MID-AMERICA APARTMENT COMMUNITY, INC. The following discussion analyzes the financial condition and results of operations of both MAA and theOperating Partnership , of which MAA is the sole general partner and in which MAA owned a 96.6% interest as ofDecember 31, 2020 . MAA conducts all of its business through theOperating Partnership and its various subsidiaries. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. MAA , an S&P 500 company, is a multifamily-focused, self-administered and self-managed real estate investment trust, or REIT. We own, operate, acquire and selectively develop apartment communities primarily located in the Southeast, Southwest and Mid-Atlantic regions ofthe United States . As ofDecember 31, 2020 , we owned and operated 299 apartment communities through theOperating Partnership and its subsidiaries, and we had an ownership interest in one apartment community through an unconsolidated real estate joint venture and had eight development communities under construction. In addition, as ofDecember 31, 2020 , 32 of our apartment communities included retail components. Our apartment communities were located across 16 states and theDistrict of Columbia as ofDecember 31, 2020 . We report in two segments, Same Store andNon-Same Store and Other. Our Same Store segment represents those apartment communities that have been owned and stabilized for at least 12 months as of the first day of the calendar year. OurNon-Same Store and Other segment includes recently acquired communities, communities being developed or in lease-up, communities undergoing extensive renovations, communities identified for disposition, communities that have incurred a significant casualty loss and stabilized communities that do not meet the requirements to be Same Store communities. Also included in ourNon-Same Store and Other segment are non-multifamily activities. Additional information regarding the composition of our segments is included in Note 13 to the consolidated financial statements included in this Annual Report on Form 10-K.
Overview
For the year endedDecember 31, 2020 , net income available for MAA common shareholders was$251.3 million as compared to$350.1 million for the year endedDecember 31, 2019 . Results for the year endedDecember 31, 2020 included$2.6 million of non-cash income related to the fair value adjustment of the embedded derivative in the MAA Series I preferred shares and$1.0 million of gains related to the sale of real estate assets. Results for the year endedDecember 31, 2019 included$17.9 million of non-cash income related to the embedded derivative in the MAA Series I preferred shares and$93.0 million of gains related to the sale of real estate assets. Revenues for the year endedDecember 31, 2020 increased 2.3% as compared to the year endedDecember 31, 2019 , driven by a 2.5% increase in our Same Store segment. Property operating expenses, excluding depreciation and amortization, for the year endedDecember 31, 2020 increased by 4.5% as compared to the year endedDecember 31, 2019 , driven by a 4.9% increase in our Same Store segment. The drivers of these changes are discussed below in the "Results of Operations" section.
COVID-19 Developments
We believe the best way we can help our residents is to work with those who have lost wages or compensation due to the COVID-19 pandemic so that they can remain in their homes. During 2020, we supported our impacted residents in need of assistance by:
• Providing interest-free rent deferral (assisting over 8,000 households);
• Waiving late payment fees; • Waiving lease termination fees; and
• Posting local and governmental assistance programs and resources on our
website.
Our on-site leasing offices have remained open throughout the COVID-19 pandemic
while adhering to orders and directives issued by state and local
governments. Since May 2020 , we have conducted normal operations at our on-site
leasing offices, permitting public access and walk-in traffic, subject to social
distancing restrictions. Further, since May 2020 , property amenities have been
open as permitted by governmental orders, directives and guidelines.
We have supported our associates with enhanced leave and sick time policies,
enhanced flextime arrangements and additional COVID-19 paid time off, among
other benefits. We continue to monitor and comply with the various federal,
state and local laws, orders and directives issued in response to the COVID-19
pandemic that affect apartment owners and operators.
Trends
During the year endedDecember 31, 2020 , revenue growth for our Same Store portfolio continued to be favorably impacted by in-place rents and the contribution of average effective rent per unit growth. The average effective rent per unit for our Same Store portfolio continued to increase from the prior year, up 2.6% for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . This growth was partially offset by a slightly lower average physical occupancy for our Same Store portfolio of 95.6%, as compared to the average physical occupancy of 95.9% achieved during the more normal operating conditions for the year endedDecember 31, 2019 . Average effective rent per unit represents the average of gross rent amounts, after the effect of leasing 26 -------------------------------------------------------------------------------- concessions, for occupied apartment units plus prevalent market rates asked for unoccupied apartment units, divided by the total number of units. Leasing concessions represent discounts to the current market rate. We believe average effective rent per unit is a helpful measurement in evaluating average pricing; however, it does not represent actual rental revenue collected per unit. Average physical occupancy is a measurement of the total number of our apartment units that are occupied by residents, and it represents the average of the daily physical occupancy for the period. An important part of our portfolio strategy is to maintain diversity of markets, submarkets, product types and price points in the Southeast, Southwest and Mid-Atlantic regions ofthe United States . This diversity tends to mitigate exposure to economic issues in any one geographic market or area. We believe that a well-balanced portfolio, including both urban and suburban locations, with a broad range of monthly rent price points, will perform well in "up" cycles as well as better weather "down" cycles. Through our investment in 36 defined markets, we are diversified across markets, urban and suburban submarkets and a variety of product types and monthly rent price points. The COVID-19 pandemic continues to disruptthe United States economy and we cannot predict when a full economic recovery will occur. Demand for apartments is primarily driven by general economic conditions in our markets and is particularly correlated to job growth. Government restrictions implemented in response to the pandemic continue to drive high unemployment and limit the number of people looking to change their current living situation. While our rent collections during the second half of the year endedDecember 31, 2020 increased as compared to the rent collections during the initial stages of the pandemic, for the full year, collections were lower than the year endedDecember 31, 2019 . The current environment could contribute to lower than normal rent collections in 2021 and continue to suppress demand for apartments, likely driving rent growth on new leases and renewals lower than it would be in a more normal economic environment. Current elevated supply levels could further affect rent growth for our portfolio, particularly for apartment communities located in urban submarkets. Properties in suburban submarkets continue to be somewhat less impacted by supply, primarily because new development has been less prevalent in those submarkets. Markets throughout the country have been impacted differently by the pandemic. The individual market economies continue to be at various stages of reopening and we expect them to stay this way for some period. Further, as new COVID-19 infections continue to occur in most areas of the country, including the markets where we operate, we are unable to predict if economies will continue to remain open or if they will be disrupted again in the near future. As we move through this uncertain time, we believe that our portfolio strategy of maintaining a diversity of markets, submarkets, product types and price points will serve the company better in this environment than a more concentrated portfolio profile. Our focus during this challenging time has been on working with residents who have been financially impacted by the pandemic on rent payment flexibility. At a portfolio level, we have focused on using our pricing system to maintain strong occupancy. As noted above, average physical occupancy for our Same Store portfolio for the year endedDecember 31, 2020 was 95.6%, which we believe positions us well to manage through the current environment and as we continue through the typically slower winter leasing season. While access to the financial markets was initially disrupted by the COVID-19 pandemic, access has returned, particularly for high credit borrowers. With our successful bond issuance in the third quarter of 2020, we demonstrated our ability to efficiently raise capital through the debt market and believe we could do the same in the equity market as necessary. However, a prolonged disruption of the markets or a decline in credit and financing conditions could negatively affect our ability to access capital necessary to fund our operations or refinance our limited near-term maturing debt. Results of Operations For the year endedDecember 31, 2020 , we achieved net income available for MAA common shareholders of$251.3 million , a 28.2% decrease as compared to the year endedDecember 31, 2019 , and total revenue growth of$37.0 million , representing a 2.3% increase in property revenues as compared to the year endedDecember 31, 2019 . The following discussion describes the primary drivers of the decrease in net income available for MAA common shareholders for the year endedDecember 31, 2020 , as compared to the year endedDecember 31, 2019 . A discussion of the results of operations for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 is found in Item 7 of Part II of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 20, 2020 , which is available free of charge on theSEC's website at www.sec.gov and on our website at https://www.maac.com, on the "For Investors" page under "Filings and Financials-Annual Reports".
Property Revenues
The following table reflects our property revenues by segment for the years
ended
December 31, 2020 December 31, 2019 Increase (Decrease) % Change
Same Store $ 1,577,451 $ 1,538,275 $ 39,176 2.5 %
Non-Same Store and Other 100,533 102,742 (2,209 ) (2.2 )%
Total $ 1,677,984 $ 1,641,017 $ 36,967 2.3 %
27
-------------------------------------------------------------------------------- The increase in property revenues for our Same Store segment for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 was the primary driver of total property revenue growth.The Same Store segment generated a 2.5% increase in revenues for the year endedDecember 31, 2020 , primarily a result of average effective rent per unit growth of 2.6% as compared to the year endedDecember 31, 2019 . The rollout of the new high-speed bulk cable internet package contributed 0.6% in Same Store segment revenue growth. The decrease in property revenues from theNon-Same Store and Other segment for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 primarily resulted from decreased revenues from the disposition of five multifamily properties located in theLittle Rock, Arkansas market during the fourth quarter of 2019, which marked our exit from that particular market. These decreases were partially offset by increased revenues from recently completed development properties. Property Operating Expenses Property operating expenses include costs for property personnel, building repairs and maintenance, real estate taxes and insurance, utilities, landscaping and other operating expenses. The following table reflects our property operating expenses by segment for the years endedDecember 31, 2020 and 2019 (dollars in thousands): December 31, 2020 December 31, 2019 Increase (Decrease) % Change Same Store $ 598,121 $ 570,085 $ 28,036 4.9 % Non-Same Store and Other 42,350 42,760 (410 ) (1.0 )% Total $ 640,471 $ 612,845 $ 27,626 4.5 % The increase in property operating expenses for our Same Store segment for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 was primarily driven by increases in real estate tax expense of$9.8 million , utilities expense of$5.4 million , insurance expense of$4.9 million and marketing expense of$3.5 million . The rollout of the new high-speed bulk cable internet package contributed 0.4% in expense growth for the Same Store segment and is reflected in the increase in utilities expense.
Depreciation and Amortization
Depreciation and amortization expense for the year ended
Other Income and Expenses
Property management expenses for the year endedDecember 31, 2020 were$52.3 million , a decrease of$2.7 million as compared to the year endedDecember 31, 2019 . General and administrative expenses for the year endedDecember 31, 2020 were$46.9 million , an increase of$3.0 million as compared to the year endedDecember 31, 2019 . Interest expense for the year endedDecember 31, 2020 was$167.6 million , a decrease of$12.3 million as compared to the year endedDecember 31, 2019 . The decrease was primarily due to a decrease of 12 basis points in our effective interest rate, an increase in capitalized interest and a decrease in average daily debt outstanding during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in our effective interest rate was primarily due to debt retirements during the year endedDecember 31, 2020 , which were retired with proceeds from unsecured debt issuances with lower effective interest rates over the same period. The increase in the capitalized interest expense was due to an increase in the number of development projects. We did not dispose of any apartment communities during the year endedDecember 31, 2020 . For the year endedDecember 31, 2019 , we disposed of five apartment communities, resulting in gains on sale of depreciable real estate assets of$81.0 million . During the year endedDecember 31, 2020 , we disposed of one land parcel resulting in a gain on sale of non-depreciable real estate assets of$1.0 million . During the year endedDecember 31, 2019 , we disposed of four land parcels resulting in gains on sale of non-depreciable real estate assets of$12.0 million . Other non-operating income for the year endedDecember 31, 2020 was$4.9 million of income, as compared to$23.0 million of income for the year endedDecember 31, 2019 . The decrease was primarily driven by the recognition of$2.6 million of non-cash income related to the fair value adjustment of the embedded derivative in the MAA Series I preferred shares during the year endedDecember 31, 2020 , compared to the recognition of$17.9 million of non-cash income related to the adjustment of the embedded derivative during the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we also recognized$5.6 million of non-cash income relating to an unconsolidated limited partnership and$3.5 million of COVID-19 related expenses in other non-operating income compared to$3.9 million of non-cash income relating to an unconsolidated limited partnership during the year endedDecember 31, 2019 . Our COVID-19 related expenses consisted primarily of cleaning supplies, contract labor and COVID-19 related leave. 28
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Funds from Operations and Core Funds from Operations
Funds from operations, or FFO, a non-GAAP financial measure, represents net income available for MAA common shareholders (computed in accordance withthe United States generally accepted accounting principles, or GAAP) excluding gains or losses on disposition of operating properties and asset impairment, plus depreciation and amortization of real estate assets, net income attributable to noncontrolling interests and adjustments for joint ventures. Because noncontrolling interest is added back, FFO, when used in this Annual Report on Form 10-K, represents FFO attributable to the Company. FFO should not be considered as an alternative to net income available for MAA common stockholders or any other GAAP measurement, as an indicator of operating performance or as an alternative to cash flow from operating, investing and financing activities as a measure of liquidity. Management believes that FFO is helpful to investors in understanding our operating performance, primarily because its calculation excludes depreciation and amortization 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. While our calculation of FFO is in accordance with theNational Association of Real Estate Investment Trusts' , or NAREIT's, definition, it may differ from the methodology for calculating FFO utilized by other REITs and, accordingly, may not be comparable to such other REITs. Core FFO represents FFO as adjusted for items that are not considered part of our core business operations, such as adjustments related to the fair value of the embedded derivative in the MAA Series I preferred shares, gain or loss on sale of non-depreciable assets, adjustments for gains or losses from unconsolidated limited partnerships, net casualty gain or loss, gain or loss on debt extinguishment, non-routine legal costs and settlements, COVID-19 related costs and mark-to-market debt adjustments. While our definition of Core FFO may be similar to others in the industry, our methodology for calculating Core FFO may differ from that utilized by other REITs and, accordingly, may not be comparable to such other REITs. Core FFO should not be considered as an alternative to net income available for MAA common shareholders as an indicator of operating performance. We believe that Core FFO is helpful in understanding our core operating performance between periods in that it removes certain items that by their nature are not comparable over periods and therefore tend to obscure actual operating performance. The following table presents a reconciliation of net income available for MAA common shareholders to FFO and Core FFO for the years endedDecember 31, 2020 and 2019, as we believe net income available for MAA common shareholders is the most directly comparable GAAP measure (dollars in thousands): Year ended
2020 2019
Net income available for MAA common shareholders
350,123
Depreciation and amortization of real estate assets 504,364
490,632
Gain on sale of depreciable real estate assets (9 ) (80,988 ) Depreciation and amortization of real estate assets of real estate joint venture 612
618
Net income attributable to noncontrolling interests 9,053
12,807
FFO attributable to the Company 765,294
773,192
Income from embedded derivative in preferred shares (1)
(2,562 ) (17,886 )
Gain on sale of non-depreciable real estate assets (1,024 ) (12,047 ) Gain from unconsolidated limited partnerships, net of tax (1)(2)
(4,757 ) (2,954 )
Net casualty loss (gain) and other settlement
proceeds (1) 484 (3,390 )
Loss on debt extinguishment (1) 344 253
Non-routine legal costs and settlements (1) (38 )
2,276
COVID-19 related costs (1)(3) 3,536
-
Mark-to-market debt adjustments (4) 75 (256 ) Core FFO$ 761,352 $ 739,188
(1) Included in "Other non-operating income" in the Consolidated Statements of
Operations.
(2) For the year ended December 31, 2020 , $5.6 million of gains from
unconsolidated limited partnerships are offset by
tax expense. For the year ended
from unconsolidated limited partnerships are offset by
income tax expense.
(3) Non-recurring additional costs resulting from the COVID-19 pandemic,
consisting primarily of additional cleaning supplies, contract labor and
COVID-19 related leave.
(4) Included in "Interest expense" in the Consolidated Statements of Operations.
Core FFO for the year endedDecember 31, 2020 was$761.4 million , an increase of$22.2 million as compared to the year endedDecember 31, 2019 , primarily as a result of an increase in property revenues of$37.0 million and decreases in interest expense of$12.3 million and property management expenses of$2.7 million . The increases to Core FFO were offset by increases in property operating expenses, excluding depreciation and amortization, of$27.6 million and general and administrative expenses of$3.0 million . 29 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Our cash flows from operating, investing and financing activities, as well as general economic and market conditions, are the principal factors affecting our liquidity and capital resources.
Operating Activities
Net cash provided by operating activities was$823.9 million for the year endedDecember 31, 2020 as compared to$781.4 million for the year endedDecember 31, 2019 . The increase in operating cash flows was primarily driven by our operating performance. Investing Activities Net cash used in investing activities was$484.7 million for the year endedDecember 31, 2020 as compared to$238.3 million for the year endedDecember 31, 2019 . The primary drivers of the change were as follows (dollars in thousands): Primary drivers of cash (outflow) inflow Increase during the year ended December 31, (Decrease) 2020 2019 in Net Cash Purchases of real estate and other assets $ (56,965 ) $ (105,106 ) $ 48,141 Capital improvements, development and other (426,941 ) (303,097 ) (123,844 ) Proceeds from disposition of real estate assets 4,175 174,814 (170,639 ) The decrease in cash outflows for purchases of real estate and other assets was driven by the acquisition activity during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The increase in cash outflows for capital improvements, development and other was primarily driven by increased development capital spend as well as increased capital spend on our interior redevelopment program, Smart Home technology initiative and our amenity and common area upgrade program during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease in cash inflows related to proceeds from disposition of real estate assets was primarily due to the sale of one land parcel during the year endedDecember 31, 2020 , as compared to the sale of five apartment communities and four land parcels during the year endedDecember 31, 2019 . No apartment communities were sold during the year endedDecember 31, 2020 .
Financing Activities
Net cash used in financing activities was$374.1 million for the year endedDecember 31, 2020 as compared to$524.3 million for the year endedDecember 31, 2019 . The primary drivers of the change were as follows (dollars in thousands): Primary drivers of cash (outflow) inflow Increase during the year ended December 31, (Decrease) 2020 2019 in Net Cash Net change in revolving credit facility $ - $ (540,000 ) $ 540,000 Net change in commercial paper 102,000 70,000 32,000 Proceeds from notes payable 447,593 1,059,289 (611,696 ) Principal payments on notes payable (441,108 ) (657,619 ) 216,511 Dividends paid on common shares (457,355 ) (437,743 ) (19,612 ) The decrease in cash outflows related to the net change in revolving credit facility resulted from no net borrowings during the year endedDecember 31, 2020 as compared to the decrease in net borrowings of$540.0 million during the year endedDecember 31, 2019 . The increase in cash inflows related to the net change in commercial paper resulted from the increase in net borrowings of$102.0 million on our commercial paper program during the year endedDecember 31, 2020 as compared to the increase in net borrowings of$70.0 million on our commercial paper program during the year endedDecember 31, 2019 . The decrease in cash inflows related to proceeds from notes payable primarily resulted from the issuance of$450.0 million of senior notes during the year endedDecember 31, 2020 , as compared to the issuance of$850.0 million of senior notes and$191.3 million of property mortgages during the year endedDecember 31, 2019 . The decrease in cash outflows from principal payments on notes payable primarily resulted from the retirement of a$300.0 million term loan and$135.7 million of property mortgages during the year endedDecember 31, 2020 , as compared to the retirement of$600.0 million in term loans, a$20.0 million tranche of senior notes and$30.4 million of property mortgages during the year endedDecember 31, 2019 . The increase in cash outflows from dividends paid on common shares primarily resulted from the increase in the dividend rate to$4.00 per share during the year endedDecember 31, 2020 as compared to the dividend rate of$3.84 per share during the year endedDecember 31, 2019 . 30 --------------------------------------------------------------------------------
Equity
As ofDecember 31, 2020 , MAA owned 114,373,727 OP Units, comprising a 96.6% limited partnership interest in MAALP, while the remaining 4,057,657 outstanding OP Units were held by limited partners of MAALP other than MAA. Holders of OP Units (other than MAA) may require us to redeem their OP Units from time to time, in which case we may, at our option, pay the redemption price either in cash (in an amount per OP Unit equal, in general, to the average closing price of MAA's common stock on the NYSE over a specified period prior to the redemption date) or by delivering one share of MAA's common stock (subject to adjustment under specified circumstances) for each OP Unit so redeemed. MAA has registered under the Securities Act 4,057,657 shares of its common stock that, as ofDecember 31, 2020 , were issuable upon redemption of OP Units, in order for those shares to be sold freely in the public markets. We have entered into separate distribution agreements with each ofJ.P. Morgan Securities LLC ,BMO Capital Markets Corp. andKeyBanc Capital Markets Inc. to establish an ATM program allowing MAA to sell shares of its common stock from time to time into the existing market at current market prices or through negotiated transactions. Under the ATM program, MAA has the authority to issue up to an aggregate of 4.0 million shares of its common stock, at such times to be determined by MAA. The ATM program currently has a maturity ofSeptember 2021 . MAA has no obligation to issue shares through the ATM program. During the year endedDecember 31, 2020 , MAA did not sell any shares of common stock under its ATM program. During the year endedDecember 31, 2019 , MAA sold 146,301 shares of common stock for net and gross proceeds of$19.6 million and$19.9 million , respectively, through its ATM program. As ofDecember 31, 2020 , 3.9 million shares remained issuable under the ATM program. For more information regarding our equity capital resources, see Note 8 and Note 9 to the consolidated financial statements included in this Annual Report on Form 10-K. Debt
The following schedule reflects our fixed and variable rate debt outstanding as
of
Principal Average Years to
Balance Rate Maturity Effective Rate
Unsecured debt
Fixed rate senior notes $ 3,922,000 6.1 3.6 %
Variable rate commercial paper 172,000 0.1 0.3 %
Debt issuance costs, discounts, premiums and
fair market value adjustments (16,627 )
Total unsecured debt $ 4,077,373 5.9 3.5 %
Secured debt
Fixed rate property mortgages $ 488,709 21.0 4.6 %
Debt issuance costs and fair market value
adjustments (3,370 )
Total secured debt $ 485,339 21.0 4.6 %
Total debt $ 4,562,712 7.4 3.6 %
Total fixed rate debt $ 4,390,712 7.7 3.7 %
31
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The following schedule presents the contractual maturity dates of our
outstanding debt, net of debt issuance costs, discounts, premiums and fair
market value adjustments, as of
Revolving Credit
Facility & Commercial Public Other
Paper ?¹? ?²? Bonds Unsecured Secured Total
2021 $ 172,000 $ - $ 72,724 $ 118,781 $ 363,505
2022 - 249,276 116,868 - 366,144
2023 - 348,160 12,232 - 360,392
2024 - 397,212 19,960 - 417,172
2025 - 396,223 - 6,795 403,018
2026 - - - - -
2027 - 594,980 - - 594,980
2028 - 395,478 - - 395,478
2029 - 561,748 - - 561,748
2030 - 296,850 - - 296,850
Thereafter - 443,662 - 359,763 803,425
Total $ 172,000 $ 3,683,589 $ 221,784 $ 485,339 $ 4,562,712 (1) The
MAALP's unsecured commercial paper program as of
the terms of the program, MAALP may issue up to a maximum aggregate amount
outstanding at any time of
2020, average daily borrowings outstanding under the commercial paper
program were $87.0 million .
(2) There were no borrowings outstanding under MAALP's
revolving credit facility as of
credit facility has a maturity date of
extensions.
The following schedule reflects the interest rate maturities of our outstanding fixed rate debt, net of debt issuance costs, discounts, premiums and fair market value adjustments, as ofDecember 31, 2020 (dollars in thousands): Fixed Rate Debt Effective Rate 2021 $ 191,505 5.2 % 2022 366,144 3.6 % 2023 360,392 4.2 % 2024 417,172 4.0 % 2025 403,018 4.2 % 2026 - - 2027 594,980 3.7 % 2028 395,478 4.2 % 2029 561,748 3.7 % 2030 296,850 3.1 % Thereafter 803,425 3.0 % Total$ 4,390,712 3.7 %
Unsecured Revolving Credit Facility & Commercial Paper
InMay 2019 , MAALP closed on a$1.0 billion unsecured revolving credit facility with a syndicate of banks led byWells Fargo Bank, National Association , or Wells Fargo, and fourteen other banks, which we refer to as the Credit Facility. The Credit Facility replaced our previous unsecured revolving credit facility and includes an expansion option up to$1.5 billion . The Credit Facility bears an interest rate of LIBOR, plus a spread of 0.75% to 1.45% based on an investment grade pricing grid. The Credit Facility matures inMay 2023 with an option to extend for two additional six-month periods. As ofDecember 31, 2020 , there was no outstanding balance under the Credit Facility, while$3.4 million of capacity was used to support outstanding letters of credit. The Credit Facility serves as our primary source of short-term liquidity. InMay 2019 , MAALP established an unsecured commercial paper program, whereby it can issue unsecured commercial paper notes with varying maturities not to exceed 397 days up to a maximum aggregate amount outstanding of$500.0 million . As ofDecember 31, 2020 , there was$172.0 million outstanding under the commercial paper program. Unsecured Senior Notes
As of
32
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In
Unsecured Term Loan
In
Secured Property Mortgages
We maintain secured property mortgages with various life insurance companies. These mortgages are usually fixed rate and can range from five to 30 years in maturity. As ofDecember 31, 2020 , we had$488.7 million of secured property mortgages. InJuly 2020 , we retired$63.6 million of mortgages associated with three apartment communities at maturity and$72.2 million of mortgages associated with four apartment communities prior to theirOctober 2020 maturities.
For more information regarding our debt capital resources, see Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K.
Contractual Obligations
The following table reflects our total contractual cash obligations as of
Contractual Obligations 2021 2022 2023 2024 2025 Thereafter Total Long-term debt obligations (1)$ 364,903 $ 368,401 $ 363,731 $ 421,566 $ 400,815 $ 2,663,293 $ 4,582,709
Fixed rate interest 158,172 152,191 137,739 115,890 106,146 590,543 1,260,681 Variable rate interest (2) 10 - - - - - 10 Operating lease obligations (3) 2,863 2,894 2,885 2,862 2,872 62,913 77,289 Total$ 525,948 $ 523,486 $ 504,355 $ 540,318
$ 509,833 $ 3,316,749 $ 5,920,689
(1) Represents principal payments gross of discounts, premiums, debt issuance
costs and fair market value adjustments of debt assumed.
(2) Interest obligations on variable rate debt instruments represent prepaid
interest under the commercial paper program that is to be recognized as
expense in 2021.
(3) Primarily comprised of a ground lease underlying one apartment community we
own and the lease of our corporate headquarters.
We have commitments, which are not reflected in the table above, to make additional capital contributions to two technology focused limited partnerships in which we hold equity interests. The capital contributions may be called by the general partners at any time untilFebruary 2025 after giving appropriate notice. As ofDecember 31, 2020 , we had committed to make additional capital contributions totaling up to$19.2 million if and when called by the general partners of the limited partnerships and untilFebruary 2025 .
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 and 2019, we had an ownership interest in a limited liability company that owns one apartment community comprised of 269 units, located inWashington, D.C. We also had ownership interests in two technology focused limited partnerships as ofDecember 31, 2020 . Our interests in these investments are unconsolidated and are recorded using the equity method as we do not have a controlling interest. As ofDecember 31, 2020 and 2019, we did not have any relationships, including those with unconsolidated entities or financial partnerships, for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not have any relationships or transactions with persons or entities that derive benefits from their non-independent relationships with us or our related parties other than those disclosed in Note 12 to the consolidated financial statements included in this Annual Report on Form 10-K. Insurance We carry comprehensive general liability coverage on our apartment communities, with limits of liability we believe are customary within the multifamily apartment industry, to insure against liability claims and related defense costs. We also maintain insurance against the risk of direct physical damage to reimburse us on a replacement cost basis for costs incurred to repair or rebuild any property, including loss of rental income during the reconstruction period. 33 -------------------------------------------------------------------------------- We renegotiated our insurance programs effectiveJuly 1, 2020 . We believe that the current property and casualty insurance program in place provides appropriate insurance coverage for financial protection against insurable risks such that any insurable loss experienced that can be reasonably anticipated would not have a significant impact on our liquidity, financial position or results of operations.
Inflation
Our resident leases at our apartment communities allow for adjustments in the rental rate at the time of renewal, which may enable us to seek rent increases. The majority of our leases are for one year or less. The short-term nature of these leases generally serves to reduce our risk to adverse effects of inflation.
Critical Accounting Policies and Estimates
A critical accounting policy is one that is both important to our financial condition and results of operations and that involves some degree of uncertainty. The preceding discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the notes thereto, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the reported amounts and disclosures in the 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.
Acquisition of real estate assets
We account for our acquisitions of investments in real estate as asset acquisitions in accordance with Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which requires the cost of the real estate acquired to be allocated to the individual acquired tangible assets, consisting of land, buildings and improvements and other, and identified intangible assets, consisting of the value of in-place leases and other contracts, on a relative fair value basis. In calculating the total asset value of acquired tangible assets, management uses stabilized net operating income, or NOI, and market specific capitalization and discount rates. Management analyzes historical stabilized NOI to determine its estimate for forecasted NOI. Management estimates the market capitalization rate by analyzing the market capitalization rates for properties with comparable ages in similarly sized markets. Management then allocates the purchase price of the asset acquisition based on the relative fair value of the individual components as a proportion of the total assets acquired.
Impairment of long-lived assets
We account for long-lived assets in accordance with the provisions of accounting standards for the impairment or disposal of long-lived assets. Management periodically evaluates long-lived assets, including investments in real estate, 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. Long-lived assets, such as real estate assets, equipment, right-of-use lease assets 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, which is estimated by analyzing historical cash flows of the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Management calculates the fair value of an asset by dividing projected cash flows based on historical operating cash flows by a market capitalization rate. Management estimates the market capitalization rate by analyzing the market capitalization rates for properties with comparable ages in similarly sized markets. No material impairment losses were recognized during the years endedDecember 31, 2020 and 2019.
Cost capitalization
In conformity with GAAP, we capitalize those expenditures that materially
enhance the value of an existing asset or substantially extend the useful life
of an existing asset. Expenditures necessary to maintain an existing property in
ordinary operating condition are expensed as incurred. Therefore, 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 us in order to elevate the
condition of the property to our standards are capitalized as incurred. The
carrying costs related to development projects, including interest, property
taxes, insurance and allocated direct development salary costs during the
construction period, are capitalized. Management uses judgment in determining
whether costs should be expensed or capitalized.
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--------------------------------------------------------------------------------Loss contingencies
The outcomes of claims, disputes and legal proceedings are subject to significant uncertainty. Management records an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We also accrue an estimate of defense costs expected to be incurred in connection with legal matters. Management reviews these accruals quarterly and makes revisions based on changes in facts and circumstances. When a loss contingency is not both probable and reasonably estimable, then we do not accrue the loss. However, for material loss contingencies, if the unrecorded loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then management discloses a reasonable estimate of the possible loss, or range of loss, if such reasonable estimate can be made. If we cannot make a reasonable estimate of the possible loss, or range of loss, then a statement to that effect is disclosed. The assessment of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involves a series of complex judgments about future events. Among the factors that we consider in this assessment, including with respect to the matters disclosed in this Annual Report on Form 10-K, are the nature of existing legal proceedings and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, our experience in similar matters, the facts available to us at the time of assessment, and how we intend to respond, or have responded, to the proceeding or claim. Management's assessment of these factors may change over time as individual proceedings or claims progress. For matters where we are not currently able to reasonably estimate a range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate; (ii) the proceedings are in the early stages; (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties; and/or (iv) discussions with the parties in matters that are expected ultimately to be resolved through negotiation and settlement have not reached the point where we believe a reasonable estimate of loss, or range of loss, can be made. In such instances, management believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss or business impact, if any.
Valuation of embedded derivative
The redemption feature embedded in the MAA Series I preferred stock is reported as a derivative asset and is adjusted to its fair value at each reporting date, with a corresponding non-cash adjustment to the income statement. The derivative asset related to the redemption feature is valued using widely accepted valuation techniques, including a discounted cash flow analysis in which the perpetual value of the preferred shares is compared to the value of the preferred shares assuming the call option is exercised, with the value of the bifurcated call option as the difference between the two values. The analysis reflects the contractual terms of the redeemable preferred shares, which are redeemable at our option beginning onOctober 1, 2026 and at the redemption price of$50 per share. We use various inputs in the analysis, including trading data available on the preferred shares, coupon yields on preferred stock issuances from REITs with similar credit ratings as MAA and treasury rates to determine the fair value of the bifurcated call option. For more information regarding our significant accounting policies, including a brief description of recent accounting pronouncements that could have a material impact on our financial statements, see Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K.
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