XNYS:MAA Mid-America Apartment Communities Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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
July 30, 2012
Common Stock, $0.01 par value
41,103,516




MID-AMERICA APARTMENT COMMUNITIES, INC.

TABLE OF CONTENTS

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

 
Condensed Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011 (Unaudited)
2

 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2012 (Unaudited) and 2011 (Unaudited).
3

 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 (unaudited) and 2011 (unaudited).
4

 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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.
31

Item 4.
Controls and Procedures.
31

 
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings.
32

Item 1A.
Risk Factors.
32

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
41

Item 3.
Defaults Upon Senior Securities.
41

Item 4.
Mine Safety Disclosures.
41

Item 5.
Other Information.
41

Item 6.
Exhibits.
42

 
Signatures
43


1



MAA
Condensed Consolidated  Balance  Sheets
June 30, 2012 and December 31, 2011
(Unaudited)
(Dollars in thousands, except share data)
 
June 30, 2012
 
December 31, 2011
Assets:
 
 
 
Real estate assets:
 
 
 
Land
$
358,429

 
$
333,846

Buildings and improvements
2,966,313

 
2,879,289

Furniture, fixtures and equipment
94,975

 
92,170

Development and capital improvements in progress
75,552

 
53,790

 
3,495,269

 
3,359,095

Less accumulated depreciation
(990,936
)
 
(961,724
)
 
2,504,333

 
2,397,371

 
 
 
 
Land held for future development
1,306

 
1,306

Commercial properties, net
7,865

 
8,125

Investments in real estate joint ventures
6,202

 
17,006

Real estate assets, net
2,519,706

 
2,423,808

 
 
 
 
Cash and cash equivalents
22,341

 
57,317

Restricted cash
1,038

 
1,362

Deferred financing costs, net
14,859

 
14,680

Other assets
28,542

 
29,195

Goodwill
4,106

 
4,106

Assets held for sale
8,496

 

Total assets
$
2,599,088

 
$
2,530,468

 
 
 
 
Liabilities and Shareholders' Equity:
 

 
 

Liabilities:
 

 
 

Secured notes payable
$
1,226,421

 
$
1,514,755

Unsecured notes payable
363,000

 
135,000

Accounts payable
5,582

 
2,091

Fair market value of interest rate swaps
27,648

 
33,095

Accrued expenses and other liabilities
89,941

 
91,718

Security deposits
6,586

 
6,310

Liabilities associated with assets held for sale
9,250

 

Total liabilities
1,728,428

 
1,782,969

 
 
 
 
Redeemable stock
4,697

 
4,037

 
 
 
 
Shareholders' equity:
 

 
 

Common stock, $0.01 par value per share, 100,000,000 shares authorized; 41,101,427 and 38,959,338 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively (1)
410

 
389

Additional paid-in capital
1,494,172

 
1,375,623

Accumulated distributions in excess of net income
(624,304
)
 
(621,833
)
Accumulated other comprehensive losses
(30,891
)
 
(35,848
)
Total MAA shareholders' equity
839,387

 
718,331

Noncontrolling interest
26,576

 
25,131

Total equity
865,963

 
743,462

Total liabilities and equity
$
2,599,088

 
$
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 June 30, 2012 and December 31, 2011 are 68,837 and 65,771, respectively.
See accompanying notes to consolidated financial statements.

2



MAA
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 2012 and 2011
(Unaudited)
(Dollars in thousands, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Operating revenues:
 
 
 
 
 
 
 
Rental revenues
$
113,783

 
$
97,996

 
$
222,111

 
$
192,517

Other property revenues
9,930

 
8,942

 
19,506

 
17,761

Total property revenues
123,713

 
106,938

 
241,617

 
210,278

Management fee income
209

 
263

 
478

 
486

Total operating revenues
123,922

 
107,201

 
242,095

 
210,764

Property operating expenses:
 

 
 

 
 

 
 

Personnel
14,322

 
13,134

 
28,634

 
25,783

Building repairs and maintenance
4,014

 
3,619

 
7,864

 
6,798

Real estate taxes and insurance
14,420

 
12,182

 
28,151

 
24,214

Utilities
6,933

 
6,148

 
13,162

 
12,031

Landscaping
2,760

 
2,634

 
5,639

 
5,238

Other operating
8,459

 
8,005

 
16,630

 
15,319

Depreciation and amortization
31,549

 
27,280

 
61,821

 
54,140

Total property operating expenses
82,457

 
73,002

 
161,901

 
143,523

Acquisition expenses
865

 
1,520

 
231

 
1,739

Property management expenses
5,570

 
5,194

 
11,024

 
10,338

General and administrative expenses
3,462

 
5,439

 
6,909

 
10,049

Income from continuing operations before non-operating items
31,568

 
22,046

 
62,030

 
45,115

Interest and other non-property income
112

 
114

 
254

 
459

Interest expense
(14,270
)
 
(13,945
)
 
(28,486
)
 
(27,704
)
(Loss) gain on debt extinguishment
(15
)
 
(48
)
 
5

 
(48
)
Amortization of deferred financing costs
(869
)
 
(707
)
 
(1,640
)
 
(1,422
)
Net casualty gain (loss) after insurance and other settlement proceeds
2

 
(265
)
 
(2
)
 
(406
)
(Loss) gain on sale of non-depreciable assets
(3
)
 
22

 
(3
)
 
16

Income from continuing operations before loss from real estate joint ventures
16,525

 
7,217

 
32,158

 
16,010

Loss from real estate joint ventures
(67
)
 
(178
)
 
(98
)
 
(423
)
Income from continuing operations
16,458

 
7,039

 
32,060

 
15,587

Discontinued operations:
 

 
 

 
 

 
 

Income from discontinued operations before gain on sale
63

 
641

 
154

 
1,255

Asset impairment on discontinued operations

 

 
(71
)
 

Net casualty loss after insurance and other settlement proceeds on discontinued operations
(2
)
 

 
(56
)
 
(7
)
Gain on sale of discontinued operations
12,953

 

 
22,453

 

Consolidated net income
29,472

 
7,680

 
54,540

 
16,835

Net income attributable to noncontrolling interests
1,312

 
252

 
2,490

 
563

Net income attributable to MAA
28,160

 
7,428

 
52,050

 
16,272

Net income available for common shareholders
$
28,160

 
$
7,428

 
$
52,050

 
$
16,272

 
 
 
 
 
 
 
 
Earnings per common share - basic:
 

 
 

 
 

 
 

Income from continuing operations available for common shareholders
$
0.37

 
$
0.18

 
$
0.73

 
$
0.41

Discontinued property operations
0.32

 
0.02

 
0.56

 
0.04

Net income available for common shareholders
$
0.69

 
$
0.20

 
$
1.29

 
$
0.45

 
 
 
 
 
 
 
 
Earnings per share - diluted:
 

 
 

 
 

 
 

Income from continuing operations available for common shareholders
$
0.37

 
$
0.18

 
$
0.73

 
$
0.41

Discontinued property operations
0.32

 
0.02

 
0.56

 
0.03

Net income available for common shareholders
$
0.69

 
$
0.20

 
$
1.29

 
$
0.44

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.6600

 
$
0.6275

 
$
1.3200

 
$
1.2550

See accompanying notes to consolidated financial statements.

3




MAA
Condensed Consolidated Statements of Comprehensive Income
Three and Six months ended June 30, 2012 and 2011
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Consolidated net income
$
29,472

 
$
7,680

 
$
54,540

 
$
16,835

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized losses from the effective portion of derivative instruments
(3,991
)
 
(8,026
)
 
(5,293
)
 
(8,203
)
Reclassification adjustment for losses included in net income for the effective portion of derivative instruments
4,944

 
7,374

 
10,492

 
15,012

Total comprehensive income
30,425

 
7,028

 
59,739

 
23,644

Less: comprehensive income attributable to noncontrolling interests
(1,354
)
 
(229
)
 
(2,732
)
 
(793
)
Comprehensive income attributable to MAA
$
29,071

 
$
6,799

 
$
57,007

 
$
22,851

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 


4




MAA
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2012 and 2011
(Unaudited)
(Dollars in thousands)
 
Six months ended June 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Consolidated net income
$
54,540

 
$
16,835

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

 
 

Depreciation and amortization
64,341

 
57,318

Stock compensation expense
1,231

 
1,686

Redeemable stock issued
285

 
293

Amortization of debt premium
(316
)
 
(180
)
Loss from investments in real estate joint ventures
98

 
423

(Gain) loss on debt extinguishment
(5
)
 
48

Derivative interest expense
358

 
222

Loss on sale of non-depreciable assets
3

 
6

Gain on sale of discontinued operations
(22,453
)
 

Net casualty loss and other settlement proceeds
58

 
406

Changes in assets and liabilities:
 

 
 

Restricted cash
102

 
(113
)
Other assets
(63
)
 
1,943

Accounts payable
3,498

 
1,012

Accrued expenses and other
(1,118
)
 
3,714

Security deposits
305

 
(62
)
Net cash provided by operating activities
100,864

 
83,551

Cash flows from investing activities:
 

 
 

Purchases of real estate and other assets
(96,906
)
 
(185,901
)
Normal capital improvements
(26,380
)
 
(22,798
)
Construction capital and other improvements
(2,304
)

(2,983
)
Renovations to existing real estate assets
(6,896
)
 
(6,005
)
Development
(42,592
)
 
(8,658
)
Distributions from real estate joint ventures
10,779

 
828

Contributions to real estate joint ventures
(73
)
 
(1,373
)
Proceeds from disposition of real estate assets
51,133

 
320

Net cash used in investing activities
(113,239
)
 
(226,570
)
Cash flows from financing activities:
 

 
 

Net change in credit lines
(232,064
)
 
(12,817
)
Proceeds from notes payable
150,000

 
150,350

Principal payments on notes payable
(1,757
)
 
(101,612
)
Payment of deferred financing costs
(1,997
)
 
(1,700
)
Repurchase of common stock
(1,640
)
 
(2,260
)
Proceeds from issuances of common shares
120,148

 
125,737

Distributions to noncontrolling interests
(2,559
)
 
(2,719
)
Dividends paid on common shares
(52,732
)
 
(45,064
)
Net cash (used in) provided by financing activities
(22,601
)
 
109,915

Net decrease in cash and cash equivalents
(34,976
)
 
(33,104
)
Cash and cash equivalents, beginning of period
57,317

 
45,942

Cash and cash equivalents, end of period
$
22,341

 
$
12,838

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
30,441

 
$
28,034

Supplemental disclosure of noncash investing and financing activities:
 

 
 

Conversion of units to shares of common stock
$
2,516

 
$
2,878

Accrued construction in progress
$
6,818

 
$
6,775

Interest capitalized
$
1,289

 
$
459

Marked-to-market adjustment on derivative instruments
$
4,841

 
$
6,587

Reclassification of  redeemable stock to liabilities
$

 
$
151

Fair value adjustment on debt assumed
$
2,578

 
$

Debt assumed
$
30,290

 
$

See accompanying notes to consolidated financial statements.

5



MAA
Notes to Condensed Consolidated Financial Statements
June 30, 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 June 30, 2012, we owned or owned interests in a total of 168 multifamily apartment communities comprising 49,002 apartments located in 13 states, including two communities comprising 626 apartments owned through our joint venture, Mid-America Multifamily Fund I, LLC, and four communities comprising 1,156 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 1,220 units as of June 30, 2012. A total of 405 units for the development projects were completed as of June 30, 2012, and therefore have been included in the totals above. Total expected costs for the development projects are $143.6 million, of which $97.1 million has been incurred to date. We expect to complete construction on three of the projects by the fourth quarter 2012, with the last project being completed by the fourth quarter 2013. Four of our properties include retail components with approximately 104,000 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 $655,000 out of period adjustment related to the capitalization of land acquisition costs recorded during the first quarter of 2012. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended June 30, 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 and six month periods ended June 30, 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 June 30,
 
Six months ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Shares Outstanding
 
 
 
 
 
 
 
 
Weighted average common shares - basic
40,983

 
36,836

 
40,243

 
36,274

 
Weighted average partnership units outstanding

(1) 
1,982



(1) 
2,041

 
Effect of dilutive securities
45

 
105

 
84

 
105

 
Weighted average common shares - diluted
41,028

 
38,923

 
40,327

 
38,420

 
 
 
 
 
 
 
 
 
 
Calculation of Earnings per Share - basic
 

 
 

 
 

 
 

 
Net income available for common shareholders
$
28,160

 
$
7,428

 
$
52,050

 
$
16,272

 
Net income allocated to unvested restricted shares
(25
)
 
(2
)
 
(54
)
 
(11
)
 
Net income available for common shareholders, adjusted
$
28,135

 
$
7,426

 
$
51,996

 
$
16,261

 
 
 
 
 
 
 
 
 
 
Weighted average common shares - basic
40,983

 
36,836

 
40,243

 
36,274

 
Earnings per share - basic
$
0.69

 
$
0.20

 
$
1.29

 
$
0.45

 
 
 
 
 
 
 
 
 
 
Calculation of Earnings per Share - diluted
 

 
 

 
 

 
 

 
Net income available for common shareholders
$
28,160

 
$
7,428

 
$
52,050

 
$
16,272

 
Net income attributable to noncontrolling interests

(1) 
252



(1 
) 
563

 
Adjusted net income available for common shareholders
$
28,160

 
$
7,680

 
$
52,050

 
$
16,835

 
 
 
 
 
 
 
 
 
 
Weighted average common shares - diluted
41,028

 
38,923

 
40,327

 
38,420

 
Earnings per share - diluted
$
0.69

 
$
0.20

 
$
1.29

 
$
0.44

 

(1) Operating partnership units are not included in dilutive earnings per share calculations for the three or six months ended June 30, 2012, as they were not dilutive.
2.           Segment Information
As of June 30, 2012, we owned or had an ownership interest in 168 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 and six month periods ended June 30, 2012 and 2011, were as follows (dollars in thousands):

 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Large Market Same Store
$
56,133

 
$
53,014

 
$
111,140

 
$
105,284

Secondary Market Same Store
47,955

 
46,510

 
95,455

 
92,366

Non-Same Store and Other
19,625

 
7,414

 
35,022

 
12,628

Total property revenues
123,713

 
106,938

 
241,617

 
210,278

Management fee income
209

 
263

 
478

 
486

Total operating revenues
$
123,922

 
$
107,201

 
$
242,095

 
$
210,764

 
 
 
 
 
 
 
 
NOI
 

 
 

 
 

 
 

Large Market Same Store
$
32,748

 
$
30,401

 
$
64,846

 
$
60,677

Secondary Market Same Store
28,224

 
26,829

 
56,007

 
53,881

Non-Same Store and Other
12,423

 
5,736

 
22,058

 
9,923

Total NOI
73,395

 
62,966

 
142,911

 
124,481

Discontinued operations NOI included above
(590
)
 
(1,750
)
 
(1,374
)
 
(3,586
)
Management fee income
209

 
263

 
478

 
486

Depreciation and amortization
(31,549
)
 
(27,280
)
 
(61,821
)
 
(54,140
)
Acquisition credit (expense)
(865
)
 
(1,520
)
 
(231
)
 
(1,739
)
Property management expense
(5,570
)
 
(5,194
)
 
(11,024
)
 
(10,338
)
General and administrative expense
(3,462
)
 
(5,439
)
 
(6,909
)
 
(10,049
)
Interest and other non-property income
112

 
114

 
254

 
459

Interest expense
(14,270
)
 
(13,945
)
 
(28,486
)
 
(27,704
)
Gain on debt extinguishment
(15
)
 
(48
)
 
5

 
(48
)
Amortization of deferred financing costs
(869
)
 
(707
)
 
(1,640
)
 
(1,422
)
Net casualty loss and other settlement proceeds
2

 
(265
)
 
(2
)
 
(406
)
Loss on sale of non-depreciable assets
(3
)
 
22

 
(3
)
 
16

Loss from real estate joint ventures
(67
)
 
(178
)
 
(98
)
 
(423
)
Discontinued operations
13,014

 
641

 
22,480

 
1,248

Net income attributable to noncontrolling interests
(1,312
)
 
(252
)
 
(2,490
)
 
(563
)
Net income attributable to MAA
$
28,160

 
$
7,428

 
$
52,050

 
$
16,272


Assets for each reportable segment as of June 30, 2012 and December 31, 2011, were as follows (dollars in thousands):
 
June 30, 2012
 
December 31, 2011
Assets
 
 
 
Large Market Same Store
$
1,125,282

 
$
1,017,015

Secondary Market Same Store
664,165

 
668,109

Non-Same Store and Other
755,800

 
760,132

Corporate assets
53,841

 
85,212

Total assets
$
2,599,088

 
$
2,530,468




3.          Equity

Total equity and its components for the six month periods ended June 30, 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
 
 
 
 
52,050

 
 
 
2,490

 
54,540

Other comprehensive income - derivative instruments (cash flow hedges)
 
 
 
 
 
 
4,957

 
242

 
5,199

Issuance and registration of common shares
20

 
120,130

 
 
 
 
 
 
 
120,150

Shares repurchased and retired

 
(1,640
)
 
 
 
 
 
 
 
(1,640
)
Shares issued in exchange for units
1

 
2,515

 
 
 
 
 
(2,516
)
 

Redeemable stock fair market value
 
 
 
 
(375
)
 
 
 
 
 
(375
)
Adjustment for noncontrolling interest ownership in operating partnership
 
 
(3,687
)
 
 
 
 
 
3,687

 

Amortization of unearned compensation
 
 
1,231

 
 
 
 
 
 
 
1,231

Dividends on common stock ($0.6600 per share)
 
 
 
 
(54,146
)
 
 
 


 
(54,146
)
Dividends on noncontrolling interest units ($0.6600 per unit)
 
 
 
 
 
 
 
 
(2,458
)
 
(2,458
)
EQUITY BALANCE JUNE 30, 2012
$
410

 
$
1,494,172

 
$
(624,304
)
 
$
(30,891
)
 
$
26,576

 
$
865,963



  
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


 


 
16,272

 


 
563

 
16,835

Other comprehensive income - derivative instruments (cash flow hedges)


 


 


 
6,579

 
230

 
6,809

Issuance and registration of common shares
21

 
125,679

 


 


 


 
125,700

Shares repurchased and retired

 
(2,260
)
 


 


 


 
(2,260
)
Exercise of stock options

 
38

 


 


 


 
38

Shares issued in exchange for units
2

 
2,876

 


 


 
(2,878
)
 

Redeemable stock fair market value


 


 
(235
)
 


 


 
(235
)
Adjustment for noncontrolling interest ownership in operating partnership


 
(5,189
)
 


 


 
5,189

 

Amortization of unearned compensation


 
1,686

 


 


 


 
1,686

Dividends on common stock ($0.6275 per share)


 


 
(46,332
)
 


 


 
(46,332
)
Dividends on noncontrolling interest units ($0.6275 per unit)


 


 


 


 
(2,569
)
 
(2,569
)
EQUITY BALANCE JUNE 30, 2011
$
371

 
$
1,264,853

 
$
(605,316
)
 
$
(42,268
)
 
$
22,660

 
$
640,300




4.           Real Estate Acquisitions

On April 2, 2012, we purchased Adalay Bay, a 240 unit apartment community located in Chesapeake, Virginia.


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

On May 10, 2012, we purchased Allure in Buckhead Village, a 230 unit apartment community with approximately 23,000 square feet of retail space located in Atlanta, Georgia.


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, the 276-unit Cedar Mill apartments in Memphis, Tennessee, the 410-unit Celery Stalk apartments in Dallas, Texas, and the 200-unit TPC Florence apartments in Florence (Louisville), Kentucky are presented as discontinued operations in the accompanying condensed consolidated financial statements. These first three properties were sold on January 12, 2012, February 9, 2012, and June 7, 2012 respectively, and resulted in a gain of approximately $22.5 million, which is included in discontinued operations. TPC Florence is considered held for sale since earnest money was received and was non-refundable as of June 8, 2012.

The following is a summary of discontinued operations for the three and six month periods ended June 30, 2012 and 2011, (dollars in thousands):
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Rental revenues
$
1,069

 
$
3,376

 
$
2,651

 
$
6,740

Other revenues
123

 
411

 
304

 
825

Total revenues
1,192

 
3,787

 
2,955

 
7,565

Expenses
 

 
 

 
 

 
 

Property operating expenses
623

 
2,070

 
1,637

 
4,119

Depreciation and amortization
373

 
873

 
879

 
1,754

Interest expense
133

 
203

 
285

 
437

Total expense
1,129

 
3,146

 
2,801

 
6,310

Income from discontinued operations before gain on sale
63

 
641

 
154

 
1,255

Asset impairment on discontinued operations

 

 
(71
)
 

Net loss on insurance and other settlement proceeds on discontinued operations
(2
)
 

 
(56
)
 
(7
)
Gain on sale of discontinued operations
12,953

 

 
22,453

 

Income from discontinued operations
$
13,014

 
$
641

 
$
22,480

 
$
1,248


6.           Share and Unit Information

On June 30, 2012, 41,101,427 common shares and 1,784,208 operating partnership units were issued and outstanding, representing a total of 42,885,635 shares and units. At June 30, 2011, 37,142,477 common shares and 1,951,819 operating partnership units were outstanding, representing a total of 39,094,296 shares and units. Additionally, we had outstanding options for the purchase of 14,457 shares of common stock at June 30, 2011.  There were no outstanding options at June 30, 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.


8



During the three and six month periods ended June 30, 2011, we issued 528,674 and 1,522,473 shares of common stock, respectively, through our ATM programs for net proceeds of $34.1 million and $95.3 million. The gross proceeds for these issuances were $34.6 million and $96.8 million respectively. During the three and six month periods ended June 30, 2012, we did not issue any shares through our ATM programs. We have 1,733,526 shares remaining under our ATM program.
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. The gross proceeds for this offering were approximately $124.1 million.

During the three and six month periods ended June 30, 2012, we issued 209 shares and 329 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 gross proceeds of $14,000 and $22,000. During the three and six month periods ended June 30, 2011, we issued 151 shares and 495,387 shares of common stock through the optional cash purchase feature of our DRSPP resulting in gross proceeds of approximately $10,000 and $30.0 million.

During the six months ended June 30, 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 six months ended June 30, 2011, 25,082 shares were acquired for these purposes.


7.           Notes Payable

On June 30, 2012 and December 31, 2011, we had total indebtedness of approximately $1.59 billion and $1.65 billion, respectively. Our indebtedness as of June 30, 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. As of June 30, 2012 the full amount was outstanding under this agreement. Upon reaching an investment grade rating from either Moody's or Standard & Poor's, the variable rate will reset monthly at LIBOR plus a spread of 1.10% to 2.05% based on an investment grade ratings grid.

As of June 30, 2012, approximately 53% 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 23 interest rate swaps and 18 interest rate caps as of June 30, 2012, representing notional amounts totaling $601.8 million and $256.4 million, respectively. We also held 3 non-designated interest rate caps with notional amounts totaling $14.3 million as of June 30, 2012.






















The following table summarizes our outstanding debt structure as of June 30, 2012 (dollars in thousands):

 
Borrowed
Balance (2)
 
Effective
Rate
 
Contract
Maturity
Fixed Rate Secured Debt
 
 
 
 
 
Individual property mortgages
$
374,738

 
4.8
%
 
8/26/2019
FNMA conventional credit facilities
50,000

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

 
 

 
 
LIBOR-based interest rate swaps
434,000

 
5.2
%
 
1/1/2014
SIFMA-based interest rate swaps
17,800

 
4.4
%
 
10/15/2012
Total fixed rate secured debt
$
876,538

 
5.0
%
 
7/29/2016
Variable Rate Secured Debt (1)
 

 
 

 
 
FNMA conventional credit facilities
$
197,721

 
0.8
%
 
3/18/2016
FNMA tax-free credit facilities
72,715

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

 
0.8
%
 
7/1/2014
Freddie Mac mortgage
15,200

 
3.6
%
 
12/10/2015
Total variable rate secured debt
$
349,883

 
1.0
%
 
1/27/2019
Total Secured Debt
$
1,226,421

 
3.9
%
 
4/15/2017
 
 
 
 
 
 
Unsecured Debt
 

 
 

 
 
Variable rate credit facility
$
78,000

 
1.7
%
 
11/1/2015
Term loan fixed with swaps
150,000

 
2.7
%
 
3/1/2017
Fixed rate senior private placement bonds
135,000

 
5.1
%
 
8/23/2020
Total Unsecured Debt
$
363,000

 
3.4
%
 
3/4/2018
 
 
 
 
 
 
Total Outstanding Debt
$
1,589,421

 
3.8
%
 
6/28/2017

(1) Includes capped balances.
(2) Excludes borrowings on properties categorized as Assets Held for Sale on the Consolidated Balance Sheet. As of June 30, 2012 held for sale properties include a $9.1 million mortgage with a fixed interest rate of 5.9% maturing on January 1, 2044.



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

9



counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 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 June 30, 2012 and 2011, we recorded ineffectiveness of $23,000 and $101,000, respectively, and during the six months ended June 30, 2012 and 2011, we recorded ineffectiveness of $33,000 and $96,000, respectively, as an increase 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 six months ended June 30, 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 June 30, 2012 and 2011, we recorded a loss of less than $1,000 and $3,000, respectively, and during the six months ended June 30, 2012 and 2011, we recorded a loss of less than $1,000 and a loss of $6,000, 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 $17.3 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 June 30, 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
 
23
 
$
601,800,000


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 $9,000 for the three months ended June 30, 2012 and a loss of $33,000 for the six months ended June 30, 2012. We did not have any derivatives not designated as hedges for the three and six months ended June 30, 2011.

As of June 30, 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














10






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 June 30, 2012 and December 31, 2011, respectively:

Fair Values of Derivative Instruments on the Consolidated Balance Sheet as of June 30, 2012 and December 31, 2011 (dollars in thousands)
 
 
Asset Derivatives
 
Liability Derivatives
 
 
 
 
June 30, 2012
 
December 31, 2011
 
 
 
June 30, 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
 
$
402

 
$
975

 
Fair market value of interest rate swaps
 
$
27,648

 
$
33,095

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives designated as hedging instruments
 
 
 
$
402

 
$
975

 
 
 
$
27,648

 
$
33,095

 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
Other assets
 
$
10

 
$
43

 
 
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives not designated as hedging instruments
 
 
 
$
10

 
$
43

 
 
 
$

 
$


























11






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 and six months ended June 30, 2012 and 2011, respectively.

Effect of Derivative Instruments on the Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 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 June 30,
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(3,991
)
 
$
(8,026
)
 
Interest expense
 
$
(4,944
)
 
$
(7,374
)
 
Interest expense
 
$
(23
)
 
$
(104
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives in cash flow hedging relationships
 
$
(3,991
)
 
$
(8,026
)
 
 
 
$
(4,944
)
 
$
(7,374
)
 
 
 
$
(23
)
 
$
(104
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 

 
 

 
 
 
 

 
 

 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(5,293
)
 
$
(8,203
)
 
Interest expense
 
$
(10,492
)
 
$
(15,012
)
 
Interest expense
 
$
(33
)
 
$
(102
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivatives in cash flow hedging relationships
 
$
(5,293
)
 
$
(8,203
)
 
 
 
$
(10,492
)
 
$
(15,012
)
 
 
 
$
(33
)
 
$
(102
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
 
 
 
 
Location of Gain or (Loss) Recognized in Income
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
Interest expense
 
$
(9
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
$
(9
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
Interest expense
 
$
(33
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Total
 
 
 
 
 
 
 
$
(33
)
 
$

 
 
 
 
 
 





12



Credit-risk-related Contingent Features

As of June 30, 2012, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of $30.2 million, which includes accrued interest but excludes any adjustment for nonperformance risk. These derivatives had a fair value, gross of asset positions, of $27.6 million at June 30, 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 June 30, 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 $15.2 million.

Certain of our derivative contracts contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of June 30, 2012, we had not breached the provisions of these agreements. If we had breached theses provisions, we could have been required to settle our obligations under the agreements at the termination value of $2.2 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 $28.0 million as of June 30, 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 June 30, 2012.

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 June 30, 2012 and December 31, 2011, totaled $569 million and $538 million, respectively, and had estimated fair values of $613 million and $560 million (excluding prepayment penalties), respectively, as of June 30, 2012 and December 31, 2011. The carrying value of variable rate notes payable (excluding the effect of interest rate swap and cap agreements) at June 30, 2012 and December 31, 2011, totaled $1,030 million and $1,112 million, respectively, and had estimated fair values of $983 million and $1,053 million (excluding prepayment penalties), respectively, as of June 30, 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.

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 June 30, 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 June 30, 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 June 30, 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
 
 
 
 
June 30, 2012
Assets
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
412

 
$

 
$
412

Liabilities
 

 
 

 
 

 
 

Derivative financial instruments
$

 
$
27,648

 
$

 
$
27,648




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)