net income attributable to noncontrolling interests

(1) 
311


Adjusted net income available for common shareholders
$
23,890

 
$
9,155

 
 
 
 
 
 
Weighted average common shares - diluted
39,607

 
37,904

 
Earnings per share - diluted
$
0.60

 
$
0.24

 

(1) Operating partnership units are not included in dilutive earnings per share calculations for the three months ended March 31, 2012, as they were not dilutive.
2.           Segment Information
As of March 31, 2012, we owned or had an ownership interest in 167 multifamily apartment communities in 13 different states from which we derived all significant sources of earnings and operating cash flows. Senior management evaluates performance and determines resource allocations by reviewing apartment communities individually and in the following reportable operating segments:
Large market same store communities are generally communities:
in markets with a population of at least one million and at least 1% of the total public multifamily REIT units; and
that we have owned and have been stabilized for at least a full 12 months and have not been classified as held for sale.
Secondary market same store communities are generally communities:
in markets with populations of more than one million but less than one percent of the total public multifamily REIT units or in markets with a population of less than one million; and
that we have owned and have been stabilized for at least a full 12 months and have not been classified as held for sale.
Non same store communities and other includes recent acquisitions, communities in development or lease-up and communities that have been classified as held for sale. Also included in non same store communities are non multifamily activities which represent less than 1% of our portfolio
On the first day of each calendar year, we determine the composition of our same store operating segments for that year as well as adjusting the previous year, which allows us to evaluate full period-over-period operating comparisons.  We utilize net operating income, or NOI, in evaluating the performance of the segments.  Total NOI represents total property revenues less total property operating expenses, excluding depreciation and amortization, for all properties held during the period regardless of their status as held for sale. We believe NOI is a helpful tool in evaluating the operating performance of our segments

7



because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance.
Revenues and NOI for each reportable segment for the three month periods ended March 31, 2012 and 2011, were as follows (dollars in thousands):

 
Three months ended March 31,
 
 
2012
 
2011
 
Revenues
 
 
 
 
Large Market Same Store
$
55,007

 
$
52,271

 
Secondary Market Same Store
47,500

 
45,857

 
Non-Same Store and Other
16,855

 
6,594

 
Total property revenues
119,362

 
104,722

 
Management fee income
269

 
223

 
Total operating revenues
$
119,631

 
$
104,945

 
 
 
 
 
 
NOI
 

 
 

 
Large Market Same Store
$
32,098

 
$
30,276

 
Secondary Market Same Store
27,783

 
27,051

 
Non-Same Store and Other
9,635

 
4,188

 
Total NOI
69,516

 
61,515

 
Discontinued operations NOI included above
4

 
(1,122
)
 
Management fee income
269

 
223

 
Depreciation and amortization
(30,643
)
 
(27,216
)
 
Acquisition credit (expense)
634

 
(219
)
 
Property management expense
(5,454
)
 
(5,144
)
 
General and administrative expense
(3,447
)
 
(4,610
)
 
Interest and other non-property income
108

 
235

 
Interest expense
(14,350
)
 
(13,914
)
 
Gain on debt extinguishment
20

 

 
Amortization of deferred financing costs
(771
)
 
(715
)
 
Net casualty loss and other settlement proceeds
(4
)
 
(141
)
 
Loss on sale of non-depreciable assets

 
(6
)
 
Loss from real estate joint ventures
(31
)
 
(245
)
 
Discontinued operations
9,217

 
514

 
Net income attributable to noncontrolling interests
(1,178
)
 
(311
)
 
Net income attributable to MAA
$
23,890

 
$
8,844

 

Assets for each reportable segment as of March 31, 2012 and December 31, 2011, were as follows (dollars in thousands):
 
March 31, 2012
 
December 31, 2011
Assets
 
 
 
Large Market Same Store
$
1,132,487

 
$
1,017,015

Secondary Market Same Store
668,910

 
668,109

Non-Same Store and Other
639,969

 
760,132

Corporate assets
86,044

 
85,212

Total assets
$
2,527,410

 
$
2,530,468





8



3.          Equity

Total equity and its components for the three month periods ended March 31, 2012, and 2011, were as follows (dollars in thousands, except per share and per unit data):
  
Mid-America Apartment Communities, Inc. Shareholders
 
 
 
 
 
Common
Stock
Amount
 
Additional
Paid-In
Capital
 
Accumulated
Distributions
in Excess of
Net Income
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Equity
EQUITY BALANCE DECEMBER 31, 2011
$
389

 
$
1,375,623

 
$
(621,833
)
 
$
(35,848
)
 
$
25,131

 
$
743,462

Net income
 
 
 
 
23,890

 
 
 
1,178

 
25,068

Other comprehensive income - derivative instruments (cash flow hedges)
 
 
 
 
 
 
4,048

 
200

 
4,248

Issuance and registration of common shares
20

 
120,123

 
 
 
 
 
 
 
120,143

Shares repurchased and retired

 
(1,415
)
 
 
 
 
 
 
 
(1,415
)
Shares issued in exchange for units

 
28

 
 
 
 
 
(28
)
 

Redeemable stock fair market value
 
 
 
 
(293
)
 
 
 
 
 
(293
)
Adjustment for noncontrolling interest ownership in operating partnership
 
 
(3,990
)
 
 
 
 
 
3,990

 

Amortization of unearned compensation
 
 
814

 
 
 
 
 
 
 
814

Dividends on common stock ($0.6600 per share)
 
 
 
 
(27,030
)
 
 
 


 
(27,030
)
Dividends on noncontrolling interest units ($0.6600 per unit)
 
 
 
 
 
 
 
 
(1,279
)
 
(1,279
)
EQUITY BALANCE MARCH 31, 2012
$
409

 
$
1,491,183

 
$
(625,266
)
 
$
(31,800
)
 
$
29,192

 
$
863,718



  
Mid-America Apartment Communities, Inc. Shareholders
 
 
 
 
 
Common
Stock
Amount
 
Additional
Paid-In
Capital
 
Accumulated
Distributions
in Excess of
Net Income
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interest
 
Total
Equity
EQUITY BALANCE DECEMBER 31, 2010
$
348

 
$
1,142,023

 
$
(575,021
)
 
$
(48,847
)
 
$
22,125

 
$
540,628

Net income


 


 
8,844

 


 
311

 
9,155

Other comprehensive income - derivative instruments (cash flow hedges)


 


 


 
7,208

 
253

 
7,461

Issuance and registration of common shares
15

 
91,402

 


 


 


 
91,417

Shares repurchased and retired

 
(1,939
)
 


 


 


 
(1,939
)
Exercise of stock options

 
26

 


 


 


 
26

Shares issued in exchange for units
2

 
2,069

 


 


 
(2,071
)
 

Redeemable stock fair market value


 


 
(43
)
 


 


 
(43
)
Adjustment for noncontrolling interest ownership in operating partnership


 
(3,955
)
 


 


 
3,955

 

Amortization of unearned compensation


 
844

 


 


 


 
844

Dividends on common stock ($0.6275 per share)


 


 
(22,971
)
 


 


 
(22,971
)
Dividends on noncontrolling interest units ($0.6275 per unit)


 


 


 


 
(1,310
)
 
(1,310
)
EQUITY BALANCE MARCH 31, 2011
$
365

 
$
1,230,470

 
$
(589,191
)
 
$
(41,639
)
 
$
23,263

 
$
623,268




4.           Real Estate Acquisitions

On February 8, 2012, we purchased a land parcel and contracted to build a 270 unit apartment community located in Mount Pleasant (Charleston), South Carolina.


9




5.           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, and in accordance with accounting standards governing the disposal of long lived assets, the 320-unit Kenwood Club apartments in Katy (Houston), Texas and the 276-unit Cedar Mill apartments in Memphis, Tennessee are presented as discontinued operations in the accompanying condensed consolidated financial statements.   These properties were sold on January 12, 2012 and February 9, 2012, respectively, and resulted in a gain of approximately $9.5 million, which is included in discontinued operations. Proceeds from the sale of Kenwood Club were held in an escrow account to be used for the tax free exchange of property under section 1031(b) of the U.S. Federal Income Tax Code. These funds are classified as restricted cash in our consolidated balance sheet.

The following is a summary of discontinued operations for the three month periods ended March 31, 2012 and 2011, (dollars in thousands):
 
Three months ended March 31,
 
2012
 
2011
Revenues
 
 
 
Rental revenues
$
290

 
$
2,143

Other revenues
12

 
254

Total revenues
302

 
2,397

Expenses
 

 
 

Property operating expenses
306

 
1,272

Depreciation and amortization
135

 
525

Interest expense
19

 
79

Total expense
460

 
1,876

(Loss) income from discontinued operations before gain on sale
(158
)
 
521

Asset impairment on discontinued operations
(71
)
 

Net loss on insurance and other settlement proceeds on discontinued operations
(54
)
 
(7
)
Gain on sale of discontinued operations
9,500

 

Income from discontinued operations
$
9,217

 
$
514


6.           Share and Unit Information

On March 31, 2012, 40,940,360 common shares and 1,935,708 operating partnership units were issued and outstanding, representing a total of 42,876,068 shares and units. At March 31, 2011, 36,545,130 common shares and 2,013,393 operating partnership units were outstanding, representing a total of 38,558,523 shares and units. Additionally, we had outstanding options for the purchase of 14,907 shares of common stock at March 31, 2011.  There were no outstanding options at March 31, 2012.

On July 3, 2008, we entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 1,350,000 shares of our common stock, from time to time in at-the-market offerings or negotiated transactions through a controlled equity offering program, or ATM. On November 5, 2009, we entered into another sales agreement with Cantor Fitzgerald & Co. with materially the same terms for an additional 4,000,000 shares. On August 26, 2010, we entered into sales agreements with Cantor Fitzgerald & Co., Raymond James & Associates, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated with materially the same terms as our previous ATM agreements for a combined total of 6,000,000 shares of our common stock.

During the three month period ended March 31, 2011, we issued a total of 993,799 shares of common stock through our ATM programs for net proceeds of $61.2 million. During the three month period ended March 31, 2012, we did not issue any shares through our ATM programs.
On March 2, 2012, we closed on an underwritten public offering of 1,955,000 shares of common stock. UBS Investment Bank and Jeffries & Company, Inc. acted as joint bookrunning managers. We received net proceeds of approximately $120 million after underwriter discounts.

10




During the three month period ended March 31, 2012, we issued 120 shares of common stock through the optional cash purchase feature of our Dividend and Distribution Reinvestment and Share Purchase Program, or DRSPP. The issuances resulted in net proceeds of $8,000. During the three month period ended March 31, 2011, we issued 495,236 shares of common stock through the optional cash purchase feature of our DRSPP resulting in net proceeds of approximately $30.0 million.

During the three months ended March 31, 2012, 15,565 shares of MAA’s common stock were acquired from employees to satisfy minimum tax withholding obligations that arose upon vesting of restricted stock granted pursuant to approved plans. During the three months ended March 31, 2011, 25,082 shares were acquired for these purposes.


7.           Notes Payable

On March 31, 2012 and December 31, 2011, we had total indebtedness of $1.5 billion and $1.6 billion, respectively. Our indebtedness as of March 31, 2012 consisted of both conventional and tax exempt debt. Borrowings were made through individual property mortgages as well as company-wide credit facilities. We utilize both secured and unsecured debt.

On March 1, 2012, we entered into a $150 million unsecured term loan agreement with a syndicate of banks led by Key Bank and J.P. Morgan with a variable rate resetting monthly at LIBOR plus a spread of 1.40% to 2.15% based on a leveraged based pricing grid and a maturity date of March 1, 2017. We had borrowings of $50 million outstanding under this agreement at March 31, 2012, with the remaining balance to be received in the second quarter.

As of March 31, 2012, approximately 64% of our outstanding debt was borrowed through secured credit facility relationships with Prudential Mortgage Capital, which are credit enhanced by the Federal National Mortgage Association, or FNMA, and Financial Federal, which are credit enhanced by Freddie Mac.

We utilize interest rate swaps and interest rate caps to help manage our current and future interest rate risk and entered into 24 interest rate swaps and 18 interest rate caps as of March 31, 2012, representing notional amounts totaling $651.8 million and $256.4 million, respectively. We also held 3 non-designated interest rate caps with notional amounts totaling $14.3 million as of March 31, 2012.






























11





The following table summarizes our outstanding debt structure as of March 31, 2012 (dollars in thousands):

 
Borrowed
Balance
 
Effective
Rate
 
Contract
Maturity
Fixed Rate Secured Debt
 
 
 
 
 
Individual property mortgages
$
352,111

 
5.0
%
 
7/6/2020
FNMA conventional credit facilities
50,000

 
4.7
%
 
3/31/2017
Credit facility balances with:
 

 
 

 
 
LIBOR-based interest rate swaps
484,000

 
5.3
%
 
10/30/2013
SIFMA-based interest rate swaps
17,800

 
4.4
%
 
10/15/2012
Total fixed rate secured debt
$
903,911

 
5.1
%
 
8/7/2016
Variable Rate Secured Debt (1)
 

 
 

 
 
FNMA conventional credit facilities
$
296,983

 
0.7
%
 
10/1/2015
FNMA tax-free credit facilities
72,715

 
1.0
%
 
7/23/2031
Freddie Mac credit facilities
64,247

 
0.7
%
 
7/1/2014
Freddie Mac mortgage
15,200

 
3.6
%
 
12/10/2015
Total variable rate secured debt
$
449,145

 
0.8
%
 
2/18/2018
Total Secured Debt
$
1,353,056

 
3.7
%
 
2/9/2017
 
 
 
 
 
 
Unsecured Debt
 

 
 

 
 
Variable rate credit facility
$
2,000

 
2.7
%
 
11/1/2015
Term loan fixed with swaps (2)
50,000

 
1.9
%
 
3/1/2017
Fixed rate senior private placement bonds
135,000

 
5.1
%
 
8/23/2020
Total Unsecured Debt
$
187,000

 
4.3
%
 
8/30/2019
 
 
 
 
 
 
Total Outstanding Debt
$
1,540,056

 
3.8
%
 
6/2/2017

(1) Includes capped balances.
(2) Balance is fixed at 2.7% by interest rate swaps that do not become effective until June 1, 2012. The unswapped rate has been used in this table.



8.           Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

We are exposed to certain risk arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future contractual and forecasted cash amounts, principally related to our borrowings, the value of which are determined by changing interest rates.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and interest rate caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty

12



if interest rates rise above the strike rate on the contract in exchange for an up front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2012 and 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2012 and 2011, we recorded ineffectiveness of $10,000 (increase to interest expense) and $5,000 (decrease to interest expense), respectively, as an adjustment to interest expense attributable to a mismatch in the underlying indices of the derivatives and the hedged interest payments made on our variable-rate debt.

During the three months ended March 31, 2012, we also had six interest rate caps with a total notional amount of $31.7 million, where only the changes in intrinsic value are recorded in accumulated other comprehensive income.  Changes in fair value of these interest rate caps due to changes in time value (e.g. volatility, passage of time, etc.) are excluded from effectiveness testing and are recognized directly in earnings.  During the three months ended March 31, 2012 and 2011, we recorded a loss of less than $1,000 and a loss of $3,000, respectively, due to changes in the time value of these interest rate caps.

Amounts reported in accumulated other comprehensive income related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $18.6 million will be reclassified to earnings as an increase to interest expense, which primarily represents the difference between our fixed interest rate swap payments and the projected variable interest rate swap payments.

As of March 31, 2012, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative
 
Number of Instruments
 
Notional
Interest Rate Caps
 
18
 
$
256,371,000

Interest Rate Swaps
 
24
 
$
651,800,000


Non-designated Hedges

Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in a loss of $24,000 for the three months ended March 31, 2012. We did not have any derivatives not designated as hedges for the three months ended March 31, 2011 .

As of March 31, 2012, we had the following outstanding interest rate derivatives that were not designated as hedges:
Interest Rate Derivative
 
Number of Instruments
 
Notional
Interest rate caps
 
3
 
$
14,280,000


 














13





Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011, respectively:

Fair Values of Derivative Instruments on the Consolidated Balance Sheet as of March 31, 2012 and December 31, 2011 (dollars in thousands)
 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
 
March 31, 2012
 
December 31, 2011
 
 
 
March 31, 2012
 
December 31, 2011
Derivatives designated as hedging instruments
 
Balance Sheet Location
 
Fair Value
 
Fair Value
 
Balance Sheet Location
 
Fair Value
 
Fair Value
Interest rate contracts
 
Other assets
 
$
1,348

 
$
975

 
Fair market value of interest rate swaps
 
$
29,360

 
$
33,095

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives designated as hedging instruments
 
 
 
$
1,348

 
$
975

 
 
 
$
29,360

 
$
33,095

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
Other assets
 
$
19

 
$
43

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
 
 
$
19

 
$
43

 
 
 
$

 
$



























14





Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Operations

The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, respectively.

Effect of Derivative Instruments on the Consolidated Statements of Operations for the
Three Months Ended March 31, 2012 and 2011 (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)
Three months ended March 31,
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(1,300
)
 
$
(176
)
 
Interest expense
 
$
(5,548
)
 
$
(7,637
)
 
Interest expense
 
$
(11
)
 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives in cash flow hedging relationships
 
$
(1,300
)
 
$
(176
)
 
 
 
$
(5,548
)
 
$
(7,637
)
 
 
 
$
(11
)
 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 
 
 
 
 
Location of Gain or (Loss) Recognized in Income
 
2012

 
2011

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
Interest expense
 
$
(24
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
$
(24
)
 
$

 
 
 
 
 
 



Credit-risk-related Contingent Features

As of March 31, 2012, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of $32.3 million, which includes accrued interest but excludes any adjustment for nonperformance risk. These derivatives had a fair value, gross of asset positions, of $29.4 million at March 31, 2012.

Certain of our derivative contracts contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of March 31, 2012, we had not breached the provisions of these agreements.  If we had breached these provisions, we could have been required to settle our obligations under the agreements at their termination value of $16.6 million.

Certain of our derivative contracts are credit enhanced by either FNMA or Freddie Mac.  These derivative contracts require that our credit enhancing party maintain credit ratings above a certain level.  If our credit support providers were downgraded below Baa1 by Moody’s or BBB+ by Standard & Poor’s, or S&P, we may be required to either post 100 percent collateral or settle the obligations at their termination value of $32.3 million as of March 31, 2012.  Both FNMA and Freddie Mac are currently rated Aaa by Moody’s and AA+ by S&P, and therefore, the provisions of this agreement have not been breached and no collateral has been posted related to these agreements as of March 31, 2012.

15




Although our derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on the Consolidated Balance Sheet.

See also discussions in Item 1. Financial Statements – Notes to Consolidated Financial Statements, Note 9.

9.           Fair Value Disclosure of Financial Instruments

Cash and cash equivalents, restricted cash, accounts payable, accrued expenses and other liabilities and security deposits are carried at amounts that reasonably approximate their fair value due to their short term nature.

On January 1, 2008, we adopted Financial Accounting Standards Board, or FASB, ASC 820 Fair Value Measurements and Disclosures, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Fixed rate notes payable at March 31, 2012 and December 31, 2011, totaled $537 million and $538 million, respectively, and had estimated fair values of $563 million and $560 million (excluding prepayment penalties), respectively, as of March 31, 2012 and December 31, 2011. The carrying value of variable rate notes payable (excluding the effect of interest rate swap and cap agreements) at March 31, 2012 and December 31, 2011, totaled $1,003 million and $1,112 million, respectively, and had estimated fair values of $949 million and $1,053 million (excluding prepayment penalties), respectively, as of March 31, 2012 and December 31, 2011. The valuation of our debt is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each debt instrument. This analysis reflects the contractual terms of the debt, and uses observable market-based inputs, including interest rate curves and credit spreads. The fair values of fixed debt are determined by using the present value of future cash outflows discounted with the applicable current market rate plus a credit spread. The fair values of variable debt are determined using the stated variable rate plus the current market credit spread. Our variable rates reset every 30 to 90 days and we conclude that these rates reasonably estimate current market rates. We have determined that inputs used to value our debt fall within Level 2 of the fair value hierarchy and therefore our fair market valuation of debt is considered Level 2 in the fair value hierarchy.

Currently, we use interest rate swaps and interest rate caps (options) to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.


16



The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

To comply with the provisions of ASC 820, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. In conjunction with the FASB's fair value measurement guidance, we made an accounting policy election to measure the credit risk of our derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, and as a result, all of our derivatives held as of March 31, 2012 and December 31, 2011 were classified as Level 2 of the fair value hierarchy.

The table below presents our assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2012
(dollars in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Balance At
 
 
 
 
March 31, 2012
Assets
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
1,367

 
$

 
$
1,367

Liabilities
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
29,360

 
$

 
$
29,360




Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2011
(dollars in thousands)
 
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Balance At
 
 
 
 
December 31, 2011
Assets
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
1,018

 
$

 
$
1,018

Liabilities
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
33,095

 
$

 
$
33,095


The fair value estimates presented herein are based on information available to management as of March 31, 2012 and December 31, 2011.  These estimates are not necessarily indicative of the amounts we could ultimately realize.  See also discussions in Item 1. Financial Statements – Notes to Consolidated Financial Statements, Note 8.







17



10.           Recent Accounting Pronouncements

Impact of Recently Issued Accounting Standards
 
In June 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  ASU 2011-05 will be applied retrospectively.  The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  We adopted ASU 2011-05 during the reporting period ended December 31, 2011, and this changes the presentation of our financial statements but not our consolidated financial condition or results of operations taken as a whole.

In November 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU supersedes certain paragraphs in ASU 2011-05 addressing reclassification adjustments out of accumulated other comprehensive income. The effective dates and expected changes to our presentation are the same as noted in ASU 2011-05 above.

In May 2011, the FASB has issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments change the wording, mainly for clarification, used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this update to result in a change in the application of the requirements in Topic 820.  The amendments in this ASU are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011.  We have adopted ASU 2011-04 for the interim and annual periods of fiscal year 2012. The adoption of ASU 2011-04 does not have a material impact on our consolidated financial condition or results of operations taken as a whole.


11.           Subsequent Events

Real Estate Acquisitions

On April 2, 2012, we closed on the purchase of Adalay Bay, a 240 unit community located in Chesapeake, Virginia.

On April 5, 2012, we closed on the purchase of Legacy at Western Oaks, a 479 unit community located in Austin, Texas. This property was purchased directly from one of our joint ventures, Mid-America Multifamily Fund II, LLC, and resulted in a gain.


















18



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 that might appear in the condensed consolidated financial statements should not be interpreted as being indicative of future operations.

Forward Looking Statements

We consider this and other sections of this Quarterly Report on Form 10-Q to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, with respect to our expectations for future periods. Forward looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future.  Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development and renovation activity as well as other capital expenditures, capital raising activities, rent growth, occupancy and rental expense growth.  Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.  Such factors include, among other things, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions.  Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such forward-looking statements included in this report may not prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

inability to generate sufficient cash flows due to market conditions, changes in supply and/or demand, competition, uninsured losses, changes in tax and housing laws, or other factors;
the availability of credit, including mortgage financing, and the liquidity of the debt markets, including a material deterioration of the financial condition of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;
inability to replace financing with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation should their investment in the multifamily industry shrink or cease to exist;
inability to acquire funding through the capital markets;
failure of new acquisitions to achieve anticipated results or be efficiently integrated into us;
failure of development communities to be completed, if at all, on a timely basis or to lease-up as anticipated;
increasing real estate taxes and insurance costs;
inability of a joint venture to perform as expected;
inability to acquire additional or dispose of existing apartment units on favorable economic terms;
unexpected capital needs;
losses from catastrophes in excess of our insurance coverage;
changes in interest rate levels, including that of variable rate debt, such as extensively used by us;
loss of hedge accounting treatment for interest rate swaps and interest rate caps;
inability to pay required distributions to maintain REIT status;
the continuation of the good credit of our interest rate swap and cap providers;
inability to meet loan covenants;
significant decline in market value of real estate serving as collateral for mortgage obligations;
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 attract and retain qualified personnel;
potential liability for environmental contamination;
adverse legislative or regulatory tax changes; and
litigation and compliance costs associated with laws requiring access for disabled persons.





19



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 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 and amortization of assets, impairment of long-lived assets, including goodwill, acquisition of real estate assets and fair value of derivative financial instruments.

Revenue Recognition

We lease multifamily residential apartments under operating leases primarily with terms of one year or less. Rental revenues are recognized using a method that represents a straight-line basis over the term of the lease and other revenues are recorded when earned. We record all gains and losses on real estate in accordance with accounting standards governing the sale of real estate.

Capitalization of expenditures and depreciation and amortization of assets

We carry real estate assets at depreciated cost.  Depreciation and amortization 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 amortization 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 is 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, real estate taxes and personnel expense.

Impairment of long-lived assets, including goodwill

We account for long-lived assets in accordance with the provisions of accounting standards for the impairment or disposal on long-lived assets and evaluate our goodwill for impairment under accounting standards for goodwill and other intangible assets. We evaluate goodwill for impairment on at least an annual basis, or more frequently if a goodwill impairment indicator is identified. We periodically evaluate long-lived assets, including investments in real estate and goodwill, for indicators that would suggest that the carrying amount of the assets may not be recoverable. The judgments regarding the existence of such indicators are based on factors such as operating performance, market conditions and legal factors.

Long-lived assets, such as real estate assets, equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented on the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss for goodwill is recognized to the extent that the carrying amount exceeds the implied fair value of goodwill. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. In the apartment industry, the primary method used for determining fair value is to divide annual operating cash flows by an appropriate capitalization rate. We determine the appropriate capitalization rate by reviewing the prevailing rates in a property’s market or submarket. Second, if the carrying

20



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 with accounting standards for business combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Acquisition of real estate assets

We account for our acquisitions of investments in real estate in accordance with ASC 805-10, Business Combinations, which requires the fair value of the real estate acquired to be allocated to the acquired tangible assets, consisting of land, building and furniture, fixtures and equipment, and identified intangible assets, consisting of the value of in-place leases.

We allocate the purchase price to the fair value of the tangible assets of an acquired property (which includes the land, building, and furniture, fixtures, and equipment) determined by valuing the property as if it were vacant, based on management's determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. These methods include using stabilized NOI and market specific capitalization and discount rates.

In allocating the fair value of identified intangible assets of an acquired property, the in-place leases are valued based on current rent rates and time and cost to lease a unit. Management concluded that the leases acquired on each of its property acquisitions are approximately at market rates since the lease terms generally do not extend beyond one year.

Fair value of derivative financial instruments

We utilize certain derivative financial instruments, primarily interest rate swaps and interest rate caps, during the normal course of business to manage, or hedge, the interest rate risk associated with our variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction.

In order for a derivative contract to be designated as a hedging instrument, changes in the hedging instrument must be highly effective at offsetting changes in the hedged item. The historical correlation of the hedging instruments and the underlying hedged items are assessed before entering into the hedging relationship and on a quarterly basis thereafter, and have been found to be highly effective.

We measure ineffectiveness using the change in the variable cash flows method or the hypothetical derivative 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 interest rate 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 interest rate caps.  The variable interest rates used in the calculation of projected receipts on the interest rate cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. Additionally, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Changes in the fair values of our derivatives are primarily the result of fluctuations in interest rates. See Notes 8 and 9 of the accompanying Condensed Consolidated Financial Statements.


Overview of the Three Months Ended March 31, 2012

We experienced an increase in income from continuing operations before non-operating items for the three months ended March 31, 2012 over the three months ended March 31, 2011 as increases in revenues outpaced increases in property operating expenses. The increases in revenues came from a 5.2% increase in our large market same store segment, a 3.6% increase in our secondary market same store segment and a 155.6% increase in our non-same store and other segment, which was primarily a

21



result of acquisitions. Our same store portfolio represents those communities that have been held and have been stabilized for at least 12 months. Communities excluded from the same store portfolio would include recent acquisitions, communities being developed or in lease-up, communities undergoing extensive renovations, and communities identified as discontinued operations.

As of March 31, 2012, our wholly-owned portfolio consisted of 46,424 apartment units in 160 communities, compared to 44,689 apartment units in 152 communities at March 31, 2011. For these communities, the average effective rent per apartment unit, excluding units in lease-up, increased to $805 per unit at March 31, 2012 from $749 per unit at March 31, 2011.  For these same communities, overall occupancy at March 31, 2012 and 2011 was 96.3% and 95.9%, respectively. Average effective rent per unit is equal to the average of gross rent amounts after the effect of leasing concessions for occupied units plus prevalent market rates asked for unoccupied units, divided by the total number of units. Leasing concessions represent discounts to the current market rate. We believe average effective rent is a helpful measurement in evaluating average pricing. It does not represent actual rental revenue collected per unit.

The following is a discussion of our consolidated financial condition and results of operations for the three month periods ended March 31, 2012 and 2011.  This discussion should be read in conjunction with all of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the Three Month Period Ended March 31, 2012 to the Three Month Period Ended March 31, 2011

Property revenues for the three months ended March 31, 2012 were approximately $119.4 million, an increase of approximately $14.6 million from the three months ended March 31, 2011 due to (i) a $2.7 million increase in property revenues from our large market same store group primarily as a result in an increase in average rent per unit, (ii) a $1.6 million increase in property revenues from our secondary market same store group primarily as a result in an increase in average rent per unit, and (iii) a $10.3 million increase in property revenues from our non-same store and other group, primarily as a result of acquisitions.

Property operating expenses include costs for property personnel, property personnel bonuses, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and depreciation and amortization. Property operating expenses, excluding depreciation and amortization, for the three months ended March 31, 2012 were approximately $49.8 million, an increase of approximately $5.5 million from the three months ended March 31, 2011 due primarily to increases in property operating expenses of (i) $0.9 million from our large market same store group, (ii) $0.9 million from our secondary market same store group, and (iii) $3.7 million from our non-same store and other group, primarily as a result of acquisitions.

Depreciation and amortization expense for the three months ended March 31, 2012 was approximately $30.6 million, an increase of approximately $3.4 million from the three months ended March 31, 2011 primarily due to the increases in depreciation and amortization expense of (i) $0.3 million from our secondary market same store group, and (ii) $3.1 million from our non-same store and other group, mainly as a result of acquisitions. Increases of depreciation and amortization expense from our secondary market same store group resulted from asset additions made during the normal course of business.

During the three months ended March 31, 2012, we sold two properties for a gain of $9.5 million.  There was no gain or loss from sale of property in the three months ended March 31, 2011.

Primarily as a result of the foregoing, net income attributable to MAA increased by approximately $15.0 million in the three months ended March 31, 2012 from the three months ended March 31, 2011.


Funds From Operations and Net Income

Funds from operations, or FFO, represents net income attributable to MAA (computed in accordance with GAAP), excluding extraordinary items, asset impairment, 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.

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

22



acquired properties, and thus are not deducted in calculating FFO.

FFO should not be considered as an alternative to net income attributable to MAA 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 and amortization 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. 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 MAA for the three month periods ended March 31, 2012, and 2011 (dollars and shares in thousands):

 
Three months ended March 31,
 
 
2012
 
2011
 
Net income attributable to MAA
$
23,890

 
$
8,844

 
Depreciation and amortization of real estate assets
30,057

 
26,687

 
Asset impairment on discontinued operations
71

 

 
Net casualty loss and other settlement proceeds
4

 
141

 
Net casualty loss and other settlement proceeds of discontinued operations
54

 
7

 
Depreciation and amortization of real estate assets of discontinued operations
135

 
525

 
(Gain) on sales of discontinued operations
(9,500
)
 

 
Depreciation and amortization of real estate assets of real estate joint ventures
557

 
514

 
Net income attributable to noncontrolling interests
1,178

 
311

 
Funds from operations
$
46,446

 
$
37,029

 

FFO for the three month period ended March 31, 2012 increased approximately $9.4 million from the three month period ended March 31, 2011 primarily as a result of the increases in property revenues of approximately $14.6 million discussed above that were only partially offset by the $5.5 million increase in property operating expenses, excluding depreciation and amortization.

Trends
During the three months ended March 31, 2012, rental demand for apartments continued to be strong as compared to the same period in 2011 and the prior quarter. Despite the winter months typically being a slower season for renting apartments, occupancy remained strong as compared to both the prior quarter ended December 31, 2011 and the three months ended March 31, 2011, average effective rent per unit continued to increase, and the average price for new leases and renewals signed trended up from January to March. Average effective rent per unit is equal to the average of gross rent amounts after the effect of leasing concessions for occupied units plus prevalent market rates asked for unoccupied units, divided by the total number of units. Leasing concessions represent discounts to the current market rate. We believe average effective rent is a helpful measurement in evaluating average pricing. It does not represent actual rental revenue collected per unit.
As mentioned above, the continued strength in pricing and occupancy through the three months ended March 31, 2012 is encouraging. However, with new employment, one of the primary drivers of apartment demand, continuing to increase at a slow pace, we remain cautious about apartment demand and pricing but optimistic about the long term prospects for apartment demand as job growth returns.
An important part of our portfolio strategy is to maintain a broad diversity of markets across the Sunbelt region of the United States. The diversity of markets tends to mitigate exposure to economic issues in any one geographic market or area. We have found that a well diversified portfolio, including both large and select secondary markets, has tended to perform well in “up” cycles as well as weather “down” cycles better. As of March 31, 2012, we were invested in over 50 separate Sunbelt region markets, with 60% of our gross assets in large markets and 40% of our gross assets in select secondary markets.

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We also continue to benefit on the supply side. New supply entering the market was low in 2011 and continues to run well below historical new supply delivery averages. Competition from condominiums reverting back to rental units, or new condominiums being converted to rental, was not a major factor in our portfolio because most of our 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 or single family houses in only a few of our submarkets. We expect this relative new supply compression to be a positive factor to our business as the new supply remains limited.
Our focus throughout 2011 and through the three months ended March 31, 2012 was increasing pricing where possible through our revenue management system, while maintaining strong physical occupancy. Through these efforts, effective rent per unit for the three months ended March 31, 2012 was positive on both a quarter over quarter and sequential quarter basis. At the same time, our average same store physical occupancy (large market same store and secondary market same store segments combined) for the three months ended March 31, 2012 remained consistent (up three basis points) with the three months ended March 31, 2011 and improved significantly (up almost 80 basis points) from the three months ended December 31, 2011. With strong occupancy in place, we expect the positive pricing trend to continue going into the typically busier spring and summer leasing season.
Overall same store revenues increased 4.5% for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011. As expected, we were able to continue to achieve more robust revenue growth as rents continued their upward trend. Although an increase in development is expected, we believe the continued reduced availability of financing for new apartment construction will likely limit new apartment construction to levels well below pre-recession deliveries. Also, more sustainable credit terms for residential mortgages should work to favor rental demand at existing multifamily properties. Long term, we expect demographic trends (including the growth of prime age groups for rentals and immigration and population movement to the southeast and southwest) will continue to build apartment rental demand for our markets.
Should the economy fall back into a recession, the limited new supply of apartments and the more disciplined mortgage financing for single family home buying should lessen the impact to some degree, but a weak economy and employment market would nevertheless limit rent growth prospects.
We continue to develop improved products, operating systems and procedures that enable us to capture more revenues. The continued roll-out of ancillary services (such as our cable saver and deposit saver programs), 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.
Throughout the three months ended March 31, 2012, we continued to have the benefit of lower interest rates resulting from a continued strong market for Federal National Mortgage Association and Federal Home Loan Mortgage Corporation debt securities. Short term interest rates continue to be at historically low levels, and as a result, we are forecasting a continuation of favorable interest rates in the near term with the expectation of rising rates as the economy improves.

Liquidity and Capital Resources

Net cash flow provided by operating activities increased to $37.8 million for the three months ended March 31, 2012 from $31.3 million for the three months ended March 31, 2011. This change is mainly a result of cash inflows from property operations induced by the $14.6 million increase in operating revenue for the three months ended March 31, 2012 from the three months ended March 31, 2011 being above the $5.5 million increase in property operating expenses, excluding depreciation and amortization, and other incremental operating expenses in total over the same period.  The change is also due to the timing of payments of operating liabilities.

Net cash used in investing activities was approximately $34.0 million during the three months ended March 31, 2012 compared to $47.3 million during the three months ended March 31, 2011.  During the three months ended March 31, 2012, we had no property acquisitions, compared to approximately $30.0 million in cash outflows for property acquisitions for the three months ended March 31, 2011. We also had cash outflows of $26.7 million related to development activities during the three months ended March 31, 2012 compared to to approximately $3.6 million for the three months ended March 31, 2011.  In addition to acquisition costs and development costs, we had outflows of $2.9 million for renovations to existing real estate assets during the three months ended March 31, 2012, compared to $2.4 million for the three months ended March 31, 2011. We received approximately $29.0 million during the three months ended March 31, 2012 primarily related to the disposition of two properties during the period. Approximately $21.6 million of these proceeds were held in escrow for a future tax free property exchange. During the three months ended March 31, 2011, we did not have property dispositions.


24



Net cash outflow for financing activities was approximately $19.3 million for the three months ended March 31, 2012, compared to net cash inflow for financing activities of $17.3 million during the three months ended March 31, 2011. During the three months ended March 31, 2012, we received net proceeds of approximately $120.1 million primarily from the issuance of shares of common stock through our March 2, 2012 public offering, and the optional cash purchase feature of our DRSPP. We used a portion of the proceeds to fund partially the pay down of our credit lines during the three months ended March 31, 2012. During the three months ended March 31, 2011, we received proceeds of approximately $91.4 million from the issuance of shares of common stock through our ATM and the optional cash purchase feature of our DRSPP. We paid down approximately $109.6 million of debt in the three months ended March 31, 2012 compared to $48.3 million paid down in the three months ended March 31, 2011, both primarily due to cash outflows for the reduction in outstanding debt in the FNMA credit facility.

The weighted average interest rate at March 31, 2012 for the $1.4 billion of secured debt outstanding was 3.7%, compared to the weighted average interest rate of 3.9% on $1.5 billion of secured debt outstanding at March 31, 2011.  The weighted average interest rate at March 31, 2012 for the $187.0 million of unsecured debt was 4.3%. We did not have unsecured debt outstanding at March 31, 2011.  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 credit facilities and bond placements. We utilize fixed rate borrowings, interest rate swaps and interest rate caps to manage our current and future interest rate risk. More details on our borrowings can be found in the schedules presented later in this section.

On March 1, 2012, we entered into a $150 million unsecured term loan agreement with a syndicate of banks lead by Key Bank and J.P. Morgan at a rate of LIBOR plus a spread of 1.40% to 2.15% based on a leveraged based pricing grid and a maturity date of March 1, 2017. We had borrowings of $50 million outstanding under this agreement at March 31, 2012, with the remaining balance to be received in the second quarter.

Approximately 51% of our outstanding obligations at March 31, 2012 were borrowed through credit facilities with/or credit enhanced by FNMA, also referred to as the FNMA Facilities. The FNMA Facilities have a combined line limit of approximately $964.4 million, of which $884.4 million was collateralized and available to borrow at March 31, 2012. We had total borrowings outstanding under the FNMA Facilities of $787.5 million at March 31, 2012. Various traunches of the FNMA Facilities mature from 2012 through 2033. 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 London Interbank Offered Rate, or 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 0.67%.

Approximately 13% of our outstanding obligations at March 31, 2012 were borrowed through a facility with/or credit enhanced by Freddie Mac, also referred to as the Freddie Mac Facility. The Freddie Mac Facility has a total line limit of $200.0 million, of which $198.2 million was collateralized and available to borrow at March 31, 2012. We had total borrowings outstanding under the Freddie Mac Facility of approximately $198.2 million at March 31, 2012. The Freddie Mac facility matures in 2014. The interest rate on the Freddie Mac Facility 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 one month or three month LIBOR, plus a credit enhancement fee of 0.65%. The Freddie Mac Reference Bill rate has traded consistently below LIBOR, and the historical average spread is 0.32% below LIBOR.

We also maintain a $250.0 million unsecured credit facility with nine banks led by Key Bank. The Key Bank Credit Line bears an interest rate of LIBOR plus a spread of 1.65% to 2.40% based on a leveraged based pricing grid. This credit line expires in November 2015 with a one year extension option. At March 31, 2012, we had $248.8 million available to be borrowed under the Key Bank Credit Line agreement with $2.0 million borrowed under this facility. Approximately $1.2 million of the facility is used to support letters of credit.

Each of our credit facilities is subject to various covenants and conditions on usage, and the secured facilities are 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, one or more of our lenders could declare a default after applicable cure periods, accelerate the due date for repayment of all amounts outstanding and/or foreclose on properties securing such facilities.  A default on an obligation to repay outstanding debt could also create a cross default on a separate piece of debt, whereby one or more of our lenders could accelerate the due date for repayment of all amounts outstanding and/or foreclose on properties securing the related facilities.  Any such event could have a material adverse effect. We believe we were in compliance with these covenants and conditions on usage at March 31, 2012.


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The following schedule details the line limits, availability, outstanding balances and contract maturities of our various borrowings as of March 31, 2012 (dollars in thousands):

 
Line
Limit
 
Amount
Collateralized and/or Available
 
Amount
Borrowed
 
Average Years
to Contract
Maturity
Fannie Mae Credit Facilities
$
964,429

 
$
884,429

 
$
787,498

 
5.4

Freddie Mac Credit Facilities
200,000

 
198,247

 
198,247

 
2.3

Other Secured Borrowings
367,311

 
367,311

 
367,311

 
8.1

Unsecured Credit Facility
250,000

 
248,827

 
2,000

 
3.6

Other Unsecured Borrowings
285,000

 
185,000

 
185,000

 
7.5

Total Debt
$
2,066,740

 
$
1,883,814

 
$
1,540,056

 
6.0


As of March 31, 2012, we had entered into designated interest rate swaps totaling a notional amount of $651.8 million. To date, these swaps prove to be highly effective hedges. We also entered into interest rate cap agreements totaling a notional amount of approximately $256.4 million as of March 31, 2012. Four major banks provide approximately 98% of our derivative fair value, all of which have investment grade ratings from Moody’s and Standard & Poors.








































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The following schedule outlines our variable versus fixed rate debt, including the impact of interest rate swaps and caps, outstanding as of March 31, 2012 (dollars in thousands):
 
Principal
Balance
 
Average Years
to Rate
Maturity
 
Effective
Rate
SECURED DEBT
 
 
 
 
 
Conventional - Fixed Rate or Swapped
$
886,111

 
4.4

 
5.1
%
Tax-free - Fixed Rate or Swapped
17,800

 
0.5

 
4.4
%
Conventional - Variable Rate - Capped  (1) (2)
213,136

 
3.8

 
1.0
%
Tax-free – Variable Rate - Capped (1)
72,715

 
1.9

 
1.0
%
Total Fixed or Hedged Rate Maturity
$
1,189,762

 
4.1

 
4.1
%
Conventional - Variable Rate
163,294

 
0.2

 
0.7
%
Total Secured Rate Maturity
$
1,353,056

 
3.6

 
3.7
%
UNSECURED DEBT
 

 
 

 
 

Fixed Rate or Swapped (3)
$
185,000

 
7.5

 
4.3
%
Variable Rate
2,000

 

 
2.7
%
Total Unsecured Rate Maturity
$
187,000

 
7.4

 
4.3
%
TOTAL DEBT RATE MATURITY
$
1,540,056

 
4.1

 
3.8
%
TOTAL FIXED OR HEDGED DEBT RATE MATURITY
$
1,374,762

 
4.6

 
4.1
%

(1) 
The effective rate represents the average rate on the underlying variable debt unless the cap rates are reached, which average 4.6% of LIBOR for conventional caps and 5.4% of SIFMA for tax-free caps.
(2) 
Includes a $15.2 million mortgage with an embedded cap at a 7% all-in interest rate.
(3) 
Balance is fixed at 2.7% by interest rate swaps that do not become effective until June 1, 2012. The unswapped rate has been used in this table.

The following schedule outlines the contractual maturity dates of our total borrowing capacity as of March 31, 2012 (in thousands):
 
 
Credit Facility Line Limits
 
 
 
 
 
 
Maturity
 
Fannie Mae Secured
 
Freddie Mac Secured
 
Key Bank Unsecured
 
Other Secured (1)
 
Other Unsecured
 
Total
2012
 
$
80,000

 
$

 
$

 
$

 
$

 
$
80,000

2013
 
203,193

 

 

 

 

 
203,193

2014
 
229,721

 
200,000

 

 
16,853

 

 
446,574

2015
 
120,000

 

 
250,000

 
51,340

 

 
421,340

2016
 
80,000

 

 

 

 

 
80,000

2017
 
80,000

 

 

 
28,782

 
150,000