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Financial Instruments and Derivatives

12 Months Ended

Dec. 31, 2021

Financial Instruments Not Carried at Fair Value

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

Fixed rate notes payable as of December 31, 2021 and 2020 totaled $4.5 billion and $4.4 billion, respectively, and had estimated fair values of $4.8 billion and $4.9 billion (excluding prepayment penalties), respectively. The carrying value of variable rate debt as of December 31, 2020 totaled $172.0 million and had an estimated fair value of $172.0 million. As of December 31, 2021, the Company had no variable rate debt outstanding. The fair values of fixed rate debt are determined by using the present value of future cash outflows discounted with the applicable current market rate plus a credit spread. The fair values of variable rate debt are determined using the stated variable rate plus the current market credit spread. The variable rates reset at various maturities typically less than 30 days, and management concluded these rates reasonably estimate current market rates.

Financial Instruments Measured at Fair Value on a Recurring Basis

As of December 31, 2021, the Company had one outstanding series of cumulative redeemable preferred stock, which is referred to as the MAA Series I preferred stock (see Note 8). The Company has recognized a derivative asset related to the redemption feature embedded in the MAA Series I preferred stock. The derivative asset 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 the Company’s option beginning on October 1, 2026 at the redemption price of $50.00 per share. The Company uses various significant 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.

The redemption feature embedded in the MAA Series I preferred stock is reported as a derivative asset in “Other assets” in the accompanying Consolidated Balance Sheets and is adjusted to its fair value at each reporting date, with a corresponding non-cash adjustment to “Other non-operating income” in the accompanying Consolidated Statements of Operations. As a result of the adjustments recorded to reflect the change in fair value of the derivative asset, the fair value of the embedded derivative asset decreased to $34.5 million as of December 31, 2021 as compared to $39.0 million as of December 31, 2020, a decrease in value of the derivative asset of $4.5 million.

The Company has determined the majority of the inputs used to value its outstanding debt and its embedded derivative fall within Level 2 of the fair value hierarchy, and as a result, the fair value valuation of its debt and embedded derivative held as of December 31, 2021 and December 31, 2020 were classified as Level 2 in the fair value hierarchy.

Cash Flow Hedges of Interest Rate Risk

The Company periodically uses derivatives to hedge exposures to interest rates. For transactions that meet the hedge accounting criteria, the Company formally designates and documents the instrument as a hedge at inception and thereafter assesses the hedge to ensure it is effective in offsetting changes in the cash flows of the underlying exposures. The changes in the fair value of a derivative designated and that qualifies as a cash flow hedge are recorded in “Accumulated other comprehensive loss” and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, there is no periodic measurement or recognition of ineffectiveness, regardless of whether or not economic mismatches exist in the hedging relationship.

As of December 31, 2021, the Company had $11.1 million in net realized losses recorded in “Accumulated other comprehensive loss” related to terminated interest rate swap and forward rate swap derivatives which were previously designated as qualifying cash flow hedging instruments. The net realized losses are reclassified to interest expense as interest payments are made over the remaining life of the associated debt. During the next twelve months, the Company estimates that an additional $1.1 million will be reclassified to earnings as an increase to “Interest expense.” Derivatives designated as cash flow hedging instruments and their related gains and losses are reported in “Net change in operating accounts and other operating activities” in the accompanying Consolidated Statements of Cash Flows.

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

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019, respectively (dollars in thousands):


Derivatives in Cash Flow Hedging Relationships	Loss Recognized in OCI on Derivative							Location of (Loss) Gain Reclassified from Accumulated	Net (Loss) Gain Reclassified from Accumulated OCL into Interest Expense (2)
For the Year ended December 31,	2021		2020		2019 (1)			OCL into Income	2021			2020			2019
Interest rate contracts	$	—	$	—	$	(11,676	)	Interest expense	$	(1,114	)	$	(1,088	)	$	1,747

(1)

The Company had outstanding interest rate swaps that terminated during the year ended December 31, 2019.

(2)

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


Derivatives Not Designated as Hedging Instruments	Location of (Loss) Gain Recognized in	(Loss) Gain Recognized in Earnings on Derivative
For the year ended December 31,	Income on Derivative	2021			2020		2019
Preferred stock embedded derivative	Other non-operating income	$	(4,560	)	$	2,562	$	17,886

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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