PART I
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our actual results could differ materially from those set forth in each forward-looking statement. Certain factors that might cause such a difference are discussed in this report, including in the subsection entitled “Forward-Looking Statements” included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. You should also review Part I, Item 1A, “Risk Factors,” for a discussion of various risks that could adversely affect us.
Item 1. Business
General
Monogram Residential Trust, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us,” “our” or “Monogram”) was organized in Maryland on August 4, 2006. We are a fully integrated self-managed real estate investment trust (“REIT”) that invests in, develops and operates high quality multifamily communities offering location and lifestyle amenities. Our principal financial goal is to increase long-term shareholder value through the operation, acquisition and development of our multifamily communities and, when appropriate, the disposition of multifamily communities in our portfolio. We plan to achieve our financial goal by allocating capital in urban, suburban-urban and high-density suburban growth markets, with a high quality, diversified portfolio that is professionally managed. We invest in stabilized operating communities and communities in various phases of development, with a focus on communities in select markets across the United States. These include luxury high-rise, mid-rise and garden style multifamily communities. Our targeted communities include existing “core” communities, which we define as communities that are already stabilized and producing rental income, as well as communities in various phases of development, redevelopment, lease up or repositioning with the intent to transition those communities to core communities. As of
December 31, 2016
, Monogram's portfolio includes investments in
51
multifamily communities in
10
states comprising
14,473
residential units.
Our investments may be wholly owned by us or held through joint venture arrangements with third-party investors, which we define as “Co-Investment Ventures” or “CO-JVs.” These are predominately equity investments but may also include debt investments, consisting of mezzanine or bridge loans.
At
December 31, 2016
, we held ownership interests in:
Equity investments
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47
operating multifamily communities (including
one
development in lease up) containing
13,022
residential units in
10
states, all of which are consolidated for financial reporting purposes. Of the
47
operating multifamily communities, 35 are held by CO-JVs.
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two
developments of multifamily communities for
656
residential units in
two
states, both of which are consolidated for financial reporting purposes and held by CO-JVs.
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Debt investments
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two
loan investments for the development of multifamily communities.
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We target locations in primary markets and coastal regions with high job and rent growth, including transit-oriented locations and vibrant areas offering lifestyle and retail amenities, and class A communities that are newer and highly amenitized with higher rents per unit for the submarket. Class A communities, where the rents are higher than the median for the submarket, have historically provided greater long-term total returns than class B communities. Also, newer communities, with updated amenities and less capital and maintenance expenditures, have historically provided greater long-term total returns than older communities. Further, because markets move in and out of favor, we mitigate our exposure to any given submarket by investing in a geographically diversified portfolio. As of
December 31, 2016
, our primary markets include Northern California, Southern California, New England, Mid-Atlantic, South Florida, Colorado, and Texas, representing
90%
of the portfolio as measured by our number of units.
We continuously review our portfolio and primary markets for long-term growth prospects, scale and operating efficiencies and expect to continue to reposition and redeploy capital to improve long-term returns. Currently certain of our markets are experiencing oversupply from new development, which is resulting in rental concessions and decelerating income growth. Some of these are in non-coastal markets, where we may decide to permanently or temporarily exit the markets. That was the case in 2015 when we exited Chicago.
Substantially all of our business is conducted through our operating partnership, Monogram Residential OP LP, a Delaware limited partnership (the “Operating Partnership”). Our wholly owned subsidiary, Monogram Residential, Inc., a Delaware corporation (“MR Inc.”), owns less than 0.1% of the Operating Partnership as its sole general partner. The remaining ownership interest in the Operating Partnership is held as a limited partner's interest by our wholly owned subsidiary, MR Business Trust, a Maryland business trust. As of
December 31, 2016
, the Operating Partnership has not issued any ownership interests to any noncontrolling interests in a so-called “UPREIT Structure,” but is organized in a manner that may facilitate an UPREIT Structure if advantageous to us in the future.
We have elected to be taxed, and currently qualify, as a REIT for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates. As of
December 31, 2016
, we believe we are in compliance with all applicable REIT requirements.
Our office is located at 5800 Granite Parkway, Suite 1000, Plano, Texas 75024, and our telephone number is (469) 250-5500.
Our shares of common stock have traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “MORE” since November 21, 2014.
Further discussion of our acquisition, development, disposition, co-investment, property management, financing and other strategies follows.
Acquisition Strategy
We focus on acquiring multifamily communities that we believe will produce increasing rental revenue and appreciate in value over our holding period. Our targeted acquisitions include existing core communities, as well as communities in various phases of development and lease up with the intent to transition those communities to core communities. Acquisitions provide us with immediate entries into markets, allowing more rapid earnings growth and rebalancing of our portfolio of assets than development investments. To date, we have made investments in individual multifamily communities. In the future, we plan to continue investing in individual multifamily communities and may pursue acquisitions of portfolios or other transactions. To date, all of our acquisitions have been for cash but as discussed above, we may acquire in an “UPREIT structure” or issue shares of our common stock. Also, as discussed below, we may also acquire interests through Co-Investment Ventures.
We invest in high quality communities in high barrier coastal markets, which have long-term diversified economic drivers. We may also invest in selected growth markets that have high job and rent growth fundamentals, such as Dallas, Austin, Houston, Denver and Atlanta. These markets may change over time as local market fundamentals change, particularly trends in demand/supply, rental growth and operating expenses. Within these markets, we primarily focus on urban, suburban-urban and high-density suburban areas with higher paying jobs, convenient transportation, retail and other lifestyle amenities. These target locations are typically in infill sites, which may include urban and suburban-urban areas, and are generally high density, lifestyle submarkets with walkable locations, near public mass transportation and employment. We believe these locations attract affluent renters, who are generally older than the typical renter demographic, and who tend to experience lower turnover and are subject to less price elasticity.
We may also incorporate into our investment portfolio lease up communities, generally recently completed multifamily developments that have not started or have just started leasing, which may provide for better pricing relative to stabilized assets and a more timely realization of operating cash flow than traditional development projects. Generally, we make additional non-recurring and revenue enhancing capital improvements to aesthetically improve the community and its amenities, when it allows us to increase rents, and stabilize occupancy with the goal of increasing yield and improving total returns.
We have internal acquisition professionals who source acquisition opportunities through relationships with local owners and brokers. Our investment process then follows established procedures that we believe are effective in evaluating the potential investment returns and underwrite the potential benefits and risks on an absolute basis and as compared to other investment options. Major factors that we consider include the macroeconomic growth fundamentals for the market, existing and projected operations, current and future cash flow, our ability to add or increase other revenue sources, existing and projected supply of competing communities, the effective operating age, the quality of construction and the attractiveness of the surrounding submarket. We also consider the synergies of the investment with our existing portfolio, including efficiencies with respect to our other investments in the market and whether we believe we will be able to hold a sufficient critical mass to optimize property management.
Development Strategy
We invest in developments where we believe we can create value and cash flow greater than through stabilized investments on a risk adjusted basis. We seek developments with characteristics similar to our stabilized multifamily investments, but at a lower cost per unit and in locations where there are limited acquisition opportunities. Our developments also allow us to build a portfolio that is tailored to our specifications for location with the latest amenities and operational efficiencies, which result in lower capital expenditures and maintenance costs. Investing in developments further allows us to maintain a younger portfolio.
We have in-house development capabilities which include the expertise to execute developments on our own or through third-party developers, which may include strategic joint ventures with national or regional real estate developers and owners (“Developer Partners”). When we utilize third-party developers, we expect to be the controlling owner, partnering with experienced developers, but maintaining control over construction, operations, financing and disposition. Similar to our acquisition strategy, utilizing local developers, rather than establishing our own regional offices, provides us with a broader and more scalable approach to sourcing and executing developments with less fixed overhead. Our developer arrangements also generally include guaranteed maximum construction contracts (“GMAX”) which helps us manage our development and construction risks. However, whether developed in-house or through third-party developers, we maintain direct involvement in the development of each project in order to ensure that the finished product is suitable as a long-term investment and includes the kinds of upgrades that provide energy and operational efficiencies.
In selecting development investment opportunities, we generally focus on sites that are already entitled and environmentally assessed. While entitled land carries a higher upfront cost, acquiring ready to develop land significantly shortens the development time cycle, and reduces the associated carrying costs and exposure to materials and labor cost escalations as well as the development risks. Because of our approach to development as described above, the average time from closing on the land to the start of vertical construction for these development projects has historically averaged approximately six months. As of
December 31, 2016
, all of our current developments are entitled.
Similar to acquisitions, our development underwriting evaluates investments on a risk adjusted basis. We seek development opportunities that provide sufficient yield spreads at stabilization to the yields for acquisitions to account for the additional development risks as well as total returns that are accretive relative to our portfolio and cost of capital. In many cases, recent cost increases have compressed development spreads as compared to acquisitions and in many cases core urban developments, particularly outside of the west coast, are generating lower risk adjusted returns. We will continue to pursue development opportunities in our target markets if the opportunities meet our risk adjusted return expectations and align with our portfolio and capital allocation plans.
We engage reputable and experienced general contractors, architects and other design professionals for our development projects. Our development team monitors each project’s progress in order to ensure that our projects achieve the high quality of construction consistent with our targeted resident profile, and are generally completed on time and in line with budget. Our process is also predicated on securing GMAX construction contracts that are based upon complete plans and specifications, rather than design build where plans are finalized during construction. This not only reduces our exposure to cost overruns but also encourages our general contractors to lock in construction costs by buying out the underlying materials and subcontractors as soon as practicable. As of
December 31, 2016
, for our remaining projects under vertical development, substantially all of the hard construction costs have been bought out, reducing potential future cost exposure. Our development process further coordinates with property management to ensure a smooth and seamless transition into leasing and operations.
Disposition Strategy
We continuously evaluate total return, net operating performance and growth prospects for our investments and markets as compared to alternative investments, and will sell assets and redeploy capital, reduce leverage or return capital to
our shareholders as warranted. Other factors we consider include the critical mass of our operating communities in the market, overall fundamentals for the market and the age of the multifamily community. We may look to dispose of communities before major capital improvements are required, as well as when we see increasing risk of competition, changing submarket fundamentals and/or in consideration of compliance with applicable federal REIT tax requirements.
We have internal professionals who utilize relationships with local owners and brokers to source dispositions. Sales agreements generally provide for a due diligence period by the seller with an amount of earnest money that is binding at the completion of the due diligence period.
In structuring dispositions, we consider various factors including federal REIT tax requirements, ownership and form of consideration. Accordingly, our dispositions may be structured as fee simple transactions, entity-level sales or like-kind tax exchanges, which generally involve using the proceeds to invest in other multifamily investments. We may also sell investments individually or in bulk. To date, all of our dispositions have been for cash, where we have not provided any seller financing.
Co-Investment Strategy
We enter into strategic Co-Investment Ventures with institutional investors which we believe offer efficient, cost effective capital for growth. This institutional investor capital generally does not carry priority or minimum returns and in some arrangements, we receive promoted interests if certain total returns are achieved. Equity from joint ventures allows us to expand the number and size of our investments, allowing us to obtain a more diversified portfolio and participation in investments that we may otherwise have deemed disproportionately too large for our current portfolio. In addition, these joint ventures may provide a very cost effective internal source of growth or capital re-allocation, if we elect to purchase or sell all of our partner’s or our ownership interest in the underlying multifamily communities. Joint ventures also allow us to earn fees for asset management, development and property management, which offset portions of our general and administrative expenses. These institutional joint venture arrangements include relatively standard market distributable cash flow provisions and are structured so that we are the manager of the Co-Investment Venture subject to certain approval rights retained by our partners.
We are the managing member for each of the separate Co-Investment Ventures. Our two institutional Co-Investment Venture partners are Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund and its affiliates, a real estate investment vehicle for Dutch pension funds (“PGGM” or the “PGGM Co-Investment Partner”), and Milky Way Partners, L.P. (the “MW Co-Investment Partner”), the primary partner of which is Korea Exchange Bank, as Trustee for and on behalf of National Pension Service (acting for and on behalf of the National Pension Fund of the Republic of Korea Government) (“NPS”). We refer to our Co-Investment Ventures with the PGGM Co-Investment Partner as “PGGM CO-JVs,” and those with the MW Co-Investment Partner as “MW CO-JVs.”
As further explained in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of this Annual Report on Form 10-K, our arrangements with PGGM provide for additional sources of capital, fees and promoted interests over the term of the joint venture. Accordingly, while we may sell certain PGGM CO-JVs or buyout PGGM’s CO-JV interest from time to time, in whole or in part, we expect to continue to enter into additional CO-JVs with PGGM. On the other hand, while our MW CO-JVs do provide fee income, some degree of operational efficiency and the possibility of purchasing their interests, they do not generally provide additional capital. Accordingly, we expect the aggregate number of our MW CO-JVs to decline over time as communities are sold or we buy out our partner’s ownership interest in the underlying multifamily communities.
When applicable, we refer to individual investments by referencing those with Developer Partners as “Developer CO-JVs.” Certain PGGM CO-JVs that also include Developer Partners are referred to as PGGM CO-JVs. We share with the PGGM Co-Investment Partner in all benefits and obligations of the Developer CO-JVs that are also PGGM CO-JVs.
We utilize Developer CO-JVs primarily for the Developer Partners’ development services, which allows us a cost effective structure to source and complete multifamily developments. In our structure, Developer Partners have limited initial capital investment, which is generally fully or partially reimbursed during the course of the development. The Developer Partners provide development cost overrun guarantees and receive back end interests that provide promoted payments once we (including PGGM in the case of a PGGM CO-JV) receive a return of all invested capital plus a preferred return. Developer Partners also generally have an option to put their developer interest at a fixed price after approximately one year after substantial completion. Developer CO-JVs generally also have mark to market options, usually only available after the seventh year after formation of the Developer CO-JV, which if elected by either party, would generally give us the option to purchase
the Developer Partners interest or sell the underlying multifamily community. Accordingly, we generally do not consider Developer CO-JVs as a significant source of capital.
The table below presents a summary of our Co-Investment Ventures as of
December 31, 2016
and
2015
. The effective ownership ranges are based on our participation in distributable operating cash from our investment in the underlying multifamily community. This effective ownership is indicative of, but may differ over time from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture. Unless otherwise noted, all of our Co-Investment Ventures are reported on the consolidated basis of accounting.
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December 31, 2016
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December 31, 2015
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Co-Investment Structure
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Number of Multifamily Communities
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Our Effective
Ownership
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Number of Multifamily Communities
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Our Effective
Ownership
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PGGM CO-JVs (a)
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21
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50% to 70%
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23
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50% to 70%
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MW CO-JVs
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14
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55%
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14
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55%
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Developer CO-JVs
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2
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100%
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2
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100%
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Total CO-JV Multifamily Communities (b)
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37
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39
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(a)
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As of
December 31, 2016
and
2015
, the PGGM CO-JVs include Developer Partners in
18
multifamily communities.
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(b)
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Total investments in multifamily communities were
51
and
56
as of
December 31, 2016
and
2015
, respectively.
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Property Management Strategy
We seek to achieve long-term earnings growth through our internal property management team and the strength of our operating platform. We execute this strategy by employing:
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a focus on revenue management utilizing rent and occupancy optimization technology platforms;
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a brand built on a “Tailored Living” experience, a boutique-style service platform that emphasizes the unique high- end nature of our communities while maintaining individual personality and characteristics of each local market and consistency in quality of resident experience;
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a capital improvement strategy that enhances revenues, reduces operating costs and maintains the quality of each community;
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employment of business intelligence and performance analytics to measure and monitor key operating metrics; and
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a high level of resident satisfaction as measured by third-party benchmarking, reputation management and resident feedback.
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Our corporate property management team is comprised of multifamily industry veterans with local market expertise. On-site property management teams at all levels as well as regional supervisors are incentivized with bonus programs tied to revenue and expense performance results, resident satisfaction, and operating excellence metrics.
Our web-based technology applications support our marketing platform by tracking resident prospects from first contact to lease, measuring effectiveness of generating traffic and closing, and providing on-line access to our customers 24/7 to lease apartments, execute renewals, submit service requests, make payments electronically and receive communications electronically. Our on-site management personnel provide high quality service, responsiveness and maintenance to enhance the resident experience. These include concierge, package delivery systems, trash pick-up, social events, business centers, internet cafes and other tailored amenities.
Our comprehensive education and training platform contributes to the quality and consistency of operations at a national level and supports the development of bench strength on our team.
Financing Strategy
The objective of our financing strategy is to maintain a strong balance sheet and provide liquidity to manage and grow the Company. We plan to achieve these objectives generally through limiting leverage as a percent of gross assets to not more than 55%, and utilizing secured and unsecured structures with an extended maturity ladder. We currently are meeting our short-term liquidity needs through our operating cash flow and borrowings under our credit facility. We currently expect to refinance our long-term debt and construction financings at or prior to their maturity dates at similar principal amounts. However, we will consider different structures, terms and maturities based on then current market pricing and availability. These structures could include single and pooled asset mortgages and debt facilities, which may be secured or unsecured.
For our development program, we expect to utilize our credit facility and individual project construction financing, generally at 45% to 60% of cost either with conventional bank construction financing or longer term construction financing. Conventional construction financing is expected to be at floating rates which allow for greater flexibility in refinancing. The base terms of these construction borrowings typically extend through the projected stabilization of the development, which may include one or two 12 month extension options. We may also obtain longer term construction financing that would extend past the stabilization period, with terms of seven to 10 years, when we can lock in favorable financing. We do expect to have increased borrowings related to our development program, since most of our equity requirements have already been met, and we are now drawing down on our construction loans. All of our current developments have existing construction financing commitments, under which we expect to incur additional consolidated borrowings of approximately
$100 million
subsequent to
December 31, 2016
to complete our development program. For these developments as well as future developments, we may also access other sources of capital, including existing cash balances, credit facility and new construction financings. Accordingly, our use of consolidated borrowings may change over time.
Additionally, we may fund some of our future investments with Co-Investment Venture arrangements as discussed above. In addition to diversification and fee opportunities, our Co-Investment Ventures also allow us to preserve our capital while continuing to invest in and operate the portfolio.
As a part of our long-term finance plans, we may consider other debt and equity offerings, refinancings and dispositions. In evaluating these options, we may consider our current and projected cost of equity versus debt, our debt maturity schedule, liquidity requirements and the other factors discussed above.
Other Strategies and Activities
We may deploy other strategies to increase total returns and shareholder value. As with other investments, we evaluate whether these investments produce sufficient risk adjusted returns, are accretive to our cost of capital and are consistent with a strong balance sheet. Over the last few years, we saw an opportunity to invest in development mezzanine loans that were not being met by other capital providers, which provided annualized cash returns in excess of 14%. As development capital has generally returned to the multifamily sector, these investment opportunities have not been as readily available at the returns that we require. Accordingly, we generally expect our current outstanding mezzanine loans to be paid off near maturity and not replaced, or if they are, they may be replaced at lower levels than our current investments.
2016
Highlights
Key transactions and highlights for
2016
included:
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Increased total consolidated rental revenue by
17.9%
from
$238.1 million
in
2015
to
$280.7 million
in
2016
, and same store comparable total rental revenues for our multifamily communities by
2.3%
from
$188.9 million
in
2015
to
$193.3 million
in
2016
;
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Our investment activity in
2016
:
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Sold two stabilized multifamily communities for a combined sales price of
$122.6 million
, before closing costs, resulting in consolidated gains on sales of real estate of
$43.6 million
;
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Invested
$97.0 million
in our development program, completing construction of
four
developments with
1,103
units;
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Achieved stabilization of five multifamily communities, increasing our total stabilized communities to
43
;
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Obtained
$171.7 million
in new permanent mortgage financing and new construction financing with a total commitment of
$104.4 million
;
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Declared total distributions of
$50.0 million
, an annual rate of
$0.30
per share (
$0.075
per share on a quarterly basis); and
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Reported net income for
2016
of
$7.9 million
, a decrease from
2015
reported net income of
$66.7 million
, where a substantial portion of the decrease related to decreased gains from sales of multifamily communities of
$39.4 million
. Funds from operations (“FFO”) decreased by
9.6%
from
$64.4 million
in
2015
to
$58.2 million
in
2016
. (See Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for a discussion regarding FFO, including reconciliations to net income in accordance with U.S. generally accepted accounting principles (“GAAP”)).
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Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.
We utilize a taxable REIT subsidiary (“TRS”) to engage in activities that REITs may be prohibited from performing, including property and asset management and other services and the conduct of certain nonqualifying real estate transactions. Our TRS is a wholly owned subsidiary of the Operating Partnership and is taxable as a regular corporation, and therefore, subject to federal, state and local income taxes. For the year ended
December 31, 2016
, our TRS did not recognize any significant income tax expense/(benefit) related to the taxable income of the TRS.
Competition
We are subject to significant competition in seeking real estate investments, capital, including both equity and debt capital, and residents. We compete with many third parties engaged in real estate investment activities including other REITs, regional and national developers, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. We also face competition from other real estate development, lending and investment programs for investments that may be suitable for us. Some of our competitors have substantially greater financial and other resources than we have. They also may have competitive advantages related to, among other things, cost of capital, governmental regulation, access to real estate investments and resident services.
Regulations
Our investments are subject to various federal, state and local laws, ordinances and regulations, including, among other things, zoning regulations, construction and occupancy permits, construction codes, land use controls, environmental controls relating to air and water quality, noise pollution and indirect environmental impacts (such as increased motor vehicle activity), rent controls, business licenses and fair housing regulations. We believe that we have all permits, licenses and approvals necessary under current law to operate our investments.
Environmental
As an owner and developer of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on communities in which we hold an interest, or on communities that may be acquired directly or indirectly in the future.
Employees
As of January 31, 2017, we have 425 employees.
Industry Segment
Our current business consists of investing in, developing and operating multifamily communities. Substantially all of our consolidated net income is from multifamily communities and related investments that we wholly own or own through joint ventures. Our management evaluates operating performance on an individual property and/or joint venture level. However, as each of our wholly owned communities and joint ventures has similar economic characteristics, we are managed on an enterprise-wide basis with one reportable segment.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-202-551-8090 for further information on the operation of the Public Reference Room. Our SEC filings are also available to the public from the SEC's website at
www.sec.gov
.
We maintain a website at www.monogramres.com. Information on our website is not incorporated by reference herein and is not a part of this Annual Report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to the Securities Exchange Act of 1934 are available free of charge in the "Investor Relations" section of our website as soon as reasonably practicable after the reports are filed with or furnished to the SEC. We intend to disclose on our website any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics that apply to any of our directors and executive officers that would otherwise be required to be disclosed under the rules of the SEC or the NYSE.
Item 1A. Risk Factors
The factors described below represent our principal risks. Our stockholders or potential investors may be referred to as “you” or “your” in this Item 1A, “Risk Factors” section.
This Item 1A includes forward-looking statements. You should refer to our discussion of the qualifications and limitations on forward-looking statements in the subsection entitled “Forward-Looking Statements” included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
The concentration of our investments in the multifamily sector may leave our profitability vulnerable to a downturn or slowdown in such sector.
Our investments are concentrated in the multifamily sector. As a result, we are subject to risks inherent in investments in multifamily communities and real estate-related assets. The potential effects on our revenues, and as a result, on cash available for distribution to our stockholders, resulting from a downturn or slowdown in the multifamily sector could be more pronounced than if our investments were more diversified.
General economic and regulatory changes or local conditions in the markets in which we own multifamily communities or in which the collateral securing our loans is located may significantly affect occupancy or rental rates and our operating results.
Our operating results will be subject to risks generally incident to the ownership of real estate and to local conditions in the markets in which we own multifamily communities or in which the collateral securing our loans is located. The risks that may adversely affect our operating results include the following:
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changes in general economic or local conditions, including layoffs, plant closings, industry slowdowns, relocations of significant local employers and other events negatively impacting local employment rates and the local economy;
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changes in supply of, or demand for, similar or competing communities in an area;
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a decline in household formation;
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the inability or unwillingness of residents to pay rent increases;
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rent control or rent stabilization laws or other housing laws, which could prevent us from raising rents;
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changes in interest rates and availability of permanent mortgage funds that may render the sale of a community difficult or unattractive;
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the illiquidity of real estate investments generally;
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changes in tax, real estate, environmental and zoning laws;
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availability of low interest mortgages for single family home buyers;
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geopolitical instability;
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residents' perceptions of the safety, convenience and attractiveness of our communities and the neighborhoods where they are located; and
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our ability to provide adequate management, maintenance and insurance.
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For these and other reasons, we cannot assure you that we will be profitable or that we will realize growth in the value of our investments.
Competition in the multifamily market may adversely affect our operations and the rental demand for our multifamily communities.
There are numerous housing alternatives that compete with our multifamily communities in attracting residents. These include other multifamily communities, condominiums and single-family homes that are available for rent in the markets in which our multifamily communities are located. If the demand for our multifamily communities declines or if competitors develop and/or acquire competing multifamily communities, rental rates may drop, which may have a material adverse effect on our financial condition and results of operations. We also face competition from other REITs, businesses and other entities in the acquisition, development and operation of multifamily communities. This competition may result in an increase in costs and prices of multifamily communities that we acquire and/or develop.
Our failure to integrate acquired communities and new personnel could create inefficiencies and reduce the return of your investment.
To grow successfully, we must be able to apply our experience in managing real estate to a larger number of communities. In addition, we must be able to integrate new management and operations personnel as our organization grows in
size and complexity. Failures in either area may result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
Short-term multifamily community leases expose us to the effects of declining market rent and could adversely affect our ability to make cash distributions to our stockholders.
Substantially all of our multifamily community leases are for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms, which could adversely affect our ability to make cash distributions to our stockholders.
Our investments are dependent on residents for revenue, and lease terminations could reduce our ability to make distributions to our stockholders.
The success of our investments in apartment communities is materially dependent on the financial stability of our residents. Lease payment defaults by residents could cause us to reduce the amount of distributions to our stockholders. A default by a significant number of residents on their lease payments to us would cause us to lose the revenue associated with such leases and, if the community is subject to a mortgage, to find an alternative source of revenue to meet mortgage payments and prevent a foreclosure. In the event of a lease default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our community. If a substantial number of our residents decide not to renew their leases upon expiration, we may not be able to relet their units. Even if the residents do renew or we can relet the units, the terms of renewal or reletting may be less favorable than current lease terms. If we are unable to promptly renew the leases or relet the units, or if the rental rates upon renewal or reletting are significantly lower than expected rates, then our results of operations and financial condition will be adversely affected. Additionally, loans that we make generally will relate to real estate. As a result, the borrower's ability to repay the loan may be dependent on the financial stability of our residents leasing the related real estate.
We may be required to make significant capital expenditures to improve our residential units in order to retain and attract residents or to sell, upgrade or reposition an apartment community in the market.
When residents do not renew their leases or otherwise vacate their space, in order to attract replacement residents, or to attract new residents, we may be required to expend funds for capital improvements to the vacated residential units. In addition, we may require substantial funds to renovate an apartment community in order to sell it, upgrade it or reposition it in the market. If we have insufficient capital reserves, we will have to obtain financing from other sources. A lender also may require escrow of capital reserves in excess of any established reserves. If these reserves or any reserves otherwise established are designated for other uses or are insufficient to meet our cash needs, we may have to obtain financing from either affiliated or unaffiliated sources to fund our cash requirements. We cannot assure you that sufficient financing will be available or, if available, will be available on economically feasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated for specific uses and may not be available for capital purposes such as future capital improvements. Additional borrowing for capital needs and capital improvements will increase our interest expense, and therefore our financial condition and our ability to make cash distributions to our stockholders may be adversely affected.
Communities that have significant vacancies could be difficult to sell, which could diminish the return on your investment.
A community may incur vacancies either by the continued default of residents under their leases or the expiration of leases. If vacancies continue for a long period of time, we may suffer reduced revenues resulting in decreased distributions to our stockholders. In addition, the resale value of the community could be diminished because the market value of a particular community will depend primarily upon the value of the leases of such community.
Difficulty of selling multifamily communities could limit flexibility.
Federal tax laws may (subject to a statutory “safe harbor”) limit our ability to earn a gain on the sale of a community (unless we own it through a subsidiary which will incur a taxable gain upon sale) if we are found to have held, acquired or developed the community primarily with the intent to resell the community or otherwise hold the asset as a “dealer,” and this limitation may affect our ability to sell communities without adversely affecting returns to our stockholders. In addition, real estate in our markets can at times be difficult to sell quickly at prices we find acceptable. These potential difficulties in selling real estate in our markets may limit our ability to change our portfolio or dispose of communities in our portfolio promptly in response to changes in economic or other conditions.
We may be unable to sell communities on advantageous terms
or to redeploy the proceeds in accordance with our business strategy.
We may sell communities to third parties as conditions warrant and as part of our business strategy. However, our ability to sell communities on advantageous terms depends on factors beyond our control, including competition from other sellers and the availability of attractive financing for potential buyers. If we are unable to sell properties on favorable terms or to redeploy the proceeds in accordance with our business strategy, then our financial condition, results of operations, cash flow and ability to pay distributions on, and the market value of, our shares of common stock could be adversely affected.
Our operating results may be negatively affected by potential development and construction delays and result in increased costs and risks, which could diminish the return on your investment.
Expansion, development and redevelopment projects entail the following considerable risks which can result in increased costs of a project or loss of our investment and could diminish the return on your investment:
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We may delay or abandon executing on development and redevelopment opportunities for a number of reasons, including changes in local market rental rates or other operating conditions, unsatisfactory performance by our developer partners or increases in construction or financing costs, and, as a result, we may fail to recover expenses already incurred in exploring these opportunities.
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The construction costs of a development or redevelopment community, due to factors such as cost overruns, design changes and timing delays arising from a lack of availability of materials and labor, weather conditions and other factors outside of our control, as well as financing costs, may exceed original estimates.
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Occupancy rates and rents at a new development or redevelopment community may fail to meet our original expectations or be sufficient to fully offset the effects of any increased construction or reconstruction costs for a number of reasons beyond our control.
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We may incur liabilities from third parties during the development or redevelopment process, including in connection with managing existing improvements on the site prior to tenant terminations and demolition (such as with respect to commercial space) or in connection with providing services to third parties (such as the construction of shared infrastructure or other improvements).
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We may not complete construction and leasing of a community on schedule, which may result in increased debt service expenses and construction or renovation costs, and could give prospective residents the right to terminate preconstruction leases for a newly developed project.
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We will be subject to risks relating to uncertainties associated with rezoning for development and environmental concerns of governmental entities and/or community groups.
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Our developers may fail to control construction costs or to build in conformity with plans, specifications, building codes and timetables, which could necessitate legal action by us to rescind the purchase or the construction contract or to compel performance. Performance may also be affected or delayed by conditions beyond the developer's control.
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We may incur additional risks when we make periodic progress payments or other advances to such developers prior to completion of construction.
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In addition, we may invest in unimproved real property or loans on unimproved property. Returns from development of unimproved communities are also subject to risks and uncertainties associated with rezoning the land for development and environmental concerns of governmental entities and/or community groups.
Unbudgeted capital expenditures or cost overruns for ongoing or planned development or redevelopment projects could adversely affect business operations and cash flow.
If capital expenditures for ongoing or planned development or redevelopment projects exceed our expectations or if such additional capital expenditures are to be reimbursed by the general contractor or the developer partner and are not, the additional cost of these expenditures could have an adverse effect on our business operations and cash flow. Such additional costs could cause us to be in default under construction financing agreements, which may require us to pay off all or a portion of the financing. In any of these situations, we might not have access to funds on a timely basis to pay the unexpected expenditures or obligations.
Further, we may guarantee all or a portion of the construction financing, including the obligation to pay interest on the financing until the development project is completed, leased up and permanent financing is obtained or the construction loan is otherwise paid. Unexpected delays in the completion of development or redevelopment projects, unexpected cost increases or budget overruns could also have a significant adverse impact on business operations and cash flow.
Development projects in which we invest may not be completed successfully or on time, and guarantors of the projects may not have the financial resources to perform their obligations under the guaranties they provide.
We may make equity investments in, acquire options to purchase interests in or make mezzanine loans to the owners of multifamily development projects. Our return on these investments is dependent upon the projects being completed
successfully, on budget and on time. We may rely upon the substantial net worth of the contractor or developer or a guarantee accompanied by financial statements showing a substantial net worth provided by an affiliate of the entity entering into the construction or development contract as an alternative to a completion bond or performance bond. For a particular investment, we may obtain guaranties that the project will be completed at a specified time, on budget and in accordance with the plans and specifications. However, we may not obtain such guaranties and cannot ensure that the guarantors will have the financial resources to perform their obligations under the guaranties they provide. On a more limited basis, we may also utilize completion or performance bonds to help ensure performance by the developers. We intend to manage these risks by ensuring, to the best of our ability, that we invest in projects with reputable, experienced and resourceful developers. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to you will be adversely affected.
Developers of the projects in which we invest are exposed to risks, which could increase our risk of loss in the event a developer fails to perform its obligations to us.
The developers of the projects in which we invest are exposed to risks not only with respect to our projects, but also with respect to other projects in which they are involved. A developer's obligations on another project could cause it financial hardship and even lead to bankruptcy, which could lead to a default on one of our projects. A default by a developer in respect of one of our multifamily development project investments, or the bankruptcy, insolvency or other failure of a developer for one of such projects, may require that we determine whether we want to assume the senior loan, take over development of the project, find another developer for the project, or sell our interest in the project. Such developer failures could result in our inability to collect on amounts under our development agreements, including GMAX provisions, delay efforts to complete or sell the development project and could ultimately preclude us from full realization of our anticipated returns. Such events could cause a decrease in the value of our assets and compel us to seek additional sources of liquidity, which may not be available, in order to hold and complete the development project through stabilization.
In some cases, in order to obtain financing on a development project, we may be asked to provide recourse, completion or payment guarantees to the lender. If the developer fails to complete the project, if the project is delayed or if the completed project fails to generate the expected cash flow, we may be liable under a loan guaranty. The occurrence of any such events may have a negative impact on our results of operations and our ability to pay distributions.
Risks associated with co-ownership arrangements with our co-venture partners, co-tenants or other partners.
As of December 31, 2016,
37
of our
51
investments in multifamily communities have been made through Co-Investment Ventures. In the future, we may enter into additional joint ventures or other co-ownership arrangements for the acquisition, development or improvement of communities as well as the acquisition of real estate-related investments. We may also purchase and develop communities in joint ventures or in partnerships, co-tenancies or other co-ownership arrangements with the sellers of the communities, affiliates of the sellers, developers or other persons. Such investments may involve risks not otherwise present with other forms of real estate investment, including the possibility that our partner in an investment might be unable to or otherwise refuse to make capital contributions when due; that we may incur liabilities as the result of action taken by our partner; that our partner might at any time have economic or business interests or goals that are inconsistent with ours; and that our partner may be in a position to take action contrary to our instructions or requests. Frequently, we and our partner may each have the right to trigger a buy/sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Any of these events could have an adverse effect on our results of operations.
Under certain circumstances, assets owned by a subsidiary REIT may be required to be disposed of via a sale of capital stock rather than an asset sale.
Under certain circumstances, assets owned by a subsidiary REIT may be required to be disposed of via a sale of capital stock rather than as an asset sale by that subsidiary REIT, which may limit the number of persons willing to acquire indirectly any assets held by that subsidiary REIT. As a result, we may not be able to realize a return on our investment in a joint venture, such as a PGGM CO-JV or MW CO-JV, at the time or on the terms we desire.
If we have insufficient capital resources to exercise an option to purchase, or comply with a put right that requires us to purchase, an interest of one of our joint venture partners, our results from operations may be adversely affected.
We have, and may have in the future, interests under joint venture agreements that are subject to buy/sell rights. If we are not able to maintain sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase, or satisfy an obligation to purchase, an interest of a co-venture partner, we may be forced to forego an investment opportunity or sell our interest when we would otherwise prefer not to sell the interest, and may be exposed to potential liability for a breach of an obligation under a joint venture agreement. Any of the foregoing events could have an adverse effect on our results of operations.
The form, timing and/or amount of distributions in future periods may vary and be impacted by economic and other considerations.
The form, timing and/or amount of cash distributions to our stockholders will be declared at the discretion of our board of directors and will depend on actual cash from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and other factors as our board of directors may consider relevant. Our board of directors may modify our distribution policy from time to time.
Our revenue and net income may vary significantly from one period to another due to investments in communities in various phases of development, redevelopment or repositioning, which could increase the variability of our cash available for distributions.
We have made and may continue to make investments in communities in various phases of development, redevelopment or repositioning, which may cause our revenues and net income to fluctuate significantly from one period to another. Projects do not produce revenue while in development or redevelopment. During any period when the number of our projects in development or redevelopment, communities in lease up or our communities with significant capital requirements increases without a corresponding increase in stable revenue-producing communities, our revenues and net income will likely decrease. Many factors may have a negative impact on the level of revenues or net income produced by our portfolio of investments, including higher than expected construction costs, failure to complete projects on a timely basis, failure of the communities to perform at expected levels upon completion of development or redevelopment, and increased borrowings necessary to fund higher than expected construction or other costs related to the project. Further, our net income and stockholders' equity could be negatively affected during periods with large portfolio acquisitions, which generally require large cash outlays and may require the incurrence of additional financing. Any such reduction in our revenues and net income during such periods could cause a resulting decrease in our cash available for distributions during the same periods.
We may have to make decisions on whether to invest in certain communities or real estate-related investments prior to receipt of detailed information on the investment.
In order to effectively compete for the acquisition of communities and other real estate-related investments in the current market, we may be required to make investment decisions and be required to make substantial non-refundable deposits prior to the completion of our analysis and due diligence on a community or real estate-related asset investments. In such cases, the information available to us at the time of making any particular investment decision, including the decision to pay any non-refundable deposit and the decision to consummate any particular investment, may be limited, and we may not have access to detailed information regarding any particular investment community, such as physical characteristics, environmental matters, zoning regulations or other local conditions affecting the investment community. Therefore, no assurance can be given that we will have knowledge of all circumstances that may adversely affect an investment. In addition, we may rely upon independent consultants in connection with their evaluation of proposed investment communities, and no assurance can be given as to the accuracy or completeness of the information provided by such independent consultants.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage may adversely affect your returns.
We maintain comprehensive insurance coverage for general liability, property and other risks on all of our apartment communities. However, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, pollution, environmental matters or extreme weather conditions such as hurricanes, floods and snowstorms that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential terrorist acts could sharply increase the premiums we pay for coverage against property and casualty claims. Mortgage lenders may require that specific coverage against terrorism be purchased by property owners as a condition for providing mortgage, bridge or mezzanine loans. It is uncertain whether such insurance policies will continue to be available, or be available at reasonable cost, which could inhibit our ability to finance or refinance our communities. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. In addition, the nature of the activities at certain communities we may acquire may expose us and our operators to potential liability for personal injuries and property damage claims. We cannot assure you that we will have adequate coverage for any such losses. In the event that any of our communities incurs a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss. In addition, other than any potential capital reserves or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged community, and we cannot assure you that any such sources of funding will be available to us for such purposes in the future. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in decreased distributions to stockholders.
We are subject to risks from natural disasters such as earthquakes and severe weather.
Natural disasters and severe weather such as earthquakes, tornadoes or hurricanes may result in significant damage to our communities. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have geographic concentration of exposures, a single catastrophe (such as an earthquake, especially in our Northern California or Southern California markets) or destructive weather event (such as a hurricane, especially within our South Florida or Mid-Atlantic markets) affecting a region may have a significant negative effect on our financial condition and results of operations. As of December 31, 2016, we owned or had an ownership interest in communities that are located in the San Francisco Bay Area, Southern California, Florida and the Washington, D.C. Area. Our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather.
We are also exposed to risks associated with inclement winter weather, particularly in our New England, Mid-Atlantic and Colorado markets in which many of our communities are located, including increased costs for the removal of snow and ice as well as from delays in construction. Inclement weather also could increase the need for maintenance and repair of our communities.
Climate change may adversely affect our business.
To the extent that climate change does occur, we may experience extreme weather and changes in precipitation and temperature, all of which may result in physical damage or a decrease in demand for our communities located in these areas or affected by these conditions. Should the impact of climate change be material in nature or occur for lengthy periods of time, our financial condition or results of operations would be adversely affected.
In addition, changes in federal and state legislation and regulation on climate change could result in increased capital expenditures to improve the energy efficiency of our existing communities and could also require us to spend more on our new development communities without a corresponding increase in revenue. For example, various federal, regional and state laws and regulations have been implemented or are under consideration to mitigate the effects of climate change caused by greenhouse gas emissions. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency and waste management. The imposition of such requirements in the future could increase the costs of maintaining or improving our existing communities or developing new communities.
The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our income and the cash available for distributions.
All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Many environmental laws restrict the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. These laws and regulations generally govern wetlands protection, storm water runoff, wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Such environmental laws often provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Some of these laws and regulations may impose joint and several liability on residents, owners or operators for the costs of investigation or remediation of contaminated communities, regardless of fault or the legality of the original disposal. Noncompliance with such laws and regulations may therefore subject us to fines and penalties. We can provide no assurance that we will not incur any material liabilities as a result of noncompliance with these laws and regulations.
High costs associated with the investigation or remediation of previously undetected environmentally hazardous conditions may adversely affect our operating results.
We are subject to various federal, state and local environmental and public health laws, regulations and ordinances.
Under various federal, state and local environmental and public health laws, ordinances and regulations, we may be required to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at our communities (including in some cases natural substances such as methane and radon gas). We may also be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the contamination. These laws often impose liability whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of investigation, removal or remediation and of defending against claims of environmental liability or paying personal injury claims could be substantial and may exceed any insurance coverage that we have for such events. The presence of such
substances, or the failure to properly remediate the contamination, may adversely affect our ability to borrow against, sell or rent the affected community. In addition, some environmental laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs it incurs as a result of the contamination.
We may face risks relating to chemical vapors and subsurface contamination.
We are also aware that environmental agencies and third parties have, in the case of certain properties with on-site or nearby contamination, asserted claims for remediation, property damage or personal injury based on the alleged actual or potential intrusion into buildings of chemical vapors or volatile organic compounds from soils or groundwater underlying or in the vicinity of those buildings or in nearby properties. In addition, some of our retail tenants, such as dry cleaners, may operate businesses which may emit chemical vapors or otherwise use chemicals subject to environmental regulation. We can provide no assurance that we will not incur any material liabilities as a result of vapor intrusion at our communities.
We may face risks relating to microbial matter growth.
Microbial matter growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Although the occurrence of microbial matter at multifamily and other structures, and the need to remediate such microbial matter, is not a new phenomenon, there has been increased awareness in recent years that certain microbial matters may produce airborne toxins or irritants and exposure to such microbial matter may cause a variety of adverse health effects and symptoms, including allergic or other reactions. If a significant microbial matter problem were to arise at one of our communities, we could be required to undertake a costly remediation program to contain or remove the microbial matter from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage, thereby reducing our operating results.
Our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient.
Operating communities or land being considered for potential acquisition by us are subjected to at least a Phase I or similar environmental assessment prior to closing, which generally does not involve invasive techniques such as soil or ground water sampling. A Phase II assessment is conducted if recommended in the Phase I report. These assessments may not identify all potential environmental liabilities. Moreover, we may in the future discover adverse environmental conditions at our communities, including at communities we acquire in the future, which may have a material adverse effect on our business, assets, financial condition or results of operations. In connection with our ownership, operation and development of communities, from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which we may be able to rely if environmental liability arises from the contamination, or if remediation costs exceed estimates. We can provide no assurance, however, that all necessary remediation actions have been or will be undertaken at our communities or that we will be indemnified, in full or at all, in the event that environmental liability arises.
Our costs associated with and the risk of failing to comply with the Americans with Disabilities Act and the Fair Housing Act may affect cash available for distributions.
Our communities and the communities underlying our investments are expected to be subject to the Americans with Disabilities Act of 1990, as amended (“Disabilities Act”). Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act's requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire communities that comply with the Disabilities Act or place the burden on the seller or other third party to comply with such laws. However, we cannot assure you that we will be able to acquire communities or allocate responsibilities in this manner. If we cannot, our funds used for compliance with these laws may affect cash available for distributions and the amount of distributions to you.
The multifamily communities in which we invest must comply with Title III of the Disabilities Act, to the extent that such communities are deemed “public accommodations” and/or “commercial facilities” as defined by the Disabilities Act. Compliance with the Disabilities Act could require removal of structural barriers to handicapped access in certain public areas of our multifamily communities where such removal is readily achievable. The Disabilities Act does not, however, consider residential communities, such as multifamily communities to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as the leasing office, are open to the public.
We also must comply with the Fair Housing Amendment Act of 1988 (“FHAA”), which requires that multifamily communities first occupied after March 13, 1991 be accessible to handicapped residents and visitors. Compliance with the
FHAA could require removal of structural barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily communities for compliance with the requirements of the FHAA and Disabilities Act and an increasing number of substantial enforcement actions and private lawsuits have been brought against multifamily communities to ensure compliance with these requirements. Noncompliance with the FHAA and Disabilities Act could result in the imposition of fines, awards of damages to private litigants, payment of attorneys' fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.
We will incur mortgage indebtedness and other borrowings, which will increase our business risks.
We do not intend to incur mortgage debt on a particular community unless we believe the community's projected cash flow is sufficient to service the mortgage debt. However, if there is a shortfall in cash flow, then the amount available for distributions to stockholders may be affected. In addition, incurring mortgage debt increases the risk of loss because (1) loss in investment value is generally borne entirely by the borrower until such time as the investment value declines below the principal balance of the associated debt and (2) defaults on indebtedness secured by a community may result in foreclosure actions initiated by lenders and our loss of the community securing the loan that is in default. For tax purposes, a foreclosure of any of our communities would be treated as a sale of the community for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the community, we would recognize taxable income on foreclosure, but would not receive any cash proceeds from the foreclosure. We may give full or partial guarantees to lenders of mortgage debt on behalf of the entities that own our communities. When we give a guaranty on behalf of an entity that owns one of our communities, we will be responsible to our lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one community may be affected by a default. If any of our communities are foreclosed upon due to a default, our ability to make distributions to our stockholders will be adversely affected.
We may from time to time be subject to litigation, which could have a material adverse effect on our business, financial condition and results of operations.
We may be a party to various claims and routine litigation arising in the ordinary course of business. Some of these claims or others to which we may be subject from time to time may result in defense costs, settlements, fines or judgments against us, some of which are not, or cannot be, covered by insurance. Payment of any such costs, settlements, fines or judgments that are not insured could have an adverse impact on our financial position and results of operations. In addition, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flow, expose us to increased risks that would be uninsured, or adversely impact our ability to attract officers and directors.
We may not be able to refinance the mortgages on our multifamily communities on favorable terms or at all, which could reduce the amount of cash available for distribution to our stockholders.
We may not be able to refinance the mortgages on our multifamily communities when the loans come due on favorable terms or at all. If interest rates are higher when the communities are refinanced, we may not be able to refinance the communities at reasonable rates and our income could be reduced. If this occurs, it would reduce cash available for distribution to our stockholders, and it may prevent us from borrowing more money.
Our financial condition and ability to pay distributions could be adversely affected by financial covenants under our credit facilities.
The terms of the agreements for our credit facilities contain certain financial and operating covenants, including, among other things, leverage ratios, certain coverage ratios, as well as limitations on our ability to incur secured indebtedness. The credit facility agreements also contain customary default provisions including, among others, the failure to timely pay debt service issued thereunder and the failure to comply with our financial and operating covenants and cross-default provisions. These covenants could limit our ability to obtain additional funds needed to address liquidity needs or pursue growth opportunities or transactions that would provide substantial returns to our stockholders. In addition, a breach of these covenants could cause a default and accelerate payment of advances under the credit facility agreements, which could have a material adverse effect on our financial condition.
Our $200 million revolving credit facility agreement may also limit our ability to pay distributions in excess of 95% of our funds from operations generally calculated in accordance with the current definition of funds from operations adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). For the year ended December 31, 2016, our declared distributions were
81%
of such credit facility defined funds from operations during such period as calculated in accordance with the NAREIT definition. See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Performance Measures - Funds from Operations” for additional information regarding
our calculation of funds from operations and a reconciliation to GAAP net income. This covenant could limit our ability to pay distributions to our stockholders.
Violating the covenants contained in either of our credit facility agreements would likely result in us incurring higher finance costs and fees and/or an acceleration of the maturity date of advances under the applicable credit facility agreement, all of which could have a material adverse effect on our results of operations and financial condition.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with obtaining financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. In general, we expect our loan agreements to restrict our ability to encumber or otherwise transfer our interest in the respective community without the prior consent of the lender. Loan documents we enter into may contain other negative covenants that may limit our ability to further mortgage the community, discontinue insurance coverage or impose other limitations. Any such restriction or limitation may have an adverse effect on our operations and limit our ability to make distributions to our stockholders.
Our ability to obtain financing on reasonable terms could be impacted by volatile credit and capital market conditions.
Commercial real estate debt markets have recently experienced volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies and global financial issues, including slowing growth in China, and recessionary implications. Should these conditions increase our overall cost of borrowings, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions, developments and property contributions. Investment returns on our assets and our ability to make acquisitions could be adversely affected by our inability to secure financing on reasonable terms, if at all.
Interest-only indebtedness and financing arrangements involving balloon payment obligations may increase our risk of default and ultimately may reduce our funds available for distribution to our stockholders.
We may finance our acquisitions of multifamily communities using interest-only mortgage indebtedness. During the interest-only period, the amount of each scheduled payment will be less than that of a traditional amortizing mortgage loan. The principal balance of the mortgage loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related mortgage loan. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell the community underlying the mortgage. If the mortgage loan has an adjustable interest rate, the amount of our scheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these mortgage loans.
Increases in interest rates could increase the amount of our debt payments, adversely affect our ability to make distributions to our stockholders and adversely affect the market price of our common stock.
We may incur indebtedness that bears interest at a variable rate. In addition, from time to time we may pay mortgage loans or finance and refinance our communities in a rising interest rate environment. Accordingly, increases in interest rates could increase our interest costs, which could have an adverse effect on our cash flow from operating activities and our ability to make distributions to you. In addition, if rising interest rates cause us to need additional capital to repay indebtedness in accordance with its terms or otherwise, we may need to liquidate one or more of our investments at times that may not permit realization of the maximum return on these investments. Prolonged interest rate increases could also negatively impact our ability to make investments with positive economic returns. Additionally, an increase in market interest rates may lead investors of our common stock to demand a greater dividend yield, which could adversely affect the market price of our common stock.
We have relatively less experience investing in mortgage, bridge, mezzanine or other loans or debt securities relating to real estate as compared to investing directly in real property, which could adversely affect our return on loan investments.
The experience of our employees with respect to investing in mortgage, bridge, mezzanine or other loans or debt securities relating to real estate is not as extensive as it is with respect to investments directly in real property. However, we have made and may continue to make such loan investments to the extent we determine that it is advantageous to us due to the state of the real estate market or in order to diversify our investment portfolio. Our less extensive experience with respect to mortgage, bridge, mezzanine or other loans could adversely affect our return on loan investments.
Our mortgage, bridge, mezzanine or other loans or debt securities may be impacted by unfavorable real estate market conditions or changes in interest rates, which could decrease the value of our loan investments.
If we make or invest in mortgage, bridge, mezzanine or other loans or debt securities, we will be at risk of defaults on those loans caused by many conditions beyond our control, including changes in interest rates and local and other economic conditions affecting real estate values. If interest rates rise, the affected investments could yield a return lower than then-current market rates. If such interest rates decrease, we will be adversely affected to the extent that such mortgage, bridge, mezzanine or other loans or debt securities are prepaid, because we may not be able to make new investments at the previously higher interest rate levels. In addition, we do not know whether the values of the community securing the loans or debt securities will remain at the levels existing on the dates of origination of the loans. If the values of the underlying communities drop, our risk will increase and the values of our interests may decrease.
Investments in real estate-related preferred equity securities involve a greater risk of loss than traditional debt financing.
We may invest in real estate-related preferred equity securities, which may involve a higher degree of risk than traditional debt financing due to a variety of factors, including that such investments are subordinate to traditional loans and are not secured by property underlying the investment. Furthermore, should the issuer default on our investment, we would be able to proceed only against the entity in which we have an interest, and not the property owned by such entity and underlying our investment. As a result, we may not recover some or all of our investment.
Interest rate hedging arrangements may be costly and ineffective and may result in losses.
We may use derivative financial instruments to hedge exposures to changes in exchange rates and interest rates on loans secured by our assets. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, or options or repurchase agreements. Although these instruments may partially protect against rising interest rates, they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Finally, nonperformance by the other party to the hedging arrangement may subject us to increased credit risks. In order to minimize counterparty credit risk, we enter into and expect to enter into hedging arrangements only with major financial institutions that have high credit ratings.
If we lose or are unable to obtain key personnel
or do not establish or maintain appropriate strategic relationships, our ability to implement our business strategies could be delayed or hindered.
We depend to a significant degree upon the services of our executive officers and our other key personnel, including Mark T. Alfieri, Daniel Swanstrom, II, Howard S. Garfield, Ross P. Odland, Margaret M. Daly and James J. McGinley, III to implement our business strategies. The loss of the services of any of our key management personnel or our inability to recruit and retain qualified personnel in the future could have an adverse effect on our business and financial results. We also intend to try to attract and retain qualified additional key personnel, but may not be able to do so on acceptable terms. Further, we have established, and intend in the future to establish, strategic relationships with firms that have special expertise in certain services or as to assets both nationally and in certain geographic regions. Maintaining these relationships will be important for us to effectively compete for assets. We cannot assure you that we will be successful in attracting and retaining such strategic relationships. If we lose or are unable to obtain the services of executive officers and other key personnel or do not establish or maintain appropriate strategic relationships, our ability to implement our business strategies could be delayed or hindered, and our operations and financial results could suffer.
A breach of our privacy or information security systems could materially adversely affect our business and financial condition.
Privacy and information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. As a result, privacy and information security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us.
Our business requires us to use and store resident and employee personal identifying information. This may include names, addresses, phone numbers, email addresses, contact preferences, tax identification numbers and payment account information. We also engage third party service providers that may have access to such personal identifying information in connection with providing necessary information technology, security and other business services to us. The collection and use of personal identifiable information is governed by federal and state laws and regulations. Privacy and information security laws continue to evolve and may be inconsistent from one jurisdiction to another. Compliance with evolving and disparate
federal and state laws and regulations may increase our operating costs and adversely impact our ability to market our communities.
Resident and employee personal identifying information may be stored in hard copy or electronically by us and the third party service providers. Such information may be compromised as a result of third-party security breaches, employee error, malfeasance, faulty password management, or other irregularity, and result in persons obtaining unauthorized access to company data or accounts, including personally identifiable information of residents and employees. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Regardless, we may experience a breach of our systems and may be unable to protect sensitive data. Moreover, if a computer security breach affects our systems, or those of our third party service providers, or results in the unauthorized release of personal identifying information, our reputation and brand could be materially damaged and materially adversely affect our business. We also may be exposed to a risk of loss or litigation and possible liability, which could result in a material adverse effect on our business, results of operations and financial condition.
Interruptions or delays in service from our third-party data center hosting facility could harm our business.
We utilize third-party data center hosting facilities. All of our data storage is conducted on servers in these facilities. Any damage to, or failure of, the systems of our third-party data centers or the failure of our data centers to meet our capacity requirements could impede or result in interruptions to our day-to-day business operations. Additionally, our failure to effectively manage and communicate our strategies with our third-party data centers or their failure to perform as required or to properly protect our data, may result in operational difficulties which may adversely affect our business, financial condition and results of operations. If one of our third-party data centers fails, our other third-party data centers may not be able to meet our capacity requirements, which could result in interruptions to our business operations.
The data centers have no obligation to renew their agreements with us on commercially reasonable terms or at all. If we are unable to renew our agreements with our data centers on commercially reasonable terms, we may experience costs or down time in connection with the transfer to new third-party providers.
The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close one or all of our third-party data centers without adequate notice, or other unanticipated problems at our data centers could result in lengthy interruptions in the day-to-day operations of our business. To date, we have not experienced these types of events, but we cannot provide any assurances that they will not occur in the future. If any such event were to occur to our business, our business could be harmed.
Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions.
In order for us to qualify as a REIT, we must satisfy certain highly technical and complex requirements set forth in the Code and Treasury Regulations for which there are only limited judicial and administrative interpretations, and which may be determined based on various factual matters and circumstances that are not entirely within our control. In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualifying. We believe we have been and are organized and qualified as a REIT, and we intend to operate in a manner that will permit us to continue to qualify as a REIT. However, we cannot assure you that we have qualified as a REIT, or that we will remain qualified as a REIT in the future.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income for that year at corporate rates (subject to any applicable alternative minimum tax). In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. Losing our REIT status would reduce our net earnings because of the additional tax liability. In addition, we would no longer be required to make distributions to our stockholders. Our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and would adversely affect your return on your investment.
Our investment strategy may cause us to incur penalty taxes, lose our REIT status, or own and sell communities through taxable REIT subsidiaries, each of which could diminish the return to our stockholders.
It is possible that one or more sales of our properties may be “prohibited transactions” under provisions of the Code. If we are deemed to have engaged in a “prohibited transaction” (i.e., we sell a property primarily for sale in the ordinary course of our trade or business) all income that we derive from such sale would be subject to a 100% penalty tax unless we qualify for a safe harbor. The Code sets forth a safe harbor for REITs that wish to sell property without risking the imposition of the 100% penalty tax, but compliance with the safe harbor may not be practical for any particular sale.
If we desire to sell a property pursuant to a transaction that does not fall within the safe harbor, we may be able to avoid the 100% penalty tax if we dispose of the property through a TRS, but there may be circumstances that prevent us from using a TRS in a transaction that does not qualify for the safe harbor or circumstances where it may not be clear whether the TRS or the REIT would be treated as the seller for U.S. federal income tax purposes. Additionally, even if it is possible to effect a property disposition through a TRS, we may decide to forego the use of a TRS in a transaction that does not meet the safe harbor requirements based on our own internal analysis, the opinion of counsel, or the opinion of other tax advisers that the disposition is not likely subject to the 100% penalty tax. In cases where a property disposition is not effected (or is not treated as being effected) through a TRS, the Internal Revenue Service could successfully assert that the disposition constitutes a prohibited transaction, in which event all of the net income from the sale of such property will be payable as a tax and therefore not available for investment by us or distribution to our stockholders.
If we acquire a property that we anticipate will not fall within the safe harbor from the 100% penalty tax upon disposition, then we may acquire such property through a TRS in order to avoid the possibility that the sale of such property will be a prohibited transaction and subject to the 100% penalty tax. If we already own such a property directly or indirectly through an entity other than a TRS, we may transfer the property to a TRS if we believe that such transfer would permit the TRS to be respected as the seller of the property for U.S. federal income tax purposes. Following the transfer of the property to a TRS, the TRS will operate the property and may sell such property, pay corporate income tax (if any) on the gain from such sale, and distribute the net proceeds from such sale to us, and we may distribute the net proceeds distributed to us by the TRS to our stockholders. This tax obligation would diminish the amount of the proceeds from the sale or operation of such property, or other income earned through the TRS, that would be distributable to our stockholders.
Our ownership of interests in TRSs raises certain tax risks.
A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election with such REIT to be treated as a TRS. A TRS also includes any corporation other than a REIT with respect to which a TRS owns securities possessing more than 35% of the total voting power or value of the outstanding securities of such corporation. Other than some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of customary or non-customary services to tenants of its parent REIT. A TRS is subject to income tax as a regular C corporation. We currently own interests in TRSs and may acquire securities in additional TRSs in the future.
We will be required to pay a 100% tax on any “redetermined rents,” “redetermined deductions,” “excess interest” or “redetermined TRS service income.” In general, redetermined rents are rents from real property that are overstated as a result of services furnished to any of our tenants by a TRS of ours. Redetermined deductions and excess interest generally represent amounts that are deducted by a TRS of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on arm’s length negotiations. Redetermined TRS service income generally represents amounts by which the gross income of a TRS attributable to its services for or on behalf of us (other than to a tenant of ours) would be increased based on arm’s length negotiations.
Any TRS itself would be subject to corporate income tax at the federal, state and local levels, (including on the gain realized from the sale of property held by it, as well as on income earned while such property is operated by the TRS). This tax obligation would diminish the amount of the proceeds from the sale or operation of such property, or other income earned through the TRS, that would be distributable to our stockholders. Federal, state and local corporate income tax rates may be increased in the future, and any such increase would reduce the amount of the net proceeds available for distribution by us to our stockholders from the sale of property or other income earned through a TRS after the effective date of any increase in such tax rates.
As a REIT, the value of the non-mortgage securities we hold in our TRSs generally may not exceed 25% of the total value of our assets at the end of any calendar quarter through December 31, 2017, and may not exceed 20% of the total value of our assets at the end of any calendar quarter thereafter. If the Internal Revenue Service were to determine that the value of our interests in all of our TRSs exceeded this limit at the end of any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interests to own a substantial number of our communities through one or more TRSs, then it is possible that the Internal Revenue Service may conclude that the value of our interests in our TRSs exceeds 25% or 20%, as applicable, of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respect to any year may, in general, be from sources other than certain real estate-related assets. Dividends paid to us from a TRS are typically considered to be non-real estate income. Therefore, we may fail to qualify as a REIT if dividends from all of our TRSs, when aggregated with all other non-real estate income with respect to any one year, are more than 25% of our gross income with respect to such year.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to qualify as a REIT. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.
If our Operating Partnership fails to maintain its status as a partnership or disregarded entity for tax purposes, its income may be subject to taxation, which would reduce the cash available to us for distribution to our stockholders.
We intend to maintain the status of the Operating Partnership as a partnership (or disregarded entity) for federal income tax purposes. However, if the Internal Revenue Service were to successfully challenge the status of the Operating Partnership as a disregarded entity or as an entity taxable as a partnership, the Operating Partnership would be taxable as a corporation. This would reduce the amount of distributions that the Operating Partnership could make to us. This could also result in our losing REIT status, and becoming subject to a corporate level tax on our income. This would substantially reduce the cash available to us to make distributions and the return on your investment. In addition, if any of the partnerships or limited liability companies through which the Operating Partnership owns its properties, in whole or in part, loses its characterization as a partnership or disregarded entity for federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the Operating Partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain REIT status.
In certain circumstances, we may be subject to federal and state taxes, which would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may become subject to federal and state taxes. For example, if we have net income from a “prohibited transaction,” such income will be subject to the 100% penalty tax. In addition, the sale or other disposition of our properties may generate gains for tax purposes which, if not adequately deferred through “like kind exchanges” under Section 1031 of the Code (“Section 1031 Exchanges”), could require us to pay more taxes or make additional distributions to our stockholders. We may not be able to make sufficient distributions to avoid income and/or excise taxes applicable to REITs.
We may also decide to retain income we earn from the sale or other disposition of our properties and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. We may also be subject to state and local taxes, including potentially the “margin tax” in the State of Texas, on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes paid by us will reduce the cash available to us for distribution to our stockholders.
Our subsidiary REITs would be subject to similar state and local taxes, and in addition may be or become subject to taxes imposed by certain states upon captive REITs.
We may face risks in connection with Section 1031 Exchanges.
From time to time we dispose of properties in transactions intended to qualify as Section 1031 Exchanges. If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
We may be disqualified from treatment as a REIT if a joint venture entity elects to qualify as a REIT and is later disqualified from treatment as a REIT.
As part of our joint ventures, such as our joint ventures with the PGGM Co-Investment Partner and the MW Co-Investment Partner, we have and we may in the future form subsidiary REITs that will acquire and hold assets. In order to qualify as a REIT, each subsidiary REIT must satisfy certain highly technical and complex requirements set forth in the Code and Treasury Regulations for which there are only limited judicial and administrative interpretations, and which may be determined based on various factual matters and circumstances that are not entirely within our control. We may be unable to satisfy these requirements for the subsidiary REITs created in our joint ventures. In the event that a subsidiary REIT is disqualified from treatment as a REIT, we will be disqualified from treatment as a REIT as well absent our ability to comply with certain relief provisions, which may not be available.
Legislative or regulatory action could adversely affect the returns to our investors.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of the federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. You are urged to consult with your own tax adviser with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. You also should note that our counsel's tax opinion was based upon existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.
There is generally a reduced tax rate on dividends paid by corporations to individuals equal to the capital gain rate, which is currently at a maximum tax rate of 20%. REIT distributions generally do not qualify for this reduced rate. The more favorable rates applicable to regular corporate dividends could cause certain non-corporate investors to perceive investments in REITs to be relatively less attractive than investments in the stock of non-REIT corporations that pay dividends, which could adversely affect the value of our stock. The maximum corporate tax rate for dividends received by corporations is 35%. As a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” to which other corporations are typically subject.
Although we have determined that it is in the best interests of our stockholders under current law to elect and maintain REIT status, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders in periods prior to January 1, 2015, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. For periods prior to January 1, 2015, in order for our distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not have been “preferential dividends.” A dividend is generally not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. If the IRS were to take the position that we inadvertently paid a preferential dividend prior to January 1, 2015, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income for such period and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure. We can provide no assurance that we will not be treated as inadvertently paying preferential dividends for periods prior to January 1, 2015. For publicly offered REITs, the rules providing for the disqualification of preferential dividends for purposes of satisfying the annual distribution requirement for REITs was repealed for periods beginning after December 31, 2014. The preferential dividend rules will continue to apply to our subsidiary REITs.
Certain provisions contained in our charter and bylaws and certain provisions of Maryland law could delay, defer or prevent a change in control.
There are provisions in our charter and bylaws and certain provisions of Maryland law that may discourage a third party from making a proposal to acquire us, even if some of our stockholders might consider the proposal to be in their best interests. These provisions include the following:
Ownership limit.
Our charter, with certain exceptions, authorizes our board of directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of our outstanding common or preferred stock, in value or number of shares, whichever is more restrictive. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might otherwise provide our stockholders with the opportunity to receive a control premium for their shares.
Issuance of additional shares of capital stock.
Our charter permits our board of directors to issue up to 1,000,000,000 shares of capital stock. Our board of directors, without any action by our stockholders, may: (1) increase or decrease the
aggregate number of shares; (2) increase or decrease the number of shares of any class or series we have authority to issue; or (3) classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of any such shares of capital stock. Thus, our board of directors could authorize the issuance of such stock with terms and conditions that could subordinate the rights of the holders of our current common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Business combinations under Maryland law.
Certain provisions of Maryland law prohibit “business combinations” with any person who beneficially owns ten percent or more of the voting power of outstanding securities, or with an affiliate who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of our outstanding voting securities (an “Interested Stockholder”), or with an affiliate of an Interested Stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. These prohibitions last for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. After the five year period, a business combination with an Interested Stockholder must be approved by two super-majority stockholder votes unless, among other conditions, holders of common stock receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its common stock. Maryland law also permits various exemptions from these provisions, including business combinations that are exempted by our board of directors before the time that the Interested Stockholder becomes an Interested Stockholder. Our bylaws contain a provision exempting any “business combination” involving us from this statute. We can offer no assurance that this provision will not be amended or eliminated at any time in the future. However, such amendment or elimination may only be done with the affirmative vote of a majority of the votes cast on the matter by the holders of the issued and outstanding shares of our common stock. The business combination statute could have the effect of discouraging others from trying to acquire control of us and increase the difficulty of consummating any offer.
Control share acquisitions under Maryland law.
Maryland law also provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the corporation's disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by interested stockholders, that is, by the person who makes or proposes to make a control share acquisition, by officers or by directors who are employees of the corporation, are excluded from the vote on whether to accord voting rights to the control shares. “Control shares” are voting shares of stock that would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition, directly or indirectly, of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares, subject to certain exceptions. This provision does not apply (1) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) to acquisitions approved or exempted by a corporation's charter or bylaws. Our bylaws contain a provision exempting any and all acquisitions by any person of shares of our stock from this statute. We can offer no assurance that this provision will not be amended or eliminated at any time in the future. However, such amendment or elimination may only be done with the affirmative vote of a majority of the votes cast on the matter by the holders of the issued and outstanding shares of our common stock. This statute could have the effect of discouraging offers from third parties to acquire us and increasing the difficulty of successfully completing this type of offer by anyone other than our affiliates or any of their affiliates.
Subtitle 8 of Title 3.
Subtitle 8 of Title 3 of the Maryland General Corporation Law (“MGCL”) permits a board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. Our charter prohibits us from electing to be subject to the provisions that would permit us to classify our board of directors or increase the vote required to remove a director without stockholder approval. We have, however, elected in our charter to be subject to the provision of Subtitle 8 that provides that vacancies on our board of directors may be filled only by the remaining directors.
Stockholders have limited control over changes in our policies and operations.
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under our charter and the MGCL, our stockholders currently have a right to vote only on the following matters:
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the election of our board of directors or the removal of any member of our board of directors for cause;
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any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to:
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increase or decrease the aggregate number of our shares;
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increase or decrease the number of our shares of any class or series that we have the authority to issue;
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classify or reclassify any unissued shares by setting or changing the preferences, conversion or other rights, restrictions, limitations as to distributions, qualifications or terms and conditions of redemption of such shares; and
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effect reverse stock splits;
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our liquidation and dissolution; and
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except as otherwise permitted by law, our being a party to any merger, consolidation, sale or other disposition of substantially all of our assets or similar reorganization.
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All other matters are subject to the discretion of our board of directors.
Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Our charter currently authorizes 1,000,000,000 shares of capital stock, of which 875,000,000 shares are designated as common stock and 125,000,000 shares are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board of directors may amend our charter to increase the number of authorized shares of capital stock, or increase or decrease the number of shares of any class or series of stock designated, and may classify or reclassify any unissued shares without the necessity of obtaining stockholder approval. Shares will be issued at the discretion of our board of directors. Investors will likely experience dilution of their equity investment in us in the event that we: (1) sell shares in future public or private offerings; (2) sell securities that are convertible into shares of our common stock; (3) issue shares of common stock upon the conversion of our convertible stock; (4) issue restricted stock units or other awards pursuant to our incentive award plan; or (5) issue shares of our common stock to sellers of communities acquired by us in connection with an exchange of limited partnership interests of the Operating Partnership. In addition, the partnership agreement for the Operating Partnership contains provisions that allow, under certain circumstances, other entities to merge into or cause the exchange or conversion of their interest for interests of the Operating Partnership. Because the limited partnership interests of the Operating Partnership may be exchanged for shares of our common stock, any merger, exchange or conversion between the Operating Partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Because of these and other reasons described in this “Risk Factors” section, you should not expect to be able to own a significant percentage of our shares.
We are engaged in litigation with affiliates of our former external advisor over the terms of the Series A Preferred Stock issued to such affiliates in connection with our transition to a self-managed company, and are unable, at this time, to predict the outcome of such litigation.
In connection with our transition to a self-managed company, we issued to affiliates of Behringer Harvard Multifamily Advisors I, LLC (“Behringer”), our former external advisor, 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”). We are engaged in litigation with Behringer over certain conversion terms of the Series A Preferred Stock contained in our charter, and we cannot, at this time, predict the outcome of such litigation. In the event of an unfavorable ruling, our financial condition could be adversely affected. See Part I, Item 3, “Legal Proceedings” of this Annual Report on Form 10-K for additional information regarding the Series A Preferred Stock litigation.
The market price and trading volume of our shares of common stock may be volatile.
The market price of our common stock has recently been, and may continue to be, volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the market price or trading volume of our common stock include:
|
|
•
|
actual or anticipated variations in our quarterly operating results or distributions;
|
|
|
•
|
changes in our funds from operations or earnings estimates;
|
|
|
•
|
publication of research reports about us or the real estate industry;
|
|
|
•
|
increases in market interest rates that lead our stockholders to demand a higher yield;
|
|
|
•
|
changes in market valuations of similar companies;
|
|
|
•
|
adverse market reaction to any additional debt we incur or acquisitions we make in the future;
|
|
|
•
|
additions or departures of key management personnel;
|
|
|
•
|
actions by institutional stockholders;
|
|
|
•
|
speculation in the press or investment community;
|
|
|
•
|
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based companies;
|
|
|
•
|
investor confidence in the stock and bond markets, generally;
|
|
|
•
|
the realization of any of the other risk factors presented in this Annual Report on Form 10-K; and
|
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|
•
|
general market and economic conditions.
|
A large number of shares of our common stock available for future sale could adversely affect the market price of our common stock
.
Sales of substantial amounts of shares of our common stock in the public market, or the perception that such sales might occur, could adversely affect the market price of our common stock. Our board of directors may also authorize the issuance of additional authorized but unissued shares of common stock or other authorized but unissued securities at any time, including pursuant to our incentive award plan. As of
December 31, 2016
,
166,832,722
shares of our common stock were issued and outstanding. In addition, as of
December 31, 2016
, we had reserved an additional
18,827,209
shares of common stock for future issuance under our incentive award plan. We have also filed a registration statement with the SEC allowing us to offer, from time to time, an indefinite amount of equity securities (including common or preferred stock) on an as-needed basis and subject to our ability to affect offerings on satisfactory terms based on prevailing market conditions. Our ability to execute our business strategy depends on our access to an appropriate blend of debt and equity financing, including issuances of common and preferred equity. No prediction can be made about the effect that future distributions or sales of our common stock will have on the market price of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Description of Properties and Real Estate-Related Assets
We make real estate investments through wholly owned entities or through Co-Investment Ventures. Our investment criteria, analysis and strategies are substantially the same under each of these ownership structures. Our investments are geographically diversified and include operating and development investments.
The following tables present our consolidated real estate investments as of
December 31, 2016
. The equity and debt investments are separately categorized based on geographic region and the stage in the development and operation of the respective investment. All categorizations are based on each investment’s status as of
December 31, 2016
. The definitions of each stage are as follows:
|
|
◦
|
Same Store are communities that are stabilized (generally once achieving 90% occupancy) for both the current and prior reporting year.
|
|
|
◦
|
Stabilized Non-Comparable are communities that have been stabilized or acquired after January 1, 2015.
|
|
|
◦
|
Lease ups are communities that have commenced leasing but have not yet reached stabilization, which may include communities that have some remaining construction.
|
|
|
•
|
Developments include communities currently under construction for which leasing activity has not commenced.
|
As of
December 31, 2016
, multifamily communities that we held an interest in were classified in the following stages:
|
|
|
|
|
|
|
|
|
|
|
Classification
|
|
|
Number of Communities
|
|
Number of Units
|
Equity Investments:
|
|
|
|
|
|
Operating Multifamily Communities:
|
|
|
|
|
|
|
Same Store
|
|
30
|
|
|
8,279
|
|
|
|
Stabilized Non-Comparable
|
|
13
|
|
|
3,404
|
|
|
|
Lease up (including developments in lease up)
|
|
4
|
|
|
1,339
|
|
|
Total Operating Multifamily Communities
|
|
47
|
|
|
13,022
|
|
|
|
|
|
|
|
|
|
|
Developments:
|
|
|
|
|
|
|
Under development and construction
|
|
2
|
|
|
656
|
|
|
|
|
|
|
|
|
|
Total Equity Investments in Multifamily Communities
|
|
49
|
|
|
13,678
|
|
|
|
|
|
|
|
|
|
Debt Investments:
|
|
|
|
|
|
Developments
|
|
2
|
|
|
795
|
|
|
|
|
|
|
|
|
|
Total Equity and Debt Investments
|
|
51
|
|
|
14,473
|
|
|
|
|
|
|
|
|
|
Our geographic regions are defined by state or by region. Our portfolio is comprised of the following geographic regions and specific markets within each region where we have multifamily communities:
|
|
•
|
Colorado — Denver market
|
|
|
•
|
Florida — North Florida market (Orlando) and South Florida market (Miami and Fort Lauderdale)
|
|
|
•
|
Georgia — Atlanta market
|
|
|
•
|
Mid-Atlantic — Washington, DC market and Philadelphia market
|
|
|
•
|
Nevada — Las Vegas market
|
|
|
•
|
New England — Greater Boston market
|
|
|
•
|
Northern California — Greater San Francisco market
|
|
|
•
|
Southern California — Greater Los Angeles market and San Diego market
|
|
|
•
|
Texas — Austin market, Dallas market and Houston market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Consolidated Equity Investments
|
|
Location
|
|
Units
|
|
Ownership
%(a)
|
|
Year of
Initial
Investment(b)
|
|
Year of Completion or Most Recent Substantial Development(c)
|
|
Physical
Occupancy
Rate(d)
|
|
Monthly
Rental
Revenue
per Unit(e)
|
|
Total Net
Real Estate
(in millions)(f)
|
Operating Multifamily Communities by Geographic Region
|
|
|
|
|
|
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4550 Cherry Creek
|
|
Denver, CO
|
|
288
|
|
|
55
|
%
|
|
2010
|
|
2004
|
|
91
|
%
|
|
$
|
2,137
|
|
|
$
|
62.6
|
|
7166 at Belmar
|
|
Lakewood, CO
|
|
308
|
|
|
55
|
%
|
|
2010
|
|
2008
|
|
94
|
%
|
|
1,636
|
|
|
45.2
|
|
Skye 2905
|
|
Denver, CO
|
|
400
|
|
|
100
|
%
|
|
2008
|
|
2010
|
|
93
|
%
|
|
1,844
|
|
|
81.9
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The District Universal Boulevard
|
|
Orlando, FL
|
|
425
|
|
|
100
|
%
|
|
2010
|
|
2009
|
|
91
|
%
|
|
1,270
|
|
|
50.2
|
|
The Franklin Delray
|
|
Delray Beach, FL
|
|
180
|
|
|
55
|
%
|
|
2012
|
|
2013
|
|
94
|
%
|
|
1,866
|
|
|
29.8
|
|
Satori
|
|
Fort Lauderdale, FL
|
|
279
|
|
|
55
|
%
|
|
2007
|
|
2010
|
|
95
|
%
|
|
2,243
|
|
|
67.0
|
|
Mid-Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 Hundred
|
|
Arlington, VA
|
|
234
|
|
|
55
|
%
|
|
2007
|
|
2010
|
|
94
|
%
|
|
1,862
|
|
|
65.8
|
|
Bailey's Crossing
|
|
Alexandria, VA
|
|
414
|
|
|
55
|
%
|
|
2007
|
|
2010
|
|
95
|
%
|
|
1,912
|
|
|
106.1
|
|
Burrough's Mill
|
|
Cherry Hill, NJ
|
|
308
|
|
|
55
|
%
|
|
2009
|
|
2004
|
|
93
|
%
|
|
1,624
|
|
|
49.0
|
|
The Cameron
|
|
Silver Spring, MD
|
|
325
|
|
|
100
|
%
|
|
2007
|
|
2010
|
|
93
|
%
|
|
2,127
|
|
|
85.7
|
|
The Lofts at Park Crest
|
|
McLean, VA
|
|
131
|
|
|
55
|
%
|
|
2010
|
|
2008
|
|
92
|
%
|
|
2,916
|
|
|
36.0
|
|
Nevada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Venue
|
|
Clark County, NV
|
|
168
|
|
|
55
|
%
|
|
2008
|
|
2009
|
|
95
|
%
|
|
1,038
|
|
|
20.2
|
|
Veritas
|
|
Henderson, NV
|
|
430
|
|
|
100
|
%
|
|
2007
|
|
2011
|
|
97
|
%
|
|
1,124
|
|
|
48.8
|
|
New England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pembroke Woods
|
|
Pembroke, MA
|
|
240
|
|
|
100
|
%
|
|
2012
|
|
2006
|
|
95
|
%
|
|
1,637
|
|
|
36.0
|
|
Stone Gate
|
|
Marlborough, MA
|
|
332
|
|
|
100
|
%
|
|
2011
|
|
2007
|
|
95
|
%
|
|
1,635
|
|
|
51.0
|
|
West Village
|
|
Mansfield, MA
|
|
200
|
|
|
55
|
%
|
|
2011
|
|
2008
|
|
95
|
%
|
|
1,885
|
|
|
28.2
|
|
Northern California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia on Santa Rosa Creek
|
|
Santa Rosa, CA
|
|
277
|
|
|
55
|
%
|
|
2010
|
|
2003
|
|
95
|
%
|
|
2,013
|
|
|
29.8
|
|
Acappella
|
|
San Bruno, CA
|
|
163
|
|
|
100
|
%
|
|
2010
|
|
2010
|
|
95
|
%
|
|
3,215
|
|
|
42.8
|
|
Argenta
|
|
San Francisco, CA
|
|
179
|
|
|
55
|
%
|
|
2011
|
|
2008
|
|
96
|
%
|
|
4,087
|
|
|
74.8
|
|
Vara
|
|
San Francisco, CA
|
|
202
|
|
|
100
|
%
|
|
2013
|
|
2013
|
|
95
|
%
|
|
3,442
|
|
|
96.5
|
|
(Table continued on next page)
(Table continued from previous page)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
Consolidated Equity Investments
|
|
Location
|
|
Units
|
|
Ownership
%(a)
|
|
Year of
Initial
Investment(b)
|
|
Year of Completion or Most Recent Substantial Development(c)
|
|
Physical
Occupancy
Rate(d)
|
|
Monthly
Rental
Revenue
per Unit(e)
|
|
Total Net
Real Estate
(in millions)(f)
|
Southern California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calypso Apartments and Lofts
|
|
Irvine, CA
|
|
177
|
|
|
55
|
%
|
|
2009
|
|
2008
|
|
96
|
%
|
|
$
|
2,261
|
|
|
$
|
47.2
|
|
Forty55 Lofts
|
|
Marina del Rey, CA
|
|
140
|
|
|
55
|
%
|
|
2009
|
|
2010
|
|
98
|
%
|
|
3,848
|
|
|
64.7
|
|
The Gallery at NoHo Commons
|
|
Los Angeles, CA
|
|
438
|
|
|
55
|
%
|
|
2009
|
|
2008
|
|
95
|
%
|
|
1,813
|
|
|
83.9
|
|
San Sebastian
|
|
Laguna Woods, CA
|
|
134
|
|
|
55
|
%
|
|
2009
|
|
2010
|
|
93
|
%
|
|
2,638
|
|
|
29.5
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allegro (g)
|
|
Addison, TX
|
|
393
|
|
|
100
|
%
|
|
2010
|
|
2013
|
|
96
|
%
|
|
1,645
|
|
|
47.4
|
|
Allusion West University
|
|
Houston, TX
|
|
231
|
|
|
55
|
%
|
|
2012
|
|
2014
|
|
96
|
%
|
|
1,695
|
|
|
36.8
|
|
Briar Forest Lofts
|
|
Houston, TX
|
|
352
|
|
|
55
|
%
|
|
2010
|
|
2008
|
|
94
|
%
|
|
1,201
|
|
|
36.0
|
|
Eclipse
|
|
Houston, TX
|
|
330
|
|
|
55
|
%
|
|
2007
|
|
2009
|
|
98
|
%
|
|
1,278
|
|
|
40.6
|
|
Fitzhugh Urban Flats
|
|
Dallas, TX
|
|
452
|
|
|
55
|
%
|
|
2010
|
|
2009
|
|
93
|
%
|
|
1,388
|
|
|
47.5
|
|
Grand Reserve (h)
|
|
Dallas, TX
|
|
149
|
|
|
100
|
%
|
|
2010
|
|
2009
|
|
95
|
%
|
|
2,300
|
|
|
25.6
|
|
Total Same Store
|
|
8,279
|
|
|
|
|
|
|
2009
|
|
94
|
%
|
|
1,882
|
|
|
1,566.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stabilized Non-Comparable:
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Point 21
|
|
Denver, CO
|
|
212
|
|
|
55
|
%
|
|
2012
|
|
2015
|
|
97
|
%
|
|
1,798
|
|
|
44.6
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Mark
|
|
Boca Raton, FL
|
|
208
|
|
|
100
|
%
|
|
2015
|
|
2015
|
|
96
|
%
|
|
2,449
|
|
|
78.5
|
|
The Mile
|
|
Miami, FL
|
|
120
|
|
|
100
|
%
|
|
2015
|
|
2016
|
|
90
|
%
|
|
2,297
|
|
|
49.6
|
|
SoMa
|
|
Miami, FL
|
|
418
|
|
|
55
|
%
|
|
2013
|
|
2016
|
|
96
|
%
|
|
2,131
|
|
|
98.4
|
|
Georgia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cyan on Peachtree
|
|
Atlanta, GA
|
|
329
|
|
|
55
|
%
|
|
2013
|
|
2015
|
|
92
|
%
|
|
2,052
|
|
|
65.2
|
|
New England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Everly
|
|
Wakefield, MA
|
|
186
|
|
|
55
|
%
|
|
2012
|
|
2014
|
|
94
|
%
|
|
2,076
|
|
|
42.5
|
|
Southern California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blue Sol
|
|
Costa Mesa, CA
|
|
113
|
|
|
100
|
%
|
|
2013
|
|
2014
|
|
97
|
%
|
|
2,551
|
|
|
34.4
|
|
Ev
|
|
San Diego, CA
|
|
208
|
|
|
100
|
%
|
|
2015
|
|
2015
|
|
100
|
%
|
|
2,212
|
|
|
80.0
|
|
Verge
|
|
San Diego, CA
|
|
444
|
|
|
70%
|
|
|
2013
|
|
2016
|
|
95
|
%
|
|
2,019
|
|
|
122.0
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4110 Fairmount
|
|
Dallas, TX
|
|
299
|
|
|
55
|
%
|
|
2012
|
|
2014
|
|
97
|
%
|
|
1,579
|
|
|
39.1
|
|
Arpeggio Victory Park
|
|
Dallas, TX
|
|
377
|
|
|
55
|
%
|
|
2012
|
|
2014
|
|
94
|
%
|
|
1,531
|
|
|
52.6
|
|
Muse Museum District
|
|
Houston, TX
|
|
270
|
|
|
55
|
%
|
|
2012
|
|
2014
|
|
97
|
%
|
|
1,744
|
|
|
44.3
|
|
SEVEN
|
|
Austin, TX
|
|
220
|
|
|
55
|
%
|
|
2011
|
|
2015
|
|
93
|
%
|
|
2,845
|
|
|
56.6
|
|
Total Stabilized Non-Comparable
|
|
3,404
|
|
|
|
|
|
|
2015
|
|
95
|
%
|
|
2,030
|
|
|
807.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Up (including Developments in lease up):
|
|
|
|
|
|
|
|
|
|
|
|
|
Mid-Atlantic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nouvelle
|
|
Tysons Corner, VA
|
|
461
|
|
|
55
|
%
|
|
2013
|
|
2015
|
|
66
|
%
|
|
N/A
|
|
|
171.3
|
|
New England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zinc
|
|
Cambridge, MA
|
|
392
|
|
|
55
|
%
|
|
2012
|
|
2015
|
|
69
|
%
|
|
N/A
|
|
|
175.7
|
|
Northern California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OLUME
|
|
San Francisco, CA
|
|
121
|
|
|
55
|
%
|
|
2014
|
|
2016
|
|
84
|
%
|
|
N/A
|
|
|
64.4
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Alexan (i)
|
|
Dallas, TX
|
|
365
|
|
|
50
|
%
|
|
2013
|
|
N/A
|
|
30
|
%
|
|
N/A
|
|
|
98.3
|
|
Total Lease Up
|
|
1,339
|
|
|
|
|
|
|
2015
|
|
59
|
%
|
|
N/A
|
|
|
509.7
|
|
Total Operating Communities
|
|
13,022
|
|
|
|
|
|
|
|
2011
|
|
87
|
%
|
|
$
|
1,925
|
|
|
$
|
2,884.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
Consolidated Equity Investments
|
|
Location
|
|
Units
|
|
Ownership
%(a)
|
|
Year of
Initial
Investment(b)
|
|
Estimated Quarter (“Q”) of
Completion(c)
|
|
Total Net
Real Estate
(in millions)(f)
|
Developments under Construction by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
Florida
|
|
|
|
|
|
|
|
|
|
|
|
|
Caspian Delray Beach
|
|
Delray Beach, FL
|
|
146
|
|
|
55
|
%
|
|
2013
|
|
2Q 2017
|
|
$
|
39.1
|
|
Southern California
|
|
|
|
|
|
|
|
|
|
|
|
|
Lucé
|
Huntington Beach, CA
|
|
510
|
|
|
65
|
%
|
|
2014
|
|
3Q 2018
|
|
77.5
|
|
Total Developments under Construction
|
|
656
|
|
|
|
|
|
|
|
|
|
116.6
|
|
Total Real Estate, Net
|
|
13,678
|
|
|
|
|
|
|
|
|
|
$
|
3,000.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________________________
|
|
(a)
|
Ownership percentage represents our participation in the distributable operating cash of the multifamily investment. Actual cash distributions may be at different percentages or may vary over time. Each of our investments with our Co-Investment Venture partners may become subject to buy/sell rights with the Co-Investment Venture partners.
|
|
|
(b)
|
Year of initial investment represents the year of our initial equity investment in the multifamily community.
|
|
|
(c)
|
We consider a multifamily community complete when the community is substantially constructed or renovated and capable of generating all significant revenue sources. Accordingly, the date provided may be different from the completion dates defined in the various contractual agreements or the final issuance of any official regulatory recognition of completion related to each multifamily community. For multifamily communities that have undergone major development or expansion, we provide the most recent date as the year of completion. The weighted average year of completion for operating communities was based upon number of units.
|
|
|
(d)
|
Physical occupancy is defined as the number of residential units occupied for Same Store, Stabilized Non-Comparable and Lease Up communities as of
December 31, 2016
, divided by the total number of residential units. Not considered in the physical occupancy rate is rental space designed for other than residential use, which is primarily retail space. As of
December 31, 2016
, our stabilized multifamily communities have approximately
159,000
square feet of leasable retail space which is approximately
1%
of total rentable area. Two large retail spaces are occupied under long-term leases by a national grocer and a national drug store, which make up approximately half of our retail square footage combined; the remaining retail spaces are small, generally 1,000 square feet or less. As of
December 31, 2016
, approximately
73%
of the
159,000
square feet of retail space was occupied. The calculation of total average physical occupancy rates is based upon weighted average number of residential units.
|
|
|
(e)
|
Monthly rental revenue per unit has been calculated based on the leases in effect as of
December 31, 2016
for Same Store and Stabilized Non-Comparable communities. Monthly rental revenue per unit includes in-place base rents for the occupied units and the current market rent for vacant residential units, including the effects of any rental concessions and affordable housing payments and subsidies, plus other recurring occupancy related charges for storage, parking, pets, trash, or other recurring resident charges. The monthly rental revenue per unit does not include non-residential rental areas, which are primarily related to retail space, and non-recurring resident charges, such as application fees, termination fees, clubhouse rentals, and late fees. Because monthly rental revenue per unit during lease up is not a meaningful measurement, monthly rental revenue per unit is only presented for Same Store and Stabilized Non-Comparable communities as of
December 31, 2016
.
|
|
|
(f)
|
Costs are presented net of accumulated depreciation in accordance with GAAP. For developments, cost represents total costs incurred through
December 31, 2016
without a reduction for depreciation.
|
|
|
(g)
|
In 2013, we completed construction of Phase II adding an additional 121 units.
|
|
|
(h)
|
Subsequent to December 31, 2016, the multifamily community was sold.
|
|
|
(i)
|
For our developments, we transfer costs of a property to land, building and improvements as units are completed and capable of generating operating revenue. As of December 31, 2016, The Alexan was
96%
complete and is expected to be completed in 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Investments (a)
|
|
Location
|
|
Units
|
|
Maturity Date (b)
|
|
Fixed Interest Rate
|
|
Loan Balance as of December 31, 2016 (in millions)
|
Loan Investments by Geographic Region
|
|
|
|
|
Developments
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
Jefferson at Stonebriar (c)
|
|
Frisco, TX
|
|
424
|
|
|
June 2018
|
|
15.0
|
%
|
|
$
|
16.5
|
|
Jefferson at Riverside (c)
|
|
Irving, TX
|
|
371
|
|
|
June 2018
|
|
15.0
|
%
|
|
10.2
|
|
Total Loan Investments
|
|
795
|
|
|
|
|
|
|
$
|
26.7
|
|
_________________________________________________________
|
|
(a)
|
All of our debt investments are wholly owned.
|
|
|
(b)
|
The maturity date may be extended up to one year at the option of the borrower after meeting certain conditions, generally with the receipt of an extension fee of 0.50% of the applicable loan balance.
|
|
|
(c)
|
We have the right to acquire the multifamily communities from the borrower subject to the first lien construction loan in the event the borrower decides to sell the community. Absent a default, the borrower has sole discretion related to the disposition of the multifamily community.
|
Our financing strategy includes obtaining financing that may be secured by our real estate investments. For the amount of encumbrances for each of our communities as of
December 31, 2016
, see “Schedule III - Real Estate and Accumulated Depreciation” to our consolidated financial statements included in this Annual Report on Form 10-K.
Item 3. Legal Proceedings
We are subject to various legal proceedings and claims that arise in the ordinary course of business operations and development. While it is not possible to ascertain the ultimate outcome of such matters, we do not believe that any of these outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.
As previously disclosed in our public filings, on November 10, 2015, Behringer, the Company’s former external advisor, filed a complaint in the District Court of Dallas County, Texas (the “District Court”) against us relating to the payment of certain fees (the “Disputed Fees”) under the terms of agreements entered into with Behringer in July 2013 and June 2014 in connection with our transition to a self-managed company. Specifically, Behringer made claims for damages to recover approximately $4.3 million in debt financing fees purportedly owed to it relating to our existing revolving credit facility as well as certain property-level debt financing arrangements. We made a counterclaim seeking approximately $1.5 million in refunds for development fees previously paid by us to Behringer in connection with the acquisition of Shady Grove. On February 10, 2017, we and Behringer agreed to settle all claims relating to the Disputed Fees pending before the District Court. Under the terms of the settlement agreement, we paid Behringer approximately $1.6 million in consideration for the settlement of the litigation in the District Court and a full release by both parties from all claims relating to the Disputed Fees.
The settlement of claims over the Disputed Fees does not address ongoing litigation over the terms of the Company’s outstanding Series A Preferred Stock. We disagree with an affiliate of Behringer, the sole holder of the Series A Preferred Stock (the “Behringer Preferred Stockholder”), on the timing of the start and end of the measurement period (as used in the Company’s charter, the “Measurement Period”) necessary to establish the appropriate conversion terms, including the conversion rate, of the Series A Preferred Stock.
As previously reported in our Form 8-K filed with the SEC on October 3, 2016, our board of directors approved the determination that the Measurement Period for the conversion of Series A Preferred Stock into shares of the Company’s common stock in connection with a Listing (as defined in the Charter) begins on January 2, 2017 and ends on February 13, 2017.
On September 30, 2016, we filed a complaint and a motion for summary judgment in the Circuit Court for Baltimore City, Maryland (the “Circuit Court”) against Behringer Harvard Holdings, LLC (“BHH”) and the Behringer Preferred Stockholder, seeking a judicial declaration that, among other things, the determination approved and adopted by our board of directors regarding the Measurement Period is, pursuant to the terms of our charter, valid, final, conclusive and binding upon us and every stockholder, including the Behringer Preferred Stockholder. Later that same day, Behringer filed a supplement to its complaint in the District Court seeking a contrary declaration. Subsequently, BHH and the Behringer Preferred Stockholder filed a motion to dismiss our complaint, which was denied by the Circuit Court on January 10, 2017. On February 8, 2017, the Circuit Court ordered BHH and the Behringer Preferred Stockholder to respond to our pending motion for summary judgment
to address whether Section 5.4 of the Charter, which concerns the Measurement Period, is unambiguous and, therefore, dispositive of the dispute. The order established a deadline for BHH and the Behringer Preferred Stockholder’s opposition and for any reply from us in support of our position. A hearing on the motion has been scheduled for March 13, 2017. As a result of the prior determinations made by our board of directors and based on the trading price of our shares of common stock during the Measurement Period, all outstanding shares of Series A Preferred Stock were canceled on February 13, 2017 without further consideration.
At this time, the outcome and timing of the Circuit Court’s ruling on the Company’s judicial declaration request are uncertain and no assurances can be given with respect to the outcome of the declaration the Company is seeking from the Circuit Court. In addition, in the event the District Court rules in favor of BHH and the Behringer Preferred Stockholder, we cannot predict the consequences of such ruling, including the possibility of a monetary judgment against us or the effect of such ruling on the previously canceled shares of Series A Preferred Stock. For more information regarding the settlement agreement on the Disputed Fees and the status of the Series A Preferred Stock, please see our Form 8-K filed with the SEC on October 3, 2016 and our Form 8-K filed with the SEC on February 17, 2017.
Item 4. Mine Safety Disclosures
Not applicable.
Notes to Consolidated Financial Statements
1.
Organization and Business
Organization
Monogram Residential Trust, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us,” or “our”) was organized in Maryland on August 4, 2006. We are a fully integrated self-managed real estate investment trust (“REIT”) that invests in, develops and operates high quality multifamily communities offering location and lifestyle amenities. We invest in stabilized operating communities and communities in various phases of development, with a focus on communities in select markets across the United States. These include luxury high-rise, mid-rise, and garden style multifamily communities. Our targeted communities include existing “core” communities, which we define as communities that are already stabilized and producing rental income, as well as communities in various phases of development, redevelopment, lease up or repositioning with the intent to transition those communities to core communities. Further, we may invest in other real estate-related securities, including mortgage, bridge, mezzanine or other loans, or in entities that make investments similar to the foregoing. Our shares of common stock have traded on the New York Stock Exchange (the “NYSE”) under the ticker symbol “MORE” since November 21, 2014.
We invest in multifamily communities that may be wholly owned by us or held through joint venture arrangements with third-party institutional or other national or regional real estate developers/owners which we define as “Co-Investment Ventures” or “CO-JVs.” These are predominately equity investments but may also include debt investments.
As of
December 31, 2016
, we have equity and debt investments in
51
multifamily communities, of which
43
are stabilized operating multifamily communities and
8
are in various stages of lease up or construction. Of the
51
multifamily communities, we wholly own
12
multifamily communities and
two
debt investments for a total of
14
wholly owned investments. The remaining
37
investments are held through Co-Investment Ventures, all of which are consolidated.
As of
December 31, 2016
, we are the managing member of each of the separate Co-Investment Ventures. Our two institutional Co-Investment Venture partners are Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund and its affiliates, a real estate investment vehicle for Dutch pension funds (“PGGM” or the “PGGM Co-Investment Partner”), and Milky Way Partners, L.P. (the “MW Co-Investment Partner”), the primary partner of which is Korea Exchange Bank, as Trustee for and on behalf of National Pension Service (acting for and on behalf of the National Pension Fund of the Republic of Korea Government) (“NPS”). Our other Co-Investment Venture partners include national or regional real estate developers/owners (“Developer Partners.”) When applicable, we refer to individual investments by referencing the individual Co-Investment Venture partner or the underlying multifamily community. We refer to our Co-Investment Ventures with the PGGM Co-Investment Partner as “PGGM CO-JVs,” those with the MW Co-Investment Partner as “MW CO-JVs,” and those with Developer Partners as “Developer CO-JVs.” Certain PGGM CO-JVs that also include Developer Partners are referred to as PGGM CO-JVs. We are the
1%
general partner of Monogram Residential Master Partnership I LP (the “Master Partnership” or the PGGM Co-Investment Partner), and PGGM is the
99%
limited partner. We are generally a
55%
owner with control of day-to-day management and operations, and the Master Partnership is generally a
45%
owner in the property owning CO-JVs, all of which are consolidated.
The table below presents a summary of our Co-Investment Ventures as of
December 31, 2016
and
2015
. The effective ownership ranges are based on our participation in the distributable operating cash from our investment in the underlying multifamily community. This effective ownership is indicative of, but may differ over time from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture. All are reported on the consolidated basis of accounting.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Co-Investment Structure
|
|
Number of Multifamily Communities
|
|
Our Effective
Ownership
|
|
Number of Multifamily Communities
|
|
Our Effective
Ownership
|
PGGM CO-JVs (a)
|
|
21
|
|
|
50% to 70%
|
|
23
|
|
|
50% to 70%
|
MW CO-JVs
|
|
14
|
|
|
55%
|
|
14
|
|
|
55%
|
Developer CO-JVs
|
|
2
|
|
|
100%
|
|
2
|
|
|
100%
|
Total
|
|
37
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
As of
December 31, 2016
and
2015
, the PGGM CO-JVs include Developer Partners in
18
multifamily communities.
|
We have elected to be taxed, and currently qualify, as a REIT for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements, to distribute annually at least
90%
of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates. As of
December 31, 2016
, we believe we are in compliance with all applicable REIT requirements.
2.
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include our consolidated accounts and the accounts of our wholly owned and majority owned subsidiaries. We also consolidate other entities in which we have a controlling financial interest or other entities (referred to as variable interest entities or “VIEs”) where we are determined to be the primary beneficiary. VIEs, as defined by GAAP, are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. The primary beneficiary is required to consolidate a VIE for financial reporting purposes. The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations and economic interests in such entities as well as the same of the other owners. See Note 6, “Variable Interest Entities” for further information about our VIEs. For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income. All inter-company accounts and transactions have been eliminated in consolidation.
Real Estate and Other Related Intangibles
Acquisitions
Prior to October 1, 2016, real estate communities acquired by us or our Co-Investment Ventures were generally classified as business combinations. Effective as of October 1, 2016, we early adopted the revised guidance regarding business combinations as further discussed below under “Recently Adopted Accounting Pronouncements.” Acquisitions of real estate communities occurring on or after October 1, 2016 are generally not expected to qualify as business combinations, but rather asset acquisitions.
Prior to October 1, 2016, we record the acquired assets and liabilities based on their fair values, including tangible assets (consisting of land, any associated rights, buildings and improvements), identified intangible assets and liabilities, asset retirement obligations, assumed debt, other liabilities and noncontrolling interests. Identified intangible assets and liabilities primarily consist of the fair value of in-place leases and contractual rights. Prior to October 1, 2016, any goodwill was recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree over the fair value of identifiable net assets acquired. Likewise, a bargain purchase gain was recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree were less than the fair value of the identifiable net assets acquired. Effective October 1, 2016, the purchase
price is allocated on a relative fair value basis to the identified assets and liabilities and no goodwill or bargain purchase gain is recognized.
The following discussion applies to our initial determination of fair value and the resulting subsequent accounting is applicable to all periods. The fair value of any tangible real estate assets acquired is determined by valuing the community as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements. Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using net operating income capitalization rates, discounted cash flow analyses or similar methods. When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles. Intangible assets are evaluated at each reporting period to determine whether the indefinite and finite useful lives are appropriate.
We determine in-place lease values based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease up periods for the respective leasable area considering current market conditions. In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease up period. We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The in-place leases are amortized over the remaining term of the in-place leases, approximately a
six
month term for multifamily in-place leases and terms ranging from
three
to
20
years for retail in-place leases.
We determine the value of above-market and below-market in-place leases for acquired communities based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (i) the remaining non-cancelable lease term for above-market leases, or (ii) the remaining non-cancelable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the above determined lease term. Given the short-term nature of multifamily leases, the value of above-market or below-market in-place leases are generally not material.
We determine the value of other contractual rights based on our evaluation of the specific characteristics of the underlying contracts and by applying a fair value model to the projected cash flows or usage rights that considers the timing and risks associated with the cash flows or usage. We amortize the value of finite contractual rights over the remaining contract period. Indefinite-lived contractual rights are not amortized but are evaluated for impairment.
We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service payments using currently available market-based terms for interest rates for debt with similar terms and remaining maturities that management believes we could obtain. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.
Initial valuations are subject to change until our information is finalized, which is no later than
12 months
from the acquisition date. We have had no significant valuation changes for acquisitions prior to
December 31, 2016
.
Developments
We capitalize project costs related to the development and construction of real estate (including interest, real estate taxes, insurance, and other direct costs associated with the development) as a cost of the development. Indirect project costs not clearly related to development and construction are expensed as incurred. Indirect project costs that clearly relate to development and construction are capitalized and allocated to the developments to which they relate. For each development, capitalization begins when we determine that the development is probable and significant development activities are underway. We suspend capitalization at such time as significant development activity ceases, but future development is still probable. We cease capitalization when the developments or other improvements, including any portion thereof, are completed and ready for their intended use, or if the intended use changes such that capitalization is no longer appropriate. Developments or improvements are generally considered ready for intended use when the certificates of occupancy have been issued and the units become ready for occupancy.
Depreciation
Buildings are depreciated over their estimated useful lives ranging from
25
to
35
years using the straight-line method. Improvements are depreciated over their estimated useful lives ranging from
3
to
15
years using the straight-line method. Communities classified as held for sale are not depreciated. Depreciation of developments begins when the development is substantially completed and ready for its intended use.
Repairs and Maintenance
Expenditures for ordinary repairs and maintenance costs are charged to expense as incurred.
Impairment of Real Estate Related Assets
If events or circumstances indicate that the carrying amount of the community may not be recoverable, we make an assessment of the community’s recoverability by comparing the carrying amount of the asset to our estimate of the aggregate undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition. If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the community. In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values. The fair value of intangibles is generally estimated by valuation of similar assets.
We recorded an impairment loss for the year ended
December 31, 2015
related to one of our developments. See Note 5, “Real Estate Investments” for more information. We did not record any impairment losses for the years ended
December 31, 2016
or
2014
.
Assets Held for Sale and Discontinued Operations
For sales of real estate or assets classified as held for sale, we evaluate whether the disposition will have a major effect on our operations and financial results and will therefore qualify as a strategic shift. If the disposition represents a strategic shift, it will be classified as discontinued operations in our consolidated statements of operations for all periods presented. If the disposition does not represent a strategic shift, it will be presented in continuing operations in our consolidated statements of operations.
We classify multifamily communities as held for sale when certain criteria are met, in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that multifamily community. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.
Cash and Cash Equivalents
We consider investments in bank deposits, money market funds and highly-liquid cash investments with original maturities of three months or less to be cash equivalents.
As of
December 31, 2016
and
2015
, cash and cash equivalents include
$28.8 million
and
$32.5 million
, respectively, held by the Master Partnership and individual Co-Investment Ventures that are available only for use in the business of the Master Partnership and the other individual Co-Investment Ventures. Cash held by the Master Partnership and individual Co-Investment Ventures is not restricted to specific uses within those entities. However, the terms of the joint venture agreements define the timing and magnitude of the distribution of those funds to us or limit our use of them for our general corporate purposes. Cash held by the Master Partnership and individual Co-Investment Ventures is distributed from time to time to the Company and to the other Co-Investment Venture partners in accordance with the applicable Co-Investment Venture governing agreement, which may not be the same as the stated effective ownership interest. Cash distributions received by the Company from the Master Partnership and individual Co-Investment Ventures are then available for our general corporate purposes.
Noncontrolling Interests
Redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities where we believe it is probable that we will be required to purchase the partner’s noncontrolling interest. We record obligations under the redeemable noncontrolling interest initially at the higher of (a) fair value or (b) the
redemption value with subsequent increased adjustments based on our assessment of the probable amount of redemption. The redeemable noncontrolling interests are temporary equity not within our control and are presented in our consolidated balance sheet outside of permanent equity between debt and equity. The determination of the redeemable classification requires analysis of contractual provisions and judgments of redemption probabilities.
Non-redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities as well as preferred cumulative, non-voting membership units (“Preferred Units”) issued by subsidiary REITs. We record these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity.
Income and losses are allocated to the noncontrolling interest holder based on its economic interests.
Transactions involving a partial sale or acquisition of a noncontrolling interest that does not result in a change of control are recorded at carrying value with no recognition of gain or loss. Any differences between the cash received or paid (net of any direct expenses) and the change in noncontrolling interest is recorded as a direct charge to additional paid-in capital. Transactions involving a partial sale or acquisition of a controlling interest resulting in a change in control are recorded at fair value with recognition of a gain or loss.
Other Assets
Other assets primarily include notes receivable, accounts receivable, restricted cash, interest rate caps, prepaid assets and deposits. We evaluate whether notes receivable are loans, investments in joint ventures or acquisitions of real estate based on a review of any rights to participate in expected residual profits and other equity and loan characteristics. As of and for the years ended
December 31, 2016
and
2015
, all of our notes receivable were appropriately accounted for as loans. We account for our derivative financial instruments, all of which are interest rate caps, at fair value. We use interest rate cap arrangements to manage our exposure to interest rate changes. We have not designated any of these derivatives as hedges for accounting purposes, and accordingly, changes in fair value are recognized in earnings.
Revenue Recognition
Rental income related to leases is recognized on an accrual basis when due from residents or commercial tenants, generally on a monthly basis. Rental revenues for leases with uneven payments and terms greater than
one
year are recognized on a straight-line basis over the term of the lease. Any deferred revenue is classified as a liability on the consolidated balance sheet and recognized on a straight-line basis as income over its contractual term.
Interest income is generated primarily on notes receivable and cash balances. Interest income is recorded on an accrual basis as earned.
Acquisition Costs
Prior to October 1, 2016, non-reimbursed acquisition costs for business combinations were expensed when it was probable that the transaction would be accounted for as a business combination and the purchase would be consummated. Effective as of October 1, 2016, we adopted the revised guidance regarding business combinations as further discussed below under “Recently Adopted Accounting Pronouncements.” Acquisitions of real estate communities occurring on or after October 1, 2016 are generally not expected to be business combinations, and accordingly, acquisition costs incurred on or after October 1, 2016 are capitalized and included in the purchase price of an acquisition of a multifamily community. Acquisition costs related to unimproved or non-operating land, primarily related to developments, are capitalized. Acquisition costs incurred prior to consummation of an acquisition are recorded in other assets. In the event, an acquisition is not consummated, any capitalized acquisition costs are expensed upon that determination.
Transition Expenses
Transition expenses include expenses directly and specifically related to our transition to self-management, primarily including legal, financial advisors, consultants, costs of the Company’s special committee of the board of directors (the “Special Committee”), general transition services (primarily related to staffing, name change, notices, transition-related insurance, information technology and facilities), expenses related to our listing on the NYSE and payments to our prior advisor and its affiliates, collectively referred to as “Behringer,” in connection with the transition to self-management discussed further in Note 13, “Transition Expenses.”
Income Taxes
We have elected to be taxed as a REIT under the Code and have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least
90%
of our REIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax at the corporate level. We intend to operate in such a manner as to continue to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. Beginning in 2013, taxable income from certain non-REIT activities is managed through a taxable REIT subsidiary (“TRS”) and is subject to applicable federal, state, and local income and margin taxes. We have no significant taxes associated with our TRS for the years ended
December 31, 2016
,
2015
or
2014
.
We have evaluated the current and deferred income tax related to state taxes with respect to which we do not have a REIT exemption, and we have
no
significant tax liability or benefit as of
December 31, 2016
or
2015
.
The carrying amounts of our assets and liabilities for financial statement purposes differ from our basis for federal income taxes due to tax accounting in Co-Investment Ventures, fair value accounting for business combinations, capitalization of interest and acquisition costs, straight lining of lease and related agreements and differing depreciation methods. The primary asset and liability balance sheet accounts with differences are real estate, intangibles, other assets, mortgages and notes payable and deferred revenues, primarily lease revenues, net. As a result of these differences, our net federal income tax basis exceeds the carrying value for financial statement purposes as of
December 31, 2016
by approximately
$66.9 million
.
We recognize the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. As of
December 31, 2016
and
2015
, we had
no
significant uncertain tax positions.
Concentration of Credit Risk
We invest our cash and cash equivalents among several banking institutions and money market accounts in an attempt to minimize exposure to any one of these entities. As of
December 31, 2016
and
2015
, we had cash and cash equivalents deposited in certain financial institutions in excess of federally-insured levels. We regularly monitor the financial condition of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.
Share-based Compensation
We have a stock-based incentive award plan for our employees and directors. Compensation expense associated with restricted stock units is recognized in general and administrative expenses in our consolidated statements of operations. We measure stock-based compensation at the estimated fair value on the grant date and recognize the amortization of compensation expense over the requisite service period.
Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting basic earnings per share for the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under our preferred stock and our stock-based incentive plans. Our unvested share-based awards are considered participating securities and are reflected in the calculation of diluted earnings per share. During periods of net loss, the assumed exercise of securities is anti-dilutive and is not included in the calculation of earnings per share. During 2016 and 2015, the dilutive impact was less than
$0.01
, and during 2014, any common stock equivalents were anti-dilutive.
For all periods presented, the convertible preferred stock was excluded from the calculation of earnings per share because the effect would not be dilutive. See Note 12 “ Stockholders’ Equity” for additional discussion.
Redemptions of Common Stock
We account for the possible redemption of our shares by classifying securities that are convertible for cash at the option of the holder outside of equity. We do not reclassify the shares to be redeemed from equity to a liability until such time as the redemption has been formally approved by our board of directors. The portion of the redeemed common stock in excess of the par value is charged to additional paid-in capital.
Reportable Segments
Our current business primarily consists of investing in and operating multifamily communities. Substantially all of our consolidated net income (loss) is from investments in real estate communities that we wholly own or own through Co-Investment Ventures. Our management evaluates operating performance on an individual investment level. However, as each of our investments has similar economic characteristics in our consolidated financial statements, the Company is managed on an enterprise-wide basis with
one
reportable segment.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes to consolidated financial statements. These estimates include such items as: the purchase price allocations for real estate and other acquisitions; impairment of long-lived assets, notes receivable; fair value evaluations; earning recognition of noncontrolling interests ; depreciation and amortization; and share-based compensation measurements. Actual results could differ from those estimates.
Reclassifications
Certain financial information on the Consolidated Statements of Operations for the years ended
December 31, 2015
and
2014
have been revised to conform to the current year presentation. For the years ended
December 31, 2015
and
2014
, the consolidated statement of operations reflects the single line item “acquisition, investment and development expenses” that was previously presented on two lines “acquisition expenses” (approximately
$0.6 million
and
$0.0 million
, respectively) and “investment and other development expenses” (approximately
$4.2 million
and
$1.2 million
, respectively).
Recently Adopted Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The guidance was effective for annual periods ending after December 15, 2016. The guidance relates to management’s responsibility in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures as applicable. The adoption of this guidance did not have an impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02 , "Amendments to the Consolidation Analysis." The guidance was effective January 1, 2016 and requires companies to evaluate the consolidation of certain legal entities under a revised consolidation model, which modified the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. Reporting entities which consolidate or hold a variable interest in a VIE as a result of this standard are subject to additional disclosure requirements. We adopted ASU 2015-02 effective January 1, 2016 applying the modified retrospective method. The adoption of this standard did not result in any changes in our previous consolidation conclusions. However, upon adoption, all previously consolidated CO-JVs, as discussed in Note 6, "Variable Interest Entities," were classified as VIEs. As we are considered the primary beneficiary, we will continue to consolidate these CO-JVs.
In April 2015, the FASB issued ASU 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” The guidance requires costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt rather than being recorded as a deferred charge and presented as an asset. The standard also requires amortization of debt issuance costs to be reported as interest expense. We are currently presenting the amortization of debt issuance costs as a separate line in the statement of operations. The standard does not address presentation of debt issuance costs related to credit facilities allowing the Company to adopt an accounting policy regarding classification of debt issuance costs related to credit facilities. Accordingly, we have elected to report debt issuance costs related to credit facilities as a deduction to the credit facilities payable in the liability section of the consolidated balance sheet. We adopted the standard effective January 1, 2016. The retrospective application required upon adoption of this standard resulted in a reclassification of approximately
$15.2 million
of unamortized debt issuance costs from other assets, net to a deduction from mortgages and notes payable of
$11.7 million
and credit facilities payable of
$3.5 million
, respectively, in our consolidated balance sheets as of December 31, 2015.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement to retrospectively account for adjustments to provisional amounts recognized in a business combination. The acquirer in a business combination is required to recognize any adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. A company must present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We adopted the standard effective January 1, 2016. The adoption of this pronouncement did not have any effect on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which affects the presentation of how share-based payments are accounted for and presented in the financial statements. We adopted the standard during the second quarter of 2016 effective as of January 1, 2016 on a modified retrospective basis. The adoption of this pronouncement did not have any effect on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Clarifying the Definition of a Business,” with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The revised guidance provides a screen to determine when a set of assets and activities (collectively referred to as a “set”) is a business or not. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The FASB made two exceptions in which a company should combine separately identifiable assets into a single asset (1) certain tangible assets attached to each other that cannot be removed without significant cost or diminution in utility or fair value and (2) in-place lease intangibles, including favorable and unfavorable lease assets and liabilities, and the related leased assets. We adopted the standard effective October 1, 2016 on a prospective basis.
3.
New Accounting Pronouncements
In May 2014, the FASB issued updated guidance with respect to revenue recognition. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The revised guidance will replace most existing revenue and real estate sale recognition guidance in GAAP when it becomes effective. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however, our accounting for the sale of real estate will be required to follow the revised guidance. The revised guidance allows for the use of either the full or modified retrospective transition method. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We have not yet selected a transition method and are currently evaluating each of our revenue streams for the effect that the adoption of the revised guidance will have on our consolidated financial statements and related disclosures. We do not expect the new guidance to have a significant effect on the recognition of our real estate sales; however, such final determination can only be made based on the specific terms of such sale. We plan to adopt the guidance effective January 1, 2018.
In February 2016, the FASB issued a new standard, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less, which are our primary lease term, will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is effective for fiscal years and interim periods within those years beginning after December 31, 2018, and early adoption is permitted. This standard must be applied as of the beginning of the earliest comparative period presented in the year of adoption. We are currently evaluating our leases to determine the impact this standard may have on our consolidated financial statements and related disclosures. As a lessee, we have a limited number of lease agreements, mostly related to our office space and office equipment. As a lessor, our primary multifamily community leases are less than one year, and we expect that only our long-term leases, primarily retail leases, will be affected.
In August 2016, the FASB issued guidance, which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. In November 2016, the FASB issued additional guidance
requiring that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period using a retrospective transition method to each period presented. We are currently evaluating the full impact of the new standard.
4. Business Combinations
In September 2015, we acquired Ev, a
208
-unit multifamily community located in San Diego, California, from an unaffiliated seller, for an aggregate gross purchase price of
$84.0 million
, excluding closing costs. Ev was a recently completed development in lease up at the date of acquisition and as of
December 31, 2016
, is classified as a stabilized operating community.
In September 2015, we acquired The Mark, a
208
-unit multifamily community located in Boca Raton, Florida, from an unaffiliated seller, for an aggregate gross purchase price of
$81.7 million
, excluding closing costs. The Mark was a recently completed development in lease up at the date of acquisition and as of
December 31, 2016
, is classified as a stabilized operating community.
The following tables present certain additional information regarding our 2015 business combinations. There were no business combinations during the year ended
December 31, 2016
.
The amounts recognized for major assets acquired and liabilities assumed, including a reconciliation to cash consideration as of the business combination dates, are as follows (in millions):
|
|
|
|
|
|
|
|
2015 Acquisitions
|
Land
|
|
$
|
23.9
|
|
Building and improvements
|
|
141.7
|
|
Accrued liabilities
|
|
(0.4
|
)
|
Cash consideration
|
|
$
|
165.2
|
|
|
|
|
Certain operating information for the periods from the business combination dates to
December 31, 2015
is as follows (in millions):
|
|
|
|
|
|
|
|
For the Periods to December 31, 2015
|
Rental revenues
|
|
$
|
1.4
|
|
Acquisition expenses
|
|
0.6
|
|
Depreciation and amortization
|
|
1.8
|
|
Net loss attributable to common stockholders
|
|
(2.3
|
)
|
See Note 18, “Subsequent Events” for information regarding an acquisition subsequent to
December 31, 2016
.
5.
Real Estate Investments
Real Estate Investments and Intangibles and Related Depreciation and Amortization
As of
December 31, 2016
and
2015
, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Buildings
|
|
Intangibles
|
|
Buildings
|
|
Intangibles
|
|
|
and
|
|
In-Place
|
|
Other
|
|
and
|
|
In-Place
|
|
Other
|
|
|
Improvements
|
|
Leases
|
|
Contractual
|
|
Improvements
|
|
Leases
|
|
Contractual
|
Cost
|
|
$
|
2,814.2
|
|
|
$
|
34.1
|
|
|
$
|
18.9
|
|
|
$
|
2,627.7
|
|
|
$
|
37.1
|
|
|
$
|
24.2
|
|
Less: accumulated depreciation and amortization
|
|
(461.9
|
)
|
|
(32.1
|
)
|
|
(3.9
|
)
|
|
(357.0
|
)
|
|
(34.9
|
)
|
|
(8.3
|
)
|
Net
|
|
$
|
2,352.3
|
|
|
$
|
2.0
|
|
|
$
|
15.0
|
|
|
$
|
2,270.7
|
|
|
$
|
2.2
|
|
|
$
|
15.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to our real estate investments for the years ended
December 31, 2016
,
2015
, and
2014
was approximately
$122.0 million
,
$98.8 million
, and
$88.8 million
, respectively.
Cost of intangibles relates to the value of in-place leases and other contractual intangibles. Cost of other contractual intangibles as of both
December 31, 2016
and
2015
, include
$2.6 million
and
$7.9 million
, respectively, of intangibles, primarily asset management and related fee revenue services. Cost of other contractual intangibles as of both
December 31, 2016
and
2015
, also includes
$6.8 million
related to the use rights of a parking garage and site improvements and
$9.5 million
of indefinite-lived contractual rights related to land air rights.
Amortization expense associated with our lease and other contractual intangibles for the years ended
December 31, 2016
,
2015
, and
2014
was approximately
$1.1 million
,
$3.4 million
, and
$4.2 million
, respectively.
Anticipated amortization associated with lease and other contractual intangibles for each of the following five years is as follows (in millions):
|
|
|
|
|
|
|
|
Anticipated Amortization
|
Year
|
|
of Intangibles
|
2017
|
|
$
|
1.1
|
|
2018
|
|
0.5
|
|
2019
|
|
0.5
|
|
2020
|
|
0.4
|
|
2021
|
|
0.4
|
|
Developments
In December 2015, we acquired The Mile, a
120
-unit multifamily development located in Miami, Florida, from an unaffiliated seller, for an aggregate gross purchase price of
$48.0 million
, excluding closing costs. As of December 31, 2015, The Mile was classified as construction in progress and as of
December 31, 2016
, is classified as operating real estate.
For the years ended
December 31, 2016
,
2015
, and
2014
, we capitalized the following amounts of interest, real estate taxes and direct overhead related to our developments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Interest
|
|
$
|
7.7
|
|
|
$
|
16.5
|
|
|
$
|
17.8
|
|
Real estate taxes
|
|
2.2
|
|
|
4.1
|
|
|
4.2
|
|
Direct overhead
|
|
0.5
|
|
|
0.6
|
|
|
0.8
|
|
Sales of Real Estate Reported in Continuing Operations
The following table presents our sales of real estate for the years ended
December 31, 2016
,
2015
and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date of Sale
|
|
Multifamily Community and Location
|
|
Sales Contract Price
|
|
Net Cash Proceeds
|
|
Gains on Sales of Real Estate
|
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
December 2016
|
|
The Reserve at LaVista Walk — Atlanta, GA (a)
|
|
$
|
57.2
|
|
|
$
|
56.5
|
|
|
$
|
26.1
|
|
August 2016
|
|
Renaissance, including land held for future development — Concord, California (b)
|
|
65.4
|
|
|
65.0
|
|
|
17.5
|
|
|
|
Total
|
|
$
|
122.6
|
|
|
$
|
121.5
|
|
|
$
|
43.6
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2015
|
|
|
|
|
|
|
July 2015
|
|
Uptown Post Oak — Houston, TX
|
|
$
|
90.1
|
|
|
$
|
88.3
|
|
|
$
|
34.4
|
|
June 2015
|
|
Burnham Pointe — Chicago, IL
|
|
126.0
|
|
|
123.6
|
|
|
48.6
|
|
June 2015
|
|
Shady Grove — Rockville, MD (c)
|
|
38.5
|
|
|
38.4
|
|
|
—
|
|
|
|
Total
|
|
$
|
254.6
|
|
|
$
|
250.3
|
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2014
|
|
|
|
|
|
|
February 2014
|
|
Tupelo Alley — Portland, OR
|
|
$
|
52.9
|
|
|
$
|
33.4
|
|
|
$
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The cash proceeds from the sale are reflected in “Tax like-kind exchange escrow” on the consolidated balance sheet as of
December 31, 2016
. The proceeds are being held in escrow in connection with a 1031 exchange for replacement properties. See Note 18, “Subsequent Events” for additional discussion on the use of the escrow.
|
|
|
(b)
|
All cash proceeds from the sale have been collected as of the date of the sale. A portion of the reported gain on sale of real estate has been deferred, reducing the gain by
$2.0 million
, pending assignment of related development and construction agreements to the buyer and our release from these agreements.
|
|
|
(c)
|
In May 2015, we recorded an impairment of
$3.1 million
based on the Company’s decision to sell the development at an amount below the carrying value. The impairment, which was primarily due to certain costs capitalized for GAAP not expected to be recovered in a sale, is included in “Acquisition, investment and development expenses” on the consolidated statement of operations. In June 2015, we closed on the sale of the development to a group led by the Developer Partner for net proceeds of
$38.4 million
, the development’s net carrying value at the date of sale.
|
The following table presents net income related to the multifamily communities sold, for the years ended
December 31, 2016
,
2015
and
2014
, and includes the gains on sale of real estate (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net income from multifamily communities sold
|
|
$
|
45.1
|
|
|
$
|
85.5
|
|
|
$
|
24.6
|
|
Less: net income attributable to noncontrolling interest
|
|
(8.1
|
)
|
|
(0.3
|
)
|
|
(7.5
|
)
|
Net income attributable to common stockholders
|
|
$
|
37.0
|
|
|
$
|
85.2
|
|
|
$
|
17.1
|
|
|
|
|
|
|
|
|
6.
Variable Interest Entities
Effective January 1, 2016, we adopted the revised guidance on consolidation accounting as further discussed in Note 2, “Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements.” Under the new guidance we have concluded that all of our CO-JVs, including the Master Partnership, are VIEs, and we are the primary beneficiary of each CO-JV. All of these VIEs were created for the purpose of operating and developing multifamily communities. Because these CO-JVs were previously consolidated, the VIE determination did not affect our financial position, financial operations or cash flows. Our ownership interest in each of the CO-JVs is based upon contributed capital and ranges from
50%
to
100%
. Each of the VIEs are businesses, and assets of each VIE are available for purposes other than the settlement of the VIE’s obligations.
The following table presents the significant balances related to our VIEs as of
December 31, 2016
and
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Total assets
|
|
$
|
2,335.1
|
|
|
$
|
2,378.1
|
|
Net operating real estate
|
|
2,154.6
|
|
|
2,033.3
|
|
Construction in progress
|
|
120.8
|
|
|
287.9
|
|
|
|
|
|
|
Mortgages and notes payable outstanding (a)
|
|
$
|
1,237.9
|
|
|
$
|
1,173.2
|
|
Plus: unamortized adjustments from business combinations
|
|
0.1
|
|
|
1.0
|
|
Less: deferred financing costs, net
|
|
(7.9
|
)
|
|
(9.5
|
)
|
Total mortgages and notes payable, net
|
|
$
|
1,230.1
|
|
|
$
|
1,164.7
|
|
|
|
|
|
|
|
|
(a)
|
Except as noted below, the lenders on the outstanding mortgages and notes payable have no recourse to us.
|
Of the
$1,237.9 million
of mortgages and notes payable outstanding as of
December 31, 2016
,
$672.1 million
represents fully funded, non recourse mortgages and the remaining
$565.8 million
relates to amounts outstanding for construction financing with total commitments of
$675.4 million
. We have provided partial payment guarantees ranging from
5%
to
25%
on
$384.0 million
of the
$565.8 million
outstanding as of
December 31, 2016
. The outstanding amount of these guarantees is
$75.7 million
as of
December 31, 2016
. Each guarantee may terminate or be reduced upon completion of the development or if the development achieves certain operating results. The construction loans are secured by a first mortgage in each multifamily community. See Note 9, “Mortgages and Notes Payable” for further information on our construction loans.
7.
Other Assets
The components of other assets as of
December 31, 2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Notes receivable, net (a)
|
|
$
|
26.7
|
|
|
$
|
36.5
|
|
Resident, tenant and other receivables
|
|
5.2
|
|
|
12.2
|
|
Escrows and restricted cash
|
|
13.7
|
|
|
8.7
|
|
Prepaid assets, deposits and other assets
|
|
5.6
|
|
|
7.6
|
|
Total other assets
|
|
$
|
51.2
|
|
|
$
|
65.0
|
|
|
|
(a)
|
Notes receivable include mezzanine loans related to multifamily development projects. As of
December 31, 2016
, the weighted average interest rate is
15.0%
and the remaining years to scheduled maturity is
1.5
years. The borrowers generally have options to prepay prior to maturity or to extend the maturity for
one
to
two
years.
|
8.
Leasing Activity
In addition to multifamily resident units, certain of our consolidated multifamily communities have retail areas, representing approximately
1%
of total rentable area of our consolidated multifamily communities. Future minimum base rental receipts due to us under these non-cancelable retail leases in effect as of
December 31, 2016
are as follows (in millions):
|
|
|
|
|
|
|
|
Future Minimum
|
Year
|
|
Lease Receipts
|
2017
|
|
$
|
3.8
|
|
2018
|
|
3.8
|
|
2019
|
|
3.8
|
|
2020
|
|
3.7
|
|
2021
|
|
3.5
|
|
Thereafter
|
|
40.0
|
|
Total
|
|
$
|
58.6
|
|
9.
Mortgages and Notes Payable
The following table summarizes the carrying amounts of the mortgages and notes payable classified by whether the obligation is ours or that of the applicable consolidated Co-Investment Venture as of
December 31, 2016
and
2015
(dollar amounts in millions and monthly LIBOR at
December 31, 2016
is
0.77%
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
December 31,
|
|
December 31,
|
|
Weighted Average
|
|
|
|
|
2016
|
|
2015
|
|
Interest Rates
|
|
Maturity Dates
|
Company level
(a)
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgages payable
|
|
$
|
292.6
|
|
|
$
|
297.3
|
|
|
3.88%
|
|
2018 to 2021
|
Total Company level
|
|
292.6
|
|
|
297.3
|
|
|
|
|
|
Co-Investment Venture level - consolidated
(b)
|
|
|
|
|
|
|
|
|
|
|
Fixed rate mortgages payable
|
|
636.6
|
|
|
631.6
|
|
|
3.23%
|
|
2017 to 2023
|
Variable rate mortgage payable (c)
|
|
35.5
|
|
|
11.6
|
|
|
Monthly LIBOR + 1.94%
|
|
2017
|
Fixed Rate construction loans payable
|
|
|
|
|
|
|
|
|
Operating
|
|
—
|
|
|
29.2
|
|
|
N/A
|
|
N/A
|
In Construction (d)
|
|
50.9
|
|
|
44.5
|
|
|
4.00%
|
|
2018
|
Variable rate construction loans payable (e)
|
|
|
|
|
|
|
|
|
Operating
|
|
498.5
|
|
|
355.3
|
|
|
Monthly LIBOR + 2.08%
|
|
2017 to 2018
|
In Construction
|
|
16.4
|
|
|
101.0
|
|
|
Monthly LIBOR + 2.15%
|
|
2019 to 2020
|
Total Co-Investment Venture level - consolidated
|
|
1,237.9
|
|
|
1,173.2
|
|
|
|
|
|
Total Company and Co-Investment Venture level
|
|
1,530.5
|
|
|
1,470.5
|
|
|
|
|
|
Plus: unamortized adjustments from business combinations
|
|
1.0
|
|
|
2.5
|
|
|
|
|
|
Less: deferred financing costs, net
|
|
(9.3
|
)
|
|
(11.7
|
)
|
|
|
|
|
Total consolidated mortgages and notes payable
|
|
$
|
1,522.2
|
|
|
$
|
1,461.3
|
|
|
|
|
|
|
|
(a)
|
Company level debt is defined as debt that is a direct obligation of the Company or one of the Company’s wholly owned subsidiaries.
|
|
|
(b)
|
Co-Investment Venture level debt is defined as consolidated debt that is an obligation of the Co-Investment Venture and not an obligation or contingency for us.
|
|
|
(c)
|
As of December 31, 2016, includes a
$24.2 million
mortgage loan with
two
one
year extension options.
|
|
|
(d)
|
As of
December 31, 2016
, includes
one
loan with a total commitment of
$53.5 million
. The construction loans includes a
two
year extension option. As of
December 31, 2016
, there is
$2.6 million
remaining to draw under the construction loan. We may elect not to fully draw down any unfunded commitment.
|
|
|
(e)
|
As of
December 31, 2016
, includes
thirteen
loans with total commitments of
$621.9 million
. As of
December 31, 2016
, the Company has partially guaranteed
seven
of these loans with total commitments of
$411.1 million
, of which
$75.7 million
is recourse to the Company. Our percentage guarantee on each of these loans ranges from
5%
to
25%
. These loans include
one
to
two
year extension options. As of
December 31, 2016
, there is
$107.1 million
remaining to draw under the construction loans. We may elect not to fully draw down any unfunded commitment.
|
As of
December 31, 2016
,
$2.6 billion
of the net consolidated carrying value of real estate collateralized the mortgages and notes payable. We believe we are in compliance with all financial covenants as of
December 31, 2016
.
As of
December 31, 2016
, contractual principal payments for our mortgages and notes payable (excluding any extension options) for the five subsequent years and thereafter are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Co-Investment
|
|
Total
|
Year
|
|
Company Level
|
|
Venture Level
|
|
Consolidated
|
2017
|
|
$
|
5.8
|
|
|
$
|
310.1
|
|
|
$
|
315.9
|
|
2018
|
|
153.4
|
|
|
425.0
|
|
|
578.4
|
|
2019
|
|
79.4
|
|
|
158.9
|
|
|
238.3
|
|
2020
|
|
54.0
|
|
|
173.0
|
|
|
227.0
|
|
2021
|
|
—
|
|
|
108.5
|
|
|
108.5
|
|
Thereafter
|
|
—
|
|
|
62.4
|
|
|
62.4
|
|
Total
|
|
$
|
292.6
|
|
|
$
|
1,237.9
|
|
|
1,530.5
|
|
Add: unamortized adjustments from business combinations
|
|
|
|
|
|
|
|
1.0
|
|
Less: deferred financing costs, net
|
|
|
|
|
|
(9.3
|
)
|
Total mortgages and notes payable
|
|
|
|
|
|
|
|
$
|
1,522.2
|
|
We believe these mortgages and notes payable can be refinanced or retired from available capital resources at or prior to their maturity dates, which may include extension options.
10.
Credit Facilities Payable
We have
two
credit facilities as of
December 31, 2016
: a
$150 million
credit facility (the “
$150
Million Facility”) and a
$200 million
revolving credit facility (the
$200
Million Facility”). The following table presents the amounts outstanding under the
two
credit facilities as of
December 31, 2016
and
2015
(dollar amounts in millions, and monthly LIBOR at
December 31, 2016
was
0.77%
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Interest Rate as of December 31, 2016
|
|
Maturity Date
|
$150 Million Facility
|
|
$
|
10.0
|
|
|
$
|
49.0
|
|
|
Monthly LIBOR + 2.08%
|
|
April 1, 2017
|
$200 Million Facility
|
|
—
|
|
|
—
|
|
|
Monthly LIBOR + 2.50%
|
|
January 14, 2019
|
Total credit facilities outstanding
|
|
10.0
|
|
|
49.0
|
|
|
|
|
|
Less: deferred financing costs, net
|
|
$
|
(2.0
|
)
|
|
$
|
(3.5
|
)
|
|
|
|
|
|
Total credit facilities payable, net
|
|
$
|
8.0
|
|
|
$
|
45.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We retired the
$150
Million Facility on February 28, 2017. The repayment was funded from draws on the $200 Million Facility. As of
December 31, 2016
, our availability to draw under the
$150
Million Facility was limited to
$83.3 million
based upon the value of the collateral pool.
The
$200
Million Facility matures on
January 14, 2019
, is fully available to be drawn on, and may be extended for an additional
one
year term at our option. Borrowing tranches bear interest at rates based on defined leverage ratios, which as of
December 31, 2016
is LIBOR +
2.5%
. The
$200
Million Facility also provides for fees based on unutilized amounts and minimum usage. We may increase the size of the
$200
Million Facility from
$200.0 million
up to a total of
$400.0 million
after satisfying certain conditions.
Draws under the
$200
Million Facility are primarily supported by equity pledges of our wholly owned subsidiaries, and are secured by a first mortgage lien, an assignment of leases and rents against
two
wholly owned multifamily communities, and a first priority perfected assignment of a portion of certain of our notes receivable. In addition, we may provide additional security related to future property acquisitions.
The
$200
Million Facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions. In particular, the
$200
Million Facility agreement requires us to maintain (as defined in the agreement) a tangible consolidated net worth of at least
$1.16 billion
, consolidated total indebtedness to total gross asset value of less than
65%
, and adjusted rolling 12-month consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated fixed charges of not less than
1.50
to 1 and a limit on distributions and share repurchases in excess of
95%
of our rolling 12-month funds from operations generally calculated in accordance with the current definition of funds from operations adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). For the year ended
December 31, 2016
, our declared distributions were
81%
of such defined funds from operations during such period. We believe we are in compliance with all provisions of the
$200
Million Facility agreement as of
December 31, 2016
.
11.
Noncontrolling Interests
Non-redeemable Noncontrolling Interests
Non-redeemable noncontrolling interests for the Co-Investment Venture partners represent their proportionate share of the equity in consolidated real estate ventures. Each noncontrolling interest is not redeemable by the holder, and accordingly, is reported as equity. Income and losses are allocated to the noncontrolling interest holders based on their effective ownership percentage. This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.
As of
December 31, 2016
and
2015
, non-redeemable noncontrolling interests (“NCI”) consisted of the following, including the direct and non-direct noncontrolling interests ownership ranges where applicable (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Effective
|
|
|
|
Effective
|
|
|
Amount
|
|
NCI %
(a)
|
|
Amount
|
|
NCI %
(a)
|
PGGM Co-Investment Partner
|
|
$
|
295.6
|
|
|
30% to 45%
|
|
$
|
332.0
|
|
|
30% to 45%
|
MW Co-Investment Partner
|
|
109.6
|
|
|
45%
|
|
123.7
|
|
|
45%
|
Developer Partners
|
|
4.1
|
|
|
0% to 10%
|
|
4.0
|
|
|
—%
|
Subsidiary preferred units
|
|
2.0
|
|
|
(b)
|
|
2.1
|
|
|
(b)
|
Total non-redeemable NCI
|
|
$
|
411.3
|
|
|
|
|
$
|
461.8
|
|
|
|
(a) Effective noncontrolling interest percentage is based upon the noncontrolling interest’s participation in distributable operating cash. This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.
(b) The effective NCI for the preferred units is not meaningful and the preferred units have no voting or participation rights.
Each noncontrolling interest relates to ownership interests in CO-JVs where we have substantial operational control rights. In the case of the PGGM Co-Investment Partner, their noncontrolling interest includes an interest in the Master Partnership and the PGGM CO-JVs. For PGGM CO-JVs and MW CO-JVs, capital contributions and distributions are generally made pro rata in accordance with these ownership interests; however, the Master Partnership’s and the PGGM CO-JV’s pro rata interests are subject to a promoted interest to us if certain performance returns are achieved. Developer CO-JVs generally have
limited participation in contributions and generally only participate in distributions after certain preferred returns are collected by us or the PGGM CO-JVs, as applicable, which in some cases may not be until we have received all of our investment capital. None of these Co-Investment Venture partners have any rights to put or redeem their ownership interest; however, they generally provide for buy/sell rights after certain periods. In certain circumstances, the governing documents of the PGGM CO-JV or MW CO-JV may require a sale of the Co-Investment Venture or its subsidiary REIT rather than an asset sale.
Noncontrolling interests also include between
121
to
125
preferred units issued by a subsidiary of each of the PGGM CO-JVs and the MW CO-JVs in order for such subsidiaries to qualify as a REIT for federal income tax purposes. The subsidiary preferred units pay an annual distribution of
12.5%
on their face value and are senior in priority to all other members’ equity. The PGGM CO-JVs and MW CO-JVs may cause the subsidiary REIT, at their option, to redeem the subsidiary preferred units in whole or in part, at any time for cash at their redemption price, generally
$500
per unit (par value). The subsidiary preferred units are not redeemable by the unit holders, and as of
December 31, 2016
, we have no current intent to exercise our redemption option. Accordingly, these noncontrolling interests are reported as equity.
For the years ended
December 31, 2016
,
2015
and
2014
, we paid the following distributions to noncontrolling interests (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Distributions paid to noncontrolling interests:
|
|
|
|
|
|
|
Operating activities
|
$
|
26.3
|
|
|
$
|
17.7
|
|
|
$
|
22.5
|
|
|
Investing and financing activities
|
35.1
|
|
|
30.8
|
|
|
25.5
|
|
|
Total
|
$
|
61.4
|
|
|
$
|
48.5
|
|
|
$
|
48.0
|
|
|
|
|
|
|
|
|
On May 7, 2015, we acquired
six
noncontrolling interests in PGGM CO-JVs, which related to equity investments in
six
multifamily communities, and
one
controlling interest in a PGGM CO-JV, which related to a debt investment in a multifamily community. The net purchase price was
$119.8 million
, exclusive of closing costs. After the acquisition, we owned
100%
in all but one of the PGGM CO-JVs in which we owned a post acquisition
93.5%
interest based upon contributed capital. In connection with the acquisitions, we also received from the Master Partnership a disposition fee of
$1.0 million
and a promoted interest payment of
$3.5 million
, which were eliminated in our consolidation of the Master Partnership but did increase net income available to the Company. No promoted interest payments were received for the years ended
December 31, 2016
and
2014
.
Because these equity investments were previously accounted for on the consolidated method of accounting, the acquisition of the investment interests did not change the carrying value for the related assets or liabilities or reported consolidated operations for revenues and expenses included in reported net income. The acquisition of the equity investments reduced noncontrolling interests for the related amounts of the CO-JVs with the difference between the noncontrolling interest amounts and the purchase price of
$59.2 million
recorded to additional paid in capital. The acquisition of the debt investment resulted in a change from equity method accounting to the consolidated method of accounting and accordingly, the underlying assets and liabilities were recorded at a fair value of
$16.6 million
.
On
February 28, 2014
, we sold an approximately
37%
noncontrolling interest in
two
Developer CO-JVs to PGGM for
$13.2 million
. No gain or loss was recognized in recording these transactions, but a net decrease to additional paid-in capital of
$0.8 million
was recorded.
During the year ended
2014
, we formed
two
new PGGM CO-JVs to develop
two
separate multifamily communities in California.
Redeemable Noncontrolling Interests
As of
December 31, 2016
and
2015
, redeemable noncontrolling interests (“NCI”) consisted of the following (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Effective
|
|
|
|
Effective
|
|
|
Amount
|
|
NCI %
(a)
|
|
Amount
|
|
NCI %
(a)
|
Developer Partners
|
|
$
|
29.1
|
|
|
0% to 10%
|
|
$
|
29.1
|
|
|
0% to 10%
|
(a) Effective noncontrolling interest percentage is based upon the noncontrolling interest’s participation in distributable operating cash. This effective ownership is indicative of, but may differ from, percentages for distributions (particularly in the event of a sale of the underlying multifamily community), contributions or financing requirements. For Co-Investment Ventures where the developer’s equity has been returned, the effective noncontrolling interest percentage is shown as zero.
Developer Partners included in redeemable noncontrolling interests represent ownership interests in Developer CO-JVs by regional or national multifamily developers, which may require that we pay or reimburse our Developer Partners upon certain events. They also generally have put options, generally exercisable
one year
after completion of the development and thereafter, pursuant to which we would be required to acquire their ownership interest at a set price. As of
December 31, 2016
, we have recorded in redeemable noncontrolling interests
$28.8 million
of put options, of which
$8.6 million
are exercisable by certain of our Developer Partners but have not been exercised. These Developer CO-JVs also generally include buy/sell provisions, generally available after the tenth year after completion of the development and mark to market elections which if elected, are generally available after the seventh year after formation of the Developer CO-JV. The mark to market provisions provide us the option to acquire the Developer Partner’s ownership interest or sell the multifamily community. None of these buy/sell or mark to market rights are currently available. If the noncontrolling interest relates to a PGGM CO-JV, then the PGGM Co-Investment Partner would be responsible for its share of such payments.
Each of these Developer CO-JVs is managed by a subsidiary of ours. As manager, we have substantial operational control rights. These Developer CO-JVs generally provide that we have a preferred cash flow distribution until we receive certain returns on and of our investment. If the individual put options are not exercised, these Developer Partners have a back end interest, generally only attributable to distributions related to a property sale or financing. Generally, these noncontrolling interests have no obligation to make any additional capital contributions. For the years ended
December 31, 2016
,
2015
and
2014
, no promoted interest payments were made by us related to redeemable noncontrolling interests.
12.
Stockholders’ Equity
Capitalization
In connection with our transition to self-management, on July 31, 2013, we issued
10,000
shares of a new Series A non-participating, voting, cumulative,
7.0%
convertible preferred stock, par value
$0.0001
per share (the “Series A Preferred Stock”), to Behringer. On February 13, 2017, all outstanding shares of the Series A Preferred Stock were canceled without any conversion or other consideration. See Note 14, “Commitments and Contingencies” for additional discussion related to the Series A Preferred Stock.
Stock Plans
Our Second Amended and Restated Incentive Award Plan (the “Incentive Award Plan”) authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards. A total of
20 million
shares has been authorized and reserved for issuance under the Incentive Award Plan and
18.8 million
shares of common stock are available for issuance as of
December 31, 2016
.
Restricted Stock Units
Restricted stock units are granted to our directors and certain executive employees and generally vest in equal increments over a
three
year period. Dividends on restricted stock units that have vested but not been exercised are reflected in other distributions in the consolidated statement of equity. The following table includes the number of restricted stock units
granted, exercised (including units used to satisfy employee income tax withholding), forfeited and outstanding as of
December 31, 2016
,
2015
, and
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
|
Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding January 1,
|
549,496
|
|
|
$
|
9.64
|
|
|
248,691
|
|
|
$
|
10.03
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
424,128
|
|
|
9.30
|
|
|
482,846
|
|
|
9.47
|
|
|
248,691
|
|
|
10.03
|
|
Exercised
|
(151,525
|
)
|
|
9.52
|
|
|
(170,632
|
)
|
|
9.71
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(20,496
|
)
|
|
9.66
|
|
|
(11,409
|
)
|
|
9.64
|
|
|
—
|
|
|
—
|
|
Outstanding December 31,
|
801,603
|
|
|
$
|
9.48
|
|
|
549,496
|
|
|
$
|
9.64
|
|
|
248,691
|
|
|
$
|
10.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested restricted stock units
|
152,363
|
|
|
$
|
9.76
|
|
|
64,437
|
|
|
$
|
9.90
|
|
|
11,356
|
|
|
$
|
10.03
|
|
Unvested restricted stock units
|
649,240
|
|
|
$
|
9.42
|
|
|
485,059
|
|
|
$
|
9.61
|
|
|
237,335
|
|
|
$
|
10.03
|
|
Restricted Stock
Restricted stock is granted to certain employees and generally vests in equal increments over a
three
year period following the grant date. The following is a summary of the restricted stock granted, exercised (including shares used to satisfy employee income tax withholding), forfeited and outstanding as of
December 31, 2016
and
2015
.
No
restricted stock was granted in
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding January 1,
|
20,868
|
|
|
$
|
9.21
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
145,845
|
|
|
9.69
|
|
|
25,746
|
|
|
9.21
|
|
Exercised
|
(6,414
|
)
|
|
9.21
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(36,638
|
)
|
|
9.20
|
|
|
(4,878
|
)
|
|
9.21
|
|
Outstanding December 31,
|
123,661
|
|
|
$
|
9.77
|
|
|
20,868
|
|
|
$
|
9.21
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
123,661
|
|
|
$
|
9.77
|
|
|
20,868
|
|
|
$
|
9.21
|
|
For the years ended
December 31, 2016
,
2015
and
2014
, we had approximately
$3.5 million
,
$3.2 million
, and
$0.8 million
, respectively, in compensation costs related to share-based payments including dividend equivalent payments. Unearned compensation costs for restricted stock units and restricted stock was approximately
$4.8 million
at
December 31, 2016
, and is expected to be recognized over a weighted average period of
2.0
years.
Distributions
The following table presents the regular distributions declared for the years ended
December 31, 2016
,
2015
and
2014
(in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
Declared (a)
|
|
Declared per Share (a)
|
|
Declared (a)
|
|
Declared per Share (a)
|
|
Declared (a)
|
|
Declared per Share (a)
|
Fourth quarter
|
|
$
|
12.5
|
|
|
$
|
0.075
|
|
|
$
|
12.5
|
|
|
$
|
0.075
|
|
|
$
|
12.5
|
|
|
$
|
0.075
|
|
Third quarter
|
|
12.5
|
|
|
0.075
|
|
|
12.5
|
|
|
0.075
|
|
|
14.9
|
|
|
0.088
|
|
Second quarter
|
|
12.5
|
|
|
0.075
|
|
|
12.5
|
|
|
0.075
|
|
|
14.7
|
|
|
0.087
|
|
First quarter
|
|
12.5
|
|
|
0.075
|
|
|
12.5
|
|
|
0.075
|
|
|
14.6
|
|
|
0.086
|
|
Total
|
|
$
|
50.0
|
|
|
$
|
0.300
|
|
|
$
|
50.0
|
|
|
$
|
0.300
|
|
|
$
|
56.7
|
|
|
$
|
0.336
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents distributions accruing during the period. Beginning with the fourth quarter of 2014, the board of directors authorizes regular distributions to be paid to stockholders of record with respect to a single record date each quarter. Prior to the fourth quarter of 2014, regular distributions accrued on a daily basis at a daily amount of
$0.000958904
(
$0.35
annualized) per share of common stock and were paid in the following month.
|
On August 12, 2014, in anticipation of the Company’s listing on a national securities exchange, our board of directors elected to suspend our distribution reinvestment plan (“DRIP”) effective
August 24, 2014
, and on November 4, 2014, our board of directors approved the termination of the DRIP. As a result, all distributions paid subsequent to August 24, 2014 were paid in cash and not reinvested in shares of our common stock.
During
2016
,
2015
and
2014
, our distributions were classified as follows for federal income tax purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Ordinary income
|
|
55
|
%
|
|
58
|
%
|
|
42
|
%
|
Capital gains
|
|
14
|
%
|
|
23
|
%
|
|
19
|
%
|
Section 1250 recapture capital gains
|
|
7
|
%
|
|
5
|
%
|
|
—
|
%
|
Return of capital
|
|
24
|
%
|
|
14
|
%
|
|
39
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
The classification changes in
2016
were primarily due to decreased dispositions in
2016
as compared to
2015
. The classification changes in
2015
were primarily due to increased dispositions in
2015
as compared to
2014
and improved operating performance in
2015
compared to
2014
.
Share Redemption Program
On August 12, 2014, in anticipation of the Company’s listing on a national securities exchange, our board of directors elected to suspend our share redemption program (“SRP”), effective August 14, 2014, and on November 4, 2014, our board of directors approved the termination of the SRP.
Prior to the suspension and subsequent termination of our SRP, the purchase price per share redeemed under the SRP was generally set at
85%
of the then-current estimated share value pursuant to our valuation policy for ordinary redemptions and at the lesser of the then-current estimated share value pursuant to our valuation policy and the average price per share paid by the original purchaser of the shares being redeemed, less any special distributions, pursuant to our valuation policy for redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility. Prior to the suspension of our SRP in August 2014 and subsequent termination, we redeemed approximately
1.6 million
common shares at an average price of
$8.80
per share for
$14.2 million
for the year ended
December 31, 2014
.
On
December 29, 2014
, the Company acquired through a tender offer approximately
2.4 million
common shares at a price of
$9.25
per share for
$22.1 million
.
13.
Transition Expenses
On July 31, 2013 (the “Initial Closing”), we entered into a series of agreements and amendments to our existing agreements and arrangements with Behringer, setting forth various terms of and conditions to the modification of the business relationships between us and Behringer. We collectively refer to these agreements as the “Self-Management Transition Agreements.” From the Initial Closing through June 30, 2014, we hired executives and staff who were previously employees of Behringer and began hiring other employees, completing our transition to a self-managed company.
During the period from the Initial Closing through September 30, 2014, Behringer provided general transition services in support of our transition to self-management. Behringer was also paid fees and reimbursements under the terms of amended advisory and property management agreements that included a reduction of certain fees and expenses paid to Behringer under the prior agreements, which are described in Note 16, “Related Party Arrangements.”
We consummated the second and final closing of the Self-Management Transition Agreements on June 30, 2014, terminating the advisory and property management services with Behringer and paying Behringer
$3.5 million
for certain intangible assets, rights and contracts,
$1.25 million
as part of the general transition services described above and a monthly installment of
$0.4 million
for general transition services. We also reconciled certain miscellaneous closing matters related to employee benefits of former Behringer employees hired by us, transfers of office equipment and similar items.
Behringer provided shareholder services from June 30, 2014 through November 20, 2014 at a cost of
$2.9 million
, including an early termination payment related to our listing on the NYSE.
In addition to the above transactions, the Company incurred other expenses related to our transition to self-management and listing on the NYSE, primarily related to Special Committee and Company legal and financial advisors and general transition services (primarily staffing, name change, notices, transition-related insurance, information technology and facilities).
The table below represents the components of our transition expenses for the year ended
December 31, 2014
(in millions). We did not incur any transition expenses for the years ended
December 31, 2016
and
2015
.
|
|
|
|
|
|
|
|
For the Year ended December 31, 2014
|
Special Committee and Company legal and financial advisors
|
|
$
|
0.9
|
|
General transition services:
|
|
|
Behringer
|
|
2.9
|
|
Other service providers
|
|
2.5
|
|
Expenses related to listing on the NYSE
|
|
6.4
|
|
Total transition expenses
|
|
$
|
12.7
|
|
14.
Commitments and Contingencies
Substantially all of our Co-Investment Ventures include buy/sell provisions and substantially all of our Developer CO-JVs also include mark to market provisions. Under most of these provisions and during specific periods, a partner could make an offer to purchase the interest of the other partner and the other partner would have the option to accept the offer or purchase the offering partner’s interest at that price or in the case of a mark to market provision, we have the option to purchase the Developer Partner’s ownership interest at the established market price or sell the multifamily community. As of
December 31, 2016
, no such buy/sell offers are outstanding or mark to market provisions are available.
In the ordinary course of business, the multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below market rent, which is determined by a local or national authority. In certain markets, a local or national housing authority may make payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the California housing authority will make level annual payments of approximately
$2.0 million
through 2028 and
no
reimbursement for the remaining
20
-year period. We may also be required to reimburse the California housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of
$14.0 million
based on the fair value of the terms over the life of the
agreement. In addition, we record rental revenue from the California housing authority on a straight-line basis, deferring a portion of the collections as deferred lease revenues. As of
December 31, 2016
and
2015
, we have approximately
$19.5 million
and
$18.9 million
, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.
As of
December 31, 2016
, we have entered into construction and development contracts with
$100.4 million
remaining to be paid, primarily related to a single development. These construction costs are expected to be paid during the completion of the development and construction period, generally within
24 months
.
Future minimum lease payments due on our lease commitment payables, primarily related to our corporate office lease which expires in 2024, are as follows (in millions):
|
|
|
|
|
|
|
|
Future Minimum Lease Payments
|
2017
|
|
$
|
0.7
|
|
2018
|
|
0.8
|
|
2019
|
|
0.8
|
|
2020
|
|
0.8
|
|
2021
|
|
0.8
|
|
Thereafter
|
|
2.4
|
|
Total
|
|
$
|
6.3
|
|
To address disagreements related to the timing of the start and end of the measurement period of the conversion provisions of the Series A Preferred Stock (See Note 12, “Stockholders Equity”), the Company’s board of directors formed a special determination committee in 2015. The special determination committee made and the board of directors approved that the measurement period begins on January 2, 2017 and ends on February 13, 2017 and on September 30, 2016, the Company filed a complaint and a motion for summary judgment that such determination is conclusive and binding upon the Company and Behringer, as the sole holder of the Series A Preferred Stock. Subsequently Behringer filed a complaint seeking a contrary declaration. The court is currently reviewing the motion for summary judgment and appeals from both parties, where a hearing on the motion has been scheduled for March 13, 2017.
As a result of the board of directors’ prior determinations and based on the trading price of the Company’s common stock during the measurement period, all outstanding shares of Series A Preferred Stock were canceled on February 13, 2017 without further consideration. As of December 31, 2016, any uncertainty over the terms and timing of the measurement period or the status of the Series A Preferred Stock has not resulted in any contingencies related to any reported financial statement amounts, including but not limited to calculations of basic and diluted earnings per share or the accounting presentation of the Series A Preferred Stock. However, the outcome of the litigation and timing of the court’s ruling on the Company’s judicial declaration request with respect to the determination by the Company’s board of directors that the measurement period ends on February 13, 2017 are uncertain and no assurances can be given with respect to the outcome of the declaration the Company is seeking from the court. In addition, in the event the court rules in favor of Behringer, we cannot predict the consequences of such ruling, including the possibility of a monetary judgment against us or the effect of such ruling on the shares of Series A Preferred Stock that were canceled on February 13, 2017 without further consideration.
We are also subject to various legal proceedings and claims which arise in the ordinary course of business, operations and developments. Matters which relate to property damage or general liability claims are generally covered by insurance. While the resolution of these legal proceedings and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.
15.
Fair Value of Derivatives and Financial Instruments
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
In connection with our measurements of fair value related to many real estate assets, noncontrolling interests, financial instruments and contractual rights, there are generally not available observable market price inputs for substantially the same items. Accordingly, each of these are classified as Level 3, and we make assumptions and use various estimates and pricing models, including, but not limited to, the estimated cash flows, discount and interest rates used to determine present values, market capitalization rates, sales of comparable investments, rental rates, costs to lease communities, useful lives of the assets, the cost of replacing certain assets, and equity valuations. These estimates are from the perspective of market participants and may also be obtained from independent third-party appraisals. However, we are responsible for the source and use of these estimates. A change in these estimates and assumptions could be material to our results of operations and financial condition.
Financial Instruments Carried at Fair Value on a Recurring Basis
We currently use interest rate cap arrangements with financial institutions to manage our exposure to interest rate changes for our loans that utilize floating interest rates. The fair value of the interest rate caps are determined using Level 2 inputs under the fair value hierarchy. These inputs include quoted prices for similar interest rate cap arrangements, including consideration of the remaining term, the current yield curve, and interest rate volatility. Because our interest rate caps are on standard, commercial terms with national financial institutions, credit issues are not considered significant. As of
December 31, 2016
, we have
$0.2 million
of interest rate caps that are carried at fair value on a recurring basis.
The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis for the year ended
December 31, 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
Gain (Loss)
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31, 2015
and
2014
, we had
no
fair value adjustments on a recurring basis.
Nonrecurring Basis — Fair Value Adjustments
As discussed in Note 5, “Real Estate Investments,” we recorded an impairment charge related to one of our developments in May 2015. Prior to the impairment, the development had a net carrying value of
$44.4 million
. The
$3.1 million
impairment is included in the line item “Acquisition, investment and development expenses” on the consolidated statement of operations. The fair value for the development was determined based upon the terms of the purchase and sale agreement which closed in June 2015. We consider this a Level 2 input under the fair value hierarchy.
As discussed in Note 11, “Noncontrolling Interests”, we acquired a controlling interest in an unconsolidated investment in real estate joint venture in May 2015. We consolidated the Custer PGGM CO-JV and recognized a loss related to the revaluation of our equity interest for the difference between our carrying value and the fair value of the investment. The fair value was determined based upon the pay-off value of the note receivable and its related accrued interest, both of which were repaid shortly after the acquisition of the controlling interest. We consider this a Level 2 input under the fair value hierarchy.
The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis during the year ended
December 31, 2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair Value
|
|
Gain (Loss)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
$
|
—
|
|
|
$
|
41.2
|
|
|
$
|
—
|
|
|
$
|
41.2
|
|
|
$
|
(3.1
|
)
|
Other Assets
|
|
—
|
|
|
16.6
|
|
|
—
|
|
|
16.6
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
57.8
|
|
|
$
|
—
|
|
|
$
|
57.8
|
|
|
$
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended
December 31, 2016
and
2014
, we had
no
fair value adjustments on a nonrecurring basis.
Financial Instruments Not Carried at Fair Value
Financial instruments held as of
December 31, 2016
and
2015
and not measured at fair value on a recurring basis include cash and cash equivalents, notes receivable, credit facilities payable and mortgages and notes payable. With the exception of our mortgages and notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature. Because the credit facilities payable bears interest at a variable rate and has a prepayment option, we believe its carrying amount approximates its fair value.
Estimated fair values for mortgages and notes payable have been determined using market pricing for similar mortgages payable, which are classified as Level 2 in the fair value hierarchy. Carrying amounts and the related estimated fair value of our mortgages and notes payable as of
December 31, 2016
and
2015
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Mortgages and notes payable
|
|
$
|
1,531.5
|
|
|
$
|
1,533.8
|
|
|
$
|
1,473.0
|
|
|
$
|
1,473.1
|
|
Less: deferred financing costs, net
|
|
(9.3
|
)
|
|
|
|
(11.7
|
)
|
|
|
Mortgages and notes payable, net
|
|
$
|
1,522.2
|
|
|
|
|
$
|
1,461.3
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
Related Party Arrangements
From our inception to July 31, 2013, we had
no
employees, were externally managed by Behringer and were supported by related party service agreements, as further described below. Through July 31, 2013, we exclusively relied on Behringer to provide certain services and personnel for management and day-to-day operations, including advisory services and property management services provided or performed by Behringer.
Effective July 31, 2013, we entered into the Self-Management Transition Agreements as discussed in Note 13, “Transition Expenses.” From the Initial Closing through June 30, 2014, we hired executives and staff who were previously employees of Behringer and began hiring other employees, completing our transition to a self-managed company. The services provided by Behringer included acquisition and advisory, property management, and asset management services which terminated on June 30, 2014 and debt financing services which terminated on June 30, 2015.
The table below shows the fees, expense reimbursements, and settlement expenses related to Behringer in exchange for such services for the years ended
December 31, 2016
, 2015, and
2014
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
Acquisition and advisory fees
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.3
|
|
Property management fees
|
|
—
|
|
|
—
|
|
|
11.3
|
|
Debt financing fees
|
|
—
|
|
|
0.2
|
|
|
2.4
|
|
Asset management fees
|
|
—
|
|
|
—
|
|
|
3.8
|
|
Administrative expense reimbursements
|
|
—
|
|
|
—
|
|
|
1.0
|
|
Shareholder services (a)
|
|
—
|
|
|
—
|
|
|
2.9
|
|
Settlement expenses (b)
|
|
1.6
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes an early termination payment of
$2.3 million
to Behringer related to our listing on the NYSE. See further discussion in Note 13, “Transition Expenses.”
|
|
|
(b)
|
On February10, 2017, the Company and Behringer agreed to settle claims asserted in litigation relating to the payment of certain disputed fees under the terms the Self-Management Transition Agreements. Under the terms of the settlement agreement, the Company paid Behringer approximately
$1.6 million
in consideration for the settlement of the litigation and a full release by both parties from all claims relating to the disputed fees in the Self-Management Transition Agreements. The settlement was expensed for the year ended
December 31, 2016
and as of
December 31, 2016
is included in accounts payable and other liabilities.
|
17.
Supplemental Disclosures of Cash Flow Information
Supplemental cash flow information for the years ended
December 31, 2016
,
2015
and
2014
is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
|
|
2016
|
|
2015
|
|
2014
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid, net of amounts capitalized of $7.7 million, $16.5 million and $17.8 million in 2016, 2015 and 2014, respectively
|
|
$
|
43.7
|
|
|
$
|
30.1
|
|
|
$
|
20.8
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Funds deposited in escrow related to a development acquisition
|
|
—
|
|
|
—
|
|
|
1.5
|
|
Transfer of real estate from construction in progress to operating real estate
|
|
290.0
|
|
|
679.4
|
|
|
286.6
|
|
Conversion of investment in unconsolidated real estate joint venture into notes receivable
|
|
—
|
|
|
5.0
|
|
|
0.8
|
|
Stock issued pursuant to our DRIP
|
|
—
|
|
|
—
|
|
|
20.5
|
|
Distributions payable
|
|
12.5
|
|
|
12.5
|
|
|
12.5
|
|
Construction costs and other related payables
|
|
18.1
|
|
|
34.9
|
|
|
92.2
|
|
18.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements.
Distributions for the First Quarter of 2017
Our board of directors has authorized a distribution in the amount of
$0.075
per share on all outstanding shares of common stock of the Company for the first quarter of 2017. The distribution is payable
April 7, 2017
to stockholders of record at the close of business on
March 31, 2017
.
Acquisition of a Multifamily Community
In January 2017, we acquired a
175
-unit multifamily community in Los Angeles, California for a gross purchase price of
$105 million
, before any closing costs. The purchase was funded from the proceeds of the tax like-kind exchange escrow of approximately
$56.8 million
, the sale of the multifamily community as discussed below and the remainder primarily funded from our credit facilities.
Sale of a Multifamily Community
In
February 2017
, we sold a
149
-unit multifamily community in Dallas, Texas for a gross sales price of
$42.0 million
, before any closing costs, and an approximate gain on sale of
$16.0 million
. As of
December 31, 2016
, the net carrying value of the multifamily community was
$25.6 million
. The related outstanding mortgage of
$19.9 million
was repaid at closing from the sales proceeds.
19. Quarterly Results (unaudited)
Presented below is a summary of the unaudited quarterly consolidated financial information for the years ended
December 31, 2016
and
2015
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarters Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Rental revenues
|
|
$
|
65,547
|
|
|
$
|
68,551
|
|
|
$
|
72,181
|
|
|
$
|
74,461
|
|
Income (loss) from continuing operations
|
|
$
|
(11,060
|
)
|
|
$
|
(11,927
|
)
|
|
$
|
9,356
|
|
|
$
|
21,554
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(8,307
|
)
|
|
$
|
(9,218
|
)
|
|
$
|
4,452
|
|
|
$
|
22,537
|
|
Basic weighted average shares outstanding
|
|
166,743
|
|
|
166,800
|
|
|
166,876
|
|
|
166,880
|
|
Diluted weighted average shares outstanding
|
|
166,743
|
|
|
166,800
|
|
|
167,649
|
|
|
167,660
|
|
Basic and diluted earnings (loss) per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.03
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarters Ended
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Rental revenues
|
|
$
|
56,643
|
|
|
$
|
59,105
|
|
|
$
|
59,191
|
|
|
$
|
63,129
|
|
Income (loss) from continuing operations
|
|
$
|
(1,177
|
)
|
|
$
|
44,473
|
|
|
$
|
30,876
|
|
|
$
|
(7,489
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
(833
|
)
|
|
$
|
49,196
|
|
|
$
|
31,362
|
|
|
$
|
(5,937
|
)
|
Basic weighted average shares outstanding
|
|
166,509
|
|
|
166,541
|
|
|
166,563
|
|
|
166,628
|
|
Diluted weighted average shares outstanding
|
|
166,509
|
|
|
167,202
|
|
|
167,260
|
|
|
167,247
|
|
Basic and diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
$
|
(0.04
|
)
|
*****