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Section 1: 10-Q


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

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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 “accelerated filer,” “large 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
 
Class
 
at October 21, 2010
 
Common Stock, $0.01 par value
   
34,184,668
 

 

 

MID-AMERICA APARTMENT COMMUNITIES, INC.

TABLE OF CONTENTS

       
Page
   
PART I – FINANCIAL INFORMATION
   
Item 1.
 
Financial Statements.
 
3
   
Condensed Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and December 31, 2009
 
3
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 (Unaudited) and 2009 (Unaudited).
 
4
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 (Unaudited) and 2009 (Unaudited).
 
5
   
Notes to Condensed Consolidated Financial Statements (Unaudited).
 
6
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
19
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
31
Item 4.
 
Controls and Procedures.
 
31
Item 4T.
 
Controls and Procedures.
 
32
         
   
PART II – OTHER INFORMATION
   
Item 1.
 
Legal Proceedings.
 
32
Item 1A.
 
Risk Factors.
 
32
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds.
 
40
Item 3.
 
Defaults Upon Senior Securities.
 
40
Item 4.
 
(Removed and Reserved).
 
40
Item 5.
 
Other Information.
 
40
Item 6.
 
Exhibits.
 
41
 
  
Signatures
  
42

 
2

 

MID-AMERICA APARTMENT COMMUNITIES, INC.
Condensed Consolidated  Balance  Sheets
September 30, 2010 (Unaudited) and December 31, 2009
(Dollars in thousands, except per share data)

   
September 30, 2010
   
December 31, 2009
 
Assets:
           
Real estate assets:
           
Land
  $ 270,980     $ 255,425  
Buildings and improvements
    2,509,193       2,364,918  
Furniture, fixtures and equipment
    81,301       73,975  
Capital improvements in progress
    3,735       10,517  
      2,865,209       2,704,835  
Less accumulated depreciation
    (862,662 )     (788,260 )
      2,002,547       1,916,575  
                 
Land held for future development
    1,306       1,306  
Commercial properties, net
    8,163       8,721  
Investments in real estate joint ventures
    15,571       8,619  
Real estate assets, net
    2,027,587       1,935,221  
                 
Cash and cash equivalents
    100,091       13,819  
Restricted cash
    2,426       561  
Deferred financing costs, net
    14,329       13,369  
Other assets
    22,519       19,731  
Goodwill
    4,106       4,106  
Assets held for sale
    18,793       19  
Total assets
  $ 2,189,851     $ 1,986,826  
                 
Liabilities and Shareholders' Equity:
               
Liabilities:
               
Notes payable
  $ 1,551,203     $ 1,399,596  
Accounts payable
    2,099       1,702  
Fair market value of interest rate swaps
    60,070       51,160  
Accrued expenses and other liabilities
    80,030       69,528  
Security deposits
    7,181       8,789  
Liabilities associated with assets held for sale
    417       23  
Total liabilities
    1,701,000       1,530,798  
                 
Redeemable stock
    3,368       2,802  
                 
Shareholders' equity:
               
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized, $25 per share liquidation preference; 8.30% Series H Cumulative Redeemable Preferred Stock, 6,200,000 shares authorized, 0 and 6,200,000 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively
    -       62  
Common stock, $0.01 par value per share, 50,000,000 shares authorized; 33,898,029 and 29,095,251 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively (1)
    338       290  
Additional paid-in capital
    1,085,697       988,642  
Accumulated distributions in excess of net income
    (559,610 )     (510,993 )
Accumulated other comprehensive losses
    (60,975 )     (47,435 )
Total Mid-America Apartment Communities, Inc. shareholders' equity
    465,450       430,566  
Noncontrolling interest
    20,033       22,660  
Total Equity
    485,483       453,226  
Total liabilities and equity
  $ 2,189,851     $ 1,986,826  

(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, 2010 and December 31, 2009 are 57,792 and 58,038, respectively.

See accompanying notes to consolidated financial statements.

 
3

 

MID-AMERICA APARTMENT COMMUNITIES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
Three and nine months ended September 30, 2010 and 2009
(Dollars in thousands, except per share data)

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Operating revenues:
                       
Rental revenues
  $ 92,842     $ 89,220     $ 274,199     $ 268,011  
Other property revenues
    8,356       5,701       23,073       15,009  
Total property revenues
    101,198       94,921       297,272       283,020  
Management fee income
    186       78       477       205  
Total operating revenues
    101,384       94,999       297,749       283,225  
Property operating expenses:
                               
Personnel
    13,036       12,244       38,111       35,570  
Building repairs and maintenance
    4,375       4,310       11,363       10,409  
Real estate taxes and insurance
    11,068       11,368       34,287       34,411  
Utilities
    6,671       6,135       17,941       16,874  
Landscaping
    2,561       2,451       7,594       7,245  
Other operating
    7,429       5,629       20,047       14,845  
Depreciation
    26,466       23,913       76,489       71,316  
Total property operating expenses
    71,606       66,050       205,832       190,670  
Acquisition expenses
    989       30       1,451       139  
Property management expenses
    4,547       4,007       13,303       12,751  
General and administrative expenses
    2,957       3,163       8,878       8,306  
Income from continuing operations before non-operating items
    21,285       21,749       68,285       71,359  
Interest and other non-property income
    217       161       618       309  
Interest expense
    (13,598 )     (14,371 )     (41,482 )     (43,072 )
Loss on debt extinguishment
    -       (2 )     -       (140 )
Amortization of deferred financing costs
    (675 )     (587 )     (1,918 )     (1,781 )
Asset impairment
    (324 )     -       (1,914 )     -  
Net casualty gains (loss) and other settlement proceeds
    350       (109 )     979       (253 )
Gain on sale of non-depreciable assets
    -       1       -       1  
Income from continuing operations before loss from real estate joint ventures
    7,255       6,842       24,568       26,423  
Loss from real estate joint ventures
    (282 )     (288 )     (856 )     (640 )
Income from continuing operations
    6,973       6,554       23,712       25,783  
Discontinued operations:
                               
Income from discontinued operations before gain on sale
    -       311       -       1,058  
Gain (loss) on sale of discontinued operations
    -       13       (2 )     2,600  
Consolidated net income
    6,973       6,878       23,710       29,441  
Net income attributable to noncontrolling interests
    224       260       889       1,536  
Net income attributable to Mid-America Apartment Communities, Inc.
    6,749       6,618       22,821       27,905  
Preferred dividend distributions
    629       3,216       6,549       9,649  
Premiums and original issuance costs associated with the redemption of preferred stock
    2,576       -       5,149       -  
Net income available for common shareholders
  $ 3,544     $ 3,402     $ 11,123     $ 18,256  
                                 
Weighted average shares outstanding (in thousands):
                               
Basic
    33,312       28,364       31,039       28,186  
Effect of dilutive securities
    101       77       101       6  
Diluted
    33,413       28,441       31,140       28,192  
                                 
Net income available for common shareholders
  $ 3,544     $ 3,402     $ 11,123     $ 18,256  
Discontinued property operations
    -       (324 )     2       (3,658 )
Income from continuing operations available for common shareholders
  $ 3,544     $ 3,078     $ 11,125     $ 14,598  
                                 
Earnings per share - basic:
                               
Income from continuing operations available for common shareholders
  $ 0.11     $ 0.11     $ 0.36     $ 0.51  
Discontinued property operations
    -       0.01       -       0.13  
Net income available for common shareholders
  $ 0.11     $ 0.12     $ 0.36     $ 0.64  
                                 
Earnings per share - diluted:
                               
Income from continuing operations available for common shareholders
  $ 0.11     $ 0.11     $ 0.36     $ 0.51  
Discontinued property operations
    -       0.01       -       0.13  
Net income available for common shareholders
  $ 0.11     $ 0.12     $ 0.36     $ 0.64  
                                 
Dividends declared per common share
  $ 0.615     $ 0.615     $ 1.845     $ 1.845  

See accompanying notes to consolidated financial statements.

 
4

 

Mid-America Apartment Communities, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2010 and 2009
(Dollars in thousands)

   
2010
   
2009
 
Cash flows from operating activities:
           
Consolidated net income
  $ 23,710     $ 29,441  
Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
Depreciation and amortization of deferred financing costs
    78,407       73,097  
Stock compensation expense
    1,915       939  
Redeemable stock issued
    296       253  
Amortization of debt premium
    (270 )     (270 )
Loss from investments in real estate joint ventures
    856       640  
Loss on debt extinguishment
    -       140  
Derivative interest expense
    405       685  
Gain on sale of non-depreciable assets
    -       (1 )
Loss (gain) on sale of discontinued operations
    2       (2,600 )
Asset impairment
    1,914       -  
Net casualty (gains) loss and other settlement proceeds
    (979 )     253  
Changes in assets and liabilities:
               
Restricted cash
    (1,865 )     (626 )
Other assets
    (4,351 )     (616 )
Accounts payable
    399       (63 )
Accrued expenses and other
    7,775       9,846  
Security deposits
    (1,546 )     (32 )
Net cash provided by operating activities
    106,668       111,086  
Cash flows from investing activities:
               
Purchases of real estate and other assets
    (215,068 )     (17,949 )
Improvements to existing real estate assets
    (31,722 )     (34,326 )
Renovations to existing real estate assets
    (4,763 )     (6,004 )
Development
    -       (5,340 )
Distributions from real estate joint ventures
    1,607       108  
Contributions to real estate joint ventures
    (9,739 )     (2,729 )
Proceeds from disposition of real estate assets
    71,421       14,372  
Net cash used in investing activities
    (188,264 )     (51,868 )
Cash flows from financing activities:
               
Net change in credit lines
    15,000       35,694  
Proceeds from notes payable
    137,881       -  
Principal payments on notes payable
    (1,004 )     (44,323 )
Payment of deferred financing costs
    (7,122 )     (1,933 )
Repurchase of common stock
    (891 )     (833 )
Proceeds from issuances of common shares and units
    247,104       25,329  
Distributions to noncontrolling interests
    (4,284 )     (4,604 )
Dividends paid on common shares
    (56,172 )     (51,836 )
Dividends paid on preferred shares
    (7,622 )     (9,649 )
Redemption of preferred stock
    (155,022 )     -  
Net cash provided by (used in) financing activities
    167,868       (52,155 )
Net increase in cash and cash equivalents
    86,272       7,063  
Cash and cash equivalents, beginning of period
    13,819       9,426  
Cash and cash equivalents, end of period
  $ 100,091     $ 16,489  
                 
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 41,718     $ 41,054  
Supplemental disclosure of noncash investing and financing activities:
               
Conversion of units to share of common stock
  $ 1,219     $ 196  
Accrued construction in progress
  $ 2,165     $ 2,476  
Interest capitalized
  $ -     $ 173  
Marked-to-market adjustment on derivative instruments
  $ (14,444 )   $ 18,229  
Reclassification of  redeemable stock to liabilities
  $ 271     $ -  

See accompanying notes to consolidated financial statements.

 
5

 
 
Mid-America Apartment Communities, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2010 (Unaudited) and 2009 (Unaudited)

1.
Consolidation and Basis of Presentation

Mid-America Apartment Communities, Inc., or we, 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, 2010, we owned or owned interests in a total of 155 multifamily apartment communities comprising 45,841 apartments located in 13 states, including two communities comprising 626 apartments owned through our joint venture, Mid-America Multifamily Fund I, LLC, and three communities comprising 1,085 apartments owned through our joint venture, Mid-America Multifamily Fund II, LLC.

The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission, or the SEC, and our accounting policies in effect as of December 31, 2009 as set forth in our annual consolidated financial statements, as of such date. The accompanying unaudited condensed consolidated financial statements include the accounts of Mid-America Apartment Communities, Inc. and its subsidiaries, including Mid-America Apartments, L.P.  In our opinion, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included and all such adjustments were of a normal recurring nature. 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, 2010 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 25, 2010.

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.

2.
Segment Information

As of September 30, 2010, we owned or had an ownership interest in 155 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 1 million 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 less than 1 million 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, communities that have been classified as held for sale and 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, which allows us to evaluate full period-over-period operating comparisons.  We utilize net operating income, or NOI, in evaluating the performance.  Total NOI represents total property revenues less total property operating expenses, excluding depreciation, 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.

 
6

 

Revenues and NOI for each reportable segment for the three and nine month periods ended September 30, 2010 and 2009, were as follows (dollars in thousands):

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Large Market Same Store
  $ 44,942     $ 44,910     $ 134,118     $ 135,321  
Secondary Market Same Store
    43,670       42,774       130,111       127,782  
Non-Same Store and Other
    12,586       7,237       33,043       19,917  
Total property revenues
    101,198       94,921       297,272       283,020  
Management fee income
    186       78       477       205  
Total operating revenues
  $ 101,384     $ 94,999     $ 297,749     $ 283,225  
                                 
NOI
                               
Large Market Same Store
  $ 24,791     $ 24,938     $ 75,069     $ 78,212  
Secondary Market Same Store
    24,337       24,172       74,160       74,464  
Non-Same Store and Other
    6,930       4,001       18,700       12,106  
Total NOI
    56,058       53,111       167,929       164,782  
Discontinued operations NOI included above
    -       (327 )     -       (1,116 )
Management fee income
    186       78       477       205  
Depreciation
    (26,466 )     (23,913 )     (76,489 )     (71,316 )
Acquisition expense
    (989 )     (30 )     (1,451 )     (139 )
Property management expense
    (4,547 )     (4,007 )     (13,303 )     (12,751 )
General and administrative expense
    (2,957 )     (3,163 )     (8,878 )     (8,306 )
Interest and other non-property income
    217       161       618       309  
Interest expense
    (13,598 )     (14,371 )     (41,482 )     (43,072 )
Gain (loss) on debt extinguishment
    -       (2 )     -       (140 )
Amortization of deferred financing costs
    (675 )     (587 )     (1,918 )     (1,781 )
Asset impairment
    (324 )     -       (1,914 )     -  
Net casualty gains (loss) and other settlement proceeds
    350       (109 )     979       (253 )
Gain on sale of non-depreciable assets
    -       1       -       1  
Loss from real estate joint ventures
    (282 )     (288 )     (856 )     (640 )
Discontinued operations
    -       324       (2 )     3,658  
Net income attributable to noncontrolling interests
    (224 )     (260 )     (889 )     (1,536 )
Net income attributable to Mid-America Apartment Communities, Inc.
  $ 6,749     $ 6,618     $ 22,821     $ 27,905  

 
7

 

Assets for each reportable segment as of September 30, 2010 and December 31, 2009, were as follows (dollars in thousands):

   
September 30,
   
December 31,
 
   
2010
   
2009
 
Assets
           
Large Market Same Store
  $ 915,932     $ 934,182  
Secondary Market Same Store
    657,347       672,692  
Non-Same Store and Other
    567,508       336,683  
Corporate assets
    49,064       43,269  
Total assets
  $ 2,189,851     $ 1,986,826  

3.
Comprehensive Income and Equity

Total comprehensive income, equity and their components for the nine month periods ended September 30, 2010, and 2009, were as follows (dollars in thousands, except per share and per unit data):

               
Mid-America Apartment Communities, Inc.  Shareholders
       
                                 
Accumulated
   
Accumulated
       
                           
Additional
   
Distributions
   
Other
       
         
Comprehensive
   
Preferred
   
Common
   
Paid-In
   
in Excess of
   
Comprehensive
   
Noncontrolling
 
   
Total
   
Income
   
Stock
   
Stock
   
Capital
   
Net Income
   
Loss
   
Interest
 
EQUITY AT DECEMBER 31, 2009
  $ 453,226           $ 62     $ 290     $ 988,642     $ (510,993 )   $ (47,435 )   $ 22,660  
Equity Activity Excluding Comprehensive Income:
                                                             
Issuance and registration of common shares
    247,008                     48       246,960                          
Shares repurchased and retired
    (891 )                           (891 )                        
Exercise of stock options
    89                             89                          
Shares issued in exchange for units
    -                             1,219                       (1,219 )
Redeemable stock fair market value
    (539 )                                   (539 )                
Adjustment for Noncontrolling Interest Ownership in operating partnership
    -                             (2,418 )                     2,418  
Amortization of unearned compensation
    1,907                             1,907                          
Dividends on common stock ($1.845 per share)
    (59,201 )                                   (59,201 )                
Dividends on noncontrolling interest units ($1.845 per unit)
    (4,215 )                                                   (4,215 )
Redemption of preferred stock
    (155,022 )           (62 )             (149,811 )     (5,149 )                
Dividends on preferred stock
    (6,549 )                                   (6,549 )                
Comprehensive income:
                                                             
Net income
    23,710       23,710                               22,821               889  
Other comprehensive loss - derivative instruments (cash flow hedges) (1)
    (14,040 )     (14,040 )                                     (13,540 )     (500 )
Comprehensive income
    9,670       9,670                                                  
                                                                 
EQUITY BALANCE SEPTEMBER 30, 2010
  $ 485,483             $ -     $ 338     $ 1,085,697     $ (559,610 )   $ (60,975 )   $ 20,033  

(1) Total other comprehensive loss – derivative instruments (cash flow hedges) for the three months ended September 30, 2010 was a loss of $4,277, consisting of a $137 loss attributable to noncontrolling interests and a loss of $4,140 attributable to Mid-America Apartment Communities, Inc.

 
8

 

               
Mid-America Apartment Communities, Inc.  Shareholders
       
                                 
Accumulated
   
Accumulated
       
                           
Additional
   
Distributions
   
Other
       
         
Comprehensive
   
Preferred
   
Common
   
Paid-In
   
in Excess of
   
Comprehensive
   
Noncontrolling
 
   
Total
   
Income
   
Stock
   
Stock
   
Capital
   
Net Income
   
Income (Loss)
   
Interest
 
EQUITY AT DECEMBER 31, 2008
  $ 442,617           $ 62     $ 282     $ 954,127     $ (464,617 )   $ (72,885 )   $ 25,648  
Equity Activity Excluding Comprehensive Income:
                                                             
Issuance and registration of common shares
    25,286                     6       25,280                          
Shares repurchased and retired
    (833 )                           (833 )                        
Exercise of stock options
    45                             45                          
Shares issued in exchange for units
    -                             196                       (196 )
Redeemable stock fair market value
    (464 )                                   (464 )                
Adjustment for Noncontrolling Interest Ownership in operating partnership
    -                             (521 )                     521  
Amortization of unearned compensation
    966                             966                          
Dividends on common stock ($1.845 per share)
    (52,215 )                                   (52,215 )             -  
Dividends on noncontrolling interest units ($1.845 per unit)
    (4,593 )                                                   (4,593 )
Dividends on preferred stock
    (9,649 )                                   (9,649 )                
Comprehensive income:
                                                             
Net income
    29,441       29,441                               27,905               1,536  
Other comprehensive income - derivative instruments (cash flow hedges) (2)
    18,914       18,914                                       17,795       1,119  
Comprehensive income
    48,355       48,355                                                  
                                                                 
EQUITY BALANCE SEPTEMBER 30, 2009
  $ 449,515             $ 62     $ 288     $ 979,260     $ (499,040 )   $ (55,090 )   $ 24,035  

(2) Total other comprehensive income – derivative instruments (cash flow hedges) for the three months ended September 30, 2010 was a loss of $5,063, consisting of a $191 loss attributable to noncontrolling interests and a loss of $4,872 attributable to Mid-America Apartment Communities, Inc.

The marked-to-market adjustment on derivative instruments is based upon the change of interest rates available for derivative instruments with similar terms and remaining maturities existing at each balance sheet date.

4.
Real Estate Acquisitions

The following communities were purchased during the first nine months of 2010:

   
Location
 
Number
   
Community
 
(Metropolitan Statistical Area: MSA)
 
of Units
 
Date Purchased
100% Owned Communities
           
Grand Cypress (1)
 
Cypress, TX (Houston)
 
312
 
April 30, 2010
535 Brookwood
 
Simpsonville, SC (Greenville)
 
256
 
June 24, 2010
Avondale at Kennesaw Farms
 
Gallatin, TN (Nashville)
 
288
 
June 29, 2010
Verandas at Sam Ridley
 
Smyrna, TN (Nashville)
 
336
 
August 12, 2010
Hue
 
Raleigh, NC (Raleigh)
 
208
 
August 17, 2010
Times Square at Craig Ranch
 
McKinney, TX (Dallas)
 
313
 
August 26, 2010
La Valencia at Starwood
 
Frisco, TX (Dallas)
 
270
 
August 27, 2010
The Venue at Stonebridge Ranch (2)
 
McKinney, TX (Dallas)
 
250
 
September 1, 2010
 
  
 
  
2,233
  
 

(1)  On July 13, 2010, we contributed Grand Cypress to Mid-America Multifamily Fund II, LLC, one of our joint ventures.

(2)  The Venue at Stonebridge Ranch is classified as held for sale in our financial statements because it was acquired with the intention of contributing the community to Mid-America Multifamily Fund II, LLC, one of our joint ventures.   We plan to make this contribution in the fourth quarter of 2010 when the permanent financing is completed.

 
9

 

On August 27, 2008, we purchased 215 units of the 234-unit Village Oaks apartments located in the Tampa, Florida MSA. The remaining 19 units had previously been sold as condominiums and we intend to acquire these units if they become available, and operate them as apartment rentals with the rest of the community. During the remainder of 2008 and during 2009, we acquired 11 of the remaining 19 units. During the first nine months of 2010, we have purchased an additional two units.

5.
Discontinued Operations

As part of our portfolio strategy to selectively dispose of mature assets that no longer meet our investment criteria and long-term strategic objectives, in July 2008, we entered into marketing contracts to list the 440-unit River Trace apartments in Memphis, Tennessee, the 96-unit Riverhills apartments in Grenada, Mississippi, and the 304-unit Woodstream apartments in Greensboro, North Carolina. All of these apartments were subsequently sold during 2009. In accordance with accounting standards governing the disposal of long lived assets, all of these communities are considered discontinued operations in the accompanying condensed consolidated financial statements.

The following is a summary of discontinued operations for the three and nine month periods ended September 30, 2010 and 2009, (dollars in thousands):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Revenues
                       
Rental revenues
  $ -     $ 728     $ -     $ 2,480  
Other revenues
    -       48       -       101  
Total revenues
    -       776       -       2,581  
Expenses
                               
Property operating expenses
    -       449       -       1,465  
Interest expense
    -       16       -       58  
Total expense
    -       465       -       1,523  
Income from discontinued operations before gain on sale
    -       311       -       1,058  
Gain (loss) on sale of discontinued operations
    -       13       (2 )     2,600  
Income from discontinued operations
  $ -     $ 324     $ (2 )   $ 3,658  

6.
Share and Unit Information

On September 30, 2010, 33,898,029 common shares and 2,195,654 operating partnership units were outstanding, representing a total of 36,093,683 shares and units. Additionally, we had outstanding options for the purchase of 19,357 shares of common stock at September 30, 2010, of which 8,795 were anti-dilutive. At September 30, 2009, 28,835,783 common shares and 2,386,188 operating partnership units were outstanding, representing a total of 31,221,971 shares and units. Additionally, Mid-America had outstanding options for the purchase of 23,507 shares of common stock at September 30, 2009, of which 14,348 were anti-dilutive.

On November 3, 2006, we entered into a sales agreement with Cantor Fitzgerald & Co. to sell up to 2,000,000 shares of our common stock, from time to time in at-the-market offerings or negotiated transactions through a controlled equity offering program. On July 3, 2008, and November 5, 2009, we entered into second and third sales agreements with Cantor Fitzgerald & Co. with materially the same terms for an additional 1,350,000 shares and 4,000,000 shares, respectively. On August 26, 2010, we entered into sales agreements with Cantor Fitzgerald & Co., Raymond James & Associates, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated with materially the same terms as our previous at-the-market agreements for a combined total of 6,000,000 shares of our common stock.

 
10

 

During the three months ended September 30, 2010, we issued 1,039,400 shares of common stock through our at-the-market, or ATM, programs for net proceeds of $55.0 million. During the nine months ended September 30, 2010, we issued a total of 4,114,000 shares of common stock through our ATM programs for net proceeds of $216.5 million.

During the three months ended September 30, 2010, we issued 551,082 shares of common stock through our Dividend and Distribution Reinvestment and Share Purchase Program, or DRSPP. The shares were issued through a one-time waiver to the optional cash purchase feature of the DRSPP. The issuance resulted in net proceeds of $30.0 million.

On June 2, 2010, we redeemed 3,100,001 shares of the 6,200,000 issued and outstanding shares of our 8.30% Series H Cumulative Redeemable Preferred Stock, or Series H. On August 5, 2010, we redeemed the remaining 3,099,999 shares of the issued and outstanding Series H. The Series H shares were redeemed for a $25 per share redemption price plus any accrued and unpaid dividends through and including the respective redemption date. The redemptions were funded by proceeds through issuances of our common shares through our ATM and DRSPP programs.

7.
Notes Payable

On September 30, 2010, we had total indebtedness of $1.6 billion, compared to $1.4 billion as of December 31, 2009. Our indebtedness as of September 30, 2010 consisted of both conventional and tax exempt debt. Borrowings were made through individual property mortgages as well as company-wide secured credit facilities.

As of September 30, 2010, approximately 85% 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, Financial Federal, which are credit enhanced by the Federal Home Loan Mortgage Corporation, or Freddie Mac, and a $50 million bank facility with a syndicate of banks.

We utilize interest rate swaps and interest rate caps to help manage our current and future interest rate risk and entered into 31 interest rate swaps and 21 interest rate caps as of September 30, 2010, representing notional amounts of $785 million and $271 million, respectively.

The following table summarizes our debt structure as of September 30, 2010 (dollars in thousands):

 
11

 

   
Borrowed
   
Effective
   
Contract
   
Balance
   
Rate
   
Maturity
Fixed Rate Debt
               
Individual property mortgages
  $ 206,853       5.0 %  
2/25/2020
Tax-exempt
    11,070       5.3 %  
12/1/2028
FNMA conventional credit facilities
    50,000       4.7 %  
3/31/2017
Credit facility balances managed with interest rate swaps
                   
LIBOR-based interest rate swaps
    767,000       5.3 %  
1/2/2013
SIFMA-based interest rate swaps
    17,800       4.4 %  
10/15/2012
Total fixed rate debt
    1,052,723       5.2 %  
10/10/2014
                     
Variable Rate Debt (1)
                   
FNMA conventional credit facilities
    329,318       0.8 %  
11/19/2014
FNMA tax-free credit facilities
    72,715       1.1 %  
3/1/2014
Feddie Mac credit facilities
    81,247       0.8 %  
6/28/2013
Freddie Mac mortgage
    15,200       3.7 %  
12/10/2015
Total variable rate debt
    498,480       1.0 %  
8/1/2014
                     
Total Outstanding Debt
  $ 1,551,203       3.8 %  
9/18/2014

(1) Includes capped balances.

 
12

 

8.
Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and interest rate caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty 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, 2010 and 2009, 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 September 30, 2010 and 2009, we recorded ineffectiveness of $86,000 and $68,000, respectively, and during the nine months ended September 30, 2010 and 2009, $346,000 and $744,000, respectively, as an increase to interest expense attributable to a mismatch in the underlying indices of the derivatives and the hedged interest payments made on our variable-rate debt.

We also have nine interest rate caps, totaling a notional amount of $56.3 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 September 30, 2010 and 2009, we recorded a loss of $7,000 and a gain of less than $1,000, respectively, and during the nine months ended September 30, 2010 and 2009, a loss of $37,000 and a gain of $109,000, respectively, due to changes in the time value of these interest rate caps.

Amounts reported in accumulated other comprehensive income related to derivatives designated in qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, we estimate that an additional $28.9 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, 2010 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
 
21
    $ 270,651,000  
Interest Rate Swaps
 
31