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MAA > SEC Filings for MAA > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for MID AMERICA APARTMENT COMMUNITIES INC

Form 10-Q for MID AMERICA APARTMENT COMMUNITIES INC


2-Nov-2012

Quarterly Report


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

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this report. Historical results and trends that might appear in the condensed consolidated financial statements should not be interpreted as being indicative of future operations.

Forward Looking Statements

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

inability to generate sufficient cash flows due to market conditions, changes in supply and/or demand, competition, uninsured losses, changes in tax and housing laws, or other factors;

the availability of credit, including mortgage financing, and the liquidity of the debt markets, including a material deterioration of the financial condition of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation;

inability to replace financing with the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation should their investment in the multifamily industry shrink or cease to exist;

inability to acquire funding through the capital markets;

failure of new acquisitions to achieve anticipated results or be efficiently integrated;

failure of development communities to be completed, if at all, on a timely basis or to lease-up as anticipated;

increasing real estate taxes and insurance costs;

inability of a joint venture to perform as expected;

inability to acquire additional or dispose of existing apartment units on favorable economic terms;

unexpected capital needs;

losses from catastrophes in excess of our insurance coverage;

changes in interest rate levels, including that of variable rate debt, such as extensively used by us;

loss of hedge accounting treatment for interest rate swaps or interest rate caps;

inability to pay required distributions to maintain REIT status;

the continuation of the good credit of our interest rate swap and cap providers;

inability to meet loan covenants;

significant decline in market value of real estate serving as collateral for mortgage obligations;

imposition of federal taxes if we fail to qualify as a REIT under the Internal Revenue Code in any taxable year or foregone opportunities to ensure REIT status;

inability to attract and retain qualified personnel;


potential liability for environmental contamination;

adverse legislative or regulatory tax changes; and

litigation and compliance costs associated with laws requiring access for disabled persons.

Critical Accounting Policies and Estimates

The following discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, and the notes thereto, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may differ from these estimates and assumptions.

We believe that the estimates and assumptions listed below are most important to the portrayal of our financial condition and results of operations because they require the greatest subjective determinations and form the basis of accounting policies deemed to be most critical. These critical accounting policies include revenue recognition, capitalization of expenditures and depreciation and amortization of assets, impairment of long-lived assets, including goodwill, acquisition of real estate assets and fair value of derivative financial instruments.

Revenue Recognition

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

Capitalization of expenditures and depreciation and amortization of assets

We carry real estate assets at depreciated cost. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the related assets, which range from 8 to 40 years for land improvements and buildings, 5 years for furniture, fixtures, and equipment, 3 to 5 years for computers and software, and 6 months amortization for acquired leases, all of which are subjective determinations. Repairs and maintenance costs are expensed as incurred while significant improvements, renovations and replacements are capitalized. The cost to complete any deferred repairs and maintenance at properties acquired by us in order to elevate the condition of the property to our standards is capitalized as incurred.

Development costs are capitalized in accordance with accounting standards for costs and initial rental operations of real estate projects and standards for the capitalization of interest cost, real estate taxes and personnel expense.

Impairment of long-lived assets, including goodwill

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

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


Goodwill is tested annually for impairment and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss for goodwill is recognized to the extent that the carrying amount exceeds the implied fair value of goodwill. This determination is made at the reporting unit level and consists of two steps. First, we determine the fair value of a reporting unit and compare it to its carrying amount. In the apartment industry, the primary method used for determining fair value is to divide annual operating cash flows by an appropriate capitalization rate. We determine the appropriate capitalization rate by reviewing the prevailing rates in a property's market or submarket. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation in accordance with accounting standards for business combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Acquisition of real estate assets

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

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

In allocating the fair value of identified intangible assets of an acquired property, the in-place leases are valued based on current rent rates and time and cost to lease a unit. Management concluded that the 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.

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 Sheet.

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 September 30, 2012

We experienced an increase in income from continuing operations before non-operating items for the three months ended September 30, 2012 over the three months ended September 30, 2011 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 2.4% increase in our secondary market same store segment and a 144.5% 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 September 30, 2012, our wholly-owned portfolio consisted of 47,941 apartment units in 161 communities, compared to 46,365 apartment units in 158 communities at September 30, 2011. For these communities, the average effective rent per apartment unit, excluding units in lease-up, increased to $854 per unit at September 30, 2012 from $784 per unit at September 30, 2011. For these same communities, overall occupancy at September 30, 2012 and 2011 was 96.0% 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 and nine month periods ended September 30, 2012 and 2011. This discussion should be read in conjunction with all of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the Three Month Period Ended September 30, 2012 to the Three Month Period Ended September 30, 2011

Property revenues for the three months ended September 30, 2012 were approximately $126.9 million, an increase of approximately $16.8 million from the three months ended September 30, 2011 due to (i) a $3.1 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 $1.1 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 $12.6 million increase in property revenues from our non-same store and other group, primarily as a result of acquisitions.

Property operating expenses include costs for property personnel, property personnel bonuses, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and depreciation and amortization. Property operating expenses, excluding depreciation and amortization, for the three months ended September 30, 2012 were approximately $52.8 million, an increase of approximately $4.9 million from the three months ended September 30, 2011 due primarily to (i) an increase in property operating expenses of $0.7 million from our large market same store group, (ii) a decrease of $0.2 million from our secondary market same store group, and (iii) an increase of $4.4 million from our non-same store and other group, primarily as a result of acquisitions. Changes in property operating expenses for our large and secondary markets are caused by declining repair and maintenance and utility costs.

Depreciation and amortization expense for the three months ended September 30, 2012 was approximately $32.0 million, an increase of approximately $3.9 million from the three months ended September 30, 2011 primarily due to the increases in depreciation and amortization expense of (i) $0.4 million from our large market same store group, (ii) $0.4 million from our secondary market same store group, and (iii) $3.1 million from our non-same store and other group, mainly as a result of acquisitions. Increases of depreciation and amortization expense from our primary and secondary market same store groups resulted from asset additions made during the normal course of business.

During the three months ended September 30, 2012, we sold five properties for a net gain of $16.1 million. We sold one property for a gain of $4.9 million in the three months ended September 30, 2011.

Acquisition expense for the three months ended September 30, 2012, was approximately $1.3 million, an increase of approximately $0.8 million from the three months ended September 30, 2011 primarily due to increased acquisition activity in the third quarter of 2012.


Primarily as a result of the foregoing, net income attributable to MAA increased by approximately $17.1 million in the three months ended September 30, 2012 from the three months ended September 30, 2011.

Comparison of the Nine Month Period Ended September 30, 2012 to the Nine Month Period Ended September 30, 2011

Property revenues for the nine months ended September 30, 2012 were approximately $364.1 million, an increase of approximately $48.1 million from the nine months ended September 30, 2011 due to (i) a $9.0 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 $4.2 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 $34.9 million increase in property revenues from our non-same store and other group, primarily as a result of acquisitions.

Property operating expenses include costs for property personnel, property personnel bonuses, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and depreciation and amortization. Property operating expenses, excluding depreciation and amortization, for the nine months ended September 30, 2012 were approximately $150.6 million, an increase of approximately $15.5 million from the nine months ended September 30, 2011 due primarily to increases in property operating expenses of (i) $2.3 million from our large market same store group, (ii) $0.8 million from our secondary market same store group, and (iii) $12.4 million million from our non-same store and other group, primarily as a result of acquisitions. Changes in property operating expenses for our large and secondary markets are caused by declining repair and maintenance and utility costs.

Depreciation and amortization expense for the nine months ended September 30, 2012 was approximately $92.7 million, an increase of approximately $11.6 million from the nine months ended September 30, 2011 primarily due to the increases in depreciation and amortization expense of (i) $0.7 million from our large market same store group, (ii) $1.1 million from our secondary market same store group, and (iii) $9.8 million from our non-same store and other group, mainly as a result of acquisitions. Increases in depreciation and amortization expense from our secondary market same store group resulted from asset additions made during the normal course of business.

During the nine months ended September 30, 2012, we sold eight properties for a net gain of $38.5 million, an increase of $33.6 million over the gain of $4.9 million in the nine months ended September 30, 2011. This gain was offset by a reduction in income from discontinued operations of $2.3 million from the nine months ended September 30, 2011 to the nine months ended September 30, 2012.

Acquisition expense for the nine months ended September 30, 2012 was approximately $1.6 million, a decrease of approximately $0.7 million compared to the nine months ended September 30, 2011 due to a correction of land acquisition costs during the first quarter of 2012.

Primarily as a result of the foregoing, net income attributable to MAA increased by approximately $52.9 million in the nine months ended September 30, 2012 from the nine months ended September 30, 2011.

Funds From Operations and Net Income

Funds from operations, or FFO, represents net income attributable to MAA (computed in accordance with GAAP), excluding extraordinary items, asset impairment, gains or losses on disposition of real estate assets, plus depreciation of real estate, and adjustments for joint ventures to reflect FFO on the same basis. Disposition of real estate assets includes sales of discontinued operations as well as proceeds received from insurance and other settlements from property damage.

Our policy is to expense the cost of interior painting, vinyl flooring and blinds as incurred for stabilized properties. During the stabilization period for acquisition properties, these items are capitalized as part of the total repositioning program of newly acquired properties, and thus are not deducted in calculating FFO.

FFO should not be considered as an alternative to net income attributable to MAA or any other GAAP measurement of performance, as an indicator of operating performance, or as an alternative to cash flow from operating, investing and financing activities as a measure of liquidity. We believe that FFO is helpful to investors in understanding our operating performance in that such calculation excludes depreciation and amortization expense on real estate assets. We believe that GAAP historical cost depreciation of real estate assets is generally not correlated with changes in the value of those assets, whose value does not diminish predictably over time. Our calculation of FFO may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs.


The following table is a reconciliation of FFO to net income attributable to MAA for the three and nine month periods ended September 30, 2012, and 2011 (dollars in thousands):

                                                  Three months ended
                                                     September 30,              Nine months ended September 30,
                                                  2012           2011              2012                 2011
Net income attributable to MAA                $  30,866       $  13,791     $        82,916       $        30,063
Depreciation and amortization of real estate
assets                                           31,404          27,490              90,924                79,460
Net casualty loss and other settlement
proceeds                                             22             286                  24                   692
Net casualty (gain) loss and other settlement
proceeds of discontinued operations                 (99 )             -                 (43 )                   7
Depreciation and amortization of real estate
assets of discontinued operations                   416           1,381               2,414                 4,226
Gain on sales of discontinued operations        (16,092 )        (4,927 )           (38,474 )              (4,927 )
Depreciation and amortization of real estate
assets of real estate joint ventures                442             567               1,437                 1,708
Net income attributable to noncontrolling
interests                                         1,212             660               3,702                 1,223
Funds from operations                         $  48,171       $  39,248     $       142,900       $       112,452

FFO for the three and nine month periods ended September 30, 2012 increased approximately $8.9 million and $30.4 million, respectively, from the three and nine month periods ended September 30, 2011 primarily as a result of the increases in property revenues of approximately $16.8 million and $48.1 million discussed above that were only partially offset by the $4.9 million and $15.5 million increase in property operating expenses, excluding depreciation and amortization.

Trends
During the three months ended September 30, 2012, rental demand for apartments continued to be strong as compared to the same period in 2011 and the prior quarter. Average same store physical occupancy for the quarter exceeded 96%, slightly higher than the second quarter of 2012, while same store average effective rent per unit continued to increase. Average same store effective rent per unit was up 5.2% over prior year and 1.7% over the second quarter of 2012. 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. In addition, the average price for both new leases and renewals signed trended up from the second quarter . . .

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