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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)

 

 

 

Ballston Tower

671 N. Glebe Rd, Suite 800

Arlington, Virginia  22203

(Address of principal executive offices, including zip code)

 

(703) 329-6300

(Registrant’s 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):

 

 

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 issuer’s 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

 

 

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AVALONBAY COMMUNITIES, INC.

FORM 10-Q

INDEX

 

	Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012	1
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the three months ended March 31, 2013 and 2012	2
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2013 and 2012	3
Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	48
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	49
Item 1a. Risk Factors	49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3. Defaults Upon Senior Securities	50
Item 4. Mine Safety Disclosures	50
Item 5. Other Information	50
Item 6. Exhibits	51
Signatures	53

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

 

		3-31-13			12-31-12
		(unaudited)
ASSETS
Real estate:
Land		$	3,287,607		$	1,440,590
Buildings and improvements		11,188,804			7,185,853
Furniture, fixtures and equipment		318,423			255,733
		14,794,834			8,882,176
Less accumulated depreciation		(2,143,581		)	(2,034,364		)
Net operating real estate		12,651,253			6,847,812
Construction in progress, including land		1,003,898			802,883
Land held for development		359,029			316,037
Operating real estate assets held for sale, net		—			48,388
Total real estate, net		14,014,180			8,015,120
Cash and cash equivalents		447,456			2,733,618
Cash in escrow		93,650			50,033
Resident security deposits		27,313			24,748
Investments in unconsolidated real estate entities		371,983			129,352
Deferred financing costs, net		36,606			38,700
Deferred development costs		33,275			24,665
Prepaid expenses and other assets		162,901			143,842
Total assets		$	15,187,364		$	11,160,078
LIABILITIES AND EQUITY
Unsecured notes, net		$	1,845,961		$	1,945,798
Variable rate unsecured credit facility		—			—
Mortgage notes payable, net		4,082,328			1,905,235
Dividends payable		138,438			110,966
Payables for construction		53,317			53,677
Accrued expenses and other liabilities		316,618			224,194
Accrued interest payable		24,290			33,056
Resident security deposits		46,755			38,626
Liabilities related to real estate assets held for sale		—			706
Total liabilities		6,507,707			4,312,258
Redeemable noncontrolling interests		20,769			7,027
Equity:
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		—			—
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			6,837,215
Noncontrolling interest		3,579			3,578
Total equity		8,658,888			6,840,793
Total liabilities and equity		$	15,187,364		$	11,160,078

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF

COMPREHENSIVE INCOME

(unaudited)

(Dollars in thousands, except per share data)

 

		For the three months ended
		3-31-13			3-31-12
Revenue:
Rental and other income		$	309,859		$	243,483
Management, development and other fees		2,272			2,549
Total revenue		312,131			246,032
Expenses:
Operating expenses, excluding property taxes		73,971			64,321
Property taxes		32,963			23,887
Interest expense, net		38,174			33,626
Loss on extinguishment of debt, net		—			1,179
Depreciation expense		109,829			61,571
General and administrative expense		10,039			9,710
Expensed acquisition, development and other pursuit costs		40,059			239
Total expenses		305,035			194,533
Equity in income (loss) of unconsolidated entities		(18,564		)	2,175
Income (loss) from continuing operations		(11,468		)	53,674
Discontinued operations:
Income from discontinued operations		2,446			3,935
Gain on sale of real estate assets		84,491			—
Total discontinued operations		86,937			3,935
Net income		75,469			57,609
Net loss (income) attributable to noncontrolling interests		(42		)	149
Net income attributable to common stockholders		$	75,427		$	57,758
Other comprehensive income:
Unrealized gain on cash flow hedges		—			11,008
Cash flow hedge losses reclassified to earnings		1,391			—
Comprehensive income		$	76,818		$	68,766
Earnings per common share - basic:
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		$	0.61
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

 

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AVALONBAY COMMUNITIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Dollars in thousands)

 

		For the three months ended
		3-31-13			3-31-12
Cash flows from operating activities:
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
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

 

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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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.

 

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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 Company’s 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 Company’s earnings per common share are determined as follows (dollars in thousands, except per share data):

 

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		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.

 

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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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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”).

 

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		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 Company’s 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 Company’s 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 Archstone’s existing secured indebtedness, as further detailed in the table below (dollars in thousands).

 

Community / Debt Facility		Stated Interest Rate		Principal Maturity Date		Principal Balance Assumed (1)			Principal Repayments at Assumption			Net Principal Balance Assumed (1)
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

 

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(1)         Balances are for consolidated debt assumed and do not include the Company’s 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 Company’s 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 Company’s 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):

 

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											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 Company’s 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 Company’s dividend reinvestment plan;

(iii)                               issued 119,292 common shares in connection with stock grants;

 

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(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 Company’s common stock in accordance with the recommendation of the Company’s 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 Company’s stock option and restricted stock grants during the three months ended March 31, 2013 is not reflected on the Company’s 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 Archstone’s assets, including all of the ownership interests in joint ventures and other entities owned by Archstone, and assumed Archstone’s liabilities, both known and unknown with certain limited exceptions.

 

Under the terms of the Purchase Agreement, the Company acquired approximately 40% of Archstone’s assets and liabilities and Equity Residential acquired approximately 60% of Archstone’s 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 Company’s preliminary purchase price allocation:

 

		Acquisition Date Preliminary Fair Value (dollars in thousands)
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

 

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