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Section 1: 10-Q (MAA 10-Q FOR PERIOD ENDED MARCH 31, 2009)

form10-q.htm

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

FORM 10-Q

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

For the quarterly period ended March 31, 2009

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from   to ______

Commission File Number: 1-12762

MID-AMERICA APARTMENT COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)

TENNESSEE
62-1543819
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

6584 POPLAR AVENUE, SUITE 300
 
MEMPHIS, TENNESSEE
38138
(Address of principal executive offices)
(Zip Code)

 (901) 682-6600
(Registrant's telephone number, including area code)

N/A
   (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ Yes  ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes  þ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 
Number of Shares Outstanding
Class
at April 20, 2009
Common Stock, $0.01 par value
28,220,636
 
 
 

 


MID-AMERICA APARTMENT COMMUNITIES, INC.
 
     
TABLE OF CONTENTS
 
   
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Financial Statements.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2009 (Unaudited) and December 31, 2008
2
 
Condensed Consolidated Statements of Operations for the three months ended March 31, 2009, and 2008 (Unaudited).
3
 
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009, and 2008 (Unaudited).
4
 
Notes to Condensed Consolidated Financial Statements (Unaudited).
5
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
12
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
24
Item 4.
Controls and Procedures.
24
Item 4T.
Controls and Procedures.
24
     
 
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings.
25
Item 1A.
Risk Factors.
25
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
31
Item 3.
Defaults Upon Senior Securities.
31
Item 4.
Submission of Matters to a Vote of Security Holders.
31
Item 5.
Other Information.
31
Item 6.
Exhibits.
32
 
Signatures
33


MID-AMERICA APARTMENT COMMUNITIES, INC.
Condensed Consolidated  Balance  Sheets
March 31, 2009 (Unaudited) and December 31, 2008
(Dollars in thousands, except per share data)
                 
           
March 31, 2009
 
December 31, 2008
Assets:
             
Real estate assets:
         
 
Land
     
 $                   240,445
 
 $                   240,426
 
Buildings and improvements
 
                   2,223,728
 
                   2,198,063
 
Furniture, fixtures and equipment
 
                        68,157
 
                        65,540
 
Capital improvements in progress
 
                        12,145
 
                        25,268
           
                   2,544,475
 
                   2,529,297
 
Less accumulated depreciation
 
                     (717,115)
 
                     (694,054)
           
                   1,827,360
 
                   1,835,243
                 
 
Land held for future development
 
                          1,306
 
                          1,306
 
Commercial properties, net
   
                          8,716
 
                          7,958
 
Investments in real estate joint ventures
 
                          6,699
 
                          6,824
   
Real estate assets, net
   
                   1,844,081
 
                   1,851,331
                 
Cash and cash equivalents
   
                        47,666
 
                          9,426
Restricted cash
   
                             763
 
                             414
Deferred financing costs, net
   
                        15,210
 
                        15,681
Other assets
   
                        13,610
 
                        16,840
Goodwill
     
                          4,106
 
                          4,106
Assets held for sale
   
                        14,379
 
                        24,157
   
Total assets
   
 $                1,939,815
 
 $                1,921,955
                 
Liabilities and Shareholders' Equity:
       
Liabilities:
           
 
Notes payable
   
 $                1,354,246
 
 $                1,323,056
 
Accounts payable
   
                          1,448
 
                          1,234
 
Fair market value of interest rate swaps
 
                        71,275
 
                        76,961
 
Accrued expenses and other liabilities
 
                        63,380
 
                        66,982
 
Security deposits
   
                          8,994
 
                          8,705
 
Liabilities associated with assets held for sale
 
                             328
 
                             595
   
Total liabilities
   
                   1,499,671
 
                   1,477,533
                 
Redeemable stock
   
                          1,588
 
                          1,805
                 
Shareholders' equity:
         
 
Preferred stock, $0.01 par value per share, 20,000,000 shares authorized,
       
 
$155,000 or $25 per share liquidation preference;
       
   
8.30% Series H Cumulative Redeemable Preferred Stock, 6,200,000
       
     
shares authorized, 6,200,000 shares issued and outstanding
 
                               62
 
                               62
 
Common stock, $0.01 par value per share, 50,000,000 shares authorized;
       
   
28,221,253 and 28,224,708 shares issued and outstanding at
       
   
March 31, 2009, and December 31, 2008, respectively (1)
 
                             282
 
                             282
 
Additional paid-in capital
   
                      954,807
 
                      954,127
 
Accumulated distributions in excess of net income
 
                     (473,661)
 
                     (464,617)
 
Accumulated other comprehensive income
 
                       (67,754)
 
                       (72,885)
   
Total Mid-America Apartment Communities, Inc. shareholders' equity
 
                      413,736
 
                      416,969
 
Noncontrolling interest
   
                        24,820
 
                        25,648
   
Total Equity
   
                      438,556
 
                      442,617
   
Total liabilities and equity
 
 $                1,939,815
 
 $                1,921,955
                 
                 
(1)
Number of shares issued and outstanding represent total shares of common stock regardless of classification on the
 
consolidated balance sheet. The number of shares classified as redeemable stock on the consolidated balance sheet
 
for March 31, 2009 and December 31, 2008, are 51,493 and 48,579, respectively.
   
                 
See accompanying notes to consolidated financial statements.
       

 
 

 
MID-AMERICA APARTMENT COMMUNITIES, INC.
Condensed Consolidated Statements of Operations
Three months ended March 31, 2009, and 2008
(Dollars in thousands, except per share data)
             
             
             
       
Three months ended
       
March 31,
       
2009
 
2008
Operating revenues:
       
 
Rental revenues
 
 $            89,284
 
 $            86,597
 
Other property revenues
 
                 4,252
 
                 4,124
 
Total property revenues
 
               93,536
 
               90,721
 
Management fee income
 
                      64
 
                      28
 
Total operating revenues
 
               93,600
 
               90,749
Property operating expenses:
       
 
Personnel
 
               11,364
 
               11,143
 
Building repairs and maintenance
 
                 2,812
 
                 2,984
 
Real estate taxes and insurance
 
               11,984
 
               11,274
 
Utilities
 
                 5,508
 
                 5,078
 
Landscaping
 
                 2,304
 
                 2,295
 
Other operating
 
                 4,259
 
                 4,128
 
Depreciation
 
               23,585
 
               21,916
 
Total property operating expenses
 
               61,816
 
               58,818
Property management expenses
 
                 4,241
 
                 4,258
General and administrative expenses
 
                 2,459
 
                 2,920
Income from continuing operations before non-operating items
 
               25,084
 
               24,753
Interest and other non-property income
 
                      80
 
                    108
Interest expense
 
              (14,229)
 
              (16,205)
Gain on debt extinguishment
 
                        3
 
                       -
Amortization of deferred financing costs
 
                   (606)
 
                   (628)
Net casualty (loss) gains and other settlement proceeds
 
                   (144)
 
                    128
Loss on sale of non-depreciable assets
 
                       -
 
                       (3)
Income from continuing operations before
       
 
loss from real estate joint ventures
 
               10,188
 
                 8,153
Loss from real estate joint ventures
 
                   (196)
 
                     (83)
Income from continuing operations
 
                 9,992
 
                 8,070
Discontinued operations:
       
 
Income from discontinued operations before gain (loss) on sale
 
                    421
 
                    200
 
Gain (loss) on sale of discontinued operations
 
                 1,432
 
                     (59)
Consolidated net income
 
               11,845
 
                 8,211
 
Net income attributable to noncontrolling interests
 
                    706
 
                    532
Net income attributable to Mid-America Apartment Communities, Inc.
               11,139
 
                 7,679
Preferred dividend distributions
 
                 3,216
 
                 3,216
Net income available for common shareholders
 
 $              7,923
 
 $              4,463
             
Weighted average shares outstanding (in thousands):
       
 
Basic
 
               28,085
 
               25,628
 
Effect of dilutive stock options
 
                      80
 
                    169
 
Diluted
 
               28,165
 
               25,797
             
Net income available for common shareholders
 
 $              7,923
 
 $              4,463
Discontinued property operations
 
                (1,853)
 
                   (141)
Income from continuing operations available for common shareholders
 $              6,070
 
 $              4,322
             
Earnings per share - basic:
       
 
Income from continuing operations
       
 
    available for common shareholders
 
 $                0.21
 
 $                0.17
 
Discontinued property operations
 
                   0.07
 
                  (0.00)
 
Net income available for common shareholders
 
 $                0.28
 
 $                0.17
             
Earnings per share - diluted:
       
 
Income from continuing operations
       
 
    available for common shareholders
 
 $                0.21
 
 $                0.17
 
Discontinued property operations
 
                   0.07
 
                  (0.00)
 
Net income available for common shareholders
 
 $                0.28
 
 $                0.17
             
Dividends declared per common share
 
 $              0.615
 
 $              0.615
             
See accompanying notes to consolidated financial statements.
       
             

 
Mid-America Apartment Communities, Inc.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2009 and 2008
(Dollars in thousands)
               
         
2009
 
2008
Cash flows from operating activities:
       
 
Consolidated net income
 
 $         11,845
 
 $           8,211
 
Adjustments to reconcile net income to net cash provided by operating activities:
       
   
Depreciation and amortization of deferred financing costs
 
            24,191
 
            22,896
   
Stock compensation expense
 
                 303
 
                 211
   
Stock issued to employee stock ownership plan
 
                    -
 
                 248
   
Redeemable stock issued
 
                   84
 
                   91
   
Amortization of debt premium
 
                  (90)
 
                (453)
   
Loss from investments in real estate joint ventures
 
                 196
 
                   83
   
Gain on debt extinguishment
 
                    (3)
 
                    -
   
Derivative interest (income) expense
 
                (396)
 
                 213
   
Loss on sale of non-depreciable assets
 
                    -
 
                     3
   
(Gain) loss on sale of discontinued operations
 
             (1,432)
 
                   59
   
Net casualty loss (gains) and other settlement proceeds
 
                 144
 
                (128)
   
Changes in assets and liabilities:
       
     
Restricted cash
 
                (288)
 
                 203
     
Other assets
 
              3,372
 
              6,467
     
Accounts payable
 
                 223
 
                 470
     
Accrued expenses and other
 
             (9,810)
 
             (7,667)
     
Security deposits
 
                 233
 
                 281
   
Net cash provided by operating activities
 
            28,572
 
            31,188
Cash flows from investing activities:
       
   
Purchases of real estate and other assets
 
                (163)
 
           (23,532)
   
Improvements to existing real estate assets
 
             (5,011)
 
             (5,931)
   
Renovations to existing real estate assets
 
             (2,332)
 
             (4,052)
   
Development
 
             (3,256)
 
             (5,971)
   
Distributions from real estate joint ventures
 
                   44
 
                      -
   
Contributions to real estate joint ventures
 
                (115)
 
             (6,776)
   
Proceeds from disposition of real estate assets
 
            11,337
 
                 502
   
Net cash provided by (used in) investing activities
 
                 504
 
           (45,760)
Cash flows from financing activities:
       
   
Net change in credit lines
 
            31,815
 
            30,444
   
Principal payments on notes payable
 
                (535)
 
           (22,838)
   
Payment of deferred financing costs
 
                (136)
 
             (1,333)
   
Repurchase of common stock
 
                (220)
 
                (399)
   
Proceeds from issuances of common shares and units
 
                 284
 
            19,082
   
Distributions to noncontrolling interests
 
             (1,561)
 
             (1,626)
   
Dividends paid on common shares
 
           (17,267)
 
           (15,675)
   
Dividends paid on preferred shares
 
             (3,216)
 
             (3,216)
   
Net cash provided by financing activities
 
              9,164
 
              4,439
   
Net increase (decrease) in cash and cash equivalents
 
            38,240
 
           (10,133)
Cash and cash equivalents, beginning of period
 
              9,426
 
            17,192
Cash and cash equivalents, end of period
 
 $         47,666
 
 $           7,059
               
Supplemental disclosure of cash flow information:
       
   Interest paid
   
 $         12,682
 
 $         15,994
Supplemental disclosure of noncash investing and financing activities:
       
   Accrued construction in progress
 
 $           5,987
 
 $           6,465
   Interest capitalized
 
 $                62
 
 $              114
   Marked-to-market adjustment on derivative instruments
 
 $           5,852
 
 $        (25,580)
   Reclass of redeemable stock from equity to liabilities
 
 $                 -
 
 $              472
               
               
See accompanying notes to consolidated financial statements.
       
 
 
 
 
 
 
 
 


Mid-America Apartment Communities, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2009, and 2008 (Unaudited)

1.           Consolidation and Basis of Presentation

Mid-America Apartment Communities, Inc. is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops and manages apartment communities in the Sunbelt region of the United States. As of March 31, 2009, we owned or owned interests in a total of 144 multifamily apartment communities comprising 42,252 apartments located in 13 states, including two communities comprising 626 apartments owned through our joint venture, Mid-America Multifamily Fund I, LLC, two communities comprising 536 apartments identified as held for sale, and two existing communities with expansion development phases comprising 340 apartments. An additional 45 apartments have been identified for and begun construction at one of our development properties, but have not been included in the total above as none of the units had been delivered as of March 31, 2009.

The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission and our accounting policies in effect as of December 31, 2008 as set forth in our annual consolidated financial statements, as of such date. The accompanying unaudited condensed consolidated financial statements include the accounts of Mid-America Apartment Communities, Inc. and its subsidiaries, including Mid-America Apartments, L.P.  In our opinion, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included and all such adjustments were of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three month period ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods.  Actual amounts realized or paid could differ from those estimates.

On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51, or Statement 160.  Statement 160 requires a noncontrolling interest of a subsidiary to be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest to be indentified in the consolidated financial statements.   When adopting Statement 160, a noncontrolling interest that is considered to be redeemable under the guidance of EITF Topic D-98, Classification and Measurement of Redeemable Securities (Topic D-98) is to be classified outside of permanent equity.   We adopted Statement 160 effective January 1, 2009, and after concluding that the noncontrolling interest is not redeemable under the guidance in Topic D-98 have reported it in equity in the Consolidated Balance Sheet.   Additionally, the income attributable to the noncontrolling interest is presented in the Consolidated Statements of Operations and the Consolidated  Statements of Cash Flows.    The additional disclosures required by Statement 160 and  the retrospective effect on total shareholders equity are outlined in Note 3 to the consolidated financial statements.

2.           Segment Information

As of March 31, 2009, we owned or had an ownership interest in 144 multifamily apartment communities in 13 different states from which we derived all significant sources of earnings and operating cash flows. Our operational structure is organized on a decentralized basis, with individual property managers having overall responsibility and authority regarding the operations of their respective properties. Each property manager individually monitors local, market and submarket trends in rental rates, occupancy percentages, and operating costs. Property managers are given the on-site responsibility and discretion to react to such trends in our best interest. Our chief operating decision maker evaluates the performance of each individual property based on its contribution to net operating income in order to ensure that the individual property continues to meet our return criteria and long-term investment goals. We define each of our multifamily communities as an individual operating segment. We have also determined that all of our communities have similar economic characteristics and also meet the other criteria which permit the communities to be aggregated into one reportable segment, which is the acquisition and operation of the multifamily communities owned.

3.           Comprehensive Income and Equity

Total comprehensive income, equity and their components for the three month periods ended March 31, 2009, and 2008, including the effect of adopting Statement of Financial Accounting Standards No. 160, or Statement 160, were as follows (dollars in thousands):
 
             
  Mid-America Apartment Communities, Inc. Shareholders
   
 
                           
Accumulated
 
Accumulated
   
                       
Additional
 
Distributions
 
Other
   
           
Comprehensive
 
Preferred
 
Common
 
Paid-In
 
in Excess of
 
Comprehensive
 
Noncontrolling
       
Total
 
Income
 
Stock
 
Stock
 
Capital
 
Net Income
 
 Income (Loss)
 
Interest
EQUITY AT DECEMBER 31, 2008
 
 $  442,617
     
 $          62
 
 $      282
 
 $   954,127
 
 $     (464,617)
 
 $            (72,885)
 
 $            25,648
Equity Activity Excluding Comprehensive Income:
                               
 
Issuance and registration of common shares
 
            278
             
             278
           
 
Shares repurchased and retired
 
          (220)
             
          (220)
           
 
Exercise of stock options
 
               10
             
                10
           
 
Redeemable stock fair market value and issuances
 
             301
                 
                  301
       
 
Adjustment for Noncontrolling Interest Ownership in
                               
   
operating partnership
 
                -
             
            298
         
                   (298)
 
Amortization of unearned compensation
 
             314
             
             314
           
 
Dividends on common stock ($0.615 per share)
 
     (17,268)
                 
           (17,268)
     
                         -
 
Dividends on noncontrolling interest units ($0.615 per unit)
         (1,561)
                         
                  (1,561)
 
Dividends on preferred stock
 
       (3,216)
                 
             (3,216)
       
Comprehensive income:
                               
 
Net income
 
        11,845
 
                   11,845
             
              11,139
     
706
 
Other comprehensive income -
                               
   
derivative instruments (cash flow hedges)
 
         5,456
 
                    5,456
                 
                     5,131
 
                     325
 
Comprehensive income
 
        17,301
 
                   17,301
                       
                                     
EQUITY BALANCE MARCH 31, 2009
 
 $ 438,556
     
 $          62
 
 $      282
 
 $  954,807
 
 $     (473,661)
 
 $             (67,754)
 
 $            24,820
                                     
 

 
                 
Mid-America Apartment Communities, Inc. Shareholders
 
                           
Accumulated
 
Accumulated
   
                       
Additional
 
Distributions
 
Other
   
           
Comprehensive
 
Preferred
 
Common
 
Paid-In
 
in Excess of
 
Comprehensive
 
Noncontrolling
       
Total
 
Income
 
Stock
 
Stock
 
Capital
 
Net Income
 
 Income (Loss)
 
Interest
EQUITY AT DECEMBER 31, 2007
 
 $  429,824
     
 $          62
 
 $       257
 
 $    832,511
 
 $     (414,966)
 
 $             (15,664)
 
 $            27,624
Equity Activity Excluding Comprehensive Income:
                               
 
Issuance and registration of common shares
 
        21,224
         
              4
 
        21,220
           
 
Shares repurchased and retired
 
           (399)
             
           (399)
           
 
Exercise of stock options
 
              207
             
             207
           
 
Stock issued to employee stock ownership plan
 
             248
             
             248
           
 
Shares issued in exchange from redeemable stock
 
              413
             
              413
           
 
Redeemable stock fair market value and issuances
 
           (282)
                 
               (282)
       
 
Adjustment for Noncontrolling Interest Ownership in
                               
   
operating partnership
 
                 -
             
        (1,029)
         
                  1,029
 
Amortization of unearned compensation
 
              163
             
              163
           
 
Dividends on common stock ($0.615 per share)
 
      (16,004)
                 
          (16,004)
     
                         -
 
Dividends on noncontrolling interest units ($0.615 per unit)
          (1,591)
                         
                  (1,591)
 
Dividends on preferred stock
 
         (3,216)
                 
             (3,216)
       
Comprehensive income:
                               
 
Net income
 
            8,211
 
                     8,211
             
               7,679
     
532
 
Other comprehensive income -
                               
   
derivative instruments (cash flow hedges)
 
      (25,580)
 
               (25,580)
                 
              (23,923)
 
                 (1,657)
 
Comprehensive income
 
       (17,369)
 
                (17,369)
                       
                                     
EQUITY BALANCE MARCH 31, 2008
 
 $    413,218
     
 $          62
 
 $       261
 
 $  853,334
 
 $    (426,789)
 
 $            (39,587)
 
 $             25,937
                                     

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


4.           Real Estate Dispositions

On January 15, 2009, we sold the Woodstream apartments, a 304-unit community located in Greensboro, North Carolina.

5.           Real Estate Acquisitions

On August 27, 2008, we purchased 215 units of the 234-unit Village Oaks apartments located in Temple Terrace, Florida, a suburb of Tampa. Throughout the remainder of 2008, we purchased four of the 19 units which had been sold as condominiums. On January 16, 2009, and February 18, 2009, we purchased one additional unit each.

6.           Discontinued Operations

As part of our portfolio strategy to selectively dispose of mature assets that no longer meet our investment criteria and long-term strategic objectives, in July 2008, we entered into marketing contracts to list the 440-unit River Trace apartments in Memphis, Tennessee, the 96-unit Riverhills apartments in Grenada, Mississippi, and the 304-unit Woodstream apartments in Greensboro, North Carolina. The Woodstream apartments were subsequently sold on January 15, 2009. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement 144, all of these communities are considered discontinued operations in the accompanying condensed consolidated financial statements.

The following is a summary of discontinued operations for the three month periods ended March 31, 2009 and 2008, (dollars in thousands):
 

     
Three Months Ended
     
March 31,
     
2009
 
2008
Revenues
       
 
Rental revenues
 
 $      969
 
 $   1,332
 
Other revenues
 
           37
 
           63
 
Total revenues
 
      1,006
 
      1,395
Expenses
       
 
Property operating expenses
 
         560
 
         714
 
Depreciation
 
            -
 
         352
 
Interest expense
 
           25
 
         129
 
Total expense
 
         585
 
      1,195
Income from discontinued operations before
       
 
gain on sale
 
         421
 
         200
Gain (loss) on sale of discontinued operations
      1,432
 
          (59)
Income from discontinued operations
 
 $   1,853
 
 $      141
           

 
7.           Share and Unit Information

On March 31, 2009, 28,221,253 common shares and 2,403,515 operating partnership units were outstanding, representing a total of 30,624,768 shares and units. Additionally, Mid-America had outstanding options for the purchase of 24,882 shares of common stock at March 31, 2009, of which 21,860 were anti-dilutive. At March 31, 2008, 26,141,363 common shares and 2,423,819 operating partnership units were outstanding, representing a total of 28,565,182 shares and units. Additionally, Mid-America had outstanding options for the purchase of 102,413 shares of common stock at March 31, 2008, of which 47,990 were anti-dilutive.


8.           Derivative Financial Instruments

In the normal course of business, we use certain derivative financial instruments to manage, or hedge, the interest rate risk associated with our variable rate debt or to hedge anticipated future debt transactions to manage well-defined interest rate risk associated with the transaction.

We do not use derivative financial instruments for speculative or trading purposes.  Further, we have a policy of entering into contracts with major financial institutions based upon their credit rating and other factors.  When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designated to hedge, we have not sustained any material loss from those instruments nor do we anticipate any material adverse effect on our net income attributable to Mid-America Apartment Communities, Inc. or financial position in the future from the use of derivatives.

We utilize derivative financial instruments that can be designated as cash flow hedges and which are expected to be highly effective in reducing the interest rate risk exposure that they are designed to hedge.  This effectiveness is essential for qualifying for hedge accounting.  Instruments that meet the special hedging criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Instruments, are formally designated as hedging instruments at the inception of the derivative contract.  We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the hedge transaction.  This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions.  We also formally assess, both at the inception of the hedging relationship and on an ongoing basis, whether the derivatives used are highly effective in offsetting changes in cash flows of hedged items.  When it is determined that a derivative has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.

All of our derivative financial instruments are reported at fair value, are represented on the consolidated balance sheet within Other assets and Fair market value of interest rate swaps, and are characterized as cash flow hedges. These transactions hedge the future cash flows of debt transactions through interest rate swaps that convert variable payments to fixed payments and interest rate caps that limit the exposure to rising interest rates.  As of March 31, 2009, we have entered into 34 interest rate swaps and 14 interest rate caps with a total notional balance of $883.2 million and $97.3 million, respectively.  As of March 31, 2009 and 2008, we recorded a liability of approximately $71.3 million and $41.8 million, respectively, to Fair market value of interest rate swaps in the consolidated balance sheets.  We also recorded approximately $0.2 million and $0.0 million as of March 31, 2009 and 2008, respectively, to other assets in the consolidated balance sheets.  The table below presents our assets and liabilities measured at fair value on a recurring basis as of March 31, 2009 and 2008, respectively.
 

Fair Values of Derivative Instruments in the Condensed Consolidated Balance Sheets as of
March 31, 2008 and March 31, 2009
                         
   
Asset Derivatives
 
Liability Derivatives
   
March 31, 2008
 
March 31, 2009
 
March 31, 2008
 
March 31, 2009
   
  (dollars in thousands)
 (dollars in thousands)
 
 (dollars in thousands)
 
 (dollars in thousands)
Derivatives designated as hedging instruments under Statement 133 Balance Sheet Location
 
 
 
Fair Value
 
Balance Sheet Location
 
 
 
Fair Value
 
Balance Sheet Location
 
 
 
Fair Value
 
Balance Sheet Location
 
 
 
 
Fair Value
  Interest rate contracts
 
Other assets
 $         15
 
Other assets
 $      217
 
Fair Market Value of Interest Rate Swaps
 $   41,759
 
Fair Market Value of Interest Rate Swaps
 $   71,275
                         
Total derivatives designated
                   
  as hedging instruments
                   
  under Statement 133
 $         15
   
 $      217
   
 $   41,759
   
 $   71,275
                         

The unrealized gains/losses in the fair value of these hedging instruments are reported on the balance sheet with a corresponding adjustment to accumulated other comprehensive income, with any ineffective portion of the hedging transactions reclassified to earnings. As of March 31, 2009, and 2008, the year-to-date ineffective portion of the hedging transactions reclassified to earnings was a $435,000 decrease, and an $188,000 increase, respectively, to interest expense.  The table below presents our financial performance of assets and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2009.

 
The Effect of Derivative Instruments on the Consolidated Statements of Operations
for the three months ended March 31, 2009 and 2008 (dollars in thousands)
                 
Derivatives in Statement 133 Cash Flow Hedging Relationships
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
                 
 
3/31/2008
3/31/2009
 
3/31/2008
3/31/2009
 
3/31/2008
3/31/2009
                 
Interest rate contracts
 $     (25,772)
 $          5,844
Interest Expense
 $                 -
 $                 -
Interest Expense
 $            (188)
 $             396
                 
Total
 $     (25,772)
 $          5,844
 
 $                 -
 $                 -
 
 $            (188)
 $             396
                 
 
 
If it becomes probable that the underlying hedged forecasted debt transactions will not occur or, if a derivative contract no longer qualifies for hedge accounting or is terminated, all future changes in the fair value of the derivative contract are marked-to-market with changes in value included in net income attributable to Mid-America Apartment Communities, Inc. for each period until the derivative instrument matures, is settled, or is re-designated.  If the hedged forecasted debt transaction becomes probable of not occurring, amounts previously deferred in accumulated other comprehensive income will immediately be reclassified to net income attributable to Mid-America Apartment Communities, Inc. If the hedged forecasted debt transaction remains probable to occur, these same previously deferred amounts will be amortized over the remaining hedged forecasted debt transactions.

As of March 31, 2009, the aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position is $74.5 million.  Certain of our derivative contracts are credit enhanced by either FNMA or Freddie Mac.  These derivative instrument contracts require that our credit enhancing party maintain credit ratings above a certain level.  If the credit rating of the credit enhancing party were to fall below these levels, it would trigger additional collateral to be deposited with the counterparty up to 100 percent of the liability position of the derivative contracts. As of March 31, 2009, the fair value of these derivatives was in a net liability position of $72.7 million of which our credit enhancing parties would be responsible for posting up to $53.2 million and we would be responsible for posting up to $19.5 million.  Both FNMA and Freddie Mac are currently rated Aaa by Moody’s and AAA by S&P. The following table summarizes the credit ratings that would trigger the credit-risk-related contingent features, along with the combined amount that would be required to post under each credit rating scenario, if triggered, as of March 31, 2009.
 

Credit Risk Contingency Collateral Requirements
As of March 31, 2009
     
Credit Rating
   
         
Moody's
 
S&P
 
Required Collateral
Aaa
 
AAA
 
$0
Aa1
 
AA+
 
$0
Aa2
 
AA
 
$0
Aa3
 
AA-
 
$0
A1
 
A+
 
($4,366,232)
A2
 
A
 
($11,593,218)
A3
 
A-
 
($60,597,956)
Baa1
 
BBB+
 
($72,661,155)

 
Certain of our derivative contracts contain a cross default provision under which a default under certain of our other indebtedness in excess of a threshold amount causes an event of default under the agreement.  Threshold amounts range from $1 million to $75 million.  As of March 31, 2009, the fair value of derivatives containing cross default provisions was in a liability position of $20.9 million.  Following an event of default, a termination event may occur, and we would be required to settle our obligations under the agreements at their termination value of $22.3 million as of March 31, 2009.  Although our derivative contracts are subject to master netting arrangements which serve as credit mitigants to both us and our counterparties under certain situations, we do not net our derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheet.

In accordance with Statement 157, we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy.  However, we have determined that the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of our own default as well as the default of our counterparties. As of March 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 3 of the fair value hierarchy.

 The table below presents Mid-America’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2009
(dollars in thousands)


     
Quoted Prices in
           
     
Active Markets
 
Significant
       
     
for Identical
 
Other
 
Significant
 
Balance at
     
Assets and
 
Observable
 
Unobservable
 
March 31,
     
Liabilities (Level 1)
 
Inputs (Level 2)
 
Inputs (Level 3)
 
2009
Assets
               
Derivative financial
               
 
instruments
 
 $                           -
 
 $                    -
 
 $                 217
 
 $               217
Liabilities
               
Derivative financial
               
 
instruments
 
 $                           -
 
 $                    -
 
 $            71,275
 
 $          71,275
                   


The table below presents a reconciliation of the beginning and ending balances of assets and liabilities having fair value measurements based on significant unobservable inputs (Level 3).
 
Changes in Level 3 Assets/(Liabilities) Measured at Fair Value on a Recurring Basis at March 31, 2009
(dollars in thousands)


             
Total Realized and
           
             
Unrealized Gains
           
         
Total Gains
 
Included in Other
 
Purchases,
 
Net Transfers
   
     
Balance at
 
Included in
 
Comprehensive
 
Issuances and
 
In and/or Out
 
Balance at
     
12/31/2008
 
Income
 
Income
 
Settlements
 
of Level 3
 
3/31/2009
Derivative
                       
 
financial
                       
 
instruments
 
 $          (76,910)
 
 $         (396)
 
 $                    5,948
 
 $               300
 
 $                  -
 
 $         (71,058)
                           


Of the instruments for which Mid-America utilized significant Level 3 inputs to determine fair value and that were still held by Mid-America at March 31, 2009, the unrealized gain for the three months ended March 31, 2009 was $5.9 million. The fair value of these instruments are reported on the balance sheet in Other assets and Fair market value of interest rate swaps with a corresponding adjustment for the unrealized gains/losses to accumulated other comprehensive income, with any ineffective portion of the hedging transactions reclassified to interest expense. We use three major banks to provide nearly 80% of our swaps, JP Morgan Chase, Royal Bank of Canada, and Deutsche Bank, all of which have high investment grade ratings from Moody’s and S&P.  Our interest rate swaps with JP Morgan Chase, Royal Bank of Canada, and Deutsche Bank had liability positions on our Condensed Consolidated Balance Sheets of $6.9 million, $25.6 million and $28.5 million, respectively, as of March 31, 2009.

Both observable and unobservable inputs may be used to determine the fair value of positions that Mid-America has classified within the Level 3 category. As a result, the unrealized gains and losses for assets and liabilities within the Level 3 category presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

The fair value estimates presented herein are based on information available to management as of March 31, 2009, and 2008.  These estimates are not necessarily indicative of the amounts Mid-America could ultimately realize.

9.           Recent Accounting Pronouncements

Impact of Recently Issued Accounting Standards
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 Fair Value Measurements, or Statement 157. Statement 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Statement 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.  FASB Staff Position No. FAS 157-2 Effective Date of FASB Statement 157, or FSP 157-2, delays the effective date of Statement 157 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  For these items, the effective date will be for fiscal years beginning after November 15, 2008.  We adopted Statement 157 effective January 1, 2008 and FSP 157-2 effective January 1, 2009. The adoption did not have a material impact on our consolidated financial condition or results of operations taken as a whole.
 
On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations, or Statement 141R. Statement 141R will significantly change the accounting for business combinations. Under Statement 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R will change the accounting treatment for certain specific items, including acquisition costs which will generally be expensed as incurred.  This will have a material impact on the way we account for property acquisitions and therefore will have a material impact on our financial statements.  Statement 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We adopted Statement 141R effective January 1, 2009.
 
On December 4, 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51, or Statement 160. Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest.  This has impacted our financial statement presentation by requiring the interests in the operating partnership not owned by the company (noncontrolling interests) be presented as a component of equity in the company’s consolidated financial statements and income contributable to the noncontrolling interests be a component of net income.  Statement 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Notes 1 and 3 to the consolidated financial statements describe the effect of our adopting Statement 160 effective January 1, 2009.
 
On March 19, 2008, the FASB issued FASB Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement 133, or Statement 161. Statement 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how an entity uses derivative instruments and how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.  Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008.  We adopted Statement 161 effective January 1, 2009, and the required disclosures are included in Note 8 to the consolidated financial statements.
 
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities to clarify that unvested share-based awards containing nonforfeitable rights to dividends are participating securities and, therefore, need to be included in the earnings allocation in computing earnings per share, or  EPS, under the two-class method described in SFAS No. 128, Earnings Per Share. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  All prior period EPS data presented are to be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the provisions of this FSP.  We adopted this FSP effective January 1, 2009 and it had a minor impact on our number of shares which did not change net income available for common shareholders per share.
 
In September 2008, the FASB ratified EITF Issue No. 08-5, Issuer’s Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement, or EITF 08-5. EITF 08-5 requires that the measurement of liabilities with inseparable, third-party credit enhancements carried at or disclosed at fair value on a recurring basis exclude the effect of the credit enhancement. EITF 08-5 is effective on a prospective basis in the first reporting period beginning on or after December 15, 2008.  We adopted EITF 08-5 effective January 1, 2009.  This EITF will remove the effect of the agency credit enhancements from our calculation of the fair value of our derivative instruments and will materially increase the value represented in the balance sheet.  The impact of this EITF on our Q1 2009 financial position is approximately a $2.0 million increase to the fair value of our derivative instruments.

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

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

Forward Looking Statements

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

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

·  
inability to generate sufficient cash flows due to market conditions, changes in supply and/or demand, competition, uninsured losses, changes in tax and housing laws, or other factors;
·  
increasing real estate taxes and insurance costs;
·  
failure of new acquisitions to achieve anticipated results or be efficiently integrated into us;
·  
failure of development communities to lease-up as anticipated;
·  
inability of a joint venture to perform as expected;
·  
inability to acquire additional or dispose of existing apartment units on favorable economic terms;
·  
losses from catastrophes in excess of our insurance coverage;
·  
unexpected capital needs;
·  
inability to attract and retain qualified personnel;
·  
potential liability for environmental contamination;
·  
adverse legislative or regulatory tax changes;
·  
litigation and compliance costs associated with laws requiring access for disabled persons;
·  
imposition of federal taxes if we fail to qualify as a REIT under the Internal Revenue Code in any taxable year or foregone opportunities to ensure REIT status;
·  
inability to acquire funding through the capital markets;
·  
inability to pay required distributions to maintain REIT status due to required debt payments;
·  
changes in interest rate levels, including that of variable rate debt, such as extensively used by us;
·  
loss of hedge accounting treatment for interest rate swaps due to volatility in the financial markets;
·  
the continuation of the good credit of our interest rate swap and cap providers;
·  
the availability of credit, including mortgage financing, and the liquidity of the debt markets, including a material deterioration of the financial condition of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, at present operating under the conservatorship of the United States Government; and
·  
inability to meet loan covenants.

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

Mid-America leases multifamily residential apartments under operating leases primarily with terms of one year or less. Rental revenues are recognized using a method that represents a straight-line basis over the term of the lease and other revenues are recorded when earned.

Mid-America records all gains and losses on real estate in accordance with Statement No. 66 Accounting for Sales of Real Estate.

Capitalization of expenditures and depreciation of assets

Mid-America carries real estate assets at depreciated cost.  Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, which range from 8 to 40 years for land improvements and buildings, 5 years for furniture, fixtures, and equipment, 3 to 5 years for computers and software, and 1 year for acquired leases, all of which are subjective determinations. Repairs and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. The cost to complete any deferred repairs and maintenance at properties acquired by Mid-America in order to elevate the condition of the property to Mid-America’s standards are capitalized as incurred.

Development costs, which are limited to adding new units to three existing properties, are capitalized in accordance with Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects and Statement No. 34, Capitalization of Interest Cost.

Impairment of long-lived assets, including goodwill

Mid-America accounts for long-lived assets in accordance with the provisions of Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or Statement 144, and evaluates its goodwill for impairment under Statement No. 142, Goodwill and Other Intangible Assets, or Statement 142. Mid-America evaluates goodwill for impairment on an annual basis in Mid-America’s fiscal fourth quarter, or sooner if a goodwill impairment indicator is identified. Mid-America periodically evaluates long-lived assets, including investments in real estate and goodwill, for indicators that would suggest that the carrying amount of the assets may not be recoverable. The judgments regarding the existence of such indicators are based on factors such as operating performance, market conditions, and legal factors.

In accordance with Statement 144, long-lived assets, such as real estate assets, equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet.

In accordance with Statement 142, goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. This determination is made at the reporting unit level and consists of two steps. First, Mid-America determines the fair value of a reporting unit and compares it to its carrying amount. In the apartment industry, the primary method used for determining fair value is to divide annual operating cash flows by an appropriate capitalization rate. Mid-America determines the appropriate capitalization rate by reviewing the prevailing rates in a property’s market or submarket. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement No. 141, Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

Fair value of derivative financial instruments

We utilize certain derivative financial instruments, primarily interest rate swaps and caps, during the normal course of business to manage, or hedge, the interest rate risk associated with our variable rate debt or as hedges in anticipation of future debt transactions to manage well-defined interest rate risk associated with the transaction.

In order for a derivative contract to be designated as a hedging instrument, the relationship between the hedging instrument and the hedged item must be highly effective.  While our calculation of hedge effectiveness contains some subjective determinations, the historical correlation of the hedging instruments and the underlying hedge are measured by Mid-America before entering into the hedging relationship and have been found to be highly correlated.

We measure ineffectiveness using the change in the variable cash flows method for interest rate swaps and the hypothetical derivative method for interest rate caps for each reporting period through the term of the hedging instruments. Any amounts determined to be ineffective are recorded in earnings.  The change in fair value of the interest rate swaps and the intrinsic value or fair value of caps designated as cash flow hedges are recorded to accumulated other comprehensive income in the statement of shareholders’ equity.

The valuation of our derivative financial instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps.  The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.  Additionally, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  See Note 8 of the Consolidated Financial Statements.

Overview of the Three Months Ended March 31, 2009

As anticipated, weaker demand for apartment housing caused our same store revenues to drop by $600,000 in the first quarter of 2009 from the first quarter of 2008 as we reduced pricing on new leases to build occupancy from year end. However, we suffered less pressure from move-outs as fewer people left our properties to buy a house. Our same store expenses in the first quarter of 2009 were actually reduced from the same quarter a year ago as we turned fewer apartments and took full advantage of system improvements to build operating efficiencies. Our interest expenses was down by approximately $2 million for the quarter as we also benefited from decreased interest rates, which more than offset the increase in our average debt outstanding from the first quarter of 2008.

Our same store portfolio consists of those properties in our portfolio which have been held and were stabilized for at least 12 months. Communities not included in the same store portfolio would include acquisitions within the last 12 months, communities being developed or in lease-up, and communities undergoing extensive renovations.

The following is a discussion of the consolidated financial condition and results of operations of Mid-America for the three month period ended March 31, 2009. This discussion should be read in conjunction with the condensed consolidated financial statements appearing elsewhere in this report. These financial statements include all adjustments, which are, in the opinion of management, necessary to reflect a fair statement of the results for the interim period presented, and all such adjustments are of a normal recurring nature.

Results of Operations

Comparison of the Three Months Ended March 31, 2009 to the Three Months Ended March 31, 2008

Property revenues for the three months ended March 31, 2009 were approximately $93.5 million, an increase of $2.8 million from the three months ended March 31, 2008 due to (i) a $3.2 million increase in property revenues from the five properties acquired during 2008, or the 2008 Acquisitions, and (ii) a $0.6 million increase in property revenues from our development communities. These increases were partially offset by a $1.0 million decrease in property revenues from all other communities. The decrease in property revenues from all other communities was generated primarily by our same store portfolio and was driven by a 0.2% decrease in average effective rent per unit and a 0.2% decrease in physical occupancy in the first quarter of 2009 from the first quarter of 2008.

Property operating expenses include costs for property personnel, property bonuses, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other property related costs. Property operating expenses for the three months ended March 31, 2009 were approximately $38.2 million, an increase of approximately $1.3 million from the three months ended March 31, 2008 due primarily to increases in property operating expenses of (i) $1.1 million from the 2008 Acquisitions, and (ii) $0.3 million from our development communities. These increases were partially offset by a decrease in property operating expense of $0.1 million from all other communities. The decrease in property operating expenses from all other communities was generated primarily by our same store portfolio and was driven by a 7.7% decrease in repair and maintenance as resident turnover decreased and as we continued to improve processes.

Depreciation expense for the three months ended March 31, 2009 was approximately $23.6 million, an increase of approximately $1.7 million from the three months ended March 31, 2008 primarily due to the increases in depreciation expense of (i) $0.9 million from the 2008 Acquisitions, (ii) $0.1 million from our development communities, and (iii) $0.8 million from all other communities. Increases of depreciation expense from all other communities resulted from asset additions made during the normal course of business. These increases were partially offset by a decrease in depreciation expense of $0.1 million from the expiration of the amortization of fair market value of leases of previously acquired communities.

Property management expenses for the three months ended March 31, 2009 were approximately $4.2 million, a slight decrease from the $4.3 million of property management expenses in the first quarter of 2008. General and administrative expenses decreased by approximately $0.5 million over this same period to $2.5 million, partially related to lower incentive bonuses.

Interest expense for the three months ended March 31, 2009 was approximately $14.2 million, a decrease of $2.0 million from the three months ended March 31, 2008. While our average debt outstanding increased by approximately $46.8 million from the first quarter of 2008 to the first quarter of 2009, this was more than offset by the decrease in our average cost of debt from 5.12% to 4.32% over the same period.

In the three months ended March 31, 2009, Mid-America benefited from gains of approximately $1.4 million due to the sale of a property.

Primarily as a result of the foregoing, net income attributable to Mid-America Apartment Communities, Inc. increased by approximately $3.5 million in the first quarter of 2009 from the first quarter of 2008.

Funds From Operations and Net Income

Funds from operations, or FFO, represents net income attributable to Mid-America Apartment Communities, Inc. (computed in accordance with GAAP), excluding extraordinary items, net income attributed to the non-controlling interest, gains or losses on disposition of real estate assets, plus depreciation of real estate, and adjustments for joint ventures to reflect FFO on the same basis. This definition of FFO is in accordance with the National Association of Real Estate Investment Trust’s, or NAREIT, definition.  Disposition of real estate assets includes sales of discontinued operations as well as proceeds received from insurance and other settlements from property damage.

In response to the Securities and Exchange Commission’s Staff Policy Statement relating to Emerging Issues Task Force Topic D-42 concerning the calculation of earnings per share for the redemption of preferred stock, we include the amount charged to retire preferred stock in excess of carrying values in our FFO calculation.

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

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

The following table is a reconciliation of FFO to net income attributable to Mid-America Apartment Communities, Inc. for the three month periods ended March 31, 2009, and 2008 (dollars and shares in thousands):
 

     
Three months
     
ended March 31,
     
2009
 
2008
Net income attributable to Mid-America Apartment Communities, Inc.
 $   11,139
 
 $     7,679
Depreciation of real estate assets
 
      23,120
 
      21,609
Net casualty loss (gains) and other settlement proceeds
 
           144
 
          (128)
Depreciation of real estate assets of discontinued operations
 
              -
 
           352
(Gains) loss on sales of discontinued operations
 
       (1,432)
 
             59
Depreciation of real estate assets of real estate joint ventures
 
           264
 
             95
Preferred dividend distribution
 
       (3,216)
 
       (3,216)
Net income attributable to noncontrolling interests
 
           706
 
           532
Funds from operations
 
 $   30,725
 
 $   26,982
           
Weighted average shares and units:
       
 
Basic
 
      30,488
 
      28,052
 
Diluted
 
      30,569
 
      28,180
           


FFO for the three month period ended March 31, 2009 increased primarily as the result of recently acquired properties and reduced interest expense as discussed above in Results of Operations.

Trends

During the first quarter of 2009, rental demand for apartments was weaker in most of our markets when compared to the first quarter of 2008. One of the primary drivers of apartment demand is job formation, and the job losses across all of our markets (with the significant exception of Texas) impacted apartment demand and pricing. Although job losses in the markets where our properties are located were significantly less than the national average, apartment demand weakened at most of our locations.

Partially mitigating the severe job losses was an apparent continuation of the trend of households moving back to the rental market from buying houses. The primary reason that our residents leave us is to buy a house, and we have seen that reason as a percent of total move-outs continue to drop. Analysts point out that homeownership increased from 65% to over 69% of households over ten years ending in 2005. This increase, representing approximately five million households, was driven primarily by the availability of new mortgage products, many requiring no down-payment and minimal credit ratings. With a reversion of mortgage underwriting back to more traditional standards, it is possible that a long-term correction will occur, and that home ownership may return to more sustainable levels. This could be quite significant for the apartment business, and we believe, if this occurs, it could benefit us for several years.

We also benefited on the supply side, as the lack of available financing for new apartment construction resulted in relatively few new apartments entering the market as new competition. Also, rents have yet to rise sufficiently to offset the rapid run-up of costs of new construction over the last five years. Competition from condominiums reverting back to being rental units, or new condominiums being converted to rental, was not a major factor in our markets because most of our markets and submarkets have not been primary areas for condominium development. We have found the same to be true for rental competition from single family homes. We have avoided committing a significant amount of capital to markets where most of the excessive inflation in house prices has occurred. We saw significant rental competition from condominiums and/or single family houses in only a few submarkets.

Our focus in the quarter was on sustaining occupancy as we entered what we think will continue to be a weaker leasing market for several quarters. By focusing on aggressive efforts to build and sustain traffic, and pricing aggressively, we were largely successful at this, as our occupancy ended the quarter only just short of the record level reached at the end of March, 2008.

Overall same store revenues weakened 0.8% compared to the same quarter a year ago. Of our primary markets, Dallas was strongest growing revenues 3.8% on a same store basis, while Atlanta and Jacksonville were weakest. Of our secondary markets, Columbus, GA and Little Rock were strongest, growing same store revenues 6.6% and 4.7%, respectively, while Memphis was one of our weakest secondary markets with revenues declining 3.0% from the same quarter a year ago.

We believe that the decline in same store revenue will be temporary, and that revenue growth should resume as soon as the second half of 2010. We also believe reduced availability of financing for new apartment construction will likely limit new apartment supply, and more sustainable credit terms for residential mortgages should work to favor rental demand at existing multi-family properties. At the same time, we expect long term demographic trends, including the growth of prime age groups for rentals, immigration, and population movement to the southeast and southwest will continue to build apartment rental demand for our markets.

While it seems likely that we will continue to face declining economic growth as a result of reduced liquidity in the economy throughout 2009 and into the first half of 2010, we think that the supply of new apartments is not excessive, and that positive absorption of apartments will return for most of our markets later in 2010. Should the economy fall into a deeper recession, the limited new supply of apartments and the more disciplined mortgage financing for single family home buying should lessen the impact.

We continue to develop improved products, operating systems and procedures that enable us to capture more revenues. Revenue opportunities in ancillary services (such as re-selling cable television and internet access), improved collections, and utility reimbursements enable us to capture increased revenue dollars.

We also actively work on improving processes and products to reduce expenses, such as new web-sites and internet access for our residents that enable them to transact their business with us more simply and effectively. Another example is that we introduced new systems to improve the apartment get-ready process, and we also implemented new software to improve our purchasing and accounts payable processes, all of which improve our operating expenses and customer service.

During the quarter ended March 31, 2009 we continued to have the benefit of lower interest rates resulting from improved market for Fannie Mae and Freddie Mac debt securities. Much of this was due to government action to improve liquidity in the credit markets, and resulted in a lower cost of debt for us. We expect this to continue for much of 2009 as the government expands its efforts in this area, and as a result we are forecasting lower interest costs for the balance of 2009.

Liquidity and Capital Resources

Net cash flow provided by operating activities decreased by approximately $2.6 million from $31.2 million in the first quarter of 2008 to $28.6 million in the first quarter of 2009 mainly as a result of the timing of real estate tax payments.

Net cash provided by investing activities was approximately $0.5 million during the first quarter of 2009, compared to net cash used in investing activities of approximately $45.8 million during the first quarter of 2008, mainly related to acquisition and disposition activity. In the first quarter of 2008, Mid-America had cash outflows of $23.5 million for a wholly owned acquisition and $6.8 million representing Mid-America’s share of two acquisitions purchased by Mid-America Multifamily Fund I, LLC, or Fund I, Mid-America’s joint venture. In the first quarter of 2009, Mid-America received $11.3 million from the sale of a property and made no significant acquisitions.

Net cash provided by financing activities increased by approximately $4.7 million from $4.4 million in the first quarter of 2008 to $9.2 million in the first quarter of 2009, mainly due to the net change in our credit lines. We increased our borrowing at the end of the first quarter of 2009 in order to provide the cash to pay off a $38.3 million mortgage that matured April 1, 2009. We also received proceeds of $19.1 million from equity issuances during the first quarter of 2008, primarily from our continuous equity offering plan, or CEO, which were used to pay down loans. No shares were issued through the CEO during the first quarter of 2009.

The weighted average interest rate at March 31, 2009 for the $1.4 billion of debt outstanding was 4.5%, compared to the weighted average interest rate of 5.1% on $1.3 billion of debt outstanding at March 31, 2008. We utilize both conventional and tax exempt debt to help finance our activities. Borrowings are made through individual property mortgages as well as company-wide secured credit facilities. We utilize fixed rate borrowings, interest rate swaps and interest rate caps to manage our current and future interest rate risk. More details on our borrowings can be found in the schedules presented later in this section.

At March 31, 2009, we had secured credit facility relationships with Prudential Mortgage Capital which are credit enhanced by the Federal National Mortgage Association, or FNMA, Financial Federal which are credit enhanced by Federal Home Loan Mortgage Corporation, or Freddie Mac, and a $50 million bank facility. Together, these credit facilities provided a total line capacity of $1.39 billion and collateralized availability to borrow of $1.38 billion at March 31, 2009. We had total borrowings outstanding under these credit facilities of $1.21 billion at March 31, 2009.

Approximately 68% of our outstanding obligations at March 31, 2009 were borrowed through facilities with/or credit enhanced by FNMA, also referred to as the FNMA Facilities. The FNMA Facilities have a combined line limit of $1.04 billion, all of which was collateralized and available to borrow at March 31, 2009. We had total borrowings outstanding under the FNMA Facilities of approximately $917 million at March 31, 2009. Various traunches of the FNMA Facilities mature from 2011 through 2018. The FNMA Facilities provide for both fixed and variable rate borrowings. The interest rate on the majority of the variable portion is based on the FNMA Discount Mortgage Backed Security, or DMBS, rate which are credit-enhanced by FNMA and are typically sold every 90 days by Prudential Mortgage Capital at interest rates approximating three-month LIBOR less a spread that has averaged 0.16% over the life of the FNMA Facilities, plus a credit enhancement fee of 0.49% to 0.795%.  While the DMBS continued to trade below three-month LIBOR during the first quarter of 2009, the spread below three-month LIBOR increased to 0.85% on April 1, 2009. While we feel this recent volatility is an anomaly and believe that this spread will return to more historic levels, we cannot forecast when or if the uncertainty and volatility in the market may change.

Approximately 22% of our outstanding obligations at March 31, 2009 were borrowed through facilities with/or credit enhanced by Freddie Mac, also referred to as the Freddie Mac Facilities. The Freddie Mac Facilities have a combined line limit of $300 million, of which $296 million was collateralized and available to borrow at March 31, 2009. We had total borrowings outstanding under the Freddie Mac Facilities of approximately $296 million at March 31, 2009. The Freddie Mac facilities mature in 2011 and 2014. The interest rate on the Freddie Mac Facilities renews every 30 or 90 days and is based on the Freddie Mac Reference Bill Rate on the date of renewal, which has historically approximated LIBOR, plus a credit enhancement fee of 0.65% to 0.69%. The Freddie Mac Reference Bill rate has traded consistently below LIBOR, and the historical average spread has risen to 0.44% below LIBOR with a spread of 1.01% below LIBOR on April 1, 2009.

Each of our secured credit facilities is subject to various covenants and conditions on usage, and is subject to periodic re-evaluation of collateral. If we were to fail to satisfy a condition to borrowing, the available credit under one or more of the facilities could not be drawn, which could adversely affect our liquidity. In the event of a reduction in real estate values the amount of available credit could be reduced. Moreover, if we were to fail to make a payment or violate a covenant under a credit facility, after applicable cure periods, one or more of our lenders could declare a default, accelerate the due date for repayment of all amounts outstanding and/or foreclose on properties securing such facilities. Any such event could have a material adverse effect.

The following schedule details the line limits, collateralized availability and the outstanding balances of our various borrowings as of March 31, 2009 (in thousands):
 

       
Line
 
Amount
 
Amount
       
Limit