Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish these objectives, we use interest rate swaps and interest rate caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2015 and 2014, 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, 2015 and 2014, we recorded ineffectiveness of $12,000 (increase to interest expense) and $59,000 (increase to interest expense), respectively, and during the six months ended June 30, 2015 and 2014, we recorded ineffectiveness of $73,000 (increase to interest expense) and $63,000 (increase 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 and due to the designation of acquired interest rate swaps with a non-zero fair value at inception.

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 $4.7 million will be reclassified to earnings as an increase to interest expense, which primarily represents the difference between our fixed interest rate swap payments and the projected variable interest rate swap payments.

As of June 30, 2015, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheets

The table below presents the fair value of our derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheet as of June 30, 2015 and December 31, 2014.

Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets as of June 30, 2015 and

December 31, 2014 (dollars in thousands)



	Asset Derivatives					Liability Derivatives
		June 30, 2015		December 31, 2014			June 30, 2015		December 31, 2014
Derivatives designated as hedging instruments	Balance Sheet Location	Fair Value		Fair Value		Balance Sheet Location	Fair Value		Fair Value
Interest rate contracts	Other assets	$	2,241	$	72	Fair market value of interest rate swaps	$	13,071	$	13,392

Total derivatives designated as hedging instruments		$	2,241	$	72		$	13,071	$	13,392

Derivatives not designated as hedging instruments

Interest rate contracts	Other assets	$	—	$	6		$	—	$	—

Total derivatives not designated as hedging instruments		$	—	$	6		$	—	$	—

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

The table below presents the effect of our derivative financial instruments on the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014.

Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations for the

Three and six months ended June 30, 2015 and 2014 (dollars in thousands)



Derivatives in 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)
Three months ended June 30,	2015			2014				2015			2014				2015			2014

Interest rate contracts	$	1,804		$	(7,403	)	Interest expense	$	(1,791	)	$	(3,085	)	Interest expense	$	(12	)	$	(59	)

Total derivatives in cash flow hedging relationships	$	1,804		$	(7,403	)		$	(1,791	)	$	(3,085	)		$	(12	)	$	(59	)

Six months ended June 30,

Interest rate contracts	$	(2,543	)	$	(8,400	)	Interest expense	$	(3,983	)	$	(6,810	)	Interest expense	$	(73	)	$	(63	)

Total derivatives in cash flow hedging relationships	$	(2,543	)	$	(8,400	)		$	(3,983	)	$	(6,810	)		$	(73	)	$	(63	)

Derivatives Not Designated as Hedging Instruments

Three months ended June 30,														Location of Gain or (Loss) Recognized in Income	2015			2014

Interest rate contracts														Interest expense	$	—		$	(59	)

Total															$	—		$	(59	)

Six months ended June 30,

Interest rate contracts														Interest expense	$	(3	)	$	(128	)

Total															$	(3	)	$	(128	)

Credit-Risk-Related Contingent Features

As of June 30, 2015, derivatives that were in a net liability position and subject to credit-risk-related contingent features had a termination value of $13.6 million, which includes accrued interest but excludes any adjustment for nonperformance risk. These derivatives had a fair value, gross of asset positions, of $13.1 million at June 30, 2015.

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, 2015, 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 the termination value of $13.6 million.

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 Condensed Consolidated Balance Sheets.

The table below presents a gross presentation, the effects of offsetting, and a net presentation of our derivatives as of June 30, 2015 and December 31, 2014. 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 Condensed Consolidated Balance Sheets (dollars in thousands):



Offsetting of Derivative Assets
As of June 30, 2015
							Gross Amounts Not Offset in the Statement of Financial Position


	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	$	2,241	$	—	$	2,241	$	(350	)	$	—	$	1,891

Offsetting of Derivative Liabilities
As of June 30, 2015
							Gross Amounts Not Offset in the Statement of Financial Position


	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	$	13,071	$	—	$	13,071	$	(350	)	$	—	$	12,721

Offsetting of Derivative Assets
As of December 31, 2014
							Gross Amounts Not Offset in the Statement of Financial Position


	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	$	78	$	—	$	78	$	—		$	—	$	78

Offsetting of Derivative Liabilities
As of December 31, 2014
							Gross Amounts Not Offset in the Statement of Financial Position


	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	$	13,392	$	—	$	13,392	$	—		$	—	$	13,392

Other Comprehensive Income

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, 2015 and 2014 (dollars in thousands):



Changes in Accumulated Other Comprehensive Income by Component
	Affected Line Item in the Consolidated Statements Of Operations	Gains and Losses on Cash Flow Hedges
		for the six months ended June 30,
		2015			2014
Beginning balance		$	(412	)	$	108
Other comprehensive loss before reclassifications		(2,543		)	(8,400		)
Amounts reclassified from accumulated other comprehensive income (interest rate contracts)	Interest expense	3,983			6,810
Net current-period other comprehensive (income) loss attributable to noncontrolling interest		(76		)	87
Net current-period other comprehensive income (loss) attributable to MAA		1,364			(1,503		)
Ending balance		$	952		$	(1,395	)

See also discussions in Note 8 to the Condensed Consolidated Financial Statements.

Interest Rate Derivative

Number of Instruments

Interest Rate Caps

Interest Rate Swaps