MAA.9.30.2013 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 September 30, 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: 001-12762
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.
þ Yes ¨ 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 | November 4, 2013 |
Common Stock, $0.01 par value | 74,776,229 |
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 September 30, 2013 (Unaudited) and December 31, 2012 (Unaudited). | 2 |
|
| Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 (Unaudited) and 2012 (Unaudited). | 3 |
|
| Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 (Unaudited) and 2012 (Unaudited). | 4 |
|
| Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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. | 25 |
|
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 37 |
|
Item 4. | Controls and Procedures. | 37 |
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| | |
| PART II – OTHER INFORMATION | |
Item 1. | Legal Proceedings. | 38 |
|
Item 1A. | Risk Factors. | 38 |
|
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 49 |
|
Item 3. | Defaults Upon Senior Securities. | 49 |
|
Item 4. | Mine Safety Disclosures. | 49 |
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Item 5. | Other Information. | 49 |
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Item 6. | Exhibits. | 50 |
|
| Signatures. | 51 |
|
MAA
Condensed Consolidated Balance Sheets
September 30, 2013 and December 31, 2012
(Unaudited)
(Dollars in thousands, except share data)
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Assets: | | | |
Real estate assets: | | | |
Land | $ | 394,848 |
| | $ | 386,670 |
|
Buildings and improvements | 3,247,874 |
| | 3,170,413 |
|
Furniture, fixtures and equipment | 102,013 |
| | 98,044 |
|
Development and capital improvements in progress | 31,595 |
| | 52,455 |
|
| 3,776,330 |
| | 3,707,582 |
|
Less accumulated depreciation | (1,068,873 | ) | | (1,027,618 | ) |
| 2,707,457 |
| | 2,679,964 |
|
| | | |
Land held for future development | 5,450 |
| | 1,205 |
|
Commercial properties, net | 7,664 |
| | 8,065 |
|
Investments in real estate joint ventures | 3,237 |
| | 4,837 |
|
Real estate assets, net | 2,723,808 |
| | 2,694,071 |
|
| | | |
Cash and cash equivalents | 181,105 |
| | 9,075 |
|
Restricted cash | 58,579 |
| | 808 |
|
Deferred financing costs, net | 13,629 |
| | 13,842 |
|
Other assets | 47,030 |
| | 29,166 |
|
Goodwill | 4,106 |
| | 4,106 |
|
Total assets | $ | 3,028,257 |
| | $ | 2,751,068 |
|
| | | |
Liabilities and Shareholders' Equity: | |
| | |
|
Liabilities: | |
| | |
|
Secured notes payable | $ | 1,050,202 |
| | $ | 1,190,848 |
|
Unsecured notes payable | 810,000 |
| | 483,000 |
|
Accounts payable | 6,963 |
| | 4,586 |
|
Fair market value of interest rate swaps | 9,858 |
| | 21,423 |
|
Accrued expenses and other liabilities | 109,282 |
| | 94,719 |
|
Security deposits | 6,892 |
| | 6,669 |
|
Total liabilities | 1,993,197 |
| | 1,801,245 |
|
| | | |
Redeemable stock | 5,039 |
| | 4,713 |
|
| | | |
Shareholders' equity: | |
| | |
|
Common stock, $0.01 par value per share, 100,000,000 shares authorized; 42,744,978 and 42,316,398 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively (1) | 427 |
| | 422 |
|
Additional paid-in capital | 1,562,211 |
| | 1,542,999 |
|
Accumulated distributions in excess of net income | (567,662 | ) | | (603,315 | ) |
Accumulated other comprehensive losses | (4,599 | ) | | (26,054 | ) |
Total MAA shareholders' equity | 990,377 |
| | 914,052 |
|
Noncontrolling interest | 39,644 |
| | 31,058 |
|
Total equity | 1,030,021 |
| | 945,110 |
|
Total liabilities and equity | $ | 3,028,257 |
| | $ | 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 September 30, 2013 and December 31, 2012 are 80,626 and 72,786, respectively. |
See accompanying notes to condensed consolidated financial statements.
MAA
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 2013 and 2012
(Unaudited)
(Dollars in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Operating revenues: | | | | | | | |
Rental revenues | $ | 125,522 |
| | $ | 113,015 |
| | $ | 366,191 |
| | $ | 323,223 |
|
Other property revenues | 10,772 |
| | 9,966 |
| | 31,596 |
| | 29,084 |
|
Total property revenues | 136,294 |
| | 122,981 |
| | 397,787 |
| | 352,307 |
|
Management fee income | 146 |
| | 209 |
| | 465 |
| | 687 |
|
Total operating revenues | 136,440 |
| | 123,190 |
| | 398,252 |
| | 352,994 |
|
Property operating expenses: | |
| | |
| | |
| | |
|
Personnel | 15,085 |
| | 14,156 |
| | 43,791 |
| | 40,966 |
|
Building repairs and maintenance | 4,595 |
| | 4,292 |
| | 11,661 |
| | 11,543 |
|
Real estate taxes and insurance | 16,811 |
| | 14,167 |
| | 48,395 |
| | 41,085 |
|
Utilities | 7,580 |
| | 7,381 |
| | 21,108 |
| | 19,678 |
|
Landscaping | 2,922 |
| | 2,640 |
| | 8,677 |
| | 7,864 |
|
Other operating | 9,160 |
| | 8,653 |
| | 26,758 |
| | 24,928 |
|
Depreciation and amortization | 33,000 |
| | 30,979 |
| | 97,883 |
| | 89,701 |
|
Total property operating expenses | 89,153 |
| | 82,268 |
| | 258,273 |
| | 235,765 |
|
Acquisition expense | — |
| | 1,343 |
| | 499 |
| | 1,574 |
|
Property management expenses | 5,193 |
| | 5,460 |
| | 15,970 |
| | 16,484 |
|
General and administrative expenses | 3,976 |
| | 3,527 |
| | 10,604 |
| | 10,436 |
|
Merger related expenses | 5,561 |
| | — |
| | 11,298 |
| | — |
|
Integration related expenses | 35 |
| | — |
| | 35 |
| | — |
|
Income from continuing operations before non-operating items | 32,522 |
| | 30,592 |
| | 101,573 |
| | 88,735 |
|
Interest and other non-property income | 16 |
| | 89 |
| | 86 |
| | 343 |
|
Interest expense | (14,941 | ) | | (14,530 | ) | | (45,715 | ) | | (42,428 | ) |
(Loss) gain on debt extinguishment/modification | (218 | ) | | — |
| | (387 | ) | | 5 |
|
Amortization of deferred financing costs | (820 | ) | | (971 | ) | | (2,427 | ) | | (2,611 | ) |
Net casualty (loss) gain after insurance and other settlement proceeds | — |
| | (22 | ) | | 455 |
| | (24 | ) |
Gain on sale of non-depreciable assets | — |
| | 48 |
| | — |
| | 45 |
|
Income from continuing operations before gain (loss) from real estate joint ventures | 16,559 |
| | 15,206 |
| | 53,585 |
| | 44,065 |
|
Gain (loss) from real estate joint ventures | 60 |
| | (72 | ) | | 161 |
| | (170 | ) |
Income from continuing operations | 16,619 |
| | 15,134 |
| | 53,746 |
| | 43,895 |
|
Discontinued operations: | |
| | |
| | |
| | |
|
Income from discontinued operations before gain on sale | 650 |
| | 753 |
| | 3,439 |
| | 4,206 |
|
Net casualty (loss) gain after insurance and other settlement proceeds on discontinued operations | (1 | ) | | 99 |
| | (5 | ) | | 43 |
|
Gain on sale of discontinued operations | 28,788 |
| | 16,092 |
| | 71,909 |
| | 38,474 |
|
Consolidated net income | 46,056 |
| | 32,078 |
| | 129,089 |
| | 86,618 |
|
Net income attributable to noncontrolling interests | 1,772 |
| | 1,212 |
| | 4,536 |
| | 3,702 |
|
Net income available for MAA common shareholders | $ | 44,284 |
| | $ | 30,866 |
| | $ | 124,553 |
| | $ | 82,916 |
|
| | | | | | | |
Earnings per common share - basic: | |
| | |
| | |
| | |
|
Income from continuing operations available for common shareholders | $ | 0.38 |
| | $ | 0.35 |
| | $ | 1.22 |
| | $ | 1.03 |
|
Discontinued property operations | 0.66 |
| | 0.39 |
| | 1.70 |
| | 1.01 |
|
Net income available for common shareholders | $ | 1.04 |
| | $ | 0.74 |
| | $ | 2.92 |
| | $ | 2.04 |
|
| | | | | | | |
Earnings per share - diluted: | |
| | |
| | |
| | |
|
Income from continuing operations available for common shareholders | $ | 0.38 |
| | $ | 0.35 |
| | $ | 1.21 |
| | $ | 1.03 |
|
Discontinued property operations | 0.66 |
| | 0.39 |
| | 1.70 |
| | 1.00 |
|
Net income available for common shareholders | $ | 1.04 |
| | $ | 0.74 |
| | $ | 2.91 |
| | $ | 2.03 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.6950 |
| | $ | 0.6600 |
| | $ | 2.0850 |
| | $ | 1.9800 |
|
See accompanying notes to condensed consolidated financial statements.
MAA
Condensed Consolidated Statements of Comprehensive Income
Three and nine months ended September 30, 2013 and 2012
(Unaudited)
(Dollars in thousands)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Consolidated net income | $ | 46,056 |
| | $ | 32,078 |
| | $ | 129,089 |
| | $ | 86,618 |
|
Other comprehensive income: | | | | | | | |
Unrealized (losses) gains from the effective portion of derivative instruments | (1,826 | ) | | (2,903 | ) | | 10,096 |
| | (8,197 | ) |
Reclassification adjustment for losses included in net income for the effective portion of derivative instruments | 3,621 |
| | 4,815 |
| | 12,098 |
| | 15,308 |
|
Total comprehensive income | 47,851 |
| | 33,990 |
| | 151,283 |
| | 93,729 |
|
Less: comprehensive income attributable to noncontrolling interests | (1,830 | ) | | (2,700 | ) | | (5,275 | ) | | (5,432 | ) |
Comprehensive income attributable to MAA | $ | 46,021 |
| | $ | 31,290 |
| | $ | 146,008 |
| | $ | 88,297 |
|
| | | | | | | |
See accompanying notes to condensed consolidated financial statements. |
MAA
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2013 and 2012
(Unaudited)
(Dollars in thousands)
|
| | | | | | | |
| Nine months ended September 30, |
| 2013 | | 2012 |
Cash flows from operating activities: | | | |
Consolidated net income | $ | 129,089 |
| | $ | 86,618 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | |
|
Retail revenue accretion | (29 | ) | | — |
|
Depreciation and amortization | 102,158 |
| | 97,691 |
|
Stock compensation expense | 1,729 |
| | 1,730 |
|
Redeemable stock issued | 535 |
| | 428 |
|
Amortization of debt premium | (948 | ) | | (541 | ) |
(Gain) loss from investments in real estate joint ventures | (161 | ) | | 170 |
|
Loss on debt extinguishment | 387 |
| | 322 |
|
Derivative interest expense | 827 |
| | 590 |
|
Gain on sale of non-depreciable assets | — |
| | (45 | ) |
Gain on sale of discontinued operations | (71,909 | ) | | (38,474 | ) |
Net casualty gain and other settlement proceeds | (450 | ) | | (19 | ) |
Changes in assets and liabilities: | |
| | |
|
Restricted cash | (391 | ) | | 63 |
|
Other assets | (7,611 | ) | | (4,569 | ) |
Accounts payable | 2,377 |
| | 3,572 |
|
Accrued expenses and other | 12,951 |
| | 10,040 |
|
Security deposits | 223 |
| | 445 |
|
Net cash provided by operating activities | 168,777 |
| | 158,021 |
|
Cash flows from investing activities: | |
| | |
|
Purchases of real estate and other assets | (89,866 | ) | | (314,909 | ) |
Normal capital improvements | (35,412 | ) | | (36,989 | ) |
Construction capital and other improvements | (3,873 | ) |
| (2,561 | ) |
Renovations to existing real estate assets | (8,616 | ) | | (11,070 | ) |
Development | (26,129 | ) | | (54,242 | ) |
Distributions from real estate joint ventures | 8,311 |
| | 11,880 |
|
Contributions to real estate joint ventures | (183 | ) | | (204 | ) |
Proceeds from disposition of real estate assets | 118,783 |
| | 97,113 |
|
Funding of escrow for exchange acquisitions | (57,380 | ) | | — |
|
Net cash used in investing activities | (94,365 | ) | | (310,982 | ) |
Cash flows from financing activities: | |
| | |
|
Net change in credit lines | 177,000 |
| | (235,064 | ) |
Proceeds from notes payable | — |
| | 271,000 |
|
Principal payments on notes payable | (8,695 | ) | | (11,760 | ) |
Payment of deferred financing costs | (2,655 | ) | | (3,577 | ) |
Repurchase of common stock | (682 | ) | | (1,863 | ) |
Proceeds from issuances of common shares | 25,038 |
| | 173,960 |
|
Distributions to noncontrolling interests | (3,574 | ) | | (3,775 | ) |
Dividends paid on common shares | (88,814 | ) | | (79,855 | ) |
Net cash provided by financing activities | 97,618 |
| | 109,066 |
|
Net increase (decrease) in cash and cash equivalents | 172,030 |
| | (43,895 | ) |
Cash and cash equivalents, beginning of period | 9,075 |
| | 57,317 |
|
Cash and cash equivalents, end of period | $ | 181,105 |
| | $ | 13,422 |
|
| | | |
Supplemental disclosure of cash flow information: | |
| | |
|
Interest paid | $ | 48,534 |
| | $ | 47,735 |
|
Supplemental disclosure of noncash investing and financing activities: | |
| | |
|
Conversion of units to shares of common stock | $ | 550 |
| | $ | 2,672 |
|
Accrued construction in progress | $ | 4,190 |
| | $ | 6,392 |
|
Interest capitalized | $ | 1,118 |
| | $ | 1,844 |
|
Marked-to-market adjustment on derivative instruments | $ | 21,367 |
| | $ | 6,521 |
|
Fair value adjustment on debt assumed | $ | 704 |
| | $ | 2,578 |
|
Debt assumed | $ | 18,293 |
| | $ | 30,290 |
|
See accompanying notes to condensed consolidated financial statements.
MAA
Notes to Condensed Consolidated Financial Statements
September 30, 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, our, us, 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 September 30, 2013, we owned or owned interests in a total of 160 multifamily apartment communities comprising 48,343 apartments located in 13 states including four communities comprising 1,156 apartments owned through our joint venture, Mid-America Multifamily Fund II, LLC. We also had two development communities under construction totaling 564 units as of September 30, 2013. A total of 174 units for the development projects were completed as of September 30, 2013, and therefore have been included in the totals above. Total expected costs for the development projects are $74.0 million, of which $43.1 million has been incurred through September 30, 2013. We expect to complete construction on one of the projects by the fourth quarter of 2013 and the other by the fourth quarter of 2014. Four of our properties include retail components with approximately 107,000 square feet of gross leasable area.
Effective October 1, 2013, pursuant to the Agreement and Plan of Merger, dated as of June 3, 2013, an indirect, wholly-owned subsidiary of Mid-America Apartments, L.P., or the Operating Partnership, or MAALP, merged with and into Colonial Realty Limited Partnership, or Colonial LP, a Delaware limited partnership, with Colonial LP surviving the merger, which is referred to as the partnership merger. Immediately following the partnership merger, Colonial Properties Trust, or Colonial, an Alabama real estate investment trust, merged with and into MAA, with MAA surviving the merger, which is referred to as the parent merger. The partnership merger and parent merger are collectively referred to as the "Merger" in the Quarterly Report on Form 10-Q. The combined company will operate under the name "MAA" and will be run by our existing management team. For additional details, see Item 1. Financial Statements – Notes to Consolidated Financial Statements, Note 11. All other footnotes contained in this Form 10-Q have been prepared as of September 30, 2013.
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, 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- and nine-month periods ended September 30, 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- and nine-month periods ended September 30, 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 September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Shares Outstanding | | | | | | | |
Weighted average common shares - basic | 42,702 |
| | 41,405 |
| | 42,584 |
| | 40,634 |
|
Weighted average partnership units outstanding | — |
| (1) | 1,781 |
| | 1,709 |
| | 1,859 |
|
Effect of unvested shares assumed | — |
| (1) | 35 |
| | 53 |
| | 74 |
|
Weighted average common shares - diluted | 42,702 |
| | 43,221 |
| | 44,346 |
| | 42,567 |
|
| | | | | | | |
Calculation of Earnings per Share - basic | |
| | |
| | |
| | |
|
Income from continuing operations | $ | 16,619 |
| | $ | 15,134 |
| | $ | 53,746 |
| | $ | 43,895 |
|
Income from continuing operations attributable to noncontrolling interests | (645 | ) | | (466 | ) | | (1,535 | ) | | (1,731 | ) |
Income from continuing operations allocated to unvested restricted shares | (14 | ) | | (12 | ) | | (47 | ) | | (39 | ) |
Income from continuing operations available for common shareholders, adjusted | $ | 15,960 |
| | $ | 14,656 |
| | $ | 52,164 |
| | $ | 42,125 |
|
| | | | | | | |
Income from discontinued operations | $ | 29,437 |
| | $ | 16,944 |
| | $ | 75,343 |
| | $ | 42,723 |
|
Income from discontinued operations attributable to noncontrolling interest | (1,127 | ) | | (746 | ) | | (3,001 | ) | | (1,971 | ) |
Income from discontinued operations allocated to unvested restricted shares | (24 | ) | | (13 | ) | | (66 | ) | | (38 | ) |
Income from discontinued operations available for common shareholders, adjusted | $ | 28,286 |
| | $ | 16,185 |
| | $ | 72,276 |
| | $ | 40,714 |
|
| | | | | | | |
Weighted average common shares - basic | 42,702 |
| | 41,405 |
| | 42,584 |
| | 40,634 |
|
Earnings per share - basic | $ | 1.04 |
| | $ | 0.74 |
| | $ | 2.92 |
| | $ | 2.04 |
|
| | | | | | | |
Calculation of Earnings per Share - diluted | |
| | |
| | |
| | |
|
Income from continuing operations | $ | 16,619 |
| | $ | 15,134 |
| | $ | 53,746 |
| | $ | 43,895 |
|
Income from continuing operations attributable to noncontrolling interests | (645 | ) | (1) | — |
| | — |
| | — |
|
Income from continuing operations allocated to unvested restricted shares | (14 | ) | (1) | — |
| | — |
| | — |
|
Income from continuing operations available for common shareholders, adjusted | $ | 15,960 |
| | $ | 15,134 |
| | $ | 53,746 |
| | $ | 43,895 |
|
| | | | | | | |
Income from discontinued operations | $ | 29,437 |
| | $ | 16,944 |
| | $ | 75,343 |
| | $ | 42,723 |
|
Income from discontinued operations attributable to noncontrolling interest | (1,127 | ) | (1) | — |
| | — |
| | — |
|
Income from discontinued operations allocated to unvested restricted shares | (23 | ) | (1) | — |
| | — |
| | — |
|
Income from discontinued operations available for common shareholders, adjusted | $ | 28,287 |
| | $ | 16,944 |
| | $ | 75,343 |
| | $ | 42,723 |
|
| | | | | | | |
Weighted average common shares - diluted | 42,702 |
| | 43,221 |
| | 44,346 |
| | 42,567 |
|
Earnings per share - diluted | $ | 1.04 |
| | $ | 0.74 |
| | $ | 2.91 |
| | $ | 2.03 |
|
(1) Operating partnership units, unvested shares assumed, and the related income with each are not included in dilutive earnings per share calculations as they were not dilutive.
2. Segment Information
As of September 30, 2013, we owned or had an ownership interest in 160 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 identified for disposition. 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. Communities are considered stabilized after achieving 90% occupancy for 90 days. Communities that have been identified for disposition are excluded from our same store portfolio. 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- and nine-month periods ended September 30, 2013 and 2012 were as follows (dollars in thousands): |
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Revenues | | | | | | | |
Large Market Same Store | $ | 64,823 |
| | $ | 61,707 |
| | $ | 191,246 |
| | $ | 181,446 |
|
Secondary Market Same Store | 52,344 |
| | 50,904 |
| | 155,650 |
| | 150,869 |
|
Non-Same Store and Other | 19,127 |
| | 10,370 |
| | 50,891 |
| | 19,992 |
|
Total property revenues | 136,294 |
| | 122,981 |
| | 397,787 |
| | 352,307 |
|
Management fee income | 146 |
| | 209 |
| | 465 |
| | 687 |
|
Total operating revenues | $ | 136,440 |
| | $ | 123,190 |
| | $ | 398,252 |
| | $ | 352,994 |
|
| | | | | | | |
NOI | |
| | |
| | |
| | |
|
Large Market Same Store | $ | 38,159 |
| | $ | 35,700 |
| | $ | 113,707 |
| | $ | 105,675 |
|
Secondary Market Same Store | 30,349 |
| | 29,816 |
| | 92,547 |
| | 89,109 |
|
Non-Same Store and Other | 12,470 |
| | 9,015 |
| | 36,798 |
| | 22,657 |
|
Total NOI | 80,978 |
| | 74,531 |
| | 243,052 |
| | 217,441 |
|
Discontinued operations NOI included above | (837 | ) | | (2,839 | ) | | (5,655 | ) | | (11,198 | ) |
Management fee income | 146 |
| | 209 |
| | 465 |
| | 687 |
|
Depreciation and amortization | (33,000 | ) | | (30,979 | ) | | (97,883 | ) | | (89,701 | ) |
Acquisition expense | — |
| | (1,343 | ) | | (499 | ) | | (1,574 | ) |
Property management expense | (5,193 | ) | | (5,460 | ) | | (15,970 | ) | | (16,484 | ) |
General and administrative expense | (3,976 | ) | | (3,527 | ) | | (10,604 | ) | | (10,436 | ) |
Merger related expenses | (5,561 | ) | | — |
| | (11,298 | ) | | — |
|
Integration Costs | (35 | ) | | — |
| | (35 | ) | | — |
|
Interest and other non-property income | 16 |
| | 89 |
| | 86 |
| | 343 |
|
Interest expense | (14,941 | ) | | (14,530 | ) | | (45,715 | ) | | (42,428 | ) |
(Loss) gain on debt extinguishment | (218 | ) | | — |
| | (387 | ) | | 5 |
|
Amortization of deferred financing costs | (820 | ) | | (971 | ) | | (2,427 | ) | | (2,611 | ) |
Net casualty (loss) gain after insurance and other settlement proceeds | — |
| | (22 | ) | | 455 |
| | (24 | ) |
Gain on sale of non-depreciable assets | — |
| | 48 |
| | — |
| | 45 |
|
Gain (loss) from real estate joint ventures | 60 |
| | (72 | ) | | 161 |
| | (170 | ) |
Discontinued operations | 29,437 |
| | 16,944 |
| | 75,343 |
| | 42,723 |
|
Net income attributable to noncontrolling interests | (1,772 | ) | | (1,212 | ) | | (4,536 | ) | | (3,702 | ) |
Net income attributable to MAA | $ | 44,284 |
| | $ | 30,866 |
| | $ | 124,553 |
| | $ | 82,916 |
|
Assets for each reportable segment as of September 30, 2013 and December 31, 2012, were as follows (dollars in thousands): |
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
Assets | | | |
Large Market Same Store | $ | 1,265,355 |
| | $ | 1,108,827 |
|
Secondary Market Same Store | 806,170 |
| | 654,315 |
|
Non-Same Store and Other | 674,432 |
| | 949,398 |
|
Corporate assets | 282,300 |
| | 38,528 |
|
Total assets | $ | 3,028,257 |
| | $ | 2,751,068 |
|
3. Equity
Total equity and its components for the nine-month periods ended September 30, 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 | | | | | 124,553 |
| | | | 4,536 |
| | 129,089 |
|
Other comprehensive income - derivative instruments (cash flow hedges) | | | | | | | 21,455 |
| | 739 |
| | 22,194 |
|
Issuance and registration of common shares | 4 |
| | 25,034 |
| | | | | | | | 25,038 |
|
Shares repurchased and retired | — |
| | (682 | ) | | | | | | | | (682 | ) |
Shares issued in exchange for units | 1 |
| | 549 |
| | | | | | (550 | ) | | — |
|
Redeemable stock fair market value | | | | | 209 |
| | | | | | 209 |
|
Adjustment for noncontrolling interest ownership in operating partnership | | | (7,418 | ) | | | | | | 7,418 |
| | — |
|
Amortization of unearned compensation | | | 1,729 |
| | | | | | | | 1,729 |
|
Dividends on common stock ($2.0850 per share) | | | | | (89,109 | ) | | | | — |
| | (89,109 | ) |
Dividends on noncontrolling interest units ($2.0850 per unit) | | | | | | | | | (3,557 | ) | | (3,557 | ) |
EQUITY BALANCE SEPTEMBER 30, 2013 | $ | 427 |
| | $ | 1,562,211 |
| | $ | (567,662 | ) | | $ | (4,599 | ) | | $ | 39,644 |
| | $ | 1,030,021 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
| |
|
| | 82,916 |
| |
|
| | 3,702 |
| | 86,618 |
|
Other comprehensive income - derivative instruments (cash flow hedges) |
|
| |
|
| |
|
| | 5,381 |
| | 1,730 |
| | 7,111 |
|
Issuance and registration of common shares | 28 |
| | 173,934 |
| |
|
| |
|
| |
|
| | 173,962 |
|
Shares repurchased and retired | — |
| | (1,863 | ) | |
|
| |
|
| |
|
| | (1,863 | ) |
Shares issued in exchange for units | 2 |
| | 2,670 |
| |
|
| |
|
| | (2,672 | ) | | — |
|
Redeemable stock fair market value |
|
| |
|
| | (168 | ) | |
|
| |
|
| | (168 | ) |
Adjustment for noncontrolling interest ownership in operating partnership |
|
| | (4,812 | ) | |
|
| |
|
| | 4,812 |
| | — |
|
Correction of classification of equity accounts | | | (27,032 | ) | | 24,871 |
| | | | 2,161 |
| | — |
|
Amortization of unearned compensation |
|
| | 1,730 |
| |
|
| |
|
| |
|
| | 1,730 |
|
Dividends on common stock ($1.9800 per share) |
|
| |
|
| | (81,813 | ) | |
|
| | — |
| | (81,813 | ) |
Dividends on noncontrolling interest units ($1.9800 per unit) |
|
| |
|
| |
|
| |
|
| | (3,667 | ) | | (3,667 | ) |
EQUITY BALANCE SEPTEMBER 30, 2012 | $ | 419 |
| | $ | 1,520,250 |
| | $ | (596,027 | ) | | $ | (30,467 | ) | | $ | 31,197 |
| | $ | 925,372 |
|
4. Real Estate Acquisitions
On May 1, 2013, we purchased Greenwood Forest, a 316-unit apartment community located in Greenwood Forest (Houston), Texas. This property was previously a part of Mid-America Multifamily Fund I, LLC.
On May 21, 2013, we purchased Station Square at Cosner's Corner, a 260-unit apartment community located in Fredericksburg, Virginia. As part of this purchase, we also acquired land for future development.
We did not acquire any additional properties during the three months ended September 30, 2013.
5. Discontinued Operations
The eight properties that we sold during the nine months ended September 30, 2013 as well as the nine properties sold by us during 2012 have been classified as discontinued operations in the Consolidated Statement of Operations.
The following table lists the communities classified as discontinued operations for the nine months ended September 30, 2013:
|
| | | | |
Community | Number of Units | Date Sold | Location | Operating Segment |
Woodbridge at the Lake | 188 | May 15, 2013 | Jacksonville, Florida | Large market same store |
Savannahs at James Landing | 256 | June 13, 2013 | Melbourne, Florida | Secondary market same store |
High Ridge | 160 | June 13, 2013 | Athens, Georgia | Secondary market same store |
TPC Jacksonville | 440 | June 20, 2013 | Jacksonville, Florida | Large market same store |
Marsh Oaks | 120 | August 15, 2013 | Jacksonville, Florida | Large market same store |
Three Oaks | 240 | September 11, 2013 | Valdosta, Georgia | Secondary market same store |
Wildwood | 216 | September 11, 2013 | Thomasville, Georgia | Secondary market same store |
Shenandoah Ridge | 272 | September 30, 2013 | Augusta, Georgia | Secondary market same store |
During the three months ended June 30, 2013, we reported the 113-unit Fountain Lake apartment community as held for sale in the Condensed Consolidated Balance Sheet and in discontinued operations in our Condensed Consolidated Statement of Operations. As of September 30, 2013, we are no longer actively marketing this community and as a result Fountain Lake was classified as held for use and therefore is not included in the discontinued operation line in the Consolidated Statement of Operations as of September 30, 2013. Fountain Lake is valued at its carrying amount before it was classified as held for sale, adjusted for any depreciation expense that would have been recognized had the asset been continuously classified as held for use, on the Condensed Consolidated Balance Sheet.
The following is a summary of income from continuing and discontinued operations attributable to MAA and noncontrolling interest for the three- and nine-month periods ended September 30, 2013 and 2012 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Income from continuing operations: | | | | | | | |
Attributable to MAA | $ | 15,974 |
| | $ | 14,668 |
| | $ | 52,211 |
| | $ | 42,164 |
|
Attributable to noncontrolling interest | 645 |
| | 466 |
| | 1,535 |
| | 1,731 |
|
Income from continuing operations | $ | 16,619 |
| | $ | 15,134 |
| | $ | 53,746 |
| | $ | 43,895 |
|
| | | | | | | |
Income from discontinued operations: | |
| | |
| | |
| | |
|
Attributable to MAA | $ | 28,310 |
| | $ | 16,198 |
| | $ | 72,342 |
| | $ | 40,752 |
|
Attributable to noncontrolling interest | 1,127 |
| | 746 |
| | 3,001 |
| | 1,971 |
|
Income from discontinued operations | $ | 29,437 |
| | $ | 16,944 |
| | $ | 75,343 |
| | $ | 42,723 |
|
The following is a summary of discontinued operations for the three- and nine-month periods ended September 30, 2013 and 2012 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, |
| Nine months ended September 30, |
| 2013 |
| 2012 |
| 2013 |
| 2012 |
Revenues | |
| |
| |
| |
Rental revenues | $ | 1,386 |
|
| $ | 5,108 |
|
| $ | 9,084 |
|
| $ | 19,659 |
|
Other revenues | 119 |
|
| 449 |
|
| 709 |
|
| 1,834 |
|
Total revenues | 1,505 |
|
| 5,557 |
|
| 9,793 |
|
| 21,493 |
|
Expenses | |
|
| |
|
| |
|
| |
|
Property operating expenses | 680 |
|
| 3,073 |
|
| 4,147 |
|
| 10,702 |
|
Depreciation and amortization | 110 |
|
| 1,421 |
|
| 1,856 |
|
| 5,401 |
|
Interest expense | 65 |
|
| 310 |
|
| 351 |
|
| 1,184 |
|
Total expense | 855 |
|
| 4,804 |
|
| 6,354 |
|
| 17,287 |
|
Income from discontinued operations before gain on sale | 650 |
|
| 753 |
|
| 3,439 |
|
| 4,206 |
|
Net (loss) gain on insurance and other settlement proceeds on discontinued operations | (1 | ) |
| 99 |
|
| (5 | ) |
| 43 |
|
Gain on sale of discontinued operations | 28,788 |
|
| 16,092 |
|
| 71,909 |
|
| 38,474 |
|
Income from discontinued operations | $ | 29,437 |
|
| $ | 16,944 |
|
| $ | 75,343 |
|
| $ | 42,723 |
|
6. Share and Unit Information
On September 30, 2013, 42,744,978 shares of common stock of MAA and 1,701,955 partnership units in the Operating Partnership were issued and outstanding, representing a total of 44,446,933 shares and units. At September 30, 2012, 41,925,288 shares of common stock of MAA and 1,774,547 partnership units in the Operating Partnership were outstanding, representing a total of 43,699,835 shares and units. There were no outstanding options as of September 30, 2013 or September 30, 2012.
On August 26, 2010, we and our Operating Partnership entered into sales agreements with Cantor Fitzgerald & Co., Raymond James & Associates, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell up to a combined total of 6,000,000 shares of our common stock, from time to time in at-the-market offerings or negotiated transactions through a controlled equity offering program, or ATM. We terminated this ATM program, and on February 25, 2013, we and our Operating Partnership entered into sales 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 sales agreements.
During the three months ended September 30, 2013, we did not issue any shares through our ATM programs. During the nine-month period ended September 30, 2013, we issued 365,011 shares through our ATM programs for net proceeds of $24.8 million and gross proceeds of $25.1 million. During the three- and nine-month periods ended September 30, 2012, we issued 812,911 shares through our ATM programs for net proceeds of $53.7 million. The gross proceeds for these issuances were $54.5 million. We have 4,134,989 shares remaining under our ATM program as of September 30, 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- and nine-month periods ended September 30, 2013.
During the three- and nine-month periods ended September 30, 2013, we issued 435 shares and 764 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 $28,000 and $50,000. During the three- and nine-month periods ended September 30, 2012, we issued 122 shares and 451 shares of common stock through the optional cash purchase feature of our DRSPP resulting in gross proceeds of approximately $8,000 and $30,000.
During the nine months ended September 30, 2013, 4,805 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 nine months ended September 30, 2012, 15,565 shares were acquired for these purposes.
7. Notes Payable
On September 30, 2013 and December 31, 2012, we had total indebtedness of approximately $1.86 billion and $1.67 billion, respectively. Our indebtedness as of September 30, 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, our Operating Partnership 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. 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. As of September 30, 2013, the full amount was outstanding under this agreement.
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 September 30, 2013, the full amount of the notes has been funded and is included in our balance sheet.
On June 14, 2013, our Operating Partnership entered into a $250 million term loan agreement with JPMorgan at a rate of LIBOR plus a spread of 1.30% on any outstanding borrowings. This agreement matures on June 14, 2014, although borrowings are only allowed to be drawn upon up until 60 days subsequent to the closing of the Merger. We had no borrowings under this agreement at September 30, 2013.
On August 7, 2013, our Operating Partnership entered into a $500 million unsecured revolving credit facility agreement with KeyBank National Association and thirteen other banks. This agreement amends our Operating Partnership's previous unsecured credit facility with KeyBank. Interest is paid using an investment grade pricing grid using LIBOR plus a spread of 0.90% to 1.70%. As of September 30, 2013, we had $350 million borrowed under this facility.
As of September 30, 2013, approximately 35% 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 Federal Home Loan Mortgage Corporation, or 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 12 interest rate caps as of September 30, 2013, representing notional amounts totaling $559.0 million and $224.6 million, respectively. We also held 11 non-designated interest rate caps with notional amounts totaling $63.8 million as of September 30, 2013.
The following table summarizes our outstanding debt structure as of September 30, 2013 (dollars in thousands):
|
| | | | | | | | |
| Borrowed Balance | | Effective Rate | | Contract Maturity |
Fixed Rate Secured Debt | | | | | |
Individual property mortgages | $ | 382,817 |
| | 4.7 | % | | 3/29/2019 |
FNMA conventional credit facilities | 50,000 |
| | 4.7 | % | | 3/31/2017 |
Credit facility balances with: | |
| | |
| | |
LIBOR-based interest rate swaps | 259,000 |
| | 5.3 | % | | 7/20/2014 |
Total fixed rate secured debt | $ | 691,817 |
| | 4.9 | % | | 5/4/2017 |
Variable Rate Secured Debt (1) | |
| | |
| | |
FNMA conventional credit facilities | $ | 189,721 |
| | 0.7 | % | | 12/2/2016 |
FNMA tax-free credit facilities | 89,217 |
| | 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 | $ | 358,385 |
| | 0.9 | % | | 2/3/2020 |
Total Secured Debt | $ | 1,050,202 |
| | 3.5 | % | | 4/12/2018 |
| | | | | |
Unsecured Debt | |
| | |
| | |
Variable rate credit facility | $ | 350,000 |
| | 1.3 | % | | 8/7/2017 |
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 | $ | 810,000 |
| | 2.7 | % | | 1/14/2019 |
| | | | | |
Total Outstanding Debt | $ | 1,860,202 |
| | 3.2 | % | | 8/11/2018 |
(1) Includes capped balances.
8. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
We are exposed to certain risks 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 and nine months ended September 30, 2013 and 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of fixed-rate
debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended September 30, 2013 and 2012, we recorded ineffectiveness of $1,000 (increase to interest expense) and $7,000 (increase to interest expense), respectively, and during the nine months ended September 30, 2013 and 2012, we recorded ineffectiveness of $26,000 (decrease to interest expense) and $40,000 (increase to interest expense), respectively, mainly attributable to a mismatch in the underlying indices of the derivatives and the hedged interest payments made on our variable-rate debt.
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 or fixed-rate debt. During the next 12 months, we estimate that an additional $8.9 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 September 30, 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 | | 12 | | $ | 224,631,000 |
|
Interest Rate Swaps (1) | | 18 | | $ | 559,000,000 |
|
(1) Includes three forward rate swaps totaling $150 million where the debt has not yet been issued. These swaps are not included in our debt discussion in MD&A or footnote 7.
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 $5,000 for the three months ended September 30, 2013 and a loss of $8,000 for the nine months ended September 30, 2013. We recorded a loss of $25,000 and $58,000 for the three and nine months ended September 30, 2012.
As of September 30, 2013, we had the following outstanding interest rate derivatives that were not designated as hedges:
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| | | | | | |
Interest Rate Derivative | | Number of Instruments | | Notional |
Interest rate caps | | 11 | | $ | 63,820,000 |
|
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 September 30, 2013 and December 31, 2012, respectively.
Fair Values of Derivative Instruments on the Consolidated Balance Sheet as of September 30, 2013 and
December 31, 2012 (dollars in thousands)
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| | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | September 30, 2013 | | December 31, 2012 | | | | September 30, 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 | | $ | 10,681 |
| | $ | 245 |
| | Fair market value of interest rate swaps | | $ | 9,858 |
| | $ | 21,423 |
|
| | | | | | | | | | | | |
Total derivatives designated as hedging instruments | | | | $ | 10,681 |
| | $ | 245 |
| | | | $ | 9,858 |
| | $ | 21,423 |
|
| | | | | | | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest rate contracts | | Other assets | | $ | 57 |
| | $ | 43 |
| | | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | |
Total derivatives not designated as hedging instruments | | | | $ | 57 |
| | $ | 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 and nine months ended September 30, 2013 and 2012, respectively.
Effect of Derivative Instruments on the Consolidated Statements of Operations for the
Three and nine months ended September 30, 2013 and 2012 (dollars in thousands)
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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 September 30, | | 2013 | | 2012 | | | | 2013 | | 2012 | | | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | (1,826 | ) | | $ | (2,903 | ) | | Interest expense | | $ | (3,621 | ) | | $ | (4,815 | ) | | Interest expense | | $ | (1 | ) | | $ | (7 | ) |
| | | | | | | | | | | | | | | | |
Total derivatives in cash flow hedging relationships | | $ | (1,826 | ) | | $ | (2,903 | ) | | | | $ | (3,621 | ) | | $ | (4,815 | ) | | | | $ | (1 | ) | | $ | (7 | ) |
| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Nine months ended September 30, | | |
| | |
| | | | |
| | |
| | | | |
| | |
|
| | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | 10,096 |
| | $ | (8,197 | ) | | Interest expense | | $ | (12,098 | ) | | $ | (15,308 | ) | | Interest expense | | $ | 26 |
| | $ | (40 | ) |
| | | | | | | | | | | | | | | | |
Total derivatives in cash flow hedging relationships | | $ | 10,096 |
| | $ | (8,197 | ) | | | | $ | (12,098 | ) | | $ | (15,308 | ) | | | | $ | 26 |
| | $ | (40 | ) |
| | | | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Three months ended September 30, | | | | | | | | | | | | Location of Gain or (Loss) Recognized in Income | | 2013 | | 2012 |
| | | | | | | | | | | | | | | | |
Interest rate contracts | | | | | | | | | | | | Interest expense | | $ | (5 | ) | | $ | (25 | ) |
| | | | | | | | | | |