Derivatives and Hedging Activities | 6 Months Ended |
Jun. 30, 2014 |
Notes To Financial Statements [Abstract] | ' |
Derivatives and Hedging Activities | ' |
Derivatives and Hedging Activities |
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Risk Management Objective of Using Derivatives |
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We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future contractual and forecasted cash amounts, principally related to our borrowings, the value of which are determined by changing interest rates, related cash flows and other factors. |
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Cash Flow Hedges of Interest Rate Risk |
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Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we use interest rate swaps and interest rate caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium. |
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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2014 and 2013, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt and forecasted issuances of fixed-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended June 30, 2014 and 2013, we recorded ineffectiveness of $59,000 (increase to interest expense) and $22,000 (decrease to interest expense), respectively, and during the six months ended June 30, 2014 and 2013, we recorded ineffectiveness of $63,000 (increase to interest expense) and $26,000 (decrease to interest expense), respectively, mainly attributable to a mismatch in the underlying indices of the derivatives and the hedged interest payments made on our variable-rate debt. |
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Amounts reported in accumulated other comprehensive income related to derivatives designated as qualifying cash flow hedges will be reclassified to interest expense as interest payments are made on our variable-rate or fixed-rate debt. During the next 12 months, we estimate that an additional $8.8 million will be reclassified to earnings as an increase to interest expense, which primarily represents the difference between our fixed interest rate swap payments and the projected variable interest rate swap payments. |
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As of June 30, 2014, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk: |
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Interest Rate Derivative | | Number of Instruments | | Notional | | | | | | | | | | | | | | | | | | | | | | |
Interest Rate Caps | | 6 | | $ | 165,000,000 | | | | | | | | | | | | | | | | | | | | | | | |
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Interest Rate Swaps | | 11 | | $ | 675,000,000 | | | | | | | | | | | | | | | | | | | | | | | |
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Non-Designated Hedges |
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Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in a loss of $59,000 for the three months ended June 30, 2014 and a loss of $128,000 for the six months ended June 30, 2014. We recorded a gain of $10,000 for the three months ended June 30, 2013 and a loss of $3,000 for the six months ended June 30, 2013. |
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As of June 30, 2014, we had the following outstanding interest rate derivatives that were not designated as hedges: |
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Interest Rate Derivative | | Number of Instruments | | Notional | | | | | | | | | | | | | | | | | | | | | | |
Interest rate caps | | 14 | | $ | 90,326,031 | | | | | | | | | | | | | | | | | | | | | | | |
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Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet |
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The table below presents the fair value of our derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2014 and December 31, 2013, respectively. |
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Fair Values of Derivative Instruments on the Consolidated Balance Sheet as of June 30, 2014 and |
December 31, 2013 (dollars in thousands) |
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| | Asset Derivatives | | Liability Derivatives | | | | | | | | |
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Derivatives designated as hedging instruments | | Balance Sheet Location | | Fair Value | | Fair Value | | Balance Sheet Location | | Fair Value | | Fair Value | | | | | | | | |
Interest rate contracts | | Other assets | | $ | 132 | | | $ | 396 | | | Fair market value of interest rate swaps | | $ | 17,997 | | | $ | 20,015 | | | | | | | | | |
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Total derivatives designated as hedging instruments | | | | $ | 132 | | | $ | 396 | | | | | $ | 17,997 | | | $ | 20,015 | | | | | | | | | |
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Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | |
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Interest rate contracts | | Other assets | | $ | 24 | | | $ | 49 | | | | | $ | — | | | $ | — | | | | | | | | | |
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Total derivatives not designated as hedging instruments | | | | $ | 24 | | | $ | 49 | | | | | $ | — | | | $ | — | | | | | | | | | |
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Tabular Disclosure of the Effect of Derivative Instruments on the Statements of Operations |
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The table below presents the effect of our derivative financial instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013, respectively. |
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Effect of Derivative Instruments on the Consolidated Statements of Operations for the |
Three and six months ended June 30, 2014 and 2013 (dollars in thousands) |
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Derivatives in Cash Flow | | Amount of | | Location of Gain or | | Amount of | | Location of Gain or | | Amount of Gain or (Loss) Recognized in Income on |
Hedging Relationships | Gain or (Loss) | (Loss) Reclassified | Gain or (Loss) | (Loss) Recognized in | Derivative (Ineffective |
| Recognized in | from Accumulated | Reclassified from | Income on Derivative | Portion and Amount |
| OCI on Derivative | OCI into Income | Accumulated | (Ineffective Portion and | Excluded from |
| (Effective Portion) | (Effective Portion) | OCI into Income | Amount Excluded from | Effectiveness Testing) |
| | | (Effective Portion) | Effectiveness Testing) | |
Three months ended June 30, | | 2014 | | 2013 | | | | 2014 | | 2013 | | | | 2014 | | 2013 |
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Interest rate contracts | | $ | (7,403 | ) | | $ | 12,105 | | | Interest expense | | $ | (3,085 | ) | | $ | (3,932 | ) | | Interest expense | | $ | (59 | ) | | $ | 22 | |
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Total derivatives in cash flow hedging relationships | | $ | (7,403 | ) | | $ | 12,105 | | | | | $ | (3,085 | ) | | $ | (3,932 | ) | | | | $ | (59 | ) | | $ | 22 | |
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Six months ended June 30, | | | | | | | | | | | | | | | | | | | | | | |
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Interest rate contracts | | $ | (8,400 | ) | | $ | 11,926 | | | Interest expense | | $ | (6,810 | ) | | $ | (8,477 | ) | | Interest expense | | $ | (63 | ) | | $ | 26 | |
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Total derivatives in cash flow hedging relationships | | $ | (8,400 | ) | | $ | 11,926 | | | | | $ | (6,810 | ) | | $ | (8,477 | ) | | | | $ | (63 | ) | | $ | 26 | |
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Derivatives Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | |
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Three months ended June 30, | | | | | | | | | | | | Location of Gain or (Loss) Recognized in Income | | 2014 | | 2013 |
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Interest rate contracts | | | | | | | | | | | | Interest expense | | $ | (59 | ) | | $ | 10 | |
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Total | | | | | | | | | | | | | | $ | (59 | ) | | $ | 10 | |
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Six months ended June 30, | | | | | | | | | | | | | | | | |
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Interest rate contracts | | | | | | | | | | | | Interest expense | | $ | (128 | ) | | $ | (3 | ) |
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Total | | | | | | | | | | | | | | $ | (128 | ) | | $ | (3 | ) |
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Credit-Risk-Related Contingent Features |
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As of June 30, 2014, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of $19.6 million, which includes accrued interest but excludes any adjustment for nonperformance risk. These derivatives had a fair value, gross of asset positions, of $18.0 million at June 30, 2014. |
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Certain of our derivative contracts contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of June 30, 2014, we had not breached the provisions of these agreements. If we had breached these provisions, we could have been required to settle our obligations under the agreements at their termination value of $2.1 million. |
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Certain of our derivative contracts contain a provision where we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of June 30, 2014, we had not breached the provisions of these agreements. If we had breached theses provisions, we could have been required to settle our obligations under the agreements at the termination value of $16.6 million. |
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Certain of our derivative contracts are credit enhanced by either FNMA or Freddie Mac. These derivative contracts require that our credit enhancing party maintain credit ratings above a certain level. If our credit support providers were downgraded below Baa1 by Moody’s or BBB+ by Standard & Poor’s, or S&P, we may be required to either post 100 percent collateral or settle the obligations at their termination value of $3.1 million as of June 30, 2014. Both FNMA and Freddie Mac are currently rated Aaa by Moody’s and AA+ by S&P, and therefore, the provisions of this agreement have not been breached, and no collateral has been posted related to these agreements as of June 30, 2014. |
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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. |
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The table below presents a gross presentation, the effects of offsetting, and a net presentation of our derivatives as of June 30, 2014 and December 31, 2013. The net amounts of derivative assets or liabilities can be reconciled to the Tabular Disclosure of Fair Values of Derivative Instruments above, which also provides the location that derivative assets and liabilities are presented on the Consolidated Balance Sheet (dollars in thousands): |
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Offsetting of Derivative Assets | | | | | |
As of June 30, 2014 | | | | | | | | | | | | | | | |
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| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Cash Collateral Received | | Net Amount | | | | | |
Derivatives | $ | 156 | | | $ | — | | | $ | 156 | | | $ | — | | | $ | — | | | $ | 156 | | | | | | |
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Offsetting of Derivative Liabilities | | | | | |
As of June 30, 2014 | | | | | | | | | | | | | | | |
| | | | | | | Gross Amounts Not Offset in the Statement of Financial Position | | | | | | | |
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| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Liabilities presented in the Statement of Financial Position | | Financial Instruments | | Cash Collateral Posted | | Net Amount | | | | | |
Derivatives | $ | 17,997 | | | $ | — | | | $ | 17,997 | | | $ | — | | | $ | — | | | $ | 17,997 | | | | | | |
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Offsetting of Derivative Assets | | | | | |
As of December 31, 2013 | | | | | | | | | | | | | | | |
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| Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets presented in the Statement of Financial Position | | Financial Instruments | | Cash Collateral Received | | Net Amount | | | | | |
Derivatives | $ | 444 | | | $ | — | | | $ | 444 | | | $ | — | | | $ | — | | | $ | 444 | | | | | | |
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Offsetting of Derivative Liabilities | | | | | |
As of December 31, 2013 | | | | | | | | | | | | | | | |
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| Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Liabilities presented in the Statement of Financial Position | | Financial Instruments | | Cash Collateral Posted | | Net Amount | | | | | |
Derivatives | $ | 20,015 | | | $ | — | | | $ | 20,015 | | | $ | — | | | $ | — | | | $ | 20,015 | | | | | | |
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Other Comprehensive Income |
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Our other comprehensive income consists entirely of gains and losses attributable to the effective portion of our cash flow hedges. The chart below shows the change in the balance for the six months ended June 30, 2014 and 2013: |
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Changes in Accumulated Other Comprehensive Income by Component | | | | | | | | | | | | | | | | | | |
| | Affected Line Item in the Consolidated Statements Of Operations | | Gains and Losses on Cash Flow Hedges | | | | | | | | | | | | | | | | | | |
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Beginning balance | | | | $ | 108 | | | $ | (26,054 | ) | | | | | | | | | | | | | | | | | | |
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Other comprehensive (loss) income before reclassifications | | | | (8,400 | ) | | 11,922 | | | | | | | | | | | | | | | | | | | |
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Amounts reclassified from accumulated other comprehensive income (interest rate contracts) | | Interest (income)/expense | | 6,810 | | | 8,477 | | | | | | | | | | | | | | | | | | | |
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Net current-period other comprehensive income (loss) attributable to noncontrolling interest | | | | 87 | | | (681 | ) | | | | | | | | | | | | | | | | | | |
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Net current-period other comprehensive (loss) income attributable to MAA | | | | (1,503 | ) | | 19,718 | | | | | | | | | | | | | | | | | | | |
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Ending balance | | | | $ | (1,395 | ) | | $ | (6,336 | ) | | | | | | | | | | | | | | | | | | |
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See also discussions in Item 1. Financial Statements – Notes to Consolidated Financial Statements, Note 9. |