MAA.3.31.2013 10Q
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, 2013
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 29, 2013 |
Common Stock, $0.01 par value | 42,723,167 |
MID-AMERICA APARTMENT COMMUNITIES, INC. (MAA)
TABLE OF CONTENTS
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| | | |
| | Page |
| PART I – FINANCIAL INFORMATION | |
Item 1. | Financial Statements. | |
|
| Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012 (Unaudited). | 2 |
|
| Condensed Consolidated Statements of Operations for the three months ended March 31, 2013 (Unaudited) and 2012 (Unaudited). | 3 |
|
| Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 (Unaudited) and 2012 (Unaudited). | 4 |
|
| Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 (Unaudited) and 2012 (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. | 31 |
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| | |
| 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. | 41 |
|
Item 3. | Defaults Upon Senior Securities. | 41 |
|
Item 4. | Mine Safety Disclosures. | 41 |
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Item 5. | Other Information. | 41 |
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Item 6. | Exhibits. | 42 |
|
| Signatures. | 43 |
|
MAA
Condensed Consolidated Balance Sheets
March 31, 2013 and December 31, 2012
(Unaudited)
(Dollars in thousands, except per share data)
|
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Assets: | | | |
Real estate assets: | | | |
Land | $ | 389,839 |
| | $ | 386,670 |
|
Buildings and improvements | 3,223,326 |
| | 3,170,413 |
|
Furniture, fixtures and equipment | 101,214 |
| | 98,044 |
|
Development and capital improvements in progress | 51,625 |
| | 52,455 |
|
| 3,766,004 |
| | 3,707,582 |
|
Less accumulated depreciation | (1,059,563 | ) | | (1,027,618 | ) |
| 2,706,441 |
| | 2,679,964 |
|
| | | |
Land held for future development | 1,205 |
| | 1,205 |
|
Commercial properties, net | 7,875 |
| | 8,065 |
|
Investments in real estate joint ventures | 749 |
| | 4,837 |
|
Real estate assets, net | 2,716,270 |
| | 2,694,071 |
|
| | | |
Cash and cash equivalents | 8,224 |
| | 9,075 |
|
Restricted cash | 649 |
| | 808 |
|
Deferred financing costs, net | 12,989 |
| | 13,842 |
|
Other assets | 32,770 |
| | 29,166 |
|
Goodwill | 4,106 |
| | 4,106 |
|
Total assets | $ | 2,775,008 |
| | $ | 2,751,068 |
|
| | | |
Liabilities and Shareholders' Equity: | |
| | |
|
Liabilities: | |
| | |
|
Secured notes payable | $ | 1,114,253 |
| | $ | 1,190,848 |
|
Unsecured notes payable | 577,000 |
| | 483,000 |
|
Accounts payable | 5,672 |
| | 4,586 |
|
Fair market value of interest rate swaps | 17,313 |
| | 21,423 |
|
Accrued expenses and other liabilities | 86,436 |
| | 94,719 |
|
Security deposits | 6,830 |
| | 6,669 |
|
Total liabilities | 1,807,504 |
| | 1,801,245 |
|
| | | |
Redeemable stock | 5,191 |
| | 4,713 |
|
| | | |
Shareholders' equity: | |
| | |
|
Common stock, $0.01 par value per share, 100,000,000 shares authorized; 42,683,322 and 42,316,398 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively (1) | 426 |
| | 422 |
|
Additional paid-in capital | 1,565,755 |
| | 1,542,999 |
|
Accumulated distributions in excess of net income | (612,128 | ) | | (603,315 | ) |
Accumulated other comprehensive losses | (21,869 | ) | | (26,054 | ) |
Total MAA shareholders' equity | 932,184 |
| | 914,052 |
|
Noncontrolling interest | 30,129 |
| | 31,058 |
|
Total equity | 962,313 |
| | 945,110 |
|
Total liabilities and equity | $ | 2,775,008 |
| | $ | 2,751,068 |
|
| |
(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, 2013 and December 31, 2012 are 75,167 and 72,786, respectively. |
See accompanying notes to consolidated financial statements.
MAA
Condensed Consolidated Statements of Operations
Three months ended March 31, 2013 and 2012
(Unaudited)
(Dollars in thousands, except per share data)
|
| | | | | | | | |
| | Three months ended March 31, |
| | 2013 | | 2012 |
Operating revenues: | | | | |
Rental revenues | | $ | 122,711 |
| | $ | 106,342 |
|
Other property revenues | | 10,479 |
| | 9,675 |
|
Total property revenues | | 133,190 |
| | 116,017 |
|
Management fee income | | 177 |
| | 269 |
|
Total operating revenues | | 133,367 |
| | 116,286 |
|
Property operating expenses: | | |
| | |
|
Personnel | | 14,682 |
| | 13,946 |
|
Building repairs and maintenance | | 3,335 |
| | 3,733 |
|
Real estate taxes and insurance | | 15,987 |
| | 13,524 |
|
Utilities | | 6,867 |
| | 6,064 |
|
Landscaping | | 3,041 |
| | 2,822 |
|
Other operating | | 8,865 |
| | 8,249 |
|
Depreciation and amortization | | 33,433 |
| | 29,718 |
|
Total property operating expenses | | 86,210 |
| | 78,056 |
|
Acquisition expense (credit) | | 10 |
| | (634 | ) |
Property management expenses | | 5,331 |
| | 5,454 |
|
General and administrative expenses | | 3,239 |
| | 3,447 |
|
Income from continuing operations before non-operating items | | 38,577 |
| | 29,963 |
|
Interest and other non-property income | | 47 |
| | 142 |
|
Interest expense | | (15,716 | ) | | (14,110 | ) |
(Loss) gain on debt extinguishment/modification | | (169 | ) | | 20 |
|
Amortization of deferred financing costs | | (804 | ) | | (771 | ) |
Net casualty gain (loss) after insurance and other settlement proceeds | | 16 |
| | (4 | ) |
Income from continuing operations before gain (loss) from real estate joint ventures | | 21,951 |
| | 15,240 |
|
Gain (loss) from real estate joint ventures | | 54 |
| | (31 | ) |
Income from continuing operations | | 22,005 |
| | 15,209 |
|
Discontinued operations: | | |
| | |
|
Income from discontinued operations before gain on sale | | — |
| | 484 |
|
Net casualty loss after insurance and other settlement proceeds on discontinued operations | | — |
| | (54 | ) |
Gain on sale of discontinued operations | | — |
| | 9,429 |
|
Consolidated net income | | 22,005 |
| | 25,068 |
|
Net income attributable to noncontrolling interests | | 825 |
| | 1,178 |
|
Net income available for MAA common shareholders | | $ | 21,180 |
| | $ | 23,890 |
|
| | | | |
Earnings per common share - basic: | | |
| | |
|
Income from continuing operations available for common shareholders | | $ | 0.50 |
| | $ | 0.37 |
|
Discontinued property operations | | — |
| | 0.23 |
|
Net income available for common shareholders | | $ | 0.50 |
| | $ | 0.60 |
|
| | | | |
Earnings per share - diluted: | | |
| | |
|
Income from continuing operations available for common shareholders | | $ | 0.50 |
| | $ | 0.37 |
|
Discontinued property operations | | — |
| | 0.23 |
|
Net income available for common shareholders | | $ | 0.50 |
| | $ | 0.60 |
|
| | | | |
Dividends declared per common share | | $ | 0.6950 |
| | $ | 0.6600 |
|
See accompanying notes to consolidated financial statements.
MAA
Condensed Consolidated Statements of Comprehensive Income
Three months ended March 31, 2013 and 2012
(Unaudited)
(Dollars in thousands)
|
| | | | | | | | |
| | Three months ended March 31, |
| | 2013 | | 2012 |
Consolidated net income | | $ | 22,005 |
| | $ | 25,068 |
|
Other comprehensive income: | | | | |
Unrealized losses from the effective portion of derivative instruments | | (179 | ) | | (1,300 | ) |
Reclassification adjustment for losses included in net income for the effective portion of derivative instruments | | 4,545 |
| | 5,548 |
|
Total comprehensive income | | 26,371 |
| | 29,316 |
|
Less: comprehensive income attributable to noncontrolling interests | | (1,003 | ) | | (1,378 | ) |
Comprehensive income attributable to MAA | | $ | 25,368 |
| | $ | 27,938 |
|
| | | | |
See accompanying notes to consolidated financial statements. |
MAA
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2013 and 2012
(Unaudited)
(Dollars in thousands) |
| | | | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Consolidated net income | $ | 22,005 |
| | $ | 25,068 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Retail revenue accretion | (10 | ) | | — |
|
Depreciation and amortization | 34,237 |
| | 31,549 |
|
Stock compensation expense | 630 |
| | 814 |
|
Redeemable stock issued | 159 |
| | 116 |
|
Amortization of debt premium | (225 | ) | | (90 | ) |
(Gain) loss from investments in real estate joint ventures | (54 | ) | | 31 |
|
Loss (gain) on debt extinguishment | 169 |
| | (20 | ) |
Derivative interest expense | 267 |
| | 164 |
|
Gain on sale of discontinued operations | — |
| | (9,429 | ) |
Net casualty (gain) loss and other settlement proceeds | (16 | ) | | 58 |
|
Changes in assets and liabilities: | |
| | |
|
Restricted cash | 159 |
| | 207 |
|
Other assets | (3,466 | ) | | 2,445 |
|
Accounts payable | 1,086 |
| | 1,910 |
|
Accrued expenses and other | (12,985 | ) | | (14,994 | ) |
Security deposits | 161 |
| | 82 |
|
Net cash provided by operating activities | 42,117 |
| | 37,911 |
|
Cash flows from investing activities: | |
| | |
|
Purchases of real estate and other assets | (32,561 | ) | | — |
|
Normal capital improvements | (8,701 | ) | | (11,426 | ) |
Construction capital and other improvements | (576 | ) |
| (795 | ) |
Renovations to existing real estate assets | (2,187 | ) | | (2,934 | ) |
Development | (12,240 | ) | | (26,745 | ) |
Distributions from real estate joint ventures | 4,964 |
| | 459 |
|
Contributions to real estate joint ventures | (16 | ) | | (51 | ) |
Proceeds from disposition of real estate assets | 76 |
| | 28,964 |
|
Funding of escrow for future acquisitions | — |
| | (21,585 | ) |
Net cash used in investing activities | (51,241 | ) | | (34,113 | ) |
Cash flows from financing activities: | |
| | |
|
Net change in credit lines | 19,000 |
| | (158,802 | ) |
Proceeds from notes payable | — |
| | 50,000 |
|
Principal payments on notes payable | (1,370 | ) | | (807 | ) |
Payment of deferred financing costs | (120 | ) | | (1,397 | ) |
Repurchase of common stock | (673 | ) | | (1,415 | ) |
Proceeds from issuances of common shares | 22,058 |
| | 120,135 |
|
Distributions to noncontrolling interests | (1,204 | ) | | (1,280 | ) |
Dividends paid on common shares | (29,418 | ) | | (25,723 | ) |
Net cash provided by (used in) financing activities | 8,273 |
| | (19,289 | ) |
Net decrease in cash and cash equivalents | (851 | ) | | (15,491 | ) |
Cash and cash equivalents, beginning of period | 9,075 |
| | 57,317 |
|
Cash and cash equivalents, end of period | $ | 8,224 |
| | $ | 41,826 |
|
| | | |
Supplemental disclosure of cash flow information: | |
| | |
|
Interest paid | $ | 16,400 |
| | $ | 16,911 |
|
Supplemental disclosure of noncash investing and financing activities: | |
| | |
|
Conversion of units to shares of common stock | $ | 443 |
| | $ | 28 |
|
Accrued construction in progress | $ | 7,126 |
| | $ | 10,027 |
|
Interest capitalized | $ | 448 |
| | $ | 638 |
|
Marked-to-market adjustment on derivative instruments | $ | 4,096 |
| | $ | 4,084 |
|
See accompanying notes to consolidated financial statements.
MAA
Notes to Condensed Consolidated Financial Statements
March 31, 2013 and 2012
(Unaudited)
1. Consolidation and Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
Mid-America Apartment Communities, Inc., or we, or our, 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, 2013, we owned or owned interests in a total of 166 multifamily apartment communities comprising 49,697 apartments located in 13 states, including one community comprising 316 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. We also had two development communities and a second phase to an existing community under construction totaling 774 units as of March 31, 2013. A total of 106 units for the development projects were completed as of March 31, 2013, and therefore have been included in the totals above. Total expected costs for the development projects are $101.3 million, of which $56.3 million has been incurred through March 31, 2013. We expect to complete construction on the three projects by the fourth quarter of 2014. Four of our properties include retail components with approximately 107,000 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, 2012 annual consolidated financial statements. The consolidated financial statements presented herein include the accounts of MAA, Mid-America Apartments, L.P, or the Operating Partnership, and all other subsidiaries in which MAA has a controlling financial interest. MAA owns approximately 96% to 100% of all consolidated subsidiaries. In our opinion, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included, and all such adjustments were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three-month period ended March 31, 2013 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 22, 2013. 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.
MAA invests in entities which may qualify as variable interest entities, or VIE. A VIE is a legal entity in which the equity investors lack sufficient equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack the power to direct the activities of a legal entity as well as the obligation to absorb its expected losses or the right to receive its expected residual returns. MAA consolidates all VIEs for which it is the primary beneficiary and uses the equity method to account for investments that qualify as VIEs but for which we are not the primary beneficiary. In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including but not limited to, those activities that most significantly impact the VIE's economic
performance and which party controls such activities.
MAA uses the equity method of accounting for its investments in entities for which we exercise significant influence, but do not have the ability to exercise control. These entities are not variable interest entities. The factors considered in determining that MAA does not have the ability to exercise control include ownership of voting interests and participatory rights of investors.
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, 2013 and 2012, 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:
|
| | | | | | | |
(dollars and shares in thousands, except per share amounts) | Three months ended March 31, |
| 2013 | | 2012 |
Shares Outstanding | | | |
Weighted average common shares - basic | 42,354 |
| | 39,505 |
|
Weighted average partnership units outstanding | 1,715 |
| | 1,936 |
|
Effect of dilutive securities | 80 |
| | 102 |
|
Weighted average common shares - diluted | 44,149 |
| | 41,543 |
|
| | | |
Calculation of Earnings per Share - basic | |
| | |
|
Income from continuing operations | $ | 22,005 |
| | $ | 15,209 |
|
Income from continuing operations attributable to noncontrolling interests | (825 | ) | | (691 | ) |
Income from continuing operations allocated to unvested restricted shares | (20 | ) | | (16 | ) |
Income from continuing operations available for common shareholders, adjusted | $ | 21,160 |
| | $ | 14,502 |
|
| | | |
Income from discontinued operations | $ | — |
| | $ | 9,859 |
|
Income from discontinued operations attributable to noncontrolling interest | — |
| | (488 | ) |
Income from discontinued operations allocated to unvested restricted shares | — |
| | (11 | ) |
Income from discontinued operations available for common shareholders, adjusted | $ | — |
| | $ | 9,360 |
|
| | | |
Weighted average common shares - basic | 42,354 |
| | 39,505 |
|
Earnings per share - basic | $ | 0.50 |
| | $ | 0.60 |
|
| | | |
Calculation of Earnings per Share - diluted | |
| | |
|
Net income available for common shareholders | $ | 21,180 |
| | $ | 23,890 |
|
Net income attributable to noncontrolling interests | 825 |
| | 1,178 |
|
Net income attributable to discontinued operations | — |
| | (9,859 | ) |
Adjusted net income from continuing operations available for common shareholders | $ | 22,005 |
| | $ | 15,209 |
|
| | | |
Weighted average common shares - diluted | 44,149 |
| | 41,543 |
|
Earnings per share - diluted | $ | 0.50 |
| | $ | 0.60 |
|
2. Segment Information
As of March 31, 2013, we owned or had an ownership interest in 166 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 1% 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. Properties in development or lease-up will be added to the same store portfolio on the first day of the calendar year after they have been owned and stabilized for at least a full 12 months. 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 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, 2013 and 2012, were as follows (dollars in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Revenues | | | |
Large Market Same Store | $ | 62,703 |
| | $ | 59,254 |
|
Secondary Market Same Store | 51,342 |
| | 49,647 |
|
Non-Same Store and Other | 19,145 |
| | 7,116 |
|
Total property revenues | 133,190 |
| | 116,017 |
|
Management fee income | 177 |
| | 269 |
|
Total operating revenues | $ | 133,367 |
| | $ | 116,286 |
|
| | | |
NOI | |
| | |
|
Large Market Same Store | $ | 37,755 |
| | $ | 34,599 |
|
Secondary Market Same Store | 31,049 |
| | 29,312 |
|
Non-Same Store and Other | 11,609 |
| | 5,605 |
|
Total NOI | 80,413 |
| | 69,516 |
|
Discontinued operations NOI included above | — |
| | (1,837 | ) |
Management fee income | 177 |
| | 269 |
|
Depreciation and amortization | (33,433 | ) | | (29,718 | ) |
Acquisition (expense) credit | (10 | ) | | 634 |
|
Property management expense | (5,331 | ) | | (5,454 | ) |
General and administrative expense | (3,239 | ) | | (3,447 | ) |
Interest and other non-property income | 47 |
| | 142 |
|
Interest expense | (15,716 | ) | | (14,110 | ) |
(Loss) gain on debt extinguishment | (169 | ) | | 20 |
|
Amortization of deferred financing costs | (804 | ) | | (771 | ) |
Net casualty gain (loss) after insurance and other settlement proceeds | 16 |
| | (4 | ) |
Gain (loss) from real estate joint ventures | 54 |
| | (31 | ) |
Discontinued operations | — |
| | 9,859 |
|
Net income attributable to noncontrolling interests | (825 | ) | | (1,178 | ) |
Net income attributable to MAA | $ | 21,180 |
| | $ | 23,890 |
|
Assets for each reportable segment as of March 31, 2013 and December 31, 2012, were as follows (dollars in thousands): |
| | | | | | | |
| March 31, 2013 | | December 31, 2012 |
Assets | | | |
Large Market Same Store | $ | 1,279,957 |
| | $ | 1,108,827 |
|
Secondary Market Same Store | 812,641 |
| | 654,315 |
|
Non-Same Store and Other | 643,028 |
| | 949,398 |
|
Corporate assets | 39,382 |
| | 38,528 |
|
Total assets | $ | 2,775,008 |
| | $ | 2,751,068 |
|
3. Equity
Total equity and its components for the three-month periods ended March 31, 2013, and 2012 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, 2012 | $ | 422 |
| | $ | 1,542,999 |
| | $ | (603,315 | ) | | $ | (26,054 | ) | | $ | 31,058 |
| | $ | 945,110 |
|
Net income | | | | | 21,180 |
| | | | 825 |
| | 22,005 |
|
Other comprehensive income - derivative instruments (cash flow hedges) | | | | | | | 4,185 |
| | 178 |
| | 4,363 |
|
Issuance and registration of common shares | 3 |
| | 22,055 |
| | | | | | | | 22,058 |
|
Shares repurchased and retired | — |
| | (673 | ) | | | | | | | | (673 | ) |
Shares issued in exchange for units | 1 |
| | 442 |
| | | | | | (443 | ) | | — |
|
Redeemable stock fair market value | | | | | (319 | ) | | | | | | (319 | ) |
Adjustment for noncontrolling interest ownership in operating partnership | | | 302 |
| | | | | | (302 | ) | | — |
|
Amortization of unearned compensation | | | 630 |
| | | | | | | | 630 |
|
Dividends on common stock ($0.6950 per share) | | | | | (29,674 | ) | | | | — |
| | (29,674 | ) |
Dividends on noncontrolling interest units ($0.6950 per unit) | | | | | | | | | (1,187 | ) | | (1,187 | ) |
EQUITY BALANCE MARCH 31, 2013 | $ | 426 |
| | $ | 1,565,755 |
| | $ | (612,128 | ) | | $ | (21,869 | ) | | $ | 30,129 |
| | $ | 962,313 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
4. Real Estate Acquisitions
On February 1, 2013, we purchased Milstead Village, a 310-unit apartment community located in Kennesaw (Atlanta), Georgia. This property was previously a part of Mid-America Multifamily Fund I, LLC, or Fund I.
5. Discontinued Operations
During the three-month period ended March 31, 2013, we did not dispose of any properties. Income from continuing operations attributable to MAA was $21.2 million for the three-month period ended March 31, 2013 compared to $14.5 million
for the three-month period ended March 31, 2012. For the three-month period ended March 31, 2013, there was no income from discontinued operations attributable to MAA. Income from discontinued operations attributable to MAA was $9.4 million for the three-month period ended March 31, 2012. Income from continuing operations attributable to noncontrolling interest was $0.8 million for the three-month period ended March 31, 2013 compared to $0.7 million for the three-month period ended March 31, 2012. For the three-month period ended March 31, 2013, there was no income from discontinued operations attributable to noncontrolling interest. Income from discontinued operations attributable to noncontrolling interest was $0.5 million for the three-month period ended March 31, 2012.
The following is a summary of discontinued operations for the three-month periods ended March 31, 2013 and 2012, (dollars in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Revenues | | | |
Rental revenues | $ | — |
| | $ | 3,565 |
|
Other revenues | — |
| | 417 |
|
Total revenues | — |
| | 3,982 |
|
Expenses | |
| | |
|
Property operating expenses | — |
| | 2,179 |
|
Depreciation and amortization | — |
| | 1,060 |
|
Interest expense | — |
| | 259 |
|
Total expense | — |
| | 3,498 |
|
Gain from discontinued operations before gain on sale | — |
| | 484 |
|
Net loss on insurance and other settlement proceeds on discontinued operations | — |
| | (54 | ) |
Gain on sale of discontinued operations | — |
| | 9,429 |
|
Income from discontinued operations | $ | — |
| | $ | 9,859 |
|
6. Share and Unit Information
On March 31, 2013, 42,683,322 common shares and 1,707,660 operating partnership units were issued and outstanding, representing a total of 44,390,982 shares and units. At March 31, 2012, 40,940,360 common shares and 1,935,708 operating partnership units were outstanding, representing a total of 42,876,068 shares and units. There were no outstanding options as of March 31, 2013 and March 31, 2012.
On August 26, 2010, we and our Operating Partnership entered into distribution agreements with Cantor Fitzgerald & Co., Raymond James & Associates, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated pursuant to our at-the-market offerings or negotiated transactions through a controlled equity offering program, or ATM for a combined total of 6,000,000 shares of our common stock. On February 25, 2013, we and our Operating Partnership entered into distribution agreements with J.P. Morgan Securities LLC, BMO Capital Markets Corp., KeyBanc Capital Markets Inc. and UBS Securities LLC to sell up to 4,500,000 shares of our common stock with materially the same terms as our previous ATM agreements.
During the three-month period ended March 31, 2013, we issued 325,166 shares through our ATM programs for net proceeds of $22.0 million. The gross proceeds for these issuances were $22.3 million. During the three-month period ended March 31, 2012, we did not issue any shares through our ATM programs. We have 4,174,834 shares remaining under our ATM program as of March 31, 2013.
On March 2, 2012, we closed on an underwritten public offering of 1,955,000 shares of common stock. UBS Investment Bank and Jefferies & 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. We had no such offerings during the three-month period ended March 31, 2013.
During the three-month period ended March 31, 2013, we issued 141 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 approximately $10,000. During the three-month period ended March 31, 2012, we issued 120 shares of common stock through the optional cash purchase feature of our DRSPP resulting in gross proceeds of approximately $8,000.
During the three months ended March 31, 2013, 4,582 shares of our 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, 2012, 15,565 shares were acquired for these purposes.
7. Notes Payable
On March 31, 2013 and December 31, 2012, we had total indebtedness of approximately $1.69 billion and $1.67 billion, respectively. Our indebtedness as of March 31, 2013 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 KeyBank 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 March 31, 2013 the full amount was outstanding under this agreement. In July 2012, we received an investment grade rating (Baa2) from Moody's rating service, which caused the variable rate to reset monthly at LIBOR plus a spread of 1.10% to 2.05% based on an investment grade ratings grid.
On August 31, 2012, our Operating Partnership issued $175 million of Senior Unsecured Notes to be funded at three separate times. The notes were offered in a private placement with four tranches: $18 million at 3.15% maturing on November 30, 2017; $20 million at 3.61% maturing on November 30, 2019; $117 million at 4.17% maturing on November 30, 2022; and $20 million at 4.33% maturing on November 30, 2024. As of March 31, 2013, the full amount of the Notes has been funded and is included in our balance sheet.
As of March 31, 2013, approximately 43% 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 18 interest rate swaps and 14 interest rate caps as of March 31, 2013, representing notional amounts totaling $484.0 million and $232.6 million, respectively. We also held 9 non-designated interest rate caps with notional amounts totaling $55.9 million as of March 31, 2013.
The following table summarizes our outstanding debt structure as of March 31, 2013 (dollars in thousands):
|
| | | | | | | | |
| Borrowed Balance | | Effective Rate | | Contract Maturity |
Fixed Rate Secured Debt | | | | | |
Individual property mortgages | $ | 371,116 |
| | 4.8 | % | | 9/2/2019 |
FNMA conventional credit facilities | 50,000 |
| | 4.7 | % | | 3/31/2017 |
Credit facility balances with: | |
| | |
| | |
LIBOR-based interest rate swaps | 334,000 |
| | 5.3 | % | | 4/22/2014 |
Total fixed rate secured debt | $ | 755,116 |
| | 5.0 | % | | 2/19/2017 |
Variable Rate Secured Debt (1) | |
| | |
| | |
FNMA conventional credit facilities | $ | 189,721 |
| | 0.8 | % | | 7/27/2016 |
FNMA tax-free credit facilities | 89,969 |
| | 0.9 | % | | 7/23/2031 |
Freddie Mac credit facilities | 64,247 |
| | 0.7 | % | | 7/1/2014 |
Freddie Mac mortgage | 15,200 |
| | 3.6 | % | | 1/1/2016 |
Total variable rate secured debt | $ | 359,137 |
| | 0.9 | % | | 12/6/2019 |
Total Secured Debt | $ | 1,114,253 |
| | 3.7 | % | | 1/14/2018 |
| | | | | |
Unsecured Debt | |
| | |
| | |
Variable rate credit facility | $ | 117,000 |
| | 1.5 | % | | 11/1/2015 |
Term loan fixed with swaps | 150,000 |
| | 2.4 | % | | 3/1/2017 |
Fixed rate senior private placement bonds | 310,000 |
| | 4.5 | % | | 7/27/2021 |
Total Unsecured Debt | $ | 577,000 |
| | 3.4 | % | | 4/6/2019 |
| | | | | |
Total Outstanding Debt | $ | 1,691,253 |
| | 3.6 | % | | 6/15/2018 |
(1) Includes capped balances.
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, related cash flows and other factors.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and interest rate caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2013 and 2012, 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, 2013 and 2012, we recorded ineffectiveness of $4,000 (decrease to interest expense) and $10,000 (increase to interest expense), respectively, attributable to a mismatch in the underlying indices of the derivatives and the hedged interest payments made on our variable-rate debt.
During the three months ended March 31, 2013, we also had two interest rate caps with a total notional amount of $7.9 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, 2013, we had no changes in the time value of these interest rate caps. During the three months ended March 31, 2012, we had a loss of less than $1,000, 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 12 months, we estimate that an additional $13.4 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, 2013, 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 | | 14 | | $ | 232,576,000 |
|
Interest Rate Swaps | | 18 | | $ | 484,000,000 |
|
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 $13,000 for the three months ended March 31, 2013 and a loss of $24,000 for the three months ended March 31, 2012.
As of March 31, 2013, we had the following outstanding interest rate derivatives that were not designated as hedges:
|
| | | | | | |
Interest Rate Derivative | | Number of Instruments | | Notional |
Interest rate caps | | 9 | | $ | 55,875,000 |
|
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, 2013 and December 31, 2012, respectively. This chart also shows the gross presentation of our derivatives as we do not net assets and liabilities:
Fair Values of Derivative Instruments on the Consolidated Balance Sheet as of March 31, 2013 and December 31, 2012 (dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | March 31, 2013 | | December 31, 2012 | | | | March 31, 2013 | | December 31, 2012 |
Derivatives designated as hedging instruments | | Balance Sheet Location | | Fair Value | | Fair Value | | Balance Sheet Location | | Fair Value | | Fair Value |
Interest rate contracts | | Other assets | | $ | 244 |
| | $ | 245 |
| | Fair market value of interest rate swaps | | $ | 17,313 |
| | $ | 21,423 |
|
| | | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | | $ | 244 |
| | $ | 245 |
| | | | $ | 17,313 |
| | $ | 21,423 |
|
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest rate contracts | | Other assets | | $ | 30 |
| | $ | 43 |
| | | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
Total derivatives not designated as hedging instruments | | | | $ | 30 |
| | $ | 43 |
| | | | $ | — |
| | $ | — |
|
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, 2013 and 2012, respectively.
Effect of Derivative Instruments on the Consolidated Statements of Operations for the
Three Months Ended March 31, 2013 and 2012 (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, | | 2013 | | 2012 | | | | 2013 | | 2012 | | | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | (179 | ) | | $ | (1,300 | ) | | Interest expense | | $ | (4,545 | ) | | $ | (5,548 | ) | | Interest expense | | $ | 4 |
| | $ | (11 | ) |
| | | | | | | | | | | | | | | | |
Total derivatives in cash flow hedging relationships | | $ | (179 | ) | | $ | (1,300 | ) | | | | $ | (4,545 | ) | | $ | (5,548 | ) | | | | $ | 4 |
| | $ | (11 | ) |
| | | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | |
Three months ended March 31, | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest rate products | | | | | | | | | | | | Interest expense | | $ | (13 | ) | | $ | (24 | ) |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | $ | (13 | ) | | $ | (24 | ) |
Credit-Risk-Related Contingent Features
As of March 31, 2013, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of $19.1 million, which includes accrued interest but excludes any adjustment for nonperformance risk. These derivatives had a fair value, gross of asset positions, of $17.3 million at March 31, 2013.
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, 2013, 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 $10.4 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 our default on the indebtedness. As of March 31, 2013, 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 $2.9 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 $16.2 million as of March 31, 2013. 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, 2013.
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.
Other Comprehensive Income
Our other comprehensive income consists entirely of gains and losses attributable to the effective portion of our cash flow hedges. The chart below shows the change in the balance for the three months ended March 31, 2013, and 2012:
|
| | | | | | | | | | | |
Changes in Accumulated Other Comprehensive Income by Component | | Affected Line Item in the Consolidated Statements Of Operations | | Gains and Losses on Cash Flow Hedges |
For the three months ended March 31, | | | 2013 | | 2012 | |
Beginning balance | |
| | $ | (26,054 | ) | | $ | (35,848 | ) | |
Other comprehensive income before reclassifications | | | | (179 | ) | | (1,300 | ) | |
Amounts reclassified from accumulated other comprehensive income (interest rate contracts) | | Interest (income)/expense | | 4,545 |
| | 5,548 |
| |
Net current-period other comprehensive income attributable to noncontrolling interest | | | | (181 | ) | | (200 | ) | |
Net current-period other comprehensive income attributable to MAA | | | | 4,185 |
| | 4,048 |
| |
Ending balance | | | | $ | (21,869 | ) | | $ | (31,800 | ) | |
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, 2013 and December 31, 2012, totaled $731 million and $732 million, respectively, and had estimated fair values of $782 million and $778 million (excluding prepayment penalties), respectively, as of March 31, 2013 and December 31, 2012. The carrying value of variable rate notes payable (excluding the effect of interest rate swap and cap agreements) at March 31, 2013 and December 31, 2012, totaled $960 million and $941 million, respectively, and had estimated fair values of $882 million and $860 million (excluding prepayment penalties), respectively, as of March 31, 2013 and December 31, 2012. 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 March 31, 2013 and December 31, 2012 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, 2013 and December 31, 2012, 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, 2013
(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, 2013 |
Assets | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 274 |
| | $ | — |
| | $ | 274 |
|
Liabilities | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 17,313 |
| | $ | — |
| | $ | 17,313 |
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 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 |
| | | | December 31, 2012 |
Assets | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 288 |
| | $ | — |
| | $ | 288 |
|
Liabilities | |
| | |
| | |
| | |
|
Derivative financial instruments | $ | — |
| | $ | 21,423 |
| | $ | — |
| | $ | 21,423 |
|
The fair value estimates presented herein are based on information available to management as of March 31, 2013 and December 31, 2012. These estimates are not necessarily indicative of the amounts we could ultimately realize. See also discussions in Item 1. Financial Statements – Notes to Consolidated Financial Statements, Note 8.
10. Recent Accounting Pronouncements
Impact of Recently Issued Accounting Standards
In February 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of Accumulated other comprehensive income, or AOCI, by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the
current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective for interim and annual periods beginning after December 15, 2012 and early adoption is permitted. We early adopted ASU 2013-02 for the annual period ended December 31, 2012. The adoption of ASU 2013-02 has not had a material impact on our consolidated financial condition or results of operations taken as a whole.
In January 2013, the FASB issued ASU, No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 clarifies that the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, would apply to derivatives accounted for in accordance with FASB ASC 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. This ASU is effective for fiscal years beginning on or after January 1, 2013 and interim periods within those annual periods. We adopted ASU 2013-01 during the period ended March 31, 2013. The adoption of ASU 2013-01 has not had a material impact on our consolidated financial condition or results of operations taken as a whole.
In June 2011, the FASB issued 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 is 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 changed 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 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 changes to our presentation are the same as noted in ASU 2011-05 above.
In May 2011, the FASB issued 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 ASU 2011-04. 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 adopted ASU 2011-04 for the interim and annual periods of fiscal year 2012. The adoption of ASU 2011-04 has not had a material impact on our consolidated financial condition or results of operations taken as a whole.
11. Subsequent Events
Real Estate Acquisitions
On May 1, 2013, we closed on the purchase of the 316-unit Greenwood Forest apartment community located in Greenwood Forest (Houston), Texas. This property was previously a part of Fund I.
Financings
On April 23, 2013, we entered into three LIBOR-based forward swaps intended to hedge the interest rate on planned future financings with a total notional amount of $150 million.
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
Mid-America Apartment Communities, Inc. considers 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, or the Exchange Act, 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, joint venture activity, development and renovation activity as well as other capital expenditures, capital raising activities, rent and expense growth, occupancy, financing activities and interest rate and other economic expectations. 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, financial conditions 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; |
| |
• | failure of new acquisitions to achieve anticipated results or be efficiently integrated; |
| |
• | failure of development communities to be completed, if at all, on a timely basis or to lease-up as anticipated; |
| |
• | inability of a joint venture to perform as expected; |
| |
• | inability to acquire additional or dispose of existing apartment units on favorable economic terms; |
| |
• | unexpected capital needs; |
| |
• | increasing real estate taxes and insurance costs; |
| |
• | losses from catastrophes in excess of our insurance coverage; |
| |
• | inability to acquire funding through the capital markets; |
| |
• | 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 decrease or cease to exist; |
| |
• | changes in interest rate levels, including that of variable rate debt, which are extensively used by us; |
| |
• | loss of hedge accounting treatment for interest rate swaps or interest rate caps; |
| |
• | 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; |
| |
• | inability to pay required distributions to maintain REIT status due to required debt payments; |
| |
• | significant change in the mortgage financing market that would cause single-family housing, either as an owned or rental product, to become a more significant competitive product; |
| |
• | 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. |
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 and Real Estate Sales
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 gains and losses on real estate sales in accordance with accounting standards governing the sale of real estate. For sale transactions meeting the requirements for the full accrual method, we remove the assets and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the transaction closes. For properties contributed to our joint ventures, we record gains on the partial sale in proportion to the outside partners’ interest in the joint venture.
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 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 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 residential leases acquired on each of its property acquisitions are approximately at market rates since the residential lease terms generally do not extend beyond one year.
Our policy is to expense the costs incurred to acquire properties in the period these costs occur. Acquisition costs include appraisal fees, title fees, broker fees, and other legal costs to acquire the property. These costs are recorded in our Statement of Operations under the line Acquisition expenses.
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 Condensed Consolidated Balance Sheets.
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, 2013
We experienced an increase in income from continuing operations for the three months ended March 31, 2013 over the three months ended March 31, 2012 as increases in revenues outpaced increases in property operating expenses. The increases in revenues came from a 5.8% increase in our large market same store segment, a 3.4% increase in our secondary market same store segment and a 169.0% increase in our non-same store and other segment, which was primarily a 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, 2013, our wholly-owned portfolio consisted of 48,225 apartment units in 161 communities, compared to 46,424 apartment units in 160 communities at March 31, 2012. For these communities, the average effective rent per apartment unit, excluding units in lease-up, increased to $861.76 per unit at March 31, 2013 from $805.00 per unit at March 31, 2012. For these same communities, overall occupancy at March 31, 2013 and 2012 was 96.1% and 96.3%, 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, 2013 and 2012. 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, 2013 to the Three-Month Period Ended March 31, 2012
Property revenues for the three months ended March 31, 2013 were approximately $133.2 million, an increase of approximately $17.2 million from the three months ended March 31, 2012 due to (i) a $3.5 million increase in property
revenues from our large market same store group primarily as a result of an increase in average rent per unit, (ii) a $1.7 million increase in property revenues from our secondary market same store group primarily as a result of an increase in average rent per unit, and (iii) a $12.0 million increase in property revenues from our non-same store and other group, primarily as a result of acquisitions. See further discussion on revenue growth in the Trends section below.
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, 2013 were approximately $52.8 million, an increase of approximately $4.4 million from the three months ended March 31, 2012 due primarily to (i) an increase in property operating expenses of $0.3 million from our large market same store group, (ii) a decrease of $0.1 million from our secondary market same store group, and (iii) an increase of $4.2 million from our non-same store and other group, primarily as a result of acquisitions. The increase in the large market same store group is mainly the result of increases in real estate taxes. The decrease in the secondary market same store group is mainly the result of decreases in building repairs and maintenance. Other increases are the result of normal operating costs.
Depreciation and amortization expense for the three months ended March 31, 2013 was approximately $33.4 million, an increase of approximately $3.7 million from the three months ended March 31, 2012 primarily due to (i) a decrease in depreciation and amortization expense of $0.1 million from our large market same store group, (ii) a decrease of $0.1 million from our secondary market same store group, and (iii) an increase of $3.9 million from our non-same store and other group, mainly as a result of acquisitions.
Acquisition credit for the three months ended March 31, 2012 was approximately $0.6 million due to a correction of land acquisition costs. There was no material acquisition expense or credit for the three months ended March 31, 2013.
Interest expense increased by approximately $1.6 million during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily as a result of an increase in our average debt outstanding of approximately $84.4 million.
For the three months ended March 31, 2012, we recorded total gain on sale of discontinued operations of approximately $9.4 million. There was no material gain (loss) on sale of discontinued operations during the three months ended March 31, 2013.
Primarily as a result of the foregoing, net income attributable to MAA decreased by approximately $2.7 million in the three months ended March 31, 2013 from the three months ended March 31, 2012.
Funds From Operations and Net Income
Funds from operations, or FFO, represents net income (computed in accordance with GAAP) excluding extraordinary items, net income attributable to noncontrolling interest, asset impairment, gains or losses on disposition of real estate assets, plus depreciation and amortization 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 Trusts, or NAREIT, definition. Disposition of real estate assets includes sales of discontinued operations.
Our policy is to expense the cost of interior painting, vinyl flooring, and blinds as incurred for stabilized properties. During the
stabilization period for acquisition properties, these items are capitalized as part of the total repositioning program of newly acquired properties, and, thus are not deducted in calculating FFO.
FFO should not be considered as an alternative to net income 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, as historical cost depreciation implies. Our calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs.
The following table is a reconciliation of FFO to net income available for MAA common shareholders for the three month periods ended March 31, 2013, and 2012 (dollars in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2013 | | 2012 |
Net income available for MAA common shareholders | $ | 21,180 |
| | $ | 23,890 |
|
Depreciation and amortization of real estate assets | 32,834 |
| | 29,136 |
|
Depreciation and amortization of real estate assets of discontinued operations | — |
| | 1,114 |
|
Gain on sales of discontinued operations | — |
| | (9,429 | ) |
Depreciation and amortization of real estate assets of real estate joint ventures | 380 |
| | 557 |
|
Net income attributable to noncontrolling interests | 825 |
| | 1,178 |
|
Funds from operations | $ | 55,219 |
| | $ | 46,446 |
|
FFO for the three-month period ended March 31, 2013 increased by approximately $8.8 million, respectively, from the three-month period ended March 31, 2012 primarily as a result of the increases in property revenues of approximately $17.2 million discussed above that was only partially offset by the $4.4 million increase in property operating expenses, excluding depreciation and amortization.
Trends
During the three-month period ended March 31, 2013, rental demand for apartments continued to be strong, as it was throughout 2012. This strength was evident on two fronts: same store physical occupancy during the quarter ended March 31, 2013 remained consistent with the quarter ended March 31, 2012, ending at over 96% for both periods; and pricing continued to increase on both new leases and renewals signed during the three-month period ended March 31, 2013 as compared to the three-month period ended December 31, 2012 and the three-month period ended March 31, 2012. We have maintained this momentum despite job formation, one of the primary drivers of apartment demand, continuing to increase at a below average pace.
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 believe that a well diversified portfolio, including both large and select secondary markets, will perform well in “up” cycles as well as weather “down” cycles better. As of March 31, 2013, we were invested in approximately 50 markets, with 58.5% of our gross assets in large markets and 41.5% of our gross assets in select secondary markets.
We also continued to benefit in the first quarter of 2013 on the supply side. New supply of rental units entering the market was low, running below historical new supply delivery averages. Multifamily permitting did pick up in 2012 and continued in the first quarter of 2013. We believe this permitting will ultimately lead to an increase in supply, but also believe the lack of new apartments in recent years combined with demand from new households will help keep supply and demand in balance. 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 or submarkets 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.
Our focus continues to be on increasing pricing where possible through our revenue management system, while maintaining strong physical occupancy. Through these efforts, same store effective monthly rent per unit for the three-month period ended March 31, 2013 was higher than the three-month period ended March 31, 2012 by 4.7%. With strong occupancy in place heading into the typically busy spring and summer leasing season, this pricing power is likely poised to continue.
Overall same store revenues increased 4.7% for the three-month period ended March 31, 2013 as compared to the three-month period ended March 31, 2012. This increase was primarily due to rising rents, and helped by increases in ancillary income. Although new multifamily development is occurring, the permitting data so far suggests that levels will remain below pre-recession deliveries, although there can be no assurance in this regard. Also, we believe that more sustainable credit terms for residential mortgages, as evidenced by the recently announced “Qualified Mortgage Rule”, should work to favor rental demand at existing multi-family 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, more disciplined mortgage financing for single family home buying should lessen the impact to the multifamily sector 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 benefit 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.
Liquidity and Capital Resources
Net cash flow provided by operating activities increased to $42.1 million for the three months ended March 31, 2013 from $37.9 million for the three months ended March 31, 2012. This increase is mainly a result of cash inflows from property operations induced by the $17.2 million increase in property revenues for the three months ended March 31, 2013 from the three months ended March 31, 2012 being above the $4.4 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 $51.2 million during the three months ended March 31, 2013 compared to $34.1 million during the three months ended March 31, 2012. During the three months ended March 31, 2013, we had $32.6 million in cash outflows for property acquisitions. We had no cash outflows for property acquisitions for the three months ended March 31, 2012. We also had cash outflows of $8.7 million related to normal recurring capital expenditures for the three months ended March 31, 2013 compared to $11.4 million for the three months ended March 31, 2012. We also had cash outflows of $12.2 million related to development activities during the three months ended March 31, 2013 compared to approximately $26.7 million for the three months ended March 31, 2012. In addition to acquisition costs and development costs, we had outflows of $2.2 million for renovations to existing real estate assets during the three months ended March 31, 2013, compared to $2.9 million for the three months ended March 31, 2012. Since we did not dispose of any properties during the three months ended March 31, 2013, we did not receive any material cash flows related to property dispositions. We received approximately $29.0 million related to the disposition of two properties during the three months ended March 31, 2012. We received approximately $5.0 million during the three months ended March 31, 2013 as distributions from our joint ventures compared to $0.5 million for the three months ended March 31, 2012. During the three months ended March 31, 2012, we had approximately $21.6 million in cash outflows related to funding of escrow for future acquisitions. We did not have any cash outflows related to funding of escrow for future acquisitions during the three months ended March 31, 2013.
Net cash inflow for financing activities was approximately $8.3 million for the three months ended March 31, 2013, compared to net cash outflow for financing activities of $19.3 million during the three months ended March 31, 2012. During the three months ended March 31, 2013, we received net proceeds of approximately $22.1 million primarily from the issuance of shares of common stock through our ATM and the optional cash purchase feature of our DRSPP. During the three months ended March 31, 2012, we received proceeds of approximately $120.1 million 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 partially fund the pay down of our credit lines during the three months ended March 31, 2012. We currently have 4,174,834 shares remaining under our ATM program. We incurred approximately $17.6 million of debt in the three months ended March 31, 2013 primarily due to new unsecured financing offset by cash outflows for the reduction in outstanding debt in the FNMA and FMAC credit facilities compared to paying off $109.6 million of debt in the three months ended March 31, 2012.
The weighted average interest rate at March 31, 2013 for the $1.1 billion of secured debt outstanding was 3.7%, compared to the weighted average interest rate of 3.7% on $1.4 billion of secured debt outstanding at March 31, 2012. The weighted average interest rate at March 31, 2013 for the $577.0 million of unsecured debt was 3.4% compared to the weighted average interest rate of 4.3% on $187 million of unsecured debt outstanding at March 31, 2012. 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 led by KeyBank 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 $150 million outstanding under this agreement at March 31, 2013. In July 2012, we received an investment grade rating (Baa2) from Moody's pricing service, which reduced the variable rate to LIBOR plus a spread of 1.10% to 2.05% based on an investment grade ratings grid.
On August 31, 2012, we issued $175 million of Senior Unsecured Notes to be funded at three separate times. The notes were offered in a private placement with four tranches: $18 million at 3.15% maturing on November 30, 2017; $20 million at 3.61% maturing on November 30, 2019; $117 million at 4.17% maturing on November 30, 2022; and $20 million at 4.33% maturing on November 30, 2024. As of March 31, 2013, the full amount of the Notes has been funded and is included in our balance sheet.
Approximately 31% of our outstanding obligations at March 31, 2013 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 $883.9 million, of which $529.7 million was collateralized and available to borrow at March 31, 2013. We had total borrowings outstanding under the FNMA Facilities of $529.7 million at March 31, 2013. Various tranches of the FNMA Facilities mature from 2013 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 12% of our outstanding obligations at March 31, 2013 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, 2013. We had total borrowings outstanding under the Freddie Mac Facility of approximately $198.2 million at March 31, 2013. 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 0.31% below LIBOR.
We also maintain a $325.0 million unsecured credit facility with nine banks led by KeyBank, which bears interest at one-month LIBOR plus a spread of 1.05% to 1.85% based on an investment pricing grid. This credit facility expires in November 2015 with a one year extension option. At March 31, 2013, we had $323.6 million available to be borrowed under this credit facility with $117.0 million borrowed. Approximately $1.4 million of this credit 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, 2013.
The following schedule details the line limits, availability, outstanding balances and contract maturities of our various borrowings as of March 31, 2013 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| Line Limit | | Amount Collateralized and/or Available | | Amount Borrowed | | Average Years to Contract Maturity |
Fannie Mae Credit Facilities | $ | 883,883 |
| | $ | 529,690 |
| | $ | 529,690 |
| | 5.9 |
|
Freddie Mac Credit Facilities | 200,000 |
| | 198,247 |
| | 198,247 |
| | 1.3 |
|
Other Secured Borrowings | 386,316 |
| | 386,316 |
| | 386,316 |
| | 6.3 |
|
Unsecured Credit Facility | 325,000 |
| | 323,637 |
| | 117,000 |
| | 2.6 |
|
Other Unsecured Borrowings | 460,000 |
| | 460,000 |
| | 460,000 |
| | 6.9 |
|
Total Debt | $ | 2,255,199 |
| | $ | 1,897,890 |
| | $ | 1,691,253 |
| | 5.5 |
|
As of March 31, 2013, we had entered into designated interest rate swaps totaling a notional amount of $484.0 million. To date, these swaps have proven to be highly effective hedges. We also entered into interest rate cap agreements totaling a notional amount of approximately $232.6 million as of March 31, 2013. Four major banks provide approximately 94% of our derivative fair value, all of which have investment grade ratings from Moody’s and Standard & Poor's.
The following schedule outlines our variable versus fixed rate debt, including the impact of interest rate swaps and caps, outstanding as of March 31, 2013 (dollars in thousands): |
| | | | | | | | | |
| Principal Balance | | Average Years to Rate Maturity | | Effective Rate |
SECURED DEBT | | | | | |
Conventional - Fixed Rate or Swapped | $ | 755,116 |
| | 3.9 |
| | 5.0 | % |
Conventional - Variable Rate - Capped (1) (2) | 213,136 |
| | 2.9 |
| | 1.0 | % |
Tax-free – Variable Rate - Capped (1) | 89,969 |
| | 3.0 |
| | 1.0 | % |
Total Fixed or Hedged Rate Maturity | $ | 1,058,221 |
| | 3.6 |
| | 3.9 | % |
Conventional - Variable Rate | 56,032 |
| | 0.2 |
| | 0.8 | % |
Total Secured Rate Maturity | $ | 1,114,253 |
| | 3.4 |
| | 3.7 | % |
UNSECURED DEBT | |
| | |
| | |
|
Fixed Rate or Swapped | $ | 460,000 |
| | 6.9 |
| | 3.8 | % |
Variable Rate | 117,000 |
| | 0.1 |
| | 1.5 | % |
Total Unsecured Rate Maturity | $ | 577,000 |
| | 5.5 |
| | 3.4 | % |
TOTAL DEBT RATE MATURITY | $ | 1,691,253 |
| | 4.1 |
| | 3.6 | % |
TOTAL FIXED OR HEDGED DEBT RATE MATURITY | $ | 1,518,221 |
| | 4.6 |
| | 3.9 | % |
| |
(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. |
The following schedule outlines the contractual maturity dates of our total borrowings outstanding as of March 31, 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Facility Amount Borrowed | | | | | | |
Maturity | | Fannie Mae Secured | | Freddie Mac Secured | | Key Bank Unsecured | | Other Secured (1) | | Other Unsecured | | Total |
2013 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
2014 | | 78,721 |
| | 198,247 |
| | — |
| | 16,127 |
| | — |
| | 293,095 |
|
2015 | | 120,000 |
| | — |
| | 117,000 |
| | 50,583 |
| | — |
| | 287,583 |
|
2016 | | 80,000 |
| | — |
| | — |
| | — |
| | — |
| | 80,000 |
|
2017 | | 80,000 |
| | — |
| | — |
| | 60,539 |
| | 168,000 |
| | 308,539 |
|
Thereafter | | 170,969 |
| | — |
| | — |
| | 259,067 |
| | 292,000 |
| | 722,036 |
|
Total | | $ | 529,690 |
| | $ | 198,247 |
| | $ | 117,000 |
| | $ | 386,316 |
| | $ | 460,000 |
| | $ | 1,691,253 |
|
| |
(1) | Chart does not present the principal amortization of property mortgages with amortizing principal balances. The total outstanding balances for these mortgages are presented in the year of the contract's maturity. See cash obligation table below for debt maturity requirement by year including the amortization of these balances. |
The following schedule outlines the interest rate maturities of our outstanding interest rate swap agreements and fixed rate debt along with our interest rate caps as of March 31, 2013 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed | | Interest | | Total | | | | Interest | | Total |
| | Rate | | Rate | | |