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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended March 31, 2019
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.)
Commission File Number: 333-190028-01 (Mid-America Apartments, L.P.)
MID-AMERICA APARTMENT COMMUNITIES, INC.
MID-AMERICA APARTMENTS, L.P.
(Exact name of registrant as specified in its charter)
Tennessee (Mid-America Apartment Communities, Inc.)
62-1543819
Tennessee (Mid-America Apartments, L.P.)
62-1543816
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
6815 Poplar Ave., Suite 500, Germantown, TN 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)
 
Securities registered pursuant to Section 12(b) of the Act:

 
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share (Mid-America Apartment Communities, Inc.)


MAA



New York Stock Exchange



8.50% Series I Cumulative Redeemable Preferred Stock, $.01 par value per share (Mid-America Apartment Communities, Inc.)
MAA^I
New York Stock Exchange
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.
Mid-America Apartment Communities, Inc.
YES  ý
NO o
Mid-America Apartments, L.P.
YES  ý
NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Mid-America Apartment Communities, Inc.
YES  ý
NO o
Mid-America Apartments, L.P.
YES  ý
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Mid-America Apartment Communities, Inc.
 
 
 
 
Large accelerated filer  ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Mid-America Apartments, L.P.
 
 
 
 
Large accelerated filer o
Accelerated filer o
Non-accelerated filer  ý
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Mid-America Apartment Communities, Inc.
YES o
NO  ý
Mid-America Apartments, L.P.
YES o
NO  ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Mid-America Apartment Communities, Inc.
Number of Shares Outstanding at
Class
April 29, 2019
Common Stock, $0.01 par value
113,995,608




MID-AMERICA APARTMENT COMMUNITIES, INC.
MID-AMERICA APARTMENTS, L.P.

TABLE OF CONTENTS

 
 
 
Page
 PART I – FINANCIAL INFORMATION
Item 1.
 
Mid-America Apartment Communities, Inc.
 
 
 
 
 
 
 
 
 
 
Mid-America Apartments, L.P.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 PART II – OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

1



Explanatory Note

This report combines the Quarterly Reports on Form 10-Q for the quarter ended March 31, 2019 of Mid-America Apartment Communities, Inc., a Tennessee corporation, and Mid-America Apartments, L.P., a Tennessee limited partnership, of which Mid-America Apartment Communities, Inc. is the sole general partner. Mid-America Apartment Communities, Inc. and its 96.5% owned subsidiary, Mid-America Apartments, L.P., are both required to file quarterly reports under the Securities Exchange Act of 1934, as amended.

Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to "MAA" refer only to Mid-America Apartment Communities, Inc., and not any of its consolidated subsidiaries. Unless the context otherwise requires, all references in this report to "we," "us," "our," or the "Company" refer collectively to Mid-America Apartment Communities, Inc., together with its consolidated subsidiaries, including Mid-America Apartments, L.P. Unless the context otherwise requires, all references in this report to the "Operating Partnership" or "MAALP" refer to Mid-America Apartments, L.P. together with its consolidated subsidiaries. "Common stock" refers to the common stock of MAA, "preferred stock" refers to the preferred stock of MAA and "shareholders" refers to the holders of shares of MAA’s common stock or preferred stock, as applicable. The common units of limited partnership interest in the Operating Partnership are referred to as "OP Units" and the holders of the OP Units are referred to as "common unitholders".

As of March 31, 2019, MAA owned 113,916,208 OP Units (96.5% of the total number of OP Units). MAA conducts substantially all of its business and holds substantially all of its assets, directly or indirectly, through the Operating Partnership, and by virtue of its ownership of the OP Units and being the Operating Partnership's sole general partner, MAA has the ability to control all of the day-to-day operations of the Operating Partnership.

We believe combining the periodic reports of MAA and the Operating Partnership, including the notes to the condensed consolidated financial statements, into this report results in the following benefits:

enhances investors' understanding of MAA and the Operating Partnership by enabling investors to view the business as a whole in the same manner that management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure in this report applies to both MAA and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

MAA is a multifamily focused, self-administered and self-managed real estate investment trust, or REIT.
Management operates MAA and the Operating Partnership as one business. We believe it is important to understand the few differences between MAA and the Operating Partnership in the context of how MAA and the Operating Partnership operate as a consolidated company. MAA and the Operating Partnership are structured as an umbrella partnership REIT, or UPREIT. MAA's interest in the Operating Partnership entitles MAA to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to MAA's percentage interest therein and entitles MAA to vote on substantially all matters requiring a vote of the partners. MAA's only material asset is its ownership of limited partnership interests in the Operating Partnership (other than cash held by MAA from time to time); therefore, MAA's primary function is acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. The Operating Partnership holds, directly or indirectly, all of the real estate assets. Except for net proceeds from public equity issuances by MAA, which are contributed to the Operating Partnership in exchange for limited partnership interests, the Operating Partnership generates the capital required by the Company's business through the Operating Partnership's operations, direct or indirect incurrence of indebtedness and issuance of OP Units.

The presentation of MAA's shareholders' equity and the Operating Partnership's capital are the principal areas of difference between the consolidated financial statements of MAA and those of the Operating Partnership. MAA's shareholders' equity may include shares of preferred stock, shares of common stock, additional paid-in capital, cumulative earnings, cumulative distributions, noncontrolling interest, treasury shares, accumulated other comprehensive income and redeemable common stock. The Operating Partnership's capital may include common capital and preferred capital of the general partner (MAA), limited partners' common capital and preferred capital, noncontrolling interest, accumulated other comprehensive income and redeemable common units. Holders of OP Units (other than MAA and its subsidiaries) may require the Operating Partnership to redeem their OP Units from time to time, in which case the Operating Partnership may, at its option, pay the redemption price either in cash (in an amount per OP Unit equal, in general, to the average closing price of MAA’s common stock on the New York Stock Exchange, or NYSE, over a specified period prior to the redemption date) or by delivering one share of MAA's common stock (subject to adjustment under specified circumstances) for each OP Unit so redeemed.


2



In order to highlight the material differences between MAA and the Operating Partnership, this combined Quarterly Report on Form 10-Q includes sections that separately present and discuss areas that are materially different between MAA and the Operating Partnership, including:

the condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q;
certain accompanying notes to the condensed consolidated financial statements, including Note 2 - Earnings per Common Share of MAA and Note 3 - Earnings per OP Unit of MAALP; Note 4 - MAA Equity and Note 5 - MAALP Capital; and Note 8 - Shareholders' Equity of MAA and Note 9 - Partners' Capital of MAALP;
the controls and procedures in Item 4 of this Quarterly Report on Form 10-Q; and
the certifications included as Exhibits 31 and 32 to this Quarterly Report on Form 10-Q.

In the sections that combine disclosures for MAA and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership (directly or indirectly through one of its subsidiaries) is generally the entity that enters into contracts, holds assets and issues debt, management believes this presentation is appropriate for the reasons set forth above and because we operate the business through the Operating Partnership. MAA, the Operating Partnership and its subsidiaries operate as one consolidated business, but MAA, the Operating Partnership and each of its subsidiaries are separate, distinct legal entities.


3



PART I – FINANCIAL INFORMATION

Item 1.    Financial Statements.

Mid-America Apartment Communities, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except share and per share data)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Real estate assets:
 
 
 
Land
$
1,878,209

 
$
1,868,828

Buildings and improvements and other
11,730,705

 
11,670,216

Development and capital improvements in progress
57,396

 
59,506

 
13,666,310

 
13,598,550

Less: Accumulated depreciation
(2,668,708
)
 
(2,549,287
)
 
10,997,602

 
11,049,263

Undeveloped land
58,257

 
58,257

Investment in real estate joint venture
44,138

 
44,181

Real estate assets, net
11,099,997

 
11,151,701

 
 
 
 
Cash and cash equivalents
44,623

 
34,259

Restricted cash
14,764

 
17,414

Other assets
144,378

 
120,407

Total assets
$
11,303,762

 
$
11,323,781

 
 
 
 
Liabilities and equity
 

 
 

Liabilities:
 

 
 

Unsecured notes payable
$
3,886,236

 
$
4,053,302

Secured notes payable
661,862

 
475,026

Accrued expenses and other liabilities
419,320

 
413,850

Total liabilities
4,967,418

 
4,942,178

 
 
 
 
Redeemable common stock
11,045

 
9,414

 
 
 
 
Shareholders' equity:
 

 
 

Preferred stock, $0.01 par value per share, 20,000,000 shares authorized; 8.50% Series I Cumulative Redeemable Shares, liquidation preference $50 per share, 867,846 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.
9

 
9

Common stock, $0.01 par value per share, 145,000,000 shares authorized; 113,916,208 and 113,844,267 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively (1)
1,137

 
1,136

Additional paid-in capital
7,141,544

 
7,138,170

Accumulated distributions in excess of net income
(1,037,268
)
 
(989,263
)
Accumulated other comprehensive loss
(3,300
)
 
(212
)
Total MAA shareholders' equity
6,102,122

 
6,149,840

Noncontrolling interests - Operating Partnership units
218,011

 
220,043

Total Company's shareholders' equity
6,320,133

 
6,369,883

Noncontrolling interests - consolidated real estate entities
5,166

 
2,306

Total equity
6,325,299

 
6,372,189

Total liabilities and equity
$
11,303,762

 
$
11,323,781

(1) 
Number of shares issued and outstanding represent total shares of common stock regardless of classification on the Condensed Consolidated Balance Sheets. The number of shares classified as redeemable common stock on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 are 101,025 and 98,371, respectively.
 
See accompanying notes to condensed consolidated financial statements.

4



Mid-America Apartment Communities, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share data)
 
Three months ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental and other property revenues
$
401,178

 
$
386,017

Expenses:
 

 
 

Operating expense, excluding real estate taxes and insurance
89,793

 
89,148

Real estate taxes and insurance
59,584

 
55,256

Depreciation and amortization
122,789

 
120,744

Total property operating expenses
272,166

 
265,148

Property management expenses
13,842

 
12,880

General and administrative expenses
13,153

 
10,132

Merger and integration related expenses

 
3,799

Interest expense
45,700

 
40,905

Loss on sale of depreciable real estate assets
13

 

Gain on sale of non-depreciable real estate assets
(8,963
)
 
(150
)
Other non-operating (income) expense
(935
)
 
2,341

Income before income tax expense
66,202

 
50,962

Income tax expense
(641
)
 
(640
)
Income from continuing operations before real estate joint venture activity
65,561

 
50,322

Income from real estate joint venture
397

 
498

Net income
65,958

 
50,820

Net income attributable to noncontrolling interests
2,298

 
1,801

Net income available for shareholders
63,660

 
49,019

Dividends to MAA Series I preferred shareholders
922

 
922

Net income available for MAA common shareholders
$
62,738

 
$
48,097

 
 
 
 
Earnings per common share - basic:
 
 
 

Net income available for MAA common shareholders
$
0.55

 
$
0.42

 
 
 
 
Earnings per common share - diluted:
 

 
 

Net income available for MAA common shareholders
$
0.55

 
$
0.42


See accompanying notes to condensed consolidated financial statements.

5



Mid-America Apartment Communities, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2019
 
2018
Net income
$
65,958

 
$
50,820

Other comprehensive income:
 
 
 
Unrealized (loss) gain from derivative instruments
(2,456
)
 
832

Adjustment for net gains reclassified into net income from derivative instruments
(745
)
 
(193
)
Total comprehensive income
62,757

 
51,459

Less: Comprehensive income attributable to noncontrolling interests
(2,185
)
 
(1,830
)
Comprehensive income attributable to MAA
$
60,572

 
$
49,629

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.



6



Mid-America Apartment Communities, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
65,958

 
$
50,820

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

 
 

     Depreciation and amortization
123,082

 
121,361

     Loss on sale of depreciable real estate assets
13

 

     Gain on sale of non-depreciable real estate assets
(8,963
)
 
(150
)
     Stock compensation expense
4,785

 
4,024

     Amortization of debt premium and debt issuance costs
1,747

 
(1,569
)
     Net change in operating accounts and other
(31,944
)
 
(21,782
)
Net cash provided by operating activities
154,678

 
152,704

 
 
 
 
Cash flows from investing activities:
 

 
 

     Purchases of real estate and other assets
(13,595
)
 

     Capital improvements, development and other
(53,214
)
 
(51,775
)
     Distributions from real estate joint ventures
43

 

     Contributions to affiliates

 
(750
)
     Proceeds from disposition of real estate assets
13,882

 
5,860

Net cash used in investing activities
(52,884
)
 
(46,665
)
 
 
 
 
Cash flows from financing activities:
 

 
 

     Proceeds from lines of credit
145,000

 
150,000

     Repayments of lines of credit
(610,000
)
 
(110,000
)
     Proceeds from notes payable
490,435

 

     Principal payments on notes payable
(1,847
)
 
(41,042
)
     Payment of deferred financing costs
(4,705
)
 

     Distributions to noncontrolling interests
(3,947
)
 
(3,865
)
     Dividends paid on common shares
(109,324
)
 
(104,876
)
     Dividends paid on preferred shares
(922
)
 
(922
)
Net change in other financing activities
1,230

 
(2,091
)
Net cash used in financing activities
(94,080
)
 
(112,796
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
7,714

 
(6,757
)
Cash, cash equivalents and restricted cash, beginning of period
51,673

 
88,867

Cash, cash equivalents and restricted cash, end of period
$
59,387

 
$
82,110

 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the Condensed Consolidated Balance Sheets:
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
44,623

 
$
59,706

Restricted cash
14,764

 
22,404

Total cash, cash equivalents and restricted cash
$
59,387

 
$
82,110

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
18,322

 
$
24,889

Income taxes paid
59

 
2,522

 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 

 
 

Conversion of OP Units to shares of common stock
$
336

 
$
2,780

Accrued construction in progress
15,155

 
14,640

Interest capitalized
388

 
795

Mark-to-market adjustment on derivative instruments
3,633

 
(1,363
)
See accompanying notes to condensed consolidated financial statements.

7




Mid-America Apartments, L.P.
Condensed Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except unit data)
 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Real estate assets:
 
 
 
Land
$
1,878,209

 
$
1,868,828

Buildings and improvements and other
11,730,705

 
11,670,216

Development and capital improvements in progress
57,396

 
59,506

 
13,666,310

 
13,598,550

Less: Accumulated depreciation
(2,668,708
)
 
(2,549,287
)
 
10,997,602

 
11,049,263

Undeveloped land
58,257

 
58,257

Investment in real estate joint venture
44,138

 
44,181

Real estate assets, net
11,099,997

 
11,151,701

 
 
 
 
Cash and cash equivalents
44,623

 
34,259

Restricted cash
14,764

 
17,414

Other assets
144,378

 
120,407

Total assets
$
11,303,762

 
$
11,323,781

 
 
 
 
Liabilities and capital
 

 
 

Liabilities:
 

 
 

Unsecured notes payable
$
3,886,236

 
$
4,053,302

Secured notes payable
661,862

 
475,026

Accrued expenses and other liabilities
419,320

 
413,850

Due to general partner
19

 
19

Total liabilities
4,967,437

 
4,942,197

 
 
 
 
Redeemable common units
11,045

 
9,414

 
 
 
 
Operating Partnership capital:
 

 
 

Preferred units, 867,846 preferred units outstanding as of March 31, 2019 and December 31, 2018, respectively
66,840

 
66,840

Common units:
 
 
 
General partner, 113,916,208 and 113,844,267 OP Units outstanding as of March 31, 2019 and December 31, 2018, respectively (1)
6,038,625

 
6,083,142

Limited partners, 4,105,171 and 4,111,301 OP Units outstanding as of March 31, 2019 and December 31, 2018, respectively (1)
218,011

 
220,043

Accumulated other comprehensive loss
(3,362
)
 
(161
)
Total operating partners' capital
6,320,114

 
6,369,864

Noncontrolling interests - consolidated real estate entities
5,166

 
2,306

Total capital
6,325,280

 
6,372,170

Total liabilities and capital
$
11,303,762

 
$
11,323,781

(1) 
Number of units outstanding represent total OP Units regardless of classification on the Condensed Consolidated Balance Sheets. The number of units classified as redeemable common units on the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 are 101,025 and 98,371, respectively.
See accompanying notes to condensed consolidated financial statements.

8



Mid-America Apartments, L.P.
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per unit data)
 
Three months ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental and other property revenues
$
401,178

 
$
386,017

Expenses:
 

 
 

Operating expense, excluding real estate taxes and insurance
89,793

 
89,148

Real estate taxes and insurance
59,584

 
55,256

Depreciation and amortization
122,789

 
120,744

Total property operating expenses
272,166

 
265,148

Property management expenses
13,842

 
12,880

General and administrative expenses
13,153

 
10,132

Merger and integration related expenses

 
3,799

Interest expense
45,700

 
40,905

Loss on sale of depreciable real estate assets
13

 

Gain on sale of non-depreciable real estate assets
(8,963
)
 
(150
)
Other non-operating (income) expense
(935
)
 
2,341

Income before income tax expense
66,202

 
50,962

Income tax expense
(641
)
 
(640
)
Income from continuing operations before real estate joint venture activity
65,561

 
50,322

Income from real estate joint venture
397

 
498

Net income
65,958

 
50,820

Dividends to preferred unitholders
922

 
922

Net income available for MAALP common unitholders
$
65,036

 
$
49,898

 
 
 
 
Earnings per common unit - basic:
 
 
 
Net income available for MAALP common unitholders
$
0.55

 
$
0.42

 
 
 
 
Earnings per common unit - diluted:
 
 
 
Net income available for MAALP common unitholders
$
0.55

 
$
0.42


See accompanying notes to condensed consolidated financial statements.

9



Mid-America Apartments, L.P.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2019
 
2018
Net income
$
65,958

 
$
50,820

Other comprehensive income:
 
 
 
Unrealized (loss) gain from derivative instruments
(2,456
)
 
832

Adjustment for net gains reclassified into net income from derivative instruments

(745
)
 
(193
)
Comprehensive income attributable to MAALP
$
62,757

 
$
51,459

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.


10



Mid-America Apartments, L.P.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 
Three months ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
65,958

 
$
50,820

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

 
 

     Depreciation and amortization
123,082

 
121,361

     Loss on sale of depreciable real estate assets
13

 

     Gain on sale of non-depreciable real estate assets
(8,963
)
 
(150
)
     Stock compensation expense
4,785

 
4,024

     Amortization of debt premium and debt issuance costs
1,747

 
(1,569
)
     Net change in operating accounts and other
(31,944
)
 
(21,782
)
Net cash provided by operating activities
154,678

 
152,704

 
 
 
 
Cash flows from investing activities:
 

 
 

     Purchases of real estate and other assets
(13,595
)
 

     Capital improvements, development and other
(53,214
)
 
(51,775
)
     Distributions from real estate joint ventures
43

 

     Contributions to affiliates

 
(750
)
     Proceeds from disposition of real estate assets
13,882

 
5,860

Net cash used in investing activities
(52,884
)
 
(46,665
)
 
 
 
 
Cash flows from financing activities:
 

 
 

     Proceeds from lines of credit
145,000

 
150,000

     Repayments of lines of credit
(610,000
)
 
(110,000
)
     Proceeds from notes payable
490,435

 

     Principal payments on notes payable
(1,847
)
 
(41,042
)
     Payment of deferred financing costs
(4,705
)
 

     Distributions paid on common units
(113,271
)
 
(108,741
)
     Distributions paid on preferred units
(922
)
 
(922
)
Net change in other financing activities
1,230

 
(2,091
)
Net cash used in financing activities
(94,080
)
 
(112,796
)
 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
7,714

 
(6,757
)
Cash, cash equivalents and restricted cash, beginning of period
51,673

 
88,867

Cash, cash equivalents and restricted cash, end of period
$
59,387

 
$
82,110

 
 
 
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the Condensed Consolidated Balance Sheets:
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
44,623

 
$
59,706

Restricted cash
14,764

 
22,404

Total cash, cash equivalents and restricted cash
$
59,387

 
$
82,110

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
18,322

 
$
24,889

Income taxes paid
59

 
2,522

 
 
 
 
Supplemental disclosure of noncash investing and financing activities:
 
 
 
Accrued construction in progress
$
15,155

 
$
14,640

Interest capitalized
388

 
795

Mark-to-market adjustment on derivative instruments
3,633

 
(1,363
)

See accompanying notes to condensed consolidated financial statements.

11



Mid-America Apartment Communities, Inc. and Mid-America Apartments, L.P.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1.           Basis of Presentation and Principles of Consolidation and Significant Accounting Policies

Unless the context otherwise requires, all references to the "Company" refer collectively to Mid-America Apartment Communities, Inc., together with its consolidated subsidiaries, including Mid-America Apartments, L.P. Unless the context otherwise requires, all references to "MAA" refer only to Mid-America Apartment Communities, Inc., and not any of its consolidated subsidiaries. Unless the context otherwise requires, the references to the "Operating Partnership" or "MAALP" refer to Mid-America Apartments, L.P. together with its consolidated subsidiaries. "Common stock" refers to the common stock of MAA and, unless the context otherwise requires, "shareholders" refers to the holders of shares of MAA’s common stock. The common units of limited partnership interests in the Operating Partnership are referred to as "OP Units," and the holders of the OP Units are referred to as "common unitholders".

As of March 31, 2019, MAA owned 113,916,208 OP Units (or 96.5% of the total number of OP Units). MAA conducts substantially all of its business and holds substantially all of its assets, directly or indirectly, through the Operating Partnership, and by virtue of its ownership of the OP Units and being the Operating Partnership's sole general partner, MAA has the ability to control all of the day-to-day operations of the Operating Partnership.

Management believes combining the notes to the condensed consolidated financial statements of MAA and the Operating Partnership results in the following benefits:

enhances readers' understanding of MAA and the Operating Partnership by enabling the reader to view the business as a whole in the same manner that management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both MAA and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined set of notes instead of two separate sets.

MAA is a multifamily focused, self-administered and self-managed real estate investment trust, or REIT. Management operates MAA and the Operating Partnership as one business. The management of the Company is comprised of individuals who are officers of MAA and employees of the Operating Partnership. Management believes it is important to understand the few differences between MAA and the Operating Partnership in the context of how MAA and the Operating Partnership operate as a consolidated company. MAA and the Operating Partnership are structured as an umbrella partnership REIT, or UPREIT. MAA's interest in the Operating Partnership entitles MAA to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to MAA's percentage interest therein and entitles MAA to vote on substantially all matters requiring a vote of the partners. MAA's only material asset is its ownership of limited partnership interests in the Operating Partnership (other than cash held by MAA from time to time); therefore, MAA's primary function is acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain debt of the Operating Partnership. The Operating Partnership holds, directly or indirectly, all of the Company's real estate assets. Except for net proceeds from public equity issuances by MAA, which are contributed to the Operating Partnership in exchange for limited partnership interests, the Operating Partnership generates the capital required by the business through the Operating Partnership's operations, direct or indirect incurrence of indebtedness and issuance of OP Units.

The presentations of MAA's shareholders' equity and the Operating Partnership's capital are the principal areas of difference between the condensed consolidated financial statements of MAA and those of the Operating Partnership. MAA's shareholders' equity may include shares of preferred stock, shares of common stock, additional paid-in capital, cumulative earnings, cumulative distributions, noncontrolling interest, treasury shares, accumulated other comprehensive income and redeemable common stock. The Operating Partnership's capital may include common capital and preferred capital of the general partner (MAA), limited partners' common capital and preferred capital, noncontrolling interest, accumulated other comprehensive income and redeemable common units. Holders of OP Units (other than MAA and its subsidiaries) may require the Operating Partnership to redeem their OP Units from time to time, in which case the Operating Partnership may, at its option, pay the redemption price either in cash (in an amount per OP Unit equal, in general, to the average closing price of MAA's common stock on the New York Stock Exchange, or NYSE, over a specified period prior to the redemption date) or by delivering one share of MAA's common stock (subject to adjustment under specified circumstances) for each OP Unit so redeemed.




12



Organization of Mid-America Apartment Communities, Inc.

The Company owns, operates, acquires and selectively develops apartment communities primarily located in the Southeast, Southwest and Mid-Atlantic regions of the United States.  As of March 31, 2019, the Company owned and operated 303 apartment communities through the Operating Partnership and its subsidiaries and had an ownership interest in one apartment community through an unconsolidated real estate joint venture. As of March 31, 2019, the Company had five development communities under construction totaling 1,090 apartment units. Total expected costs for these five development projects are $230.5 million, of which $59.5 million had been incurred through March 31, 2019. The Company expects to complete two developments in the second half of 2019, one development in the first half of 2020, one development in the second half of 2020 and one development in the first half of 2021. Thirty of the Company's apartment communities include retail components with approximately 615,000 square feet of gross leasable space. The Company also has four commercial properties with approximately 260,000 square feet of combined gross leasable area. The Company’s apartment communities and commercial properties are located across 17 states and the District of Columbia.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared by the Company's management in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or the SEC. The condensed consolidated financial statements of MAA presented herein include the accounts of MAA, the Operating Partnership and all other subsidiaries in which MAA has a controlling financial interest. MAA owns, directly or indirectly, approximately 80% to 100% of all consolidated subsidiaries, including the Operating Partnership. The condensed consolidated financial statements of MAALP presented herein include the accounts of MAALP and all other subsidiaries in which MAALP has a controlling financial interest. MAALP owns, directly or indirectly, 80% to 100% of all consolidated subsidiaries. In management's 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 Company invests in entities which may qualify as variable interest entities, or VIEs, and MAALP is considered a 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. MAALP is classified as a VIE, since the limited partners lack substantive kick-out rights and substantive participating rights. The Company 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 it is not the primary beneficiary. In determining whether the Company is the primary beneficiary of a VIE, management considers both 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. The Company uses the equity method of accounting for its investments in entities for which the Company exercises significant influence, but does not have the ability to exercise control. The factors considered in determining whether the Company has the ability to exercise control include ownership of voting interests and participatory rights of investors (see "Investments in Unconsolidated Affiliates" below).

Changes in Presentation

In an effort to simplify the Company's presentation of cash flows from financing activities within the condensed consolidated statements of cash flows, the Company combined "Repurchase of common stock"; "Debt prepayment and extinguishment costs"; "Proceeds from issuances of common shares"; and "Exercise of stock options" into one line, "Net change in other financing activities" within the cash flows from financing activities section. No presentation changes were made to the cash flows from operating or investing activities sections of the condensed consolidated statements of cash flows. Prior year amounts have been changed to conform to the Company's current year presentation. These changes in presentation had no effect on the Company's ending cash, cash equivalents and restricted cash balances and did not impact the classification of cash flows between operating, investing and financing activities.
Noncontrolling Interests
As of March 31, 2019, the Company had two types of noncontrolling interests with respect to its consolidated subsidiaries, (1) noncontrolling interests related to the common unitholders of its Operating Partnership (see below) and (2) noncontrolling interest related to its consolidated real estate entities (see "Investment in Consolidated Real Estate Entities" below). The noncontrolling interests in the accompanying condensed consolidated financial statements relating to the limited partnership interests in the Operating Partnership are owned by the holders of the Class A OP Units. MAA is the sole general partner of the

13



Operating Partnership and holds all of the outstanding Class B OP Units. Net income (after allocations to preferred ownership interests) is allocated to MAA and the noncontrolling interests based on their respective ownership percentages of the Operating Partnership. Issuance of additional Class A OP Units or Class B OP Units changes the ownership percentage of both the noncontrolling interests and MAA. The issuance of Class B OP Units generally occurs when MAA issues common stock and the issuance proceeds are contributed to the Operating Partnership in exchange for Class B OP Units equal to the number of shares of MAA's common stock issued. At each reporting period, the allocation between total MAA shareholders’ equity and noncontrolling interests is adjusted to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership. MAA’s Board of Directors established economic rights in respect to each Class A OP Unit that were equivalent to the economic rights in respect to each share of MAA common stock. See Note 9 for additional details.

Investments in Unconsolidated Affiliates

Through its investment in a limited liability company, or the Apartment LLC, the Company together with an institutional investor indirectly owns one apartment community, Post Massachusetts Avenue, located in Washington, D.C.  The Company owned a 35.0% equity interest in the unconsolidated real estate joint venture as of March 31, 2019 and provides property and asset management services to the Apartment LLC for which it earns fees. The joint venture was determined to be a VIE, but the Company is not designated as a primary beneficiary. As a result, the Company accounts for its investment in the Apartment LLC using the equity method of accounting as the Company is able to exert significant influence over the joint venture but does not have a controlling interest.  As of March 31, 2019, the Company's investment in the Apartment LLC totaled $44.1 million.  

In September 2017, a subsidiary of the Operating Partnership invested in a limited partnership, Real Estate Technology Ventures, L.P. As of March 31, 2019, the Operating Partnership indirectly owned 20.7% of the limited partnership. The limited partnership was determined to be a VIE, but the Company is not designated as a primary beneficiary. As a result, the Company accounts for its investment in the limited partnership using the equity method of accounting as the investment is considered more than minor. As of March 31, 2019, the Company's investment in the limited partnership totaled $3.7 million and is included in "Other assets" in the accompanying Condensed Consolidated Balance Sheet. As of March 31, 2019, the Company was committed to make additional capital contributions totaling $13.6 million if and when called by the general partner of the limited partnership and until September 2022.

Investments in Consolidated Real Estate Entities

The Company owns a 92.5% equity interest in a consolidated real estate entity that developed, constructed and operates a 359-unit apartment community in Denver, Colorado. The owner of the remaining 7.5% equity interest, a private real estate company, was generally responsible for the development and construction of the community, which was completed during the year ended December 31, 2018. The Company will continue to operate and manage the community. The entity was determined to be a VIE with the Company designated as the primary beneficiary.  As a result, the accounts of the entity are consolidated by the Company.  As of March 31, 2019, the consolidated assets and liabilities included buildings and improvements and other, net of accumulated depreciation of $69.8 million; land of $14.9 million; and accrued expenses and other liabilities of $1.0 million.

During the first quarter of 2019, the Company acquired an 80.0% equity interest in a consolidated real estate entity that will develop, construct and operate an apartment community in Phoenix, Arizona. The joint venture acquired the land site and initiated development of the apartment community in the first quarter of 2019. The owner of the remaining 20.0% equity interest, a private real estate company, is responsible for the development and construction of the community, and the Company will operate and manage the community upon its completion. The entity was determined to be a VIE with the Company designated as the primary beneficiary. As a result, the accounts of the entity are consolidated by the Company. As of March 31, 2019, the consolidated assets and liabilities included development and capital improvements in process of $4.7 million; land of $9.4 million; and accrued expenses and other liabilities of $0.7 million.

Fair Value Measurements

The Company applies the guidance in Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, to the valuation of real estate assets recorded at fair value, if any; to its impairment valuation analysis of real estate assets; to its disclosure of the fair value of financial instruments, principally indebtedness; and to its derivative financial instruments.  Fair value disclosures required under ASC Topic 820 are summarized in Note 7 utilizing the following hierarchy:

Level 1 - Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the assets or liability.

14



Leases

In 2016, the Financial Accounting Standard Board, or FASB, issued Accounting Standard Update, or ASU, 2016-02, Leases (Topic 842), which established new principles, presentation and disclosure requirements for lease accounting for both the lessee and lessor. On January 1, 2019, management adopted ASU 2016-02 using the modified retrospective transition approach with an effective date as of the adoption date and elected certain practical expedients allowed by the new standard. Under the new standard, lessors are required to account for leases in a similar manner as previous lease accounting guidance but aligned with the newly adopted revenue recognition standard. Lessees are required to record most leases on the balance sheet and recognize lease expense in the income statement in a manner similar to previous practice. The new standard requires a lessee to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for all leases with terms of more than twelve months. Expenses related to leases determined to be operating leases are recognized on a straight-line basis, while expenses related to leases determined to be financing leases are recognized based on an effective interest method in which interest and amortization are presented separately in the income statement.

Comparative periods presented in this Quarterly Report on Form 10-Q continue to apply guidance in ASC Topic 840, Leases, and have not been recast as the Company adopted the new standard using the modified retrospective transition approach effective as of January 1, 2019. The adoption of the new lease standard has not resulted in a significant change in the accounting for the Company’s rental revenues as the Company's residential, retail and commercial leases, where it is the lessor, will continue to be accounted for as operating leases. Management has elected available practical expedients that provide lessors an option not to separate lease and non-lease components when certain criteria are met, and instead, allow for those components to be accounted for as a single lease component. Thus, beginning with the effective date of the adoption of the new standard, January 1, 2019, rental revenues and non-lease reimbursable property revenues meet the criteria to be aggregated into a single lease component and are reported in the line item, "Rental revenues", as presented in the disaggregation of the Company's revenues in Note 11.

The Company is the lessee under certain ground, office, equipment and other operating leases. Based on its election of the package of practical expedients provided in ASU 2016-02, the Company did not reassess the classification of existing leases with its adoption of ASC Topic 842. The Company’s existing leases as of January 1, 2019 will continue to be accounted for as operating leases; however, if contracts are modified subsequent to the adoption of ASC Topic 842, the Company will be required to reassess the contracts using guidance provided under ASC Topic 842. The Company recognized total right-of-use assets of $54.3 million within "Other assets" and related lease obligations of $33.6 million within "Accrued expenses and other liabilities" on its Condensed Consolidated Balance Sheets for leases in effect as of January 1, 2019. As most leases do not provide a readily determinable implicit rate to discount future minimum lease payments to present value, management estimated the Company's incremental borrowing rate based on information available as of the date of adoption and based on the remaining lease terms as of the date of initial application. Operating leases recognized upon adoption have a weighted-average remaining lease term of approximately 33 years and a weighted-average discount rate of approximately 4.4%. Lease expense for the three months ended March 31, 2019, recognized under ASC Topic 842, continued to be immaterial for the Company and was recognized in a similar manner as compared to the three months ended March 31, 2018. Cash paid for amounts included in the measurement of operating lease liabilities during the three months ended March 31, 2019 was also immaterial.
Revenue Recognition

The Company primarily leases multifamily residential apartments under operating leases generally due on a monthly basis with terms of approximately one year or less, which are recorded as operating leases. Rental revenues are recognized in accordance with ASC Topic 842 using a method that represents a straight-line basis over the term of the lease. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of rental revenues on a straight-line basis over the reasonably assured lease term. Rental revenues represent approximately 93% of the Company's total revenues and include gross market rent less adjustments for concessions, vacancy loss and bad debt. Approximately 6% of the Company's total revenues represents reimbursable property revenues from its tenants for utility reimbursements, which are generally recognized and due on a monthly basis as tenants obtain control of the service over the term of the lease. The remaining 1% of the Company's total revenues represents other non-lease revenues primarily driven by nonrefundable fees and commissions.

With the adoption of ASC Topic 842, rental revenues and non-lease reimbursable property revenues meet the criteria to be aggregated into a single lease component and to be reported in a single line, while non-lease reimbursable property revenues recognized prior to January 1, 2019 will continue to be reported as non-lease revenues and recognized in accordance with ASC Topic 606, Revenue Recognition. The guidance requires that revenue recognized outside of the scope of ASC Topic 842 is

15



recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.

2.    Earnings per Common Share of MAA

Basic earnings per share is computed using the two-class method by dividing net income available to MAA common shareholders by the weighted average number of common shares outstanding during the period.  All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with 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 diluted earnings per share being the more dilutive of the treasury stock or two-class methods.  OP Units are included in dilutive earnings per share calculations when the units are dilutive to earnings per share. For the three months ended March 31, 2019 and 2018, MAA's diluted earnings per share was computed using the treasury stock method and the two-class method, respectively, as presented below (dollars and shares in thousands, except per share amounts):
 
Three months ended March 31,
 
2019
 
2018
Calculation of Earnings per Common Share - basic
 
 
 
Net income
$
65,958

 
$
50,820

Net income attributable to noncontrolling interests
(2,298
)
 
(1,801
)
Unvested restricted stock (allocation of earnings)
(87
)
 
(79
)
Preferred dividends
(922
)
 
(922
)
Net income available for common shareholders, adjusted
$
62,651

 
$
48,018

 
 
 
 
Weighted average common shares - basic
113,726

 
113,507

Earnings per common share - basic
$
0.55

 
$
0.42

 
 
 
 
Calculation of Earnings per Common Share - diluted
 
 
 
Net income
$
65,958

 
$
50,820

Net income attributable to noncontrolling interests (1)
(2,298
)
 
(1,801
)
Unvested restricted stock (allocation of earnings) (2)

 
(79
)
Preferred dividends
(922
)
 
(922
)
Net income available for common shareholders, adjusted
$
62,738

 
$
48,018

 
 
 
 
Weighted average common shares - basic
113,726

 
113,507

Effect of dilutive securities (2)
207

 

Weighted average common shares - diluted
113,933

 
113,507

Earnings per common share - diluted
$
0.55

 
$
0.42


(1) For the three months ended March 31, 2019 and March 31, 2018, 4.1 million OP Units and 4.2 million OP Units, respectively, and their related income are not included in the diluted earnings per share calculations as they are not dilutive.
(2) For the three months ended March 31, 2018, 0.2 million potentially dilutive securities and their related income are not included in the diluted earnings per share calculation as they are not dilutive.


16



3.    Earnings per OP Unit of MAALP

Basic earnings per common unit is computed using the two-class method by dividing net income available for common unitholders by the weighted average number of OP Units outstanding during the period. All outstanding unvested restricted unit awards contain rights to non-forfeitable distributions and participate in undistributed earnings with common unitholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per common unit. Diluted earnings per common unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units. Both the unvested restricted unit awards and other potentially dilutive common units, and the related impact to earnings, are considered when calculating earnings per common unit on a diluted basis with diluted earnings per common unit being the more dilutive of the treasury stock or two-class methods.  For the three months ended March 31, 2019 and 2018, MAA's diluted earnings per common unit was computed using the treasury stock method and the two-class method, respectively, as presented below (dollars and units in thousands, except per unit amounts):

 
Three months ended March 31,
 
2019
 
2018
Calculation of Earnings per Common Unit - basic
 
 
 
Net income
$
65,958

 
$
50,820

Unvested restricted stock (allocation of earnings)
(87
)
 
(79
)
Preferred unit distributions
(922
)
 
(922
)
Net income available for common unitholders, adjusted
$
64,949

 
$
49,819

 
 
 
 
Weighted average common units - basic
117,837

 
117,689

Earnings per common unit - basic
$
0.55

 
$
0.42

 
 
 
 
Calculation of Earnings per Common Unit - diluted
 
 
 
Net income
$
65,958

 
$
50,820

Unvested restricted stock (allocation of earnings) (1)

 
(79
)
Preferred unit distributions
(922
)
 
(922
)
Net income available for common unitholders, adjusted
$
65,036

 
$
49,819

 
 
 
 
Weighted average common units - basic
117,837

 
117,689

Effect of dilutive securities (1)
207

 

Weighted average common units - diluted
118,044

 
117,689

Earnings per common unit - diluted
$
0.55

 
$
0.42


(1) For the three months ended March 31, 2018, 0.2 million potentially dilutive securities and their related income are not included in the diluted earnings per share calculation as they are not dilutive.


17



4.    MAA Equity

Changes in total equity and its components for the three months ended March 31, 2019 and 2018 were as follows (dollars in thousands):

  
Mid-America Apartment Communities, Inc. Shareholders' Equity
 
 
 
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Distributions in Excess of Net Income
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests - Operating Partnership
 
Noncontrolling Interests - Consolidated Real Estate Entities
 
Total
Equity
EQUITY BALANCE DECEMBER 31, 2018
$
9

 
$
1,136

 
$
7,138,170

 
$
(989,263
)
 
$
(212
)
 
$
220,043

 
$
2,306

 
$
6,372,189

Net income

 

 

 
63,660

 

 
2,298

 

 
65,958

Other comprehensive income - derivative instruments

 

 

 

 
(3,088
)
 
(113
)
 

 
(3,201
)
Issuance and registration of common shares

 
1

 
1,128

 

 

 

 

 
1,129

Shares repurchased and retired

 

 
(3,023
)
 

 

 

 

 
(3,023
)
Exercise of stock options

 

 
208

 

 

 

 

 
208

Shares issued in exchange for common units

 

 
336

 

 

 
(336
)
 

 

Redeemable stock fair market value adjustment

 

 

 
(1,351
)
 

 

 

 
(1,351
)
Adjustment for noncontrolling interests in Operating Partnership

 

 
(60
)
 

 

 
60

 

 

Amortization of unearned compensation

 

 
4,785

 

 

 

 

 
4,785

Dividends on preferred stock

 

 

 
(922
)
 

 

 

 
(922
)
Dividends on common stock ($0.9600 per share)

 

 

 
(109,392
)
 

 

 

 
(109,392
)
Dividends on noncontrolling interests units ($0.9600 per unit)

 

 

 

 

 
(3,941
)
 

 
(3,941
)
Contribution from noncontrolling interest

 

 

 

 

 

 
2,860

 
2,860

EQUITY BALANCE MARCH 31, 2019
$
9

 
$
1,137

 
$
7,141,544

 
$
(1,037,268
)
 
$
(3,300
)
 
$
218,011

 
$
5,166

 
$
6,325,299


  
Mid-America Apartment Communities, Inc. Shareholders' Equity
 
 
 
 
 
 
 
Preferred Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Distributions
in Excess of
Net Income
 
Accumulated
Other
Comprehensive
Income 
 
Noncontrolling
Interests - Operating Partnership
 
Noncontrolling Interests - Consolidated Real Estate Entities
 
Total
Equity
EQUITY BALANCE DECEMBER 31, 2017
$
9

 
$
1,134

 
$
7,121,112

 
$
(784,500
)
 
$
2,157

 
$
231,676

 
$
2,306

 
$
6,573,894

Net income

 

 

 
49,019

 

 
1,801

 

 
50,820

Other comprehensive loss - derivative instruments

 

 

 

 
610

 
29

 

 
639

Issuance and registration of common shares

 
1

 
104

 

 

 

 

 
105

Shares repurchased and retired

 

 
(2,912
)
 

 

 

 

 
(2,912
)
Exercise of stock options

 

 
625

 

 

 

 
 
 
625

Shares issued in exchange for common units

 

 
2,780

 

 

 
(2,780
)
 

 

Shares issued in exchange for redeemable stock

 


 
1,915

 

 

 

 

 
1,915

Redeemable stock fair market value adjustment

 

 

 
965

 

 

 

 
965

Adjustment for noncontrolling interests in Operating Partnership

 

 
92

 

 

 
(92
)
 

 

Cumulative adjustment due to adoption of ASU 2017-12
 
 
 
 

 
(233
)
 
233

 

 
 
 

Amortization of unearned compensation

 

 
4,024

 

 

 

 

 
4,024

Dividends on preferred stock

 

 

 
(922
)
 

 

 

 
(922
)
Dividends on common stock ($0.9225 per share)

 

 

 
(104,971
)
 

 

 

 
(104,971
)
Dividends on noncontrolling interests units ($0.9225 per unit)

 

 

 

 

 
(3,819
)
 

 
(3,819
)
EQUITY BALANCE MARCH 31, 2018
$
9

 
$
1,135

 
$
7,127,740

 
$
(840,642
)
 
$
3,000

 
$
226,815

 
$
2,306

 
$
6,520,363



18



5.    MAALP Capital

Changes in total capital and its components for the three months ended March 31, 2019 and 2018 were as follows (dollars in thousands):
 
Mid-America Apartments, L.P. Unitholders' Capital
 
 
 
 
 
Limited Partner
 
General Partner
 
Preferred Units
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling Interests- Consolidated Real Estate Entities
 
Total Partnership Capital
CAPITAL BALANCE DECEMBER 31, 2018
$
220,043

 
$
6,083,142

 
$
66,840

 
$
(161
)
 
$
2,306

 
$
6,372,170

Net income
2,298

 
62,738

 
922

 

 

 
65,958

Other comprehensive income - derivative instruments

 

 

 
(3,201
)
 

 
(3,201
)
Issuance of units

 
1,129

 

 

 

 
1,129

Units repurchased and retired

 
(3,023
)
 

 

 

 
(3,023
)
Exercise of unit options

 
208

 

 

 

 
208

General partner units issued in exchange for limited partner units
(336
)
 
336

 

 

 

 

Redeemable units fair market value adjustment

 
(1,351
)
 

 

 

 
(1,351
)
Adjustment for limited partners' capital at redemption value
(53
)
 
53

 

 

 

 

Amortization of unearned compensation

 
4,785

 

 

 

 
4,785

Distributions to preferred unitholders

 

 
(922
)
 

 

 
(922
)
Distributions to common unitholders ($0.9600 per unit)
(3,941
)
 
(109,392
)
 

 

 

 
(113,333
)
Contribution from noncontrolling interest

 

 

 

 
2,860

 
2,860

CAPITAL BALANCE MARCH 31, 2019
$
218,011

 
$
6,038,625

 
$
66,840

 
$
(3,362
)
 
$
5,166

 
$
6,325,280


  
Mid-America Apartments, L.P. Unitholders' Capital
 
 
 
 
 
Limited Partner
 
General Partner
 
Preferred Units
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling Interests - Consolidated Real Estate Entities
 
Total Partnership Capital
CAPITAL BALANCE DECEMBER 31, 2017
$
231,676

 
$
6,270,758

 
$
66,840

 
$
2,295

 
$
2,306

 
$
6,573,875

Net income
1,801

 
48,097

 
922

 

 

 
50,820

Other comprehensive income - derivative instruments

 

 

 
639

 

 
639

Issuance of units

 
105

 

 

 

 
105

Units repurchased and retired

 
(2,912
)
 

 

 

 
(2,912
)
Exercise of unit options

 
625

 

 

 

 
625

General partner units issued in exchange for limited partner units
(2,780
)
 
2,780

 

 

 

 

Units issued in exchange for redeemable units

 
1,915

 

 

 

 
1,915

Redeemable units fair market value adjustment

 
965

 

 

 

 
965

Adjustment for limited partners' capital at redemption value
(63
)
 
63

 

 

 

 

Cumulative adjustment due to adoption of ASU 2017-12

 
(233
)
 

 
233

 

 

Amortization of unearned compensation

 
4,024

 

 

 

 
4,024

Distributions to preferred unitholders

 

 
(922
)
 

 

 
(922
)
Distributions to common unitholders ($0.9225 per unit)
(3,819
)
 
(104,971
)
 

 

 

 
(108,790
)
CAPITAL BALANCE MARCH 31, 2018
$
226,815

 
$
6,221,216

 
$
66,840

 
$
3,167

 
$
2,306

 
$
6,520,344



19



6.           Borrowings

The following table summarizes the Company's outstanding debt as of March 31, 2019 (dollars in thousands):
 
Balance
 
Weighted Average Effective Rate
 
Weighted Average Contract Maturity
Unsecured debt
 

 
 

 
 
Variable rate revolving credit facility
$
75,000

 
3.4
%
 
4/15/2020
Fixed rate senior notes
2,942,000

 
4.0
%
 
11/26/2025
Term loans fixed with swaps
300,000

 
2.3
%
 
3/1/2022
Variable rate term loans
600,000

 
3.4
%
 
1/22/2020
Debt issuance costs, discounts and fair market value adjustments
(30,764
)
 
 
 
 
Total unsecured debt
$
3,886,236

 
3.8
%
 
 
Fixed rate secured debt
 
 
 
 
 
Individual property mortgages
$
665,588

 
4.5
%
 
5/2/2036
Debt issuance costs and fair market value adjustments
(3,726
)
 
 
 
 
Total secured debt
$
661,862

 
4.5
%
 
 
Total outstanding debt
$
4,548,098

 
3.9
%
 
 

Unsecured Revolving Credit Facility

MAALP maintains a $1.0 billion unsecured revolving credit facility with a syndicate of banks led by KeyBank National Association, or the Credit Facility. The Credit Facility includes an expansion option up to $1.5 billion. The Credit Facility bears an interest rate of the London Interbank Offered Rate, or LIBOR, plus a spread of 0.85% to 1.55% based on an investment grade pricing grid and, as of March 31, 2019, the interest rate was 3.40%. The Credit Facility expires in April 2020 with an option to extend for an additional six months. As of March 31, 2019, MAALP had $75.0 million outstanding under the Credit Facility with another $2.5 million of additional capacity used to support outstanding letters of credit.

Senior Unsecured Notes

As of March 31, 2019, MAALP had approximately $2.7 billion in principal amount of publicly issued senior unsecured notes and $242.0 million of privately placed senior unsecured notes. The senior unsecured notes had maturities at issuance ranging from seven to twelve years, with an average of 6.7 years remaining until maturity as of March 31, 2019.

In March 2019, MAALP publicly issued $300.0 million in aggregate principal amount of senior unsecured notes, maturing March 2029 with an interest rate of 3.950% per annum, or the 2029 Notes. The purchase price paid by the initial purchasers was 99.720% of the principal amount. The 2029 Notes are general unsecured senior obligations of MAALP and rank equally in right of payment with all other senior unsecured indebtedness of MAALP. Interest on the 2029 Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2019. The net proceeds of the offering, after deducting the original issue discount, underwriting commissions and expenses of approximately $2.8 million, were $297.2 million. The 2029 Notes have been reflected net of discount and debt issuance costs in the Condensed Consolidated Balance Sheet as of March 31, 2019. In connection with the issuance of the 2029 Notes, MAALP cash settled $300.0 million in forward interest rate swap agreements, entered into during the second half of 2018 to effectively lock the interest rate on the planned transaction, resulting in an effective interest rate of 4.24% over the ten year life of the 2029 Notes.

Unsecured Term Loans

The Company maintains four term loans with a syndicate of banks, one led by KeyBank National Association, or KeyBank, two by Wells Fargo Bank, N.A., or Wells Fargo, and one by U.S. Bank National Association, or U.S. Bank. The KeyBank term loan has a balance of $150.0 million, matures in 2021, and has a variable interest rate of LIBOR plus a spread of 0.90% to 1.75% based on the Company's credit ratings. Both Wells Fargo term loans have balances of $300.0 million, mature in 2022 and 2019, respectively, and have variable interest rates of LIBOR plus spreads of 0.90% to 1.75% and 0.75% to 1.65%, respectively, based on the Company's credit ratings. The interest rate of the Wells Fargo term loan due in 2022 is fixed at 2.32% with a forward swap through the swap's maturity date, January 2020. The Wells Fargo term loan due in 2019 was entered into by the Company in December 2018. The U.S. Bank term loan has a balance of $150.0 million, matures in 2020, and has a variable interest rate of LIBOR plus a spread of 0.90% to 1.90% based on the Company's credit ratings.

Secured Property Mortgages

As of March 31, 2019, the Company had $665.6 million of fixed rate conventional property mortgages with a weighted average

20



interest rate of 4.5% and a weighted average maturity in 2036, which includes a $191.3 million mortgage with a fixed rate of 4.43% associated with seven apartment communities entered into in February 2019. The mortgage is scheduled to mature in February 2049.

Guarantees

As of March 31, 2019, MAA fully and unconditionally guaranteed $242.0 million of the privately placed senior unsecured notes issued by MAALP.

7.           Financial Instruments and Derivatives

Financial Instruments Not Carried at Fair Value

Cash and cash equivalents, restricted cash, and accrued expenses and other liabilities are carried at amounts that reasonably approximate their fair value due to their short term nature.

Fixed rate notes payable as of March 31, 2019 and December 31, 2018, totaled $3.6 billion and $3.1 billion, respectively, and had estimated fair values of $3.7 billion and $3.1 billion (excluding prepayment penalties) as of March 31, 2019 and December 31, 2018, respectively. The carrying values of variable rate notes payable (excluding the impact of interest rate swap agreements) as of March 31, 2019 and December 31, 2018, totaled $1.0 billion and $1.1 billion, respectively, and had estimated fair values of $1.0 billion and $1.1 billion (excluding prepayment penalties) as of March 31, 2019 and December 31, 2018, respectively. The fair values of fixed rate debt are determined by using the present value of future cash outflows discounted with the applicable current market rate plus a credit spread. The fair values of variable rate debt are determined using the stated variable rate plus the current market credit spread. The variable rates reset every 30 to 90 days, and management concluded that these rates reasonably estimate current market rates.

Financial Instruments Measured at Fair Value on a Recurring Basis

As of March 31, 2019, the Company had four outstanding interest rate derivatives with a total notional balance of $300.0 million that were designated as cash flow hedges of interest rate risk. The Company uses interest rate swaps to add stability to interest expense and to manage, or hedge, its exposure to interest rate movements associated with its variable rate debt or as hedges in anticipation of future debt transactions. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The fair value of interest rate derivative contracts designated as hedging instruments recorded in "Other assets" in the accompanying Condensed Consolidated Balance Sheets was $2.5 million and $3.7 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of interest rate derivative contract liabilities recorded in "Accrued expenses and other liabilities" in the accompanying Condensed Consolidated Balance Sheet was $5.3 million as of December 31, 2018. There were no interest rate derivative contract liabilities as of March 31, 2019.

To comply with the provisions of ASC Topic 820, management incorporates credit valuation adjustments to appropriately reflect both its nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Based on guidance issued by the FASB, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

The derivative asset related to the redemption feature embedded in the MAA Series I preferred stock is valued using widely accepted valuation techniques, including a discounted cash flow analysis in which the perpetual value of the preferred shares is compared to the value of the preferred shares assuming the call option is exercised, with the value of the bifurcated call option as the difference between the two values. This analysis reflects the contractual terms of the redeemable preferred shares, which are redeemable at the Company's option beginning on October 1, 2026 and at the redemption price of $50 per share (see Note 8). The analysis uses observable market-based inputs, including trading data available on the preferred shares, coupon yields on preferred stock issuances from REITs with similar credit ratings as MAA and treasury rates to determine the fair value of the bifurcated call option.


21



The redemption feature embedded in the MAA Series I preferred stock is reported as a derivative asset in "Other assets" in the accompanying Condensed Consolidated Balance Sheets and is adjusted to its fair value at each reporting date, with a corresponding non-cash adjustment to "Other non-operating (expense) income" in the accompanying Condensed Consolidated Statements of Operations. As a result of adjustments of non-cash expense recorded to reflect the change in fair value of the derivative asset during the three months ended March 31, 2019, the fair value of the embedded derivative decreased to $18.1 million as of March 31, 2019 as compared to $18.6 million as of December 31, 2018.

The Company has determined the majority of the inputs used to value its outstanding debt and derivatives, including its embedded derivative, fall within Level 2 of the fair value hierarchy, and as a result, the fair value valuation of its debt and all of its derivatives held as of March 31, 2019 and December 31, 2018 were classified as Level 2 in the fair value hierarchy. The Company's derivative financial instruments and their related gains and losses are reported in "Net change in operating accounts and other" in the accompanying Condensed Consolidated Statements of Cash Flows.

Cash Flow Hedges of Interest Rate Risk

The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in "Accumulated other comprehensive loss" and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses will be recognized in the period in which hedged transactions impact earnings, regardless of whether or not economic mismatches exist in the hedging relationship. Amounts reported in "Accumulated other comprehensive loss" related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on the Company's variable rate or fixed rate debt. During the next twelve months, the Company estimates that an additional $1.6 million will be reclassified to earnings as a decrease to "Interest expense", which primarily represents the difference between the fixed interest rate swap payments and the projected variable interest rate swap receipts.

Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

The tables below present the effect of the Company's derivative financial instruments on the Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (dollars in thousands):
Derivatives in Cash Flow Hedging Relationships
 
(Loss) Gain Recognized in OCI on Derivative
 
Location of Gain Reclassified from Accumulated OCL into Income
 
Gain Reclassified from Accumulated OCL into Interest Expense(1)
Three months ended March 31,
 
2019
 
2018
 
 
2019
 
2018
Interest rate contracts
 
$
(2,456
)
 
$
832

 
Interest Expense
 
$
745

 
$
193

(1)  
See the Condensed Consolidated Statements of Comprehensive Income for changes in accumulated other comprehensive loss as these changes are presented net of the allocation to noncontrolling interests.

Derivatives Not Designated as Hedging Instruments
 
Location of Loss Recognized in Income on Derivative
 
Loss Recognized in Earnings on Derivative
For the three months ended March 31,
 
 
2019
 
2018
Preferred stock embedded derivative
 
Other non-operating (income) expense
 
$
(524
)
 
$
(2,644
)

Credit-Risk-Related Contingent Features

Certain of the Company's derivative contracts contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. As of March 31, 2019, the Company had not breached the provisions of these agreements. If the provisions had been breached, the Company could have been required to settle its obligations under the agreements although there was no termination value liability as of March 31, 2019. Although the Company's derivative contracts are subject to master netting arrangements, which serve as credit mitigants to both the Company and its counterparties under certain situations, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral in the Condensed Consolidated Balance Sheets.


22



8.           Shareholders' Equity of MAA

As of March 31, 2019, 113,916,208 shares of common stock of MAA and 4,105,171 OP Units (excluding the OP Units held by MAA) were issued and outstanding, representing a total of 118,021,379 shares and units. As of March 31, 2018, 113,745,207 shares of common stock of MAA and 4,141,780 OP Units (excluding the OP Units held by MAA) were outstanding, representing a total of 117,886,987 shares and units. Options to purchase 87,788 shares of MAA's common stock were outstanding as of March 31, 2019, compared to 95,838 outstanding options as of March 31, 2018. During the three months ended March 31, 2019 and 2018, MAA issued 2,827 shares and 12,600 shares, respectively, related to the exercise of stock options. These exercises resulted in proceeds of $0.2 million and $0.6 million, respectively.

Preferred Stock

As of March 31, 2019, MAA had one outstanding series of cumulative redeemable preferred stock, which has the following characteristics:
Description
 
Outstanding Shares
 
Liquidation Preference(1)
 
Optional Redemption Date
 
Redemption Price (2)
 
Stated Dividend Yield
 
Approximate Dividend Rate
Series I
 
867,846
 
$50.00
 
10/1/2026
 
$50.00
 
8.50%
 
$4.25
(1) The total liquidation preference for the outstanding preferred stock is $43.4 million.
(2) The redemption price is the price at which the preferred stock is redeemable, at MAA's option, for cash.

9.    Partners' Capital of MAALP

Common units of limited partnership interests in MAALP are represented by OP Units. As of March 31, 2019, there were 118,021,379 OP Units outstanding, 113,916,208, or 96.5%, of which represent Class B OP Units (common units issued to or held by MAALP's general partner or any of its subsidiaries), which were owned by MAA, MAALP's general partner. The remaining 4,105,171 OP Units were Class A OP Units owned by Class A limited partners. As of March 31, 2018, there were 117,886,987 OP Units outstanding, 113,745,207, or 96.5%, of which were owned by MAA and 4,141,780 of which were owned by the Class A limited partners.

MAA, as the sole general partner of MAALP, has full, complete and exclusive discretion to manage and control the business of MAALP subject to the restrictions specifically contained within MAALP's agreement of limited partnership, or the Partnership Agreement. Unless otherwise stated in the Partnership Agreement, this power includes, but is not limited to, acquiring, leasing, or disposing of any real property; constructing buildings and making other improvements to properties owned; borrowing money, modifying or extinguishing current borrowings, issuing evidence of indebtedness, and securing such indebtedness by mortgage, deed of trust, pledge or other lien on MAALP's assets; and distribution of MAALP's cash or other assets in accordance with the Partnership Agreement. MAA can generally, at its sole discretion, issue and redeem OP Units and determine the consideration to be received or the redemption price to be paid, as applicable. The general partner may delegate these and other powers granted if the general partner remains in supervision of the designee.

Under the Partnership Agreement, MAALP may issue Class A OP Units and Class B OP Units. Class A OP Units are any OP Units other than Class B OP Units, while Class B OP Units are those issued to or held by MAALP's general partner or any of its subsidiaries. In general, the limited partners do not have the power to participate in the management or control of MAALP's business except in limited circumstances including changes in the general partner and protective rights if the general partner acts outside of the provisions provided in the Partnership Agreement. The transferability of Class A OP Units is also limited by the Partnership Agreement.

Net income (after allocations to preferred ownership interests) is allocated to the general partner and limited partners based on their respective ownership percentages of MAALP. Issuance or redemption of additional Class A OP Units or Class B OP Units changes the relative ownership percentage of the partners. The issuance of Class B OP Units generally occurs when MAA issues common stock and the proceeds from that issuance are contributed to MAALP in exchange for the issuance to MAA of a number of OP Units equal to the number of shares of common stock issued. Likewise, if MAA repurchases or redeems outstanding shares of common stock, MAALP generally redeems an equal number of Class B OP Units with similar terms held by MAA for a redemption price equal to the purchase price of those shares of common stock. At each reporting period, the allocation between general partner capital and limited partner capital is adjusted to account for the change in the respective percentage ownership of the underlying capital of MAALP. Holders of the Class A OP Units may require MAA to redeem their Class A OP Units, in which case MAA may, at its option, pay the redemption price either in cash (in an amount per Class A OP Unit equal, in general, to the average closing price of MAA's common stock on the NYSE over a specified period prior to the

23



redemption date) or by delivering one share of MAA common stock (subject to adjustment under specified circumstances) for each Class A OP Unit so redeemed.

At March 31, 2019, a total of 4,105,171 Class A OP Units were outstanding and redeemable for 4,105,171 shares of MAA common stock, with an approximate value of $448.8 million, based on the closing price of MAA’s common stock on March 29, 2019 of $109.33 per share. At March 31, 2018, a total of 4,141,780 Class A OP Units were outstanding and redeemable for 4,141,780 shares of MAA common stock, with an approximate value of $377.9 million, based on the closing price of MAA’s common stock on March 29, 2018 of $91.24 per share. MAALP pays the same per unit distributions in respect to the OP Units as the per share dividends MAA pays in respect to its common stock.

As of March 31, 2019, MAALP had one outstanding series of cumulative redeemable preferred units, or the MAALP Series I Preferred Units.  The MAALP Series I Preferred Units have the same characteristics as the MAA Series I preferred stock described in Note 8.  As of March 31, 2019, 867,846 units of the MAALP Series I Preferred Units were outstanding. 

10.     Commitments and Contingencies

Leases

The Company's leases include a ground lease expiring in 2074 related to one of its apartment communities and an office lease expiring in 2028 related to its corporate headquarters. Both leases contain stated rent increases that generally compensate for the impact of inflation.  The Company also has other immaterial office and equipment operating leases.  

The table below reconciles undiscounted cash flows for each of the first five years and total of the remaining years to the operating lease obligations recorded on the Condensed Consolidated Balance Sheet as of March 31, 2019 (in thousands):
 
Operating Leases
2019
$
2,054

2020
2,744

2021
2,771

2022
2,767

2023
2,761

Thereafter
68,516

Total minimum lease payments
81,613

Net present value adjustments
(48,056
)
Operating lease obligations
$
33,557


Legal Proceedings
 
In June 2016, plaintiffs Cathi Cleven and Tara Cleven, on behalf of a purported class of plaintiffs, filed a complaint against MAA and the Operating Partnership in the United States District Court for the Western District of Texas, Austin Division. In January 2017, Areli Arellano and Joe L. Martinez joined the lawsuit as additional plaintiffs. The lawsuit alleges that the Company (but not Post Properties) charged late fees at its Texas properties that violate Section 92.019 of the Texas Property Code, or Section 92.019, which provides that a landlord may not charge a tenant a late fee for failing to pay rent unless, among other things, the fee is a reasonable estimate of uncertain damages to the landlord that are incapable of precise calculation and result from the late payment of rent. The plaintiffs are seeking monetary damages and attorneys' fees and costs. In September 2018, the District Court certified a class proposed by the plaintiffs. Additionally, in September 2018, the District Court denied the Company’s motion for summary judgment and granted the plaintiffs’ motion for partial summary judgment. Because the District Court certified a class prior to granting the plaintiffs’ motion for partial summary judgment, the District Court’s ruling applies to the entire class. In October 2018, the Fifth Circuit Court of Appeals accepted the Company’s petition to review the District Court’s order granting class certification. The Company also intends to appeal the District Court’s order granting plaintiff's motion for summary judgment to the Fifth Circuit Court of Appeals if permission to appeal is granted. The Company will continue to vigorously defend the action and pursue such appeals. Management estimates that the Company's maximum exposure in the lawsuit, given the class certification and summary judgment ruling, is $54.6 million, which includes both potential damages and attorneys' fees but excludes any prejudgment interest that may be awarded.

In April 2017, plaintiff Nathaniel Brown, on behalf of a purported class of plaintiffs, filed a complaint against the Operating Partnership, as the successor by merger to Post Properties' primary operating partnership, and MAA in the United States District Court for the Western District of Texas, Austin Division. The lawsuit alleges that Post Properties, Inc. (and, following

24



the Post Properties merger in December 2016, the Operating Partnership) charged late fees at its Texas properties that violate Section 92.019. The plaintiffs are seeking monetary damages and attorney's fees and costs. In September 2018, the District Court certified a class proposed by the plaintiff.  Additionally, in September 2018, the District Court denied the Company’s motion for summary judgment and granted the plaintiff’s motion for partial summary judgment. Because the District Court certified a class prior to granting the plaintiff’s motion for partial summary judgment, the District Court’s ruling applies to the entire class. In October 2018, the Fifth Circuit Court of Appeals accepted the Company's petition to review the District Court's order granting class certification. The Company also intends to appeal the District Court’s order granting plaintiff’s motion for summary judgment to the Fifth Circuit Court of Appeals if permission to appeal is granted. The Company will continue to vigorously defend the action and pursue such appeals. Management estimates that the Company's maximum exposure in the lawsuit, given the class certification and summary judgment ruling, is $8.4 million, which includes both potential damages and attorneys' fees but excludes any prejudgment interest that may be awarded.

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of its business operations. Matters which arise out of allegations of bodily injury, property damage and employment practices are generally covered by insurance. While the resolution of these other matters cannot be predicted with certainty, management does not currently believe that such matters, either individually or in the aggregate, will have a material adverse effect on the Company's financial condition, results of operations or cash flows in the event of a negative outcome.

Loss Contingencies

The outcomes of claims, disputes and legal proceedings are subject to significant uncertainty. The Company records an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. The Company also accrues an estimate of defense costs expected to be incurred in connection with legal matters. Management reviews these accruals quarterly and makes revisions based on changes in facts and circumstances. When a loss contingency is not both probable and reasonably estimable, management does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then management discloses a reasonable estimate of the possible loss, or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then a statement to that effect is disclosed.

The assessment of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involves a series of complex judgments about future events. Among the factors considered in this assessment, are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, management's experience in similar matters, the facts available to management at the time of assessment, and how the Company intends to respond, or has responded, to the proceeding or claim. Management's assessment of these factors may change over time as individual proceedings or claims progress. For matters where management is not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate; (ii) the proceedings are in the early stages; (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties; and/or (iv) discussions with the parties in matters that are ultimately expected to be resolved through negotiation and settlement have not reached the point where management believes a reasonable estimate of loss, or range of loss, can be made. The Company believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss or business impact, if any.

As of March 31, 2019 and December 31, 2018, the Company's accrual for loss contingencies relating to unresolved legal matters was $8.8 million and $8.7 million in the aggregate, respectively. The loss contingencies are presented in "Accrued expenses and other liabilities" in the accompanying Condensed Consolidated Balance Sheets.

11.           Segment Information

As of March 31, 2019, the Company owned and operated 303 multifamily apartment communities in 17 different states from which it derived all significant sources of earnings and operating cash flows. The Company views each consolidated apartment community as an operating segment. The Company's chief operating decision maker, which is the Company’s Chief Executive Officer, evaluates performance and determines resource allocations of each of the apartment communities on a Same Store and Non-Same Store and Other basis, as well as an individual apartment community basis. This is consistent with the aggregation criteria under GAAP as each of the apartment communities generally has similar economic characteristics, facilities, services, and tenants. The following reflects the two reportable segments for the Company:

Same Store communities are communities that the Company has owned and have been stabilized for at least a full 12

25



months.
Non-Same Store and Other includes recent acquisitions, communities in development or lease-up, communities that have been identified for disposition and communities that have incurred a significant casualty loss. Also included in Non-Same Store and Other are non-multifamily activities.

On the first day of each calendar year, the Company determines the composition of its Same Store and Non-Same Store and Other reportable segments for that year as well as adjusts the previous year, which allows the Company to evaluate full period-over-period operating comparisons.  Properties in development or lease-up are added to the Same Store portfolio on the first day of the calendar year after it has 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 the Same Store portfolio.

The chief operating decision maker utilizes net operating income, or NOI, in evaluating the performance of its operating 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. Management believes that NOI is a helpful tool in evaluating the operating performance of the 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 months ended March 31, 2019 and 2018 were as follows (in thousands):
 
Three months ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Same Store
 
 
 
Rental revenues
$
372,441

 
$
341,095

Reimbursable property revenues (1)

 
23,002

Other property revenues
3,099

 
2,874

Total Same Store revenues
$
375,540

 
$
366,971

Non-Same Store and Other
 
 
 
Rental revenues
$
25,499

 
$
17,945

Reimbursable property revenues (1)

 
685

Other property revenues
139

 
416

Total Non-Same Store and Other revenues
$
25,638

 
$
19,046

Total rental and other property revenues
$
401,178

 
$
386,017

 
 
 
 
Net Operating Income:
 

 
 

Same Store NOI
$
237,439

 
$
231,655

Non-Same Store and Other NOI
14,362

 
9,958

Total NOI
251,801

 
241,613

Depreciation and amortization
(122,789
)
 
(120,744
)
Property management expenses
(13,842
)
 
(12,880
)
General and administrative expenses
(13,153
)
 
(10,132
)
Merger and integration expenses

 
(3,799
)
Interest expense
(45,700
)
 
(40,905
)
Loss on sale of depreciable real estate assets
(13
)
 

Gain on sale of non-depreciable real estate assets
8,963

 
150

Other non-operating income (expense)
935

 
(2,341
)