10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 10, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
Commission file number 1-12672
AVALONBAY COMMUNITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland |
|
77-0404318 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
Ballston Tower
671 N. Glebe Rd, Suite 800
Arlington, Virginia 22203
(Address of principal executive offices, including zip code)
(703) 329-6300
(Registrants telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the Exchange registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date:
129,379,969 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2013
AVALONBAY COMMUNITIES, INC.
FORM 10-Q
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Page |
PART I - FINANCIAL INFORMATION | |
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Item 1. Condensed Consolidated Financial Statements |
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|
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Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012 |
1 |
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2 | |
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3 | |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
5 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
48 |
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48 | |
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|
|
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49 | |
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49 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
49 |
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50 | |
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50 | |
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50 | |
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51 | |
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53 |
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
3-31-13 |
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12-31-12 |
| ||
|
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(unaudited) |
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|
| ||
ASSETS |
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|
|
|
| ||
Real estate: |
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|
|
|
| ||
Land |
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$ |
3,287,607 |
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$ |
1,440,590 |
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Buildings and improvements |
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11,188,804 |
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7,185,853 |
| ||
Furniture, fixtures and equipment |
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318,423 |
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255,733 |
| ||
|
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14,794,834 |
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8,882,176 |
| ||
Less accumulated depreciation |
|
(2,143,581 |
) |
(2,034,364 |
) | ||
Net operating real estate |
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12,651,253 |
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6,847,812 |
| ||
Construction in progress, including land |
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1,003,898 |
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802,883 |
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Land held for development |
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359,029 |
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316,037 |
| ||
Operating real estate assets held for sale, net |
|
|
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48,388 |
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Total real estate, net |
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14,014,180 |
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8,015,120 |
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|
|
|
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Cash and cash equivalents |
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447,456 |
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2,733,618 |
| ||
Cash in escrow |
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93,650 |
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50,033 |
| ||
Resident security deposits |
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27,313 |
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24,748 |
| ||
Investments in unconsolidated real estate entities |
|
371,983 |
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129,352 |
| ||
Deferred financing costs, net |
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36,606 |
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38,700 |
| ||
Deferred development costs |
|
33,275 |
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24,665 |
| ||
Prepaid expenses and other assets |
|
162,901 |
|
143,842 |
| ||
Total assets |
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$ |
15,187,364 |
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$ |
11,160,078 |
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LIABILITIES AND EQUITY |
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|
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Unsecured notes, net |
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$ |
1,845,961 |
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$ |
1,945,798 |
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Variable rate unsecured credit facility |
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|
|
|
| ||
Mortgage notes payable, net |
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4,082,328 |
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1,905,235 |
| ||
Dividends payable |
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138,438 |
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110,966 |
| ||
Payables for construction |
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53,317 |
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53,677 |
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Accrued expenses and other liabilities |
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316,618 |
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224,194 |
| ||
Accrued interest payable |
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24,290 |
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33,056 |
| ||
Resident security deposits |
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46,755 |
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38,626 |
| ||
Liabilities related to real estate assets held for sale |
|
|
|
706 |
| ||
Total liabilities |
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6,507,707 |
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4,312,258 |
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|
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Redeemable noncontrolling interests |
|
20,769 |
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7,027 |
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|
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Equity: |
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|
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Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both March 31, 2013 and December 31, 2012; zero shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively |
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Common stock, $0.01 par value; 140,000,000 shares authorized at both March 31, 2013 and December 31, 2012; 129,382,118 and 114,403,472 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively |
|
1,294 |
|
1,144 |
| ||
Additional paid-in capital |
|
8,967,298 |
|
7,086,407 |
| ||
Accumulated earnings less dividends |
|
(206,667 |
) |
(142,329 |
) | ||
Accumulated other comprehensive loss |
|
(106,616 |
) |
(108,007 |
) | ||
Total equity |
|
8,655,309 |
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6,837,215 |
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Noncontrolling interest |
|
3,579 |
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3,578 |
| ||
Total equity |
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8,658,888 |
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6,840,793 |
| ||
Total liabilities and equity |
|
$ |
15,187,364 |
|
$ |
11,160,078 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands, except per share data)
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For the three months ended |
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3-31-13 |
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3-31-12 |
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Revenue: |
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Rental and other income |
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$ |
309,859 |
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$ |
243,483 |
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Management, development and other fees |
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2,272 |
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2,549 |
| ||
Total revenue |
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312,131 |
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246,032 |
| ||
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|
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Expenses: |
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|
|
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Operating expenses, excluding property taxes |
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73,971 |
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64,321 |
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Property taxes |
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32,963 |
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23,887 |
| ||
Interest expense, net |
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38,174 |
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33,626 |
| ||
Loss on extinguishment of debt, net |
|
|
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1,179 |
| ||
Depreciation expense |
|
109,829 |
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61,571 |
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General and administrative expense |
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10,039 |
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9,710 |
| ||
Expensed acquisition, development and other pursuit costs |
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40,059 |
|
239 |
| ||
Total expenses |
|
305,035 |
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194,533 |
| ||
Equity in income (loss) of unconsolidated entities |
|
(18,564 |
) |
2,175 |
| ||
|
|
|
|
|
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Income (loss) from continuing operations |
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(11,468 |
) |
53,674 |
| ||
|
|
|
|
|
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Discontinued operations: |
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|
|
|
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Income from discontinued operations |
|
2,446 |
|
3,935 |
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Gain on sale of real estate assets |
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84,491 |
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|
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Total discontinued operations |
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86,937 |
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3,935 |
| ||
|
|
|
|
|
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Net income |
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75,469 |
|
57,609 |
| ||
Net loss (income) attributable to noncontrolling interests |
|
(42 |
) |
149 |
| ||
|
|
|
|
|
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Net income attributable to common stockholders |
|
$ |
75,427 |
|
$ |
57,758 |
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|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
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Unrealized gain on cash flow hedges |
|
|
|
11,008 |
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Cash flow hedge losses reclassified to earnings |
|
1,391 |
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|
| ||
Comprehensive income |
|
$ |
76,818 |
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$ |
68,766 |
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|
|
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Earnings per common share - basic: |
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|
|
|
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Income (loss) from continuing operations attributable to common stockholders |
|
$ |
(0.10 |
) |
$ |
0.57 |
|
Discontinued operations attributable to common stockholders |
|
0.73 |
|
0.04 |
| ||
Net income attributable to common stockholders |
|
$ |
0.63 |
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$ |
0.61 |
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|
|
|
|
|
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Earnings per common share - diluted: |
|
|
|
|
| ||
Income (loss) from continuing operations attributable to common stockholders |
|
$ |
(0.10 |
) |
$ |
0.56 |
|
Discontinued operations attributable to common stockholders |
|
0.73 |
|
0.04 |
| ||
Net income attributable to common stockholders |
|
$ |
0.63 |
|
$ |
0.60 |
|
|
|
|
|
|
| ||
Dividends per common share |
|
$ |
1.07 |
|
$ |
0.97 |
|
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
|
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For the three months ended |
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|
|
3-31-13 |
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3-31-12 |
| ||
|
|
|
|
|
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Cash flows from operating activities: |
|
|
|
|
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Net income |
|
$ |
75,469 |
|
$ |
57,609 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
| ||
Depreciation expense |
|
109,829 |
|
61,571 |
| ||
Depreciation expense from discontinued operations |
|
|
|
1,741 |
| ||
Amortization of deferred financing costs and debt (premium)/discount |
|
(1,604 |
) |
1,475 |
| ||
Amortization of stock-based compensation |
|
2,099 |
|
1,984 |
| ||
Equity in (income) loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations |
|
16,734 |
|
(1,346 |
) | ||
Loss on extinguishment of debt, net |
|
|
|
1,179 |
| ||
Gain on sale of real estate assets |
|
(84,491 |
) |
|
| ||
Increase in cash in operating escrows |
|
(6,758 |
) |
(1,225 |
) | ||
Increase in resident security deposits, prepaid expenses and other assets |
|
(23,299 |
) |
(8,167 |
) | ||
Decrease in accrued expenses, other liabilities and accrued interest payable |
|
(6,591 |
) |
(9,481 |
) | ||
Net cash provided by operating activities |
|
81,388 |
|
105,340 |
| ||
|
|
|
|
|
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Cash flows from investing activities: |
|
|
|
|
| ||
Development/redevelopment of real estate assets including land acquisitions and deferred development costs |
|
(221,274 |
) |
(159,091 |
) | ||
Acquisition of real estate assets, including partnership interest |
|
(749,275 |
) |
(7,442 |
) | ||
Capital expenditures - existing real estate assets |
|
(1,852 |
) |
(2,746 |
) | ||
Capital expenditures - non-real estate assets |
|
(1,764 |
) |
(147 |
) | ||
Proceeds from sale of real estate, net of selling costs |
|
327,922 |
|
|
| ||
Increase (decrease) in payables for construction |
|
(360 |
) |
7,014 |
| ||
Decrease in cash in construction escrows |
|
|
|
1,731 |
| ||
Increase in investments in unconsolidated real estate entities |
|
(2,978 |
) |
(5,659 |
) | ||
Net cash used in investing activities |
|
(649,581 |
) |
(166,340 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Issuance of common stock |
|
253 |
|
8,956 |
| ||
Dividends paid |
|
(110,891 |
) |
(84,926 |
) | ||
Repayments of mortgage notes payable, including prepayment penalties |
|
(1,507,243 |
) |
(52,038 |
) | ||
Repayment of unsecured notes |
|
(100,000 |
) |
(179,400 |
) | ||
Payment of deferred financing costs and issuance discounts |
|
|
|
(123 |
) | ||
Distributions to DownREIT partnership unitholders |
|
(8 |
) |
(7 |
) | ||
Distributions to joint venture and profit-sharing partners |
|
(80 |
) |
(73 |
) | ||
Net cash used by financing activities |
|
(1,717,969 |
) |
(307,611 |
) | ||
|
|
|
|
|
| ||
Net decrease in cash and cash equivalents |
|
(2,286,162 |
) |
(368,611 |
) | ||
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
|
2,733,618 |
|
616,853 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
|
$ |
447,456 |
|
$ |
248,242 |
|
|
|
|
|
|
| ||
Cash paid during the period for interest, net of amount capitalized |
|
$ |
45,765 |
|
$ |
42,684 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosures of non-cash investing and financing activities (amounts in whole dollars):
During the three months ended March 31, 2013:
· As described in Note 4, Equity, 14,889,706 shares of common stock valued at $1,875,210,000 were issued as partial consideration for the Archstone Acquisition (as defined in this Form 10-Q); 119,292 shares of common stock valued at $15,394,000 were issued in connection with stock grants; 550 shares valued at $76,000 were issued through the Companys dividend reinvestment plan; 29,219 shares valued at $3,590,000 were withheld to satisfy employees tax withholding and other liabilities; and 9,226 shares and options valued at $780,000 previously issued in connection with employee compensation were forfeited. In addition, the Company granted 215,230 options for common stock at a value of $5,768,000.
· The Company recorded a decrease to other liabilities and a corresponding decrease to interest expense, net of $1,414,000; and reclassified $1,391,000 of deferred cash flow hedge losses from other comprehensive income to interest expense, net to record the impact of the Companys derivative and hedge accounting activity.
· Common dividends declared but not paid totaled $138,438,000.
· The Company recorded $13,262,000 in redeemable noncontrolling interests associated with the acquisition of consolidated joint ventures as part of the Archstone Acquisition. The Company also recorded an increase of $526,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner and DownREIT partnership units. For further discussion of the nature and valuation of these items, see Note 11, Fair Value.
· The Company assumed secured indebtedness with a principal amount of $3,512,202,000 in conjunction with the Archstone Acquisition, discussed further in Note 3, Notes Payable, Unsecured Notes and Credit Facility. The Company also assumed an obligation related to outstanding preferred interests of approximately $66,500,000, included in accrued expenses and other liabilities, and discussed further in Note 5, Archstone Acquisition, and Note 12, Subsequent Events.
During the three months ended March 31, 2012:
· 91,471 shares of common stock valued at $12,161,000 were issued in connection with stock grants; 735 shares valued at $95,000 were issued through the Companys dividend reinvestment plan; 39,054 shares valued at $5,119,000 were withheld to satisfy employees tax withholding and other liabilities; and 4,027 shares valued at $324,000 previously issued in connection with employee compensation were forfeited. In addition, the Company granted 113,804 options for common stock at a value of $3,306,000.
· The Company recorded a decrease to other liabilities and a corresponding increase to other comprehensive income of $11,008,000; and recorded a decrease to prepaid expenses and other assets of $11,000, with a corresponding offset to the basis of unsecured notes, net to record the impact of the Companys hedge accounting activity.
· Common dividends declared but not paid totaled $92,508,000.
· The Company recorded an increase of $309,000 in redeemable noncontrolling interests with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner and DownREIT partnership units.
· The Company assumed a 4.61% coupon fixed rate mortgage loan with an outstanding balance of $11,958,000 in conjunction with the acquisition of The Mark Pasadena.
AVALONBAY COMMUNITIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization and Basis of Presentation
AvalonBay Communities, Inc. (the Company, which term, unless the context otherwise requires, refers to AvalonBay Communities, Inc. together with its consolidated subsidiaries), is a Maryland corporation that elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986 (the Code). The Company focuses on the development, acquisition, ownership and operation of apartment communities in high barrier to entry markets of the United States. These markets are primarily located in the New England, Metro New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and Southern California regions of the country.
At March 31, 2013, excluding real estate investments owned through the Residual JV discussed in this Form 10-Q, the Company owned or held a direct or indirect ownership interest in 245 operating apartment communities containing 73,477 apartment homes in 12 states and the District of Columbia, of which five communities containing 2,164 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 27 communities under construction that are expected to contain an aggregate of 7,802 apartment homes when completed. The Company also owned or held a direct or indirect ownership interest in land or rights to land in which the Company expects to develop an additional 42 communities that, if developed as expected, will contain an estimated 12,040 apartment homes.
The interim unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements required by GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the financial statements and notes included in the Companys 2012 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.
Capitalized terms used without definition have the meaning as provided elsewhere in this Form 10-Q.
Earnings per Common Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share (EPS). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Companys earnings per common share are determined as follows (dollars in thousands, except per share data):
|
|
For the three months ended |
| ||||
|
|
3-31-13 |
|
3-31-12 |
| ||
Basic and diluted shares outstanding |
|
|
|
|
| ||
|
|
|
|
|
| ||
Weighted average common shares - basic |
|
119,680,510 |
|
94,855,266 |
| ||
|
|
|
|
|
| ||
Weighted average DownREIT units outstanding |
|
7,500 |
|
7,500 |
| ||
|
|
|
|
|
| ||
Effect of dilutive securities |
|
423,118 |
|
791,013 |
| ||
|
|
|
|
|
| ||
Weighted average common shares - diluted |
|
120,111,128 |
|
95,653,779 |
| ||
|
|
|
|
|
| ||
Calculation of Earnings per Share - basic |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
75,427 |
|
$ |
57,758 |
|
Net income allocated to unvested restricted shares |
|
(139 |
) |
(254 |
) | ||
Net income attributable to common stockholders, adjusted |
|
$ |
75,288 |
|
$ |
57,504 |
|
|
|
|
|
|
| ||
Weighted average common shares - basic |
|
119,680,510 |
|
94,855,266 |
| ||
|
|
|
|
|
| ||
Earnings per common share - basic |
|
$ |
0.63 |
|
$ |
0.61 |
|
|
|
|
|
|
| ||
Calculation of Earnings per Share - diluted |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
75,427 |
|
$ |
57,758 |
|
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations |
|
8 |
|
7 |
| ||
|
|
|
|
|
| ||
Adjusted net income attributable to common stockholders |
|
$ |
75,435 |
|
$ |
57,765 |
|
|
|
|
|
|
| ||
Weighted average common shares - diluted |
|
120,111,128 |
|
95,653,779 |
| ||
|
|
|
|
|
| ||
Earnings per common share - diluted |
|
$ |
0.63 |
|
$ |
0.60 |
|
Certain options to purchase shares of common stock in the amounts of 608,148 and 427,288 were outstanding at March 31, 2013 and 2012, respectively, but were not included in the computation of diluted earnings per share because such options were anti-dilutive.
The Company is required to estimate the forfeiture of stock options and recognize compensation cost net of the estimated forfeitures. The estimated forfeitures included in compensation cost are adjusted to reflect actual forfeitures at the end of the vesting period. The forfeiture rate at March 31, 2013 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.2%. The application of estimated forfeitures did not materially impact compensation expense for the three months ended March 31, 2013 or 2012.
Derivative Instruments and Hedging Activities
The Company enters into interest rate swap and interest rate cap agreements (collectively, the Hedging Derivatives) for interest rate risk management purposes and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Company does not enter into derivative transactions for trading or other speculative purposes. The Company assesses both at inception and on an on-going basis the effectiveness of qualifying cash flow and fair value hedges. Hedge ineffectiveness is reported as a component of interest expense, net. The fair values of the Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of the Hedging Derivatives that are in a liability position are included in accrued expenses and other liabilities. Fair value changes for derivatives that are not in qualifying hedge relationships are reported as a component of interest expense, net. For the derivative positions that the Company has determined qualify as effective cash flow hedges, the Company has recorded the effective portion of cumulative changes in the fair value of the Hedging Derivatives in other comprehensive income. Amounts recorded in other comprehensive income will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The change in fair value of the Hedging Derivatives that the Company has determined qualified as effective fair value hedges is reported as an adjustment to the carrying amount of the corresponding debt being hedged.
Legal and Other Contingencies
The Company accounts for recoveries from legal matters as a reduction in the legal and related costs incurred associated with the matter, with recoveries in excess of these costs reported as a gain or, where appropriate, a reduction in the basis of a community to which the suit related.
The Company is involved in various claims and/or administrative proceedings that arise in the ordinary course of the Companys business. While no assurances can be given, the Company does not believe that any of these outstanding litigation matters, individually or in the aggregate, will have a material adverse effect on the Companys financial position or results of operations.
Acquisitions of Investments in Real Estate
The Company accounts for acquisitions of investments in real estate in accordance with the authoritative guidance for the initial measurement, which require the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree to be recognized at fair value. Typical assets and liabilities acquired include land, building, furniture, fixtures, and equipment, and identified intangible assets and liabilities, consisting of the value of above-below market leases and in-place leases. In making estimates of fair values for purposes of allocating purchase price, we utilize various sources, including our own analysis of recently acquired and existing comparable properties in our portfolio and other market data.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentations.
Recently Adopted Accounting Standards
In February 2013, the FASB issued guidance on reclassifications out of accumulated other comprehensive income (AOCI). For significant items reclassified out of AOCI to net income in their entirety, reporting is required about the effect of the reclassifications on the respective line items where net income is presented. Additionally, for items that are not reclassified to net income in their entirety, a cross reference to other disclosures is required in the notes. The Company has adopted the guidance with no material impact on the Companys financial position or results of operations.
2. Interest Capitalized
The Company capitalizes interest during the development and redevelopment of real estate assets. Capitalized interest associated with the Companys development or redevelopment activities totaled $13,139,000 and $12,320,000 for the three months ended March 31, 2013 and 2012, respectively.
3. Notes Payable, Unsecured Notes and Credit Facility
The Companys mortgage notes payable, unsecured notes and Credit Facility, as defined below, as of March 31, 2013 and December 31, 2012, are summarized below (dollars in thousands). The following amounts and discussion do not include the mortgage notes related to the communities classified as held for sale, if any, as of March 31, 2013 and December 31, 2012, as shown in the Condensed Consolidated Balance Sheets (see Note 7, Real Estate Disposition Activities).
|
|
3-31-13 |
|
12-31-12 |
| ||
|
|
|
|
|
| ||
Fixed rate unsecured notes (1) |
|
$ |
1,850,000 |
|
$ |
1,950,000 |
|
Fixed rate mortgage notes payable - conventional and tax-exempt (2) |
|
2,875,541 |
|
1,427,133 |
| ||
Variable rate mortgage notes payable - conventional and tax-exempt (2) |
|
1,058,967 |
|
476,935 |
| ||
|
|
|
|
|
| ||
Total notes payable and unsecured notes |
|
5,784,508 |
|
3,854,068 |
| ||
|
|
|
|
|
| ||
Credit Facility |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total mortgage notes payable, unsecured notes and Credit Facility |
|
$ |
5,784,508 |
|
$ |
3,854,068 |
|
(1) Balances at March 31, 2013 and December 31, 2012 exclude $4,039 and $4,202, respectively, of debt discount, as reflected in unsecured notes, net on the Companys Condensed Consolidated Balance Sheets.
(2) Balances at March 31, 2013 and December 31, 2012 exclude $147,820 and $1,167, respectively of debt premium as reflected in mortgage notes payable, net on the Companys Condensed Consolidated Balance Sheets.
The following financing activity occurred during the three months ended March 31, 2013:
· In February 2013, the Company assumed indebtedness in conjunction with the Archstone Acquisition, discussed further below.
· In March 2013, the Company repaid $100,000,000 of its 4.95% medium term notes in accordance with its scheduled maturity.
As a portion of the consideration for the Archstone Acquisition, the Company assumed $2,034,482 net consolidated principal amount of Archstones existing secured indebtedness, as further detailed in the table below (dollars in thousands).
Community / Debt Facility |
|
Stated Interest |
|
Principal Maturity |
|
Principal |
|
Principal |
|
Net Principal |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Tax-exempt bonds |
|
|
|
|
|
|
|
|
|
|
| |||
Fixed Rate |
|
|
|
|
|
|
|
|
|
|
| |||
Archstone Meadowbrook Crossing |
|
4.61 |
% |
Nov-2036 |
|
$ |
62,200 |
|
$ |
|
|
$ |
62,200 |
|
Variable Rate |
|
|
|
|
|
|
|
|
|
|
| |||
Archstone Clinton North/South |
|
SIFMA + 1.53 |
% |
May-2038 |
|
268,500 |
|
|
|
268,500 |
| |||
Archstone Midtown West |
|
SIFMA + 1.13 |
% |
May-2029 |
|
100,500 |
|
|
|
100,500 |
| |||
Archstone San Bruno |
|
SIFMA + 1.35 |
% |
Dec-2037 |
|
64,450 |
|
|
|
64,450 |
| |||
Archstone Calabasas |
|
SIFMA + 1.48 |
% |
Apr-2038 |
|
44,410 |
|
|
|
44,410 |
| |||
|
|
|
|
|
|
540,060 |
|
|
|
540,060 |
| |||
Conventional loans |
|
|
|
|
|
|
|
|
|
|
| |||
Fixed Rate |
|
|
|
|
|
|
|
|
|
|
| |||
Fannie Mae Pool 6 (2) |
|
6.19 |
% |
Nov-2015 |
|
940,923 |
|
443,000 |
|
497,923 |
| |||
Fannie Mae Pool 2 (2) |
|
6.26 |
% |
Nov-2017 |
|
692,192 |
|
|
|
692,192 |
| |||
Archstone First + M |
|
5.60 |
% |
May-2053 |
|
128,826 |
|
|
|
128,826 |
| |||
Archstone San Bruno II |
|
5.37 |
% |
Apr-2021 |
|
31,700 |
|
|
|
31,700 |
| |||
Archstone Meadowbrook Crossing |
|
4.81 |
% |
Nov-2036 |
|
22,325 |
|
|
|
22,325 |
| |||
Archstone Lexington |
|
5.55 |
% |
Mar-2016 |
|
16,984 |
|
|
|
16,984 |
| |||
|
|
|
|
|
|
1,832,950 |
|
443,000 |
|
1,389,950 |
| |||
Variable Rate |
|
|
|
|
|
|
|
|
|
|
| |||
Fannie Mae Pool 9 |
|
LIBOR + 1.27 |
% |
Nov-2014 |
|
636,756 |
|
636,756 |
|
|
| |||
Freddie Mac Pool |
|
LIBOR + 0.96 |
% |
Nov-2014 |
|
184,483 |
|
184,483 |
|
|
| |||
Archstone South San Francisco |
|
DMBS + 1.00 |
% |
Apr-2013 |
|
76,706 |
|
76,706 |
|
|
| |||
Archstone Calabasas |
|
DMBS + 1.44 |
% |
Aug-2018 |
|
57,472 |
|
|
|
57,472 |
| |||
Archstone San Bruno III |
|
LIBOR + 2.60 |
% |
May-2013 |
|
47,000 |
|
|
|
47,000 |
| |||
Archstone Wheaton Station |
|
DMBS + 1.00 |
% |
Apr-2013 |
|
44,539 |
|
44,539 |
|
|
| |||
Archstone La Mesa |
|
DMBS + 1.00 |
% |
Apr-2013 |
|
24,755 |
|
24,755 |
|
|
| |||
Archstone Parkland Gardens |
|
LIBOR + 2.25 |
% |
May-2017 |
|
18,176 |
|
18,176 |
|
|
| |||
Archstone Toscano |
|
LIBOR + 6.00 |
% |
May-2016 |
|
42,805 |
|
42,805 |
|
|
| |||
Archstone Memorial Heights |
|
LIBOR + 2.50 |
% |
May-2017 |
|
6,500 |
|
6,500 |
|
|
| |||
|
|
|
|
|
|
1,139,192 |
|
1,034,720 |
|
104,472 |
| |||
Total Indebtedness |
|
|
|
|
|
$ |
3,512,202 |
|
$ |
1,477,720 |
|
$ |
2,034,482 |
|
(1) Balances are for consolidated debt assumed and do not include the Companys share of the principal amount of debt held by unconsolidated joint ventures. Balances also do not include amounts held in principal reserve funds that were received by the Company, and are held for the repayment of the respective borrowing. Amounts held in principal reserve funds are presented in Cash in escrow on the accompanying Condensed Consolidated Balance Sheets.
(2) Borrowings are collateralized by multiple communities acquired in the Archstone Acquisition, and are cross-defaulted.
The Company recognized an adjustment to the basis of the net assumed consolidated indebtedness of approximately $150,298,000, representing the excess of the fair value over the principal amount of the notes assumed. The fair value adjustment associated with the indebtedness assumed will be recognized as a component of interest expense, net.
The Company has a $1,300,000,000 revolving variable rate unsecured credit facility with a syndicate of banks (the Credit Facility) which matures in April 2017. The Company has the option to extend the maturity by up to one year for a fee of $1,950,000. The Credit Facility bears interest at varying levels based on the London Interbank Offered Rate (LIBOR), rating levels achieved on our unsecured notes and on a maturity schedule selected by us. The current stated pricing is LIBOR plus 1.05% (1.25% at March 31, 2013). The annual facility fee is approximately $1,950,000 annually based on the $1,300,000,000 facility size and based on our current credit rating.
The Company had no borrowings outstanding under the Credit Facility and had $55,491,000 and $44,883,000 outstanding in letters of credit that reduced the borrowing capacity as of March 31, 2013 and December 31, 2012, respectively.
In the aggregate, secured notes payable mature at various dates from May 2013 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $4,082,329,000, excluding communities classified as held for sale, as of March 31, 2013).
As of March 31, 2013, the Company has guaranteed approximately $474,916,000 of mortgage notes payable by wholly owned subsidiaries; all such mortgage notes payable are consolidated for financial reporting purposes. The weighted average interest rate of the Companys fixed rate mortgage notes payable (conventional and tax-exempt) was 5.9% and 5.8% at March 31, 2013 and December 31, 2012, respectively. The weighted average interest rate of the Companys variable rate mortgage notes payable and its Credit Facility, including the effect of certain financing related fees, was 1.9% and 2.7% at March 31, 2013 and December 31, 2012, respectively.
Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at March 31, 2013, excluding mortgage notes secured by communities classified as held for sale, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Stated |
| |||
|
|
Secured |
|
Secured |
|
Unsecured |
|
interest rate |
| |||
|
|
notes |
|
notes |
|
notes |
|
of unsecured |
| |||
Year |
|
payments (1) |
|
maturities |
|
maturities |
|
notes |
| |||
|
|
|
|
|
|
|
|
|
| |||
2013 |
|
$ |
13,774 |
|
$ |
270,144 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2014 |
|
19,527 |
|
|
|
150,000 |
|
5.375 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2015 |
|
17,716 |
|
904,005 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2016 |
|
18,482 |
|
16,255 |
|
250,000 |
|
5.750 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2017 |
|
19,604 |
|
710,491 |
|
250,000 |
|
5.700 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2018 |
|
19,259 |
|
63,261 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2019 |
|
7,802 |
|
610,813 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2020 |
|
8,256 |
|
|
|
250,000 |
|
6.100 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2021 |
|
8,120 |
|
27,844 |
|
250,000 |
|
3.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2022 |
|
8,602 |
|
|
|
450,000 |
|
2.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Thereafter |
|
92,481 |
|
1,098,072 |
|
250,000 |
|
2.850 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
233,623 |
|
$ |
3,700,885 |
|
$ |
1,850,000 |
|
|
|
(1) Secured note payments are comprised of the principal pay downs for amortizing mortgage notes.
The Company was in compliance at March 31, 2013 with certain customary financial and other covenants under the Credit Facility and the Companys unsecured notes.
4. Equity
The following summarizes the changes in equity for the three months ended March 31, 2013 (dollars in thousands):
|
|
|
|
|
|
Accumulated |
|
Accumulated |
|
|
|
|
|
|
| |||||||
|
|
|
|
Additional |
|
earnings |
|
other |
|
Total |
|
|
|
|
| |||||||
|
|
Common |
|
paid-in |
|
less |
|
comprehensive |
|
stockholders |
|
Noncontrolling |
|
Total |
| |||||||
|
|
stock |
|
capital |
|
dividends |
|
gain (loss) |
|
equity |
|
interests |
|
equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at December 31, 2012 |
|
$ |
1,144 |
|
$ |
7,086,407 |
|
$ |
(142,329 |
) |
$ |
(108,007 |
) |
$ |
6,837,215 |
|
$ |
3,578 |
|
$ |
6,840,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income attributable to common stockholders |
|
|
|
|
|
75,427 |
|
|
|
75,427 |
|
|
|
75,427 |
| |||||||
Cash flow hedge loss reclassified to earnings |
|
|
|
|
|
|
|
1,391 |
|
1,391 |
|
|
|
1,391 |
| |||||||
Change in redemption value of redeemable noncontrolling interest |
|
|
|
|
|
(526 |
) |
|
|
(526 |
) |
|
|
(526 |
) | |||||||
Noncontrolling interests income allocation |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
1 |
| |||||||
Dividends declared to common stockholders |
|
|
|
|
|
(138,438 |
) |
|
|
(138,438 |
) |
|
|
(138,438 |
) | |||||||
Issuance of common stock, net of withholdings |
|
150 |
|
1,871,818 |
|
(801 |
) |
|
|
1,871,167 |
|
|
|
1,871,167 |
| |||||||
Amortization of deferred compensation |
|
|
|
9,073 |
|
|
|
|
|
9,073 |
|
|
|
9,073 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2013 |
|
$ |
1,294 |
|
$ |
8,967,298 |
|
$ |
(206,667 |
) |
$ |
(106,616 |
) |
$ |
8,655,309 |
|
$ |
3,579 |
|
$ |
8,658,888 |
|
During the three months ended March 31, 2013, the Company:
(i) issued 3,531 shares of common stock in connection with stock options exercised;
(ii) issued 550 common shares through the Companys dividend reinvestment plan;
(iii) issued 119,292 common shares in connection with stock grants;
(iv) withheld 29,219 common shares to satisfy employees tax withholding and other liabilities;
(v) cancelled 5,214 shares of restricted common stock upon forfeiture; and
(vi) issued 14,889,706 common shares in connection with the closing of the Archstone Acquisition.
With respect to the 14,889,706 common shares issued in conjunction with the Archstone Acquisition to Lehman (as defined below), the Company and Lehman entered into a shareholders agreement (the Shareholders Agreement). Under the Shareholders Agreement, until February 27, 2014 Lehman will vote all of its shares of the Companys common stock in accordance with the recommendation of the Companys board of directors on any matter other than an extraordinary transaction. After February 14, 2014, and for so long as Lehman holds more than 5% of our common stock, Lehman will vote all of its shares of our common stock (i) in accordance with the recommendations of our board of directors with respect to any election of directors, compensation and equity plan matters, and any amendment to our charter to increase our authorized capital stock; (ii) on all matters proposed by other shareholders, either proportionately in accordance with the votes of the other shareholders or, at its election, in accordance with the recommendation of our board of directors; and (iii) on all other matters, in its sole and absolute discretion.
In addition, the Company granted 215,230 options for common stock to employees. Any deferred compensation related to the Companys stock option and restricted stock grants during the three months ended March 31, 2013 is not reflected on the Companys Condensed Consolidated Balance Sheet as of March 31, 2013, and will not be reflected until earned as compensation cost.
In August 2012, the Company commenced a third continuous equity program (CEP III), under which the Company is authorized to sell up to $750,000,000 of shares of its common stock from time to time during a 36-month period. The Company had no sales under CEP III during the three months ended March 31, 2013, and has $646,274,000 of additional amounts of shares authorized for issuance under this program as of March 31, 2013.
5. Archstone Acquisition
On February 27, 2013, pursuant to an asset purchase agreement (the Purchase Agreement) dated November 26, 2012, by and among the Company, Equity Residential and its operating partnership, ERP Operating Limited Partnership (together, Equity Residential), Lehman Brothers Holdings, Inc. (Lehman), and Archstone Enterprise LP (Archstone, which has since changed its name to Jupiter Enterprise LP), the Company, together with Equity Residential, acquired, directly or indirectly, all of Archstones assets, including all of the ownership interests in joint ventures and other entities owned by Archstone, and assumed Archstones liabilities, both known and unknown with certain limited exceptions.
Under the terms of the Purchase Agreement, the Company acquired approximately 40% of Archstones assets and liabilities and Equity Residential acquired approximately 60% of Archstones assets and liabilities (the Archstone Acquisition). The Company accounted for the acquisition as a business combination and recorded the purchase price to acquired tangible assets consisting primarily of direct and indirect interests in land and related improvements, buildings and improvements, construction in progress and identified intangible assets and liabilities, consisting primarily of the value of above and below market leases, and the value of in-places leases, at their fair values. The following table summarizes the Companys preliminary purchase price allocation:
|
|
Acquisition Date |
| |
Land and land improvements |
|
$ |
1,760,100 |
|
Buildings and improvements |
|
3,729,422 |
| |
FF&E |
|
52,290 |
| |
Construction-in-progress, including land and land held for development |
|
404,765 |
| |
In-place lease intangibles |
|
182,467 |
| |
Other assets |
|
85,829 |
| |
Total consolidated assets |
|
$ |
6,214,873 |
|
Interest in unconsolidated real estate entities |
|
256,454 |
| |
Total assets |
|
$ |
6,471,327 |
|
Fair value of assumed mortgage notes payable |
|
3,732,980 |
| |
Liability for preferred obligations |
|
66,500 |
| |
Other liabilities |
|
34,100 |
| |
Noncontrolling interest |
|
13,262 |
| |
Net Assets Acquired |
|
$ |
2,624,485 |
|
Common shares issued |
|
1,875,210 |
| |
Cash consideration |
|
$ |
749,275 |
|
The allocation of the fair values to the assets acquired and liabilities assumed is subject to further adjustment due primarily to information not readily available at the acquisition date, additional market information and final purchase price settlement with the sellers and Equity Residential in accordance with the terms of the Purchase Agreement. The Company's assessment of the fair values and the allocation of the purchase price to the identified tangible and intangible assets and assumed liabilities is its current best estimate of fair value.
The Company engaged a third party valuation specialist to assist in the determination of the fair value of each of the component parts of the operating communities, consisting of land and land improvements, buildings and improvements, furniture, fixtures and equipment, above and below market leases and in-place lease-related intangibles.
Land valuation was based on a market approach, whereby recent sales of similar properties were used, adjusted for differences due to location, the state of entitlement as well as the shape and size of the parcel. Improvements to the land were valued using a replacement cost approach and considered the structures and amenities included for the communities. The approach applied industry standard replacement costs adjusted for geographic specific considerations, and reduced by estimated depreciation. The value for furniture, fixtures and equipment was also determined based on a replacement cost approach, adjusted for estimated depreciation. The FF&E value estimate considered both costs for items in the apartment homes, such as appliances and furnishings, and those for common areas such as exercise facilities and on site offices. The estimate of depreciation was made considering industry standard information and depreciation curves for the identified asset classes. The fair value of buildings acquired was estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement cost approach considered the composition of structures in the acquired portfolio, adjusted for an estimate of depreciation. If the operating community is held in an unconsolidated joint venture, the Company valued its interest in the operating community based on its ownership interest.
The value of the acquired lease-related intangibles considered the estimated cost of leasing the apartment homes as if the acquired buildings were vacant, as well as the value of the current leases relative to market-rate leases. The in-place lease value was determined using an average total lease-up time, the number of apartment homes and net revenues generated during the lease-up time. The lease-up period for an apartment community was assumed to be 12 months to achieve stabilized occupancy. Net revenues were developed using market rent considering actual leasing and industry rental rate data. The value of current leases relative to a market-rate lease was based on market rents obtained for market comparables, and considered a market derived discount rate.
The Company used an internal model to determine the fair value for the development land parcels acquired. The Company used a discounted cash flow analysis on the expected cash flows for a multifamily rental community that is expected to be constructed on the respective land parcels. The cash flow analysis incorporated assumptions that market participants would make, including applying discount factors to the estimated future cash flows of the underlying asset, the compound annual growth rate for the revenue from the operating community, and the exit capitalization rate.
The Company valued the Development Communities under construction and/or in lease-up using either the invested capital basis, or an internal model, depending on the stage of construction completion. For Development Communities earlier in the construction process, not in lease-up, invested capital was the relevant metric and considered reflective of the fair value of the community. For Development Communities that either had completed construction or that were substantially complete with construction and in lease-up, the Company used a capitalization rate model. The capitalization rate model considered the pro-forma NOI for the Development Community, considering the NOI for comparable operating communities, with adjustments for the location and/or quality of the community. A capitalization rate was applied to each Development Communitys NOI which was based on a relevant capitalization rate observed in a comparable acquisition or disposition, if available, as adjusted by the Company for differences between the Development Community and the referenced comparable transactions.
Given the significance of unobservable inputs, the Company has classified the valuations of the real estate assets acquired as Level 3 prices under the fair value hierarchy.
Other assets acquired consisted primarily of working capital determined by the Company to be reflective of the fair value.
The Company recognized $69,271,000 in acquisition related expenses associated with the Archstone Acquisition, with $29,457,000 reported as a component of Equity in income (loss) of unconsolidated entities, and the balance in expensed acquisition, development and other pursuit costs, on the accompanying Condensed Consolidated Statements of Comprehensive Income.
Consideration
Pursuant to the Purchase Agreement and separate arrangements between the Company and Equity governing the allocation of liabilities assumed under the Purchase Agreement, the Companys portion of consideration under the Purchase Agreement, consisted of the following:
· the issuance of 14,889,706 shares of the Companys common stock, valued at $1,875,210,000 as of the markets close on February 27, 2013;
· a cash payment of approximately $749,000,000;
· the assumption of consolidated indebtedness with a fair value of approximately $3,732,979,000, consisting of $3,512,202,000 principal amount of consolidated indebtedness and $220,777,000 representing the amount by which fair value of the aforementioned debt exceeds the principal face value, $70,479,000 of which related to debt the Company repaid concurrent with the Archstone Acquisition;
· the acquisition with Equity Residential of interests in entities that have preferred units outstanding some of which may be presented for redemption from time to time. The Companys 40% share of the fair value of the collective obligation, including accrued dividends on these outstanding Archstone preferred units as of the closing date of the Archstone Acquisition is approximately $66,500,000; and
· the assumption with Equity Residential of all other liabilities, known or unknown, of Archstone, other than certain excluded liabilities. The Company shares approximately 40% of the responsibility for these liabilities.
The Company valued the assumed mortgage notes payable using a discounted cash flow analysis that incorporated assumptions that market participants would use. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considered credit valuation adjustments to appropriately reflect the Companys nonperformance risk. The Company has concluded that the value of the assumed mortgage notes payable are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.
The Company valued its obligation under the preferred units outstanding based on the current liquidation price of the respective preferred unit series, including accrued but unpaid dividends as appropriate. As disclosed in Note 12, Subsequent Events, the Company redeemed certain outstanding preferred units in April 2013. The Company used the pricing for the settlement discussed in Note 12, Subsequent Events as the fair value at February 27, 2013.
The following table presents information for Archstone that is included in our Condensed Consolidated Statement of Comprehensive Income from the acquisition date, February 27, 2013, through March 31, 2013 (in thousands).
|
|
For the period including |
| |
Revenues |
|
$ |
36,624 |
|
Loss attributable to common shareholders (1) |
|
$ |
(22,635 |
) |
(1) Amounts exclude acquisition costs for the Archstone Acquisition.
The following table presents the Companys supplemental consolidated pro forma information as if the acquisition had occurred on January 1, 2012 (in thousands except per share amounts unaudited):
|
|
For the three months |
|
For the three months |
| ||
Revenues |
|
$ |
384,078 |
|
$ |
344,479 |
|
Income from continuing operations |
|
106,853 |
|
66,397 |
| ||
Earnings per common share - diluted (from continuing operations) |
|
$ |
0.84 |
|
$ |
0.52 |
|
The unaudited proforma consolidated results are prepared for informational purposes only, and are based on assumptions and estimates considered appropriate by the Companys management. However, they are not necessarily indicative of what the Companys consolidated financial condition or results of operations actually would have been assuming the Archstone Acquisition had occurred on January 1, 2012, nor do they purport to represent the consolidated financial position or results of operations for future periods.
Investments in Archstone Legacy Entities
In connection with the Archstone Acquisition, the Company entered into a limited liability company agreement with Equity Residential to acquire and own directly and indirectly certain Archstone entities (the Archstone Legacy Entities) which hold indirect interests in real estate assets, including 16 of the 60 of the consolidated communities acquired by the Company. The Archstone Legacy Entities have outstanding preferred interests held by unrelated third parties with an aggregate liquidation preference of approximately $175,000,000 (including accrued but unpaid distributions), of which approximately $102,000,000 are subject to redemption at the election of the holders of such interests. One of the Archstone Legacy Entities previously entered into tax protection arrangements with the holders of certain of the preferred interests, which arrangements may limit for varying periods of time the Companys and Equity Residentials ability to dispose of the properties held indirectly by the Archstone Legacy Entities or to refinance certain related indebtedness, without making payments to the holders of such preferred interests. Pursuant to this LLC agreement, the Company has agreed to bear 40% of the economic cost of these preferred redemption obligations, as well as the tax protection payments that may arise from our disposition or refinancing of properties of the Archstone Legacy Entities that were contributed to a subsidiary that will be consolidated by the Company. The fair value the Companys proportionate share of these preferred redemption obligations of approximately $66,500,000 is recorded as a component of Accrued expenses and other liabilities on the accompanying Condensed Consolidated Balance Sheets. As part of the Archstone Acquisition, the Company and Equity Residential have agreed with Lehman and Archstone to require the acquired Archstone Legacy Entities to have sufficient funds available to honor their redemption obligations and to make any payments under its tax protection arrangements, when they may become due. The principal assets indirectly held by the limited liability company that acquired the Archstone Legacy Entities are interests in a subsidiary of the Companys (the AvalonBay Legacy Subsidiary) and a subsidiary of Equity Residential, each of which subsidiaries acquired certain properties formerly owned by the Archstone Legacy Entities. The Company consolidates the assets, liabilities and results of operations of the AvalonBay Legacy Subsidiary.
Investments in Archstone Unconsolidated Entities
In conjunction with the Archstone Acquisition, the Company acquired interests in the following entities:
· Archstone Multifamily Partners AC LP (the Archstone U.S. Fund) The Archstone U.S. Fund was formed in July 2011 and is fully invested. As of March 31, 2013, the Archstone U.S. Fund owns nine communities containing 1,728 apartment communities, one of which includes a marina containing 218 boat slips. Through subsidiaries the Company owns the general partner of the fund and holds a 28.6% interest in the fund.
Subsidiaries of the Archstone U.S. Fund have nine loans secured by individual assets with amounts outstanding in the aggregate of $329,684,000 with varying maturity dates, ranging from 2013 to 2022. The mortgage loans are payable by the subsidiaries of the Archstone U.S. Fund with operating cash flow or disposition proceeds from the underlying real estate. The Company has not guaranteed the debt of the Archstone U.S. Fund, nor does it have any obligation to fund this debt should the Archstone U.S. Fund be unable to do so.
· Archstone Multifamily Partners AC JV LP (the AC JV) is a joint venture in which the Company assumed Archstones 20% ownership interest. The AC JV was formed in 2011 and as of March 31, 2013 owned two apartment communities, containing 818 apartment homes in Cambridge, MA and Herndon, VA. The AC JV
partnership agreement contains provisions that require the Company to provide a right of first offer (ROFO) to the AC JV in connection with additional opportunities to acquire or develop additional interests in multifamily real estate assets within a specified geographic radius of the two existing assets, generally one mile or less. The Company owns two land parcels for the development of 444 apartment homes, classified as Development Rights in Cambridge, MA, acquired as part of the Archstone Acquisition that are subject to ROFO restrictions. The ROFO restrictions expire in 2019.
As of March 31, 2013, subsidiaries of the AC JV have eight unsecured loans outstanding in the aggregate of $162,300,000 which mature in July 2021, and which were made by the investors in the venture, including us, in proportion to the investors respective equity ownership interest. The unsecured loans are payable by the subsidiaries of the AC JV with operating cash flow from the venture. The Company has not guaranteed the debt of the AC JV, nor does it have any obligation to fund this debt should the AC JV be unable to do so.
· Brandywine Apartments of Maryland, LLC (Brandywine) Brandywine owns a 305 apartment home community located in Washington, DC. The community is managed by a third party. Brandywine is comprised of five members who hold various interests in the joint venture. In conjunction with the Archstone Acquisition, the Company assumed a 26.1% equity interest in the venture, and subsequently purchased an additional 2.6% interest such that as of March 31, 2013, the Company now holds a 28.7% equity interest in the venture.
Brandywine has an outstanding $17,665,000 fixed rate mortgage loan that is payable by the venture. The Company has not guaranteed the debt of Brandywine, nor does the Company have any obligation to fund this debt should Brandywine be unable to do so.
· Additionally, through subsidiaries the Company and Equity Residential entered into three limited liability company agreements (collectively, the Residual JV) through which the Company and Equity Residential acquired (i) certain assets of Archstone that the Company and Equity Residential plan to divest (to third parties or to the Company or Equity Residential) over time (the Residual Assets), and (ii) various liabilities of Archstone that the Company and Equity Residential agreed to assume in conjunction with the Archstone Acquisition (the Residual Liabilities). The Residual Assets include interests in apartment communities in Germany (including through a fund which Archstone managed), a 20.0% interest in a joint venture which owns and manages six apartment communities with 1,902 apartment homes in the United States, two land parcels, and various licenses, insurance policies, contracts, office leases and other miscellaneous assets. The Residual Liabilities include most existing or future litigation and claims related to Archstones operations for periods before the close of the Archstone Acquisition, except for (i) claims that principally relate to the physical condition of the assets acquired directly by the Company or Equity Residential, which generally remain the sole responsibility of the Company or Equity Residential, as applicable, and (ii) certain tax and other litigation between Archstone and various equity holders in Archstone related to periods before the close of the Archstone Acquisition for which Lehman has agreed to indemnify the Company and Equity Residential. The Company and Equity Residential jointly control the Residual JV and the Company holds a 40% economic interest in the assets and liabilities of the Residual JV.
6. Investments in Real Estate Entities
Investments in consolidated entities
Except in connection with the Archstone Acquisition, the Company did not acquire any additional communities during the three months ended March 31, 2013.
Investment in unconsolidated entities
As of March 31, 2013, including the interests in joint ventures acquired in the Archstone Acquisition, and excluding its interest in the Residual JV, the Company had investments in seven unconsolidated real estate entities with ownership interest percentages ranging from 15.2% to 31.3%. The Company accounts for its investments in unconsolidated real estate entities under the equity method of accounting. The significant accounting policies of the Companys unconsolidated real estate entities are consistent with those of the Company in all material respects.
During the three months ended March 31, 2013, AvalonBay Value Added Fund, LP (Fund I) sold one community located in San Francisco, CA and AvalonBay Value Added Fund II, LP (Fund II) sold one community located in Gaithersburg, MD. These communities contain 365 apartment homes and 32,000 square feet of retail space and were sold for $142,600,000. The Companys proportionate share of the aggregate gain in accordance with GAAP for these dispositions was $9,352,000.
The following is a combined summary of the financial position of the entities accounted for using the equity method excluding those held in joint ventures with Equity Residential, as of the dates presented (dollars in thousands):
|
|
3-31-13 |
|
12-31-12 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
Assets: |
|
|
|
|
| ||
Real estate, net |
|
$ |
2,112,739 |
|
$ |
1,337,084 |
|
Other assets |
|
779,722 |
|
73,252 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
2,892,461 |
|
$ |
1,410,336 |
|
|
|
|
|
|
| ||
Liabilities and partners capital: |
|
|
|
|
| ||
Mortgage notes payable and credit facility |
|
$ |
1,391,811 |
|
$ |
943,259 |
|
Other liabilities |
|
36,351 |
|
20,405 |
| ||
Partners capital |
|
1,464,299 |
|
446,672 |
| ||
|
|
|
|
|
| ||
Total liabilities and partners capital |
|
$ |
2,892,461 |
|
$ |
1,410,336 |
|
The following is a combined summary of the operating results of the entities accounted for using the equity method, excluding investments in joint ventures with Equity Residential, for the periods presented (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
3-31-13 |
|
3-31-12 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
|
|
|
|
|
| ||
Rental and other income |
|
$ |
43,827 |
|
$ |
42,627 |
|
Operating and other expenses |
|
(17,705 |
) |
(18,669 |
) | ||
Gain on sale of communities |
|
54,051 |
|
8,909 |
| ||
Interest expense, net |
|
(15,269 |
) |
(13,066 |
) | ||
Depreciation expense |
|
(13,151 |
) |
(12,700 |
) | ||
Net income (loss) |
|
$ |
51,753 |
|
$ |
7,101 |
|
In conjunction with the formation of Fund I and Fund II, as well as the acquisition and development of certain other investments in unconsolidated entities, the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $6,726,000 at March 31, 2013 and $7,342,000 at December 31, 2012 of the respective investment balances.
As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures. These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Companys obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500,000 for Fund I and approximately $8,910,000 for Fund II as of March 31, 2013). As of March 31, 2013, the expected realizable values of the real estate assets owned by Fund I and Fund II are considered adequate to cover such potential payments under a liquidation scenario. The estimated fair value of, and the Companys obligation under these guarantees, both at inception and as of March 31, 2013, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of March 31, 2013.
Abandoned Pursuit Costs and Impairment of Long-Lived Assets
The Company capitalizes pre-development costs incurred in pursuit of new development opportunities for which the Company currently believes future development is probable (Development Rights). Future development of these Development Rights is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and the availability of capital. Initial pre-development costs incurred for pursuits for which future development is not yet considered probable are expensed as incurred. In addition, if the status of a Development Right changes, making future development by the Company no longer probable, any capitalized pre-development costs are written off with a charge to expense. The Company expensed costs related to abandoned pursuits, which include the abandonment of Development Rights as well as costs incurred in pursuing the disposition of assets for which the disposition did not occur, in the amounts of $245,000 and $147,000 for the three months ended March 31, 2013 and 2012, respectively. These costs are included in operating expenses, excluding property taxes on the accompanying Condensed Consolidated Statements of Comprehensive Income. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods.
The Company evaluates its real estate and other long-lived assets for impairment when potential indicators of impairment exist. Such assets are stated at cost, less accumulated depreciation and amortization, unless the carrying amount of the asset is not recoverable. If events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable, the Company assesses its recoverability by comparing the carrying amount of the long-lived asset to its estimated undiscounted future cash flows. If the carrying amount exceeds the aggregate undiscounted future cash flows, the Company recognizes an impairment loss to the extent the carrying amount exceeds the estimated fair value of the long-lived asset. Based on periodic tests of recoverability of long-lived assets, the Company did not record any impairment losses for the three months ended March 31, 2013 and 2012.
The Company also evaluates its unconsolidated investments for other than temporary impairment, considering both its carrying value of the investment, estimated as the expected proceeds that it would receive if the entity were dissolved and the net assets were liquidated at their current GAAP basis, as well as the Companys proportionate share of any impairment of assets held by unconsolidated investments. There were no impairment losses recognized by any of the Companys investments in unconsolidated entities during the three months ended March 31, 2013 and 2012.
7. Real Estate Disposition Activities
During the three months ended March 31, 2013, the Company sold three communities. Two of the communities sold, Crystal House I and Crystal House II, both located in Arlington, VA were acquired by the Company as part of the Archstone Acquisition, and planned for disposition at that time. These communities, containing a total of 827 apartment homes, were sold for an aggregate price of $197,150,000. In addition, the Company sold Avalon at Decoverly located in Rockville, MD. This community, containing 564 apartment homes, was sold for $135,250,000 resulting in a gain in accordance with GAAP of $84,491,000.
The operations for any real estate assets sold from January 1, 2012 through March 31, 2013, as well as for assets classified as held for sale at March 31, 2013, have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.
The following is a summary of income (loss) from discontinued operations for the periods presented (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
3-31-13 |
|
3-31-12 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
|
|
|
|
|
| ||
Rental income |
|
$ |
3,228 |
|
$ |
8,455 |
|
Operating and other expenses |
|
(782 |
) |
(2,699 |
) | ||
Interest expense, net |
|
|
|
(80 |
) | ||
Depreciation expense |
|
|
|
(1,741 |
) | ||
Income from discontinued operations |
|
$ |
2,446 |
|
$ |
3,935 |
|
8. Segment Reporting
The Companys reportable operating segments include Established Communities, Other Stabilized Communities, and Development/Redevelopment Communities. Annually as of January 1st, the Company determines which of its communities fall into each of these categories and maintains that classification, unless disposition plans regarding a community change, throughout the year for the purpose of reporting segment operations.
In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.
The Companys segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segments performance. The Companys chief operating decision maker is comprised of several members of its executive management team who use net operating income (NOI) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a communitys or communities operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.
A reconciliation of NOI to net income for the three months ended March 31, 2013 and 2012 is as follows (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
3-31-13 |
|
3-31-12 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
75,469 |
|
$ |
57,609 |
|
Indirect operating expenses, net of corporate income |
|
9,041 |
|
8,036 |
| ||
Investments and investment management expense |
|
1,015 |
|
1,446 |
| ||
Expensed acquisition, development and other pursuit costs |
|
40,059 |
|
239 |
| ||
Interest expense, net |
|
38,174 |
|
33,626 |
| ||
Loss on extinguishment of debt |
|
|
|
1,179 |
| ||
General and administrative expense |
|
10,039 |
|
9,710 |
| ||
Equity in (income) loss of unconsolidated entities |
|
18,564 |
|
(2,175 |
) | ||
Depreciation expense |
|
109,829 |
|
61,571 |
| ||
Gain on sale of real estate assets |
|
(84,491 |
) |
|
| ||
Income from discontinued operations |
|
(2,446 |
) |
(3,935 |
) | ||
Net operating income |
|
$ |
215,253 |
|
$ |
167,306 |
|
The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.
The following table provides details of the Companys segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual communitys status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three months ended March 31, 2013 and 2012 have been adjusted for the real estate assets that were sold from January 1, 2012 through March 31, 2013, or otherwise qualify as discontinued operations as of March 31, 2013, as described in Note 7, Real Estate Disposition Activities.
|
|
Total |
|
|
|
% NOI change |
|
Gross |
| |||
|
|
revenue |
|
NOI |
|
from prior year |
|
real estate (1) |
| |||
|
|
|
|
|
|
|
|
|
| |||
For the three months ended March 31, 2013 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Established |
|
|
|
|
|
|
|
|
| |||
New England |
|
$ |
44,655 |
|
$ |
28,577 |
|
1.7 |
% |
$ |
1,387,495 |
|
Metro NY/NJ |
|
61,244 |
|
42,439 |
|
5.5 |
% |
1,915,890 |
| |||
Mid-Atlantic |
|
25,035 |
|
18,188 |
|
1.6 |
% |
631,207 |
| |||
Pacific Northwest |
|
11,376 |
|
7,850 |
|
10.5 |
% |
443,564 |
| |||
Northern California |
|
36,603 |
|
27,504 |
|
11.6 |
% |
1,312,838 |
| |||
Southern California |
|
26,910 |
|
18,463 |
|
5.9 |
% |
987,209 |
| |||
Total Established |
|
205,823 |
|
143,021 |
|
5.6 |
% |
6,678,203 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Other Stabilized |
|
80,862 |
|
56,243 |
|
N/A |
|
7,136,065 |
| |||
Development / Redevelopment |
|
23,174 |
|
15,989 |
|
N/A |
|
1,915,146 |
| |||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
359,029 |
| |||
Non-allocated (2) |
|
2,272 |
|
N/A |
|
N/A |
|
69,318 |
| |||
Total |
|
$ |
312,131 |
|
$ |
215,253 |
|
28.7 |
% |
$ |
16,157,761 |
|
|
|
|
|
|
|
|
|
|
| |||
For the three months ended March 31, 2012 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Established |
|
|
|
|
|
|
|
|
| |||
New England |
|
$ |
33,881 |
|
$ |
22,065 |
|
7.5 |
% |
$ |
1,100,828 |
|
Metro NY/NJ |
|
57,219 |
|
39,591 |
|
9.8 |
% |
1,962,197 |
| |||
Mid-Atlantic |
|
25,696 |
|
18,816 |
|
6.4 |
% |
591,140 |
| |||
Pacific Northwest |
|
7,905 |
|
5,572 |
|
11.9 |
% |
301,793 |
| |||
Northern California |
|
31,112 |
|
22,793 |
|
15.5 |
% |
1,180,070 |
| |||
Southern California |
|
23,747 |
|
16,559 |
|
11.9 |
% |
931,512 |
| |||
Total Established |
|
179,560 |
|
125,396 |
|
10.2 |
% |
6,067,540 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Other Stabilized |
|
30,252 |
|
19,498 |
|
N/A |
|
1,098,074 |
| |||
Development / Redevelopment |
|
33,671 |
|
22,412 |
|
N/A |
|
1,641,636 |
| |||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
297,127 |
| |||
Non-allocated (2) |
|
2,549 |
|
N/A |
|
N/A |
|
104,282 |
| |||
Total |
|
$ |
246,032 |
|
$ |
167,306 |
|
17.4 |
% |
$ |
9,208,659 |
|
(1) Does not include gross real estate assets held for sale of $0 and $255,431 as of March 31, 2013 and 2012, respectively.
(2) Revenue represents third party management, asset management and developer fees and miscellaneous income which are not allocated to a reportable segment.
9. Stock-Based Compensation Plans
Information with respect to stock options granted under the Companys 1994 Stock Option and Incentive Plan (the 1994 Plan) and under the AvalonBay Communities, Inc. 2009 Stock Option and Incentive Plan (the 2009 Plan) are as follows (dollars in thousands, other than per share amounts):
|
|
|
|
Weighted |
|
|
|
Weighted |
| ||
|
|
|
|
average |
|
|
|
average |
| ||
|
|
2009 Plan |
|
exercise price |
|
1994 Plan |
|
exercise price |
| ||
|
|
shares |
|
per share |
|
shares |
|
per share |
| ||
|
|
|
|
|
|
|
|
|
| ||
Options Outstanding, December 31, 2012 |
|
307,554 |
|
$ |
112.67 |
|
719,830 |
|
$ |
105.40 |
|
Exercised |
|
(1,320 |
) |
74.20 |
|
(2,211 |
) |
43.41 |
| ||
Granted |
|
215,230 |
|
129.03 |
|
|
|
|
| ||
Forfeited |
|
|
|
|
|
(4,012 |
) |
127.56 |
| ||
Options Outstanding, March 31, 2013 |
|
521,464 |
|
$ |
119.52 |
|
713,607 |
|
$ |
105.47 |
|
Options Exercisable March 31, 2013 |
|
189,542 |
|
$ |
104.27 |
|
713,607 |
|
$ |
105.47 |
|
The weighted average fair value of the options granted under the 2009 Plan during the three months ended March 31, 2013 is estimated at $26.78 per share on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: dividend yield of 3.7% over the expected life of the option, volatility of 34%, risk-free interest rate of 0.91% and an expected life of approximately five years.
The Company adopted a revised compensation framework under which share-based compensation will be granted, composed of annual awards and multiyear long term incentive performance awards. Annual awards will include restricted stock awards for which one third of the award will vest annually over a three year period following the measurement period. Under the multiyear long term incentive component of the revised framework, the Company will grant a target number of restricted stock units, with the ultimate award determined by the total shareholder return of the Companys common stock over a three-year measurement period. The share-based compensation earned will be in the form of restricted stock, or upon election of the recipient up to 25% in the form of stock options, for which one third of the award will vest annually over a three year period following the measurement period.
During the three months ended March 31, 2013, the Company granted awards for restricted stock units with an estimated compensation cost of $15,349,000. This amount of restricted stock units includes an award which matures at the end of 2015 as well as two transitional awards that mature at the end of 2013 and 2014. The restricted stock units were valued using a Monte Carlo model with the following weighted average assumptions: baseline share value of $130.23, a dividend yield of 2.8%, estimated volatility figures over the life of the plan using 50% historical volatility and 50% implied volatility and risk free rates over the life of the plan ranging from 0.08% to 0.37%, resulting in an average estimated fair value per restricted stock unit of $110.00.
At March 31, 2013, the Company had 227,668 outstanding unvested shares granted under restricted stock awards. Restricted stock vesting during the three months ended March 31, 2013 totaled 93,462 shares and had fair values at the grant date ranging from $48.60 to $149.05 per share. The total grant date fair value of shares vested was $8,981,349 and $11,727,000 for the three months ended March 31, 2013 and 2012, respectively.
Total employee stock-based compensation cost recognized in income was $5,616,515 and $2,974,000 for the three months ended March 31, 2013 and 2012, respectively, and total capitalized stock-based compensation cost was $1,860,178 and $1,276,000 for the three months ended March 31, 2013 and 2012, respectively. Of these amounts, compensation expense of $2,099,000, and capitalized stock-based compensation costs of $421,000 related to the grants under the revised compensation framework. At March 31, 2013, there was a total of $6,632,039 and $14,564,587 in unrecognized compensation cost for unvested stock options and unvested restricted stock, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options and restricted stock is expected to be recognized over a weighted average period of 2.52 years and 3.11 years, respectively.
10. Related Party Arrangements
Unconsolidated Entities
Including the investments acquired as part of the Archstone Acquisition, the Company manages unconsolidated real
estate entities for which it receives asset management, property management, development and redevelopment fee revenue. From these entities, the Company received fees of $2,272,000 and $2,549,000 in the three months ended March 31, 2013 and 2012, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $7,046,000 and $3,484,000 as of March 31, 2013 and December 31, 2012, respectively.
Director Compensation
The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $256,000 and $209,000 for the three months ended March 31, 2013 and 2012, respectively, as a component of general and administrative expense. Deferred compensation relating to these restricted stock grants and deferred stock awards was $153,000 and $364,000 on March 31, 2013 and December 31, 2012, respectively.
11. Fair Value
Financial Instruments Carried at Fair Value
Derivative Financial Instruments
Currently, the Company uses interest rate swap and interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Companys financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poors Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus minimizing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty non-performance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2013, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
Hedge ineffectiveness from qualifying hedge relationships did not have a material impact on earnings of the Company for any prior period, and the Company does not anticipate that it will have a material effect in the future.
The following table summarizes the consolidated Hedging Derivatives at March 31, 2013, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):
|
|
Non- |
|
|
|
|
| |||
|
|
designated |
|
Cash Flow |
|
Cash Flow |
| |||
|
|
Hedges |
|
Hedges |
|
Hedges |
| |||
|
|
Interest |
|
Interest |
|
Interest |
| |||
|
|
Rate Caps |
|
Rate Caps |
|
Rate Swaps |
| |||
|
|
|
|
|
|
|
| |||
Notional balance |
|
$ |
568,514 |
|
$ |
179,675 |
|
$ |
215,000 |
|
Weighted average interest rate (1) |
|
1.5 |
% |
2.4 |
% |
4.6 |
% | |||
Weighted average capped interest rate |
|
5.8 |
% |
5.3 |
% |
N/A |
| |||
Earliest maturity date |
|
Aug-13 |
|
Jul-13 |
|
May-13 |
| |||
Latest maturity date |
|
Sep-17 |
|
Jun-15 |
|
May-13 |
| |||
(1) For interest rate caps, this represents the weighted average interest rate on the debt.
Excluding derivatives executed to hedge debt on communities classified as held for sale, the Company had four derivatives designated as cash flow hedges and 14 derivatives not designated as hedges at March 31, 2013. In conjunction with the Archstone Acquisition, the Company became the holder of 10 derivative positions with a fair value of approximately $20,000 at March 31, 2013. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2013, resulted in an unrecognized gain of approximately $1,414,000, included in Interest expense, net in the Condensed Consolidated Statements of Comprehensive Income. To adjust the Hedging Derivatives in qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded an increase in other comprehensive income of $11,008,000 during the three months ended March 31, 2012. The Company reclassified $1,391,000 from accumulated other comprehensive loss into earnings as a component of the interest expense, net for the three months ended March 31, 2013. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive losses into earnings within the next 12 months to offset the variability of cash flows of the hedged item during this period. The Company did not have any derivatives designated as fair value hedges as of March 31, 2013 or 2012.
The Company is also party to a $215,000,000 forward interest rate protection agreement, which was entered into in 2011 to reduce the impact of variability in interest rates on a portion of our expected debt issuance activity in 2013. In 2013, based on changes in the Companys capital markets outlook for the year, and current liquidity position, it is now uncertain as to whether it will issue the anticipated debt for which this interest rate protection agreement was transacted. The Company will cash settle this position at or prior to its maturity in May 2013 for the fair value at the time of settlement. At the point that the Company deems the anticipated debt issuance probable of not occurring, it will record a charge for the reversal of the deferred loss recorded within accumulated other comprehensive income of $53,484,000 for the forward interest swap agreement. If the Company does issue the debt as previously anticipated, then the amounts recorded within accumulated other comprehensive income will be recognized as interest expense over the term of the debt.
Redeemable Noncontrolling Interests
In conjunction with the consolidated joint ventures acquired as part of the Archstone Acquisition, the Company assumed guarantee obligations that Archstone had provided to certain joint venture partners in the form of redemption options (the Puts). Two of the Puts allow the joint venture partners in the ventures to require the Company to purchase their interest in the investment at a guaranteed minimum amount beginning in June 2022, or earlier if the operating communities underlying the joint ventures are sold. The Puts are payable in cash and have a price determined by a guaranteed return on the joint venture partners net capital contributions over the term of the partnership. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation, applying the contractual guaranteed rate of return to the joint venture partners net capital contribution balance as of period end. The Company assumed an additional redemption option related to a development right, where the joint venture partner has the right to put its interest in the venture to the Company upon stabilization of the planned apartment community. The value of the Companys obligation is based on the joint venture partners current interest in the venture, including any implied return thereon under the terms of the joint venture agreement. Given the significance of the unobservable inputs, the valuation of these puts are classified in Level 3 of the fair value hierarchy.
The Company provided a redemption option (the Put) that allows a joint venture partner of the Company to require the Company to purchase its interest in the investment at a guaranteed minimum amount. The Put is payable in cash. The Company determines the fair value of the Put based on unobservable inputs considering the assumptions that market participants would make in pricing the obligation, applying a guaranteed rate of return to the joint venture partners net capital contribution balance as of period end. Given the significance of the unobservable inputs, the valuation is classified in Level 3 of the fair value hierarchy.
The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement. Under the DownREIT agreement, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Companys common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares in the Companys common stock. The limited partnership units in the DownREIT are valued using the market price of the Companys common stock, a Level 1 price under the fair value hierarchy.
Financial Instruments Not Carried at Fair Value
Cash and Cash Equivalents
Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values.
Other Financial Instruments
Rents receivable, accounts and construction payable and accrued expenses and other liabilities are carried at their face amounts, which reasonably approximate their fair values.
The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Companys nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its credit facility are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.
Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis
The following table summarizes the classification between the three levels of the fair value hierarchy of the Companys financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):
|
|
|
|
Quoted Prices |
|
Significant |
|
|
| ||||
|
|
|
|
in Active |
|
Other |
|
Significant |
| ||||
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
Total Fair Value |
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
Description |
|
3/31/2013 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest Rate Caps |
|
$ |
29 |
|
$ |
|
|
$ |
29 |
|
$ |
|
|
Interest Rate Swaps |
|
(52,069 |
) |
|
|
(52,069 |
) |
|
| ||||
Puts |
|
(19,819 |
) |
|
|
|
|
(19,819 |
) | ||||
DownREIT units |
|
(950 |
) |
(950 |
) |
|
|
|
| ||||
Indebtedness |
|
(6,115,233 |
) |
(1,993,536 |
) |
(4,121,697 |
) |
|
| ||||
Total |
|
$ |
(6,188,042 |
) |
$ |
(1,994,486 |
) |
$ |
(4,173,737 |
) |
$ |
(19,819 |
) |
12. Subsequent Events
The Company evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued with the following notable events:
· In April 2013, the Company repaid $170,125,000 principal amount of a 4.81% secured mortgage note pursuant to its scheduled maturity date.
· Also in April 2013, the Company redeemed $30,000,000 of its proportionate share of the preferred interest obligations assumed in conjunction with the Archstone Acquisition.
· In May 2013, the Company repaid $5,465,000 principal amount of a 5.55% secured note at par in advance of its July 2028 scheduled maturity date.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends as described more fully under Forward-Looking Statements included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under Forward-Looking Statements below and the risk factors described in Item 1a, Risk Factors, of our Form 10-K for the year ended December 31, 2012 (our Form 10-K).
All capitalized terms have the meaning as provided elsewhere in this Form 10-Q.
Executive Overview
Business Description
We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier to entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. We seek to create long-term shareholder value by accessing capital at cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier to entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.
Our strategy is to be leaders in market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing submarkets of the United States. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.
We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are predominantly located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the United States.
First Quarter 2013 Highlights
On February 27, 2013, pursuant to the Purchase Agreement dated November 26, 2012, by and among us, Equity Residential, Lehman, and Archstone, we, together with Equity Residential, acquired, directly or indirectly, all of Archstones assets, including all of the ownership interests in joint ventures and other entities owned by Archstone, and assumed Archstones liabilities, with certain limited exceptions.
Under the terms of the Purchase Agreement, we acquired approximately 40% of Archstones assets and liabilities and Equity Residential acquired approximately 60% of Archstones assets and liabilities (the Archstone Acquisition). We acquired the following:
· 58 apartment communities that will be consolidated for financial reporting purposes, containing 19,263 apartment homes (we disposed of two additional communities containing 827 apartment homes in March 2013 also acquired as part of the Archstone Acquisition), of which six communities are under construction and/or in lease-up and are expected to contain 1,667 apartment homes upon completion;
· six parcels of land, four of which we intend to develop, and options to acquire two more parcels of land which, if developed as expected, will contain a total of 2,064 apartment homes;
· interests in unconsolidated joint ventures in which we are the general partner or managing member, which own 11 apartment communities containing 2,548 apartment homes, and an interest in an unconsolidated joint venture in which we are a limited partner which owns one apartment community containing 305 apartment homes as further discussed below; and
· a 40% ownership interest in unconsolidated joint venture arrangements with Equity Residential which will hold assets and liabilities that we and Equity will jointly manage, and that we and Equity intend to sell to or resolve with third parties, and/or subsequently transfer to Equity or to us as further discussed below.
The Company experienced strong operating performance in the first quarter of 2013.
· Net income attributable to common stockholders for the quarter ended March 31, 2013 was $75,427,000, an increase of $17,669,000 or 31% from the prior year period. The increase is primarily due to gains from disposition of real estate assets, coupled with an increase in Net Operating Income (NOI) from our existing and newly developed and acquired communities, partially offset by expensed transaction costs and increased depreciation expense associated with the Archstone Acquisition.
· For the quarter ended March 31, 2013, Established Communities NOI increased by $7,621,000 or 5.6% over the prior year period. This increase was driven by an increase in rental revenue of 4.9% due to increases in both rental rates and economic occupancy partially offset by an increase in operating expenses of 3.3% as compared to the prior year period.
· At March 31, 2013, we had approximately $541,106,000 in unrestricted cash and cash in escrow.
Our portfolio results for the quarter ended March 31, 2013 include approximately one month of operations from the communities acquired as part of the Archstone Acquisition, and reflect year-over-year revenue growth, as well as continued sequential rental revenue growth. The overall increase in revenues was driven by our portfolio growth and leasing activity for new development as well as an increase in rental rates and occupancy for our Established Communities. We expect year-over-year revenue growth to continue for the balance of 2013, supported in part by the newly acquired Archstone communities. We believe continued favorable apartment fundamentals, and a capital markets environment that provides continued access to cost effective capital, support our investment activity as further discussed below.
During the quarter ended March 31, 2013, we completed the construction of three communities with an aggregate of 696 apartment homes for a total capitalized cost of $179,000,000. Also, we started construction of two communities containing 701 apartment homes with an expected aggregate total capitalized cost of $259,200,000. As part of the Archstone Acquisition, we acquired five communities under construction for which we will complete construction activity. At March 31, 2013, 27 communities were under construction with a total projected capitalized cost of approximately $2,198,500,000. As of March 31, 2013, approximately $1,045,080,000 of the capital for this development was invested, with $1,153,420,000 remaining to invest.
During the three months ended March 31, 2013, we started the redevelopment of Eaves Stamford located in Stamford, CT. Eaves Stamford contains 238 apartment homes and is expected to be redeveloped for a total capitalized cost of $9,500,000, excluding costs incurred prior to redevelopment. At March 31, 2013, there were five communities under redevelopment, with an expected investment of approximately $55,300,000, excluding costs incurred prior to the start of redevelopment, with $44,851,000 remaining to be invested.
At present, cash on hand and available capital from our Credit Facility are sufficient to provide the capital necessary to fund our committed development and redevelopment activities as of March 31, 2013. We believe that our balance sheet, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges and our current modest use of financial encumbrances (such as secured financing), provide adequate access to liquidity from the capital markets through the issuance of corporate securities (which could include unsecured debt and/or common and preferred equity) and secured debt, as well as from other sources of liquidity such as from joint ventures or from our retained cash, to meet any reasonably foreseeable liquidity needs as they arise. See the discussion under Liquidity and Capital Resources.
We established Fund I and Fund II (collectively the Funds) to engage in acquisition programs through discretionary investment funds. We believe this investment format provides the following attributes: (i) third-party joint venture equity as an additional source of financing to expand and diversify our portfolio; (ii) additional sources
of income in the form of property management and asset management fees and, potentially, incentive distributions if the performance of the Funds exceeds certain thresholds; and (iii) visibility into the transactions occurring in multi-family assets that helps us with other investment decisions related to our wholly-owned portfolio.
Fund I has nine institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund I and excluding costs incurred in excess of our equity in the underlying net assets of Fund I, we have made an equity investment of approximately $12,788,000 in Fund I (net of distributions and excluding the purchase by us of a mortgage note secured by a Fund I community), representing a 15.2% combined general partner and limited partner equity interest. Fund I was our principal vehicle for acquiring apartment communities from its formation in March 2005 through the close of its investment period in March 2008. Fund I has a term that expired in March 2013, plus two one-year extension options. We have executed the first one-year extension.
Fund II has six institutional investors, including us. One of our wholly owned subsidiaries is the general partner of Fund II, and excluding costs incurred in excess of our equity in the underlying net assets of Fund II, we have made an equity investment of $101,688,000 (net of distributions), representing a 31.3% combined general partner and limited partner equity interest. Fund II served as the exclusive vehicle through which we acquired investment interests in apartment communities from its formation in September 2008 through the close of its investment period in August 2011.
During the quarter ended March 31, 2013, Fund I sold Avalon Yerba Buena, located in San Francisco, CA, containing 160 apartment homes and 32,000 square feet of retail space for $103,000,000. Also during the first quarter of 2013, Fund II sold Avalon Rothbury, a 205 apartment home community, located in Gaithersburg, MD, for $39,600,000. Our proportionate share of the aggregate gain in accordance with GAAP for the dispositions by Fund I and Fund II was $9,352,000.
In connection with the Archstone Acquisition, we assumed Archstones position in the Archstone U.S. Fund as the general partner, through which we are the managing member; a limited partner, through which we hold a 28.6% equity interest; and a Class A partner, through which we hold a promote interest. The Archstone U.S. Fund was formed in July 2011 as a discretionary real estate investment vehicle and is fully invested. The Archstone U.S. Fund has a term expiring in 2021, subject to two, one-year extensions if necessary for the orderly dissolution of the Fund. The Archstone U.S. Fund will not impact the Companys development activities or investments acquired in operating communities acquired from unrelated third parties.
We also acquired interests in other joint venture entities as part of the Archstone Acquisition as described elsewhere in this report.
Communities Overview
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (Development Communities) and Development Rights as defined below. Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:
· Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the period ended March 31, 2013, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2012, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. Established
Communities do not include communities acquired as part of the Archstone Acquisition.
· Other Stabilized Communities are all other completed communities that we own or have a direct or indirect ownership interest in, and that attained stabilized occupancy, as defined above, subsequent to January 1, 2012, such that they have stabilized occupancy as of January 1, 2013 or upon acquisition if subsequent to January 1, 2013. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year. Beginning in the quarter ended March 31, 2013, Other Stabilized Communities include the stabilized operating communities acquired as part of the Archstone Acquisition.
· Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.
· Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed either $5,000,000 or 10% of the communitys pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.
Development Communities are communities that are under construction and for which a certificate of occupancy has not been received. These communities may be partially or fully complete and operating.
Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we control the land through a ground lease or own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.
We currently lease our corporate headquarters located in Arlington, Virginia under an operating lease. The lease term ends in 2020, subject to two five year renewal options. All other regional and administrative offices are leased under operating leases.
As of March 31, 2013, communities that we owned or held a direct or indirect interest in, excluding indirect interests in joint ventures with Equity Residential, were classified as follows:
|
|
Number of |
|
Number of |
|
|
|
communities |
|
apartment homes |
|
|
|
|
|
|
|
Current Communities |
|
|
|
|
|
|
|
|
|
|
|
Established Communities: |
|
|
|
|
|
New England |
|
30 |
|
7,490 |
|
Metro NY/NJ |
|
25 |
|
8,416 |
|
Mid-Atlantic |
|
11 |
|
4,443 |
|
Pacific Northwest |
|
10 |
|
2,387 |
|
Northern California |
|
19 |
|
5,680 |
|
Southern California |
|
21 |
|
5,263 |
|
Total Established |
|
116 |
|
33,679 |
|
|
|
|
|
|
|
Other Stabilized Communities: |
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