10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 5, 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 September 30, 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 |
Non-accelerated filer (Do not check if a smaller reporting company) o |
|
Smaller reporting company o |
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:
129,413,103 shares of common stock, par value $0.01 per share, were outstanding as of October 31, 2013
AVALONBAY COMMUNITIES, INC.
FORM 10-Q
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Page | ||
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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 September 30, 2013 (unaudited) and December 31, 2012 |
1 | |
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| ||
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2 | ||
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| ||
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3-4 | ||
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| ||
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Notes to Condensed Consolidated Financial Statements (unaudited) |
5-25 | |
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|
| |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
26-53 | ||
|
| ||
54 | |||
|
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54 | |||
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| |||
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55 | |||
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55 | |||
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55 | |||
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55 | |||
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55 | |||
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56 | |||
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56 | |||
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59 | |||
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
9-30-13 |
|
12-31-12 |
| ||
|
|
(unaudited) |
|
|
| ||
ASSETS |
|
|
|
|
| ||
Real estate: |
|
|
|
|
| ||
Land |
|
$ |
3,302,403 |
|
$ |
1,424,797 |
|
Buildings and improvements |
|
11,116,909 |
|
6,934,099 |
| ||
Furniture, fixtures and equipment |
|
333,638 |
|
251,537 |
| ||
|
|
14,752,950 |
|
8,610,433 |
| ||
Less accumulated depreciation |
|
(2,445,294 |
) |
(1,988,764 |
) | ||
Net operating real estate |
|
12,307,656 |
|
6,621,669 |
| ||
Construction in progress, including land |
|
1,418,836 |
|
802,857 |
| ||
Land held for development |
|
282,285 |
|
316,037 |
| ||
Operating real estate assets held for sale, net |
|
275,874 |
|
274,556 |
| ||
Total real estate, net |
|
14,284,651 |
|
8,015,119 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
|
112,910 |
|
2,733,618 |
| ||
Cash in escrow |
|
98,429 |
|
49,950 |
| ||
Resident security deposits |
|
27,868 |
|
24,748 |
| ||
Investments in unconsolidated real estate entities |
|
347,386 |
|
129,352 |
| ||
Deferred financing costs, net |
|
39,085 |
|
38,700 |
| ||
Deferred development costs |
|
33,799 |
|
24,665 |
| ||
Prepaid expenses and other assets |
|
200,979 |
|
143,926 |
| ||
Total assets |
|
$ |
15,145,107 |
|
$ |
11,160,078 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
Unsecured notes, net |
|
$ |
2,245,191 |
|
$ |
1,945,798 |
|
Variable rate unsecured credit facility |
|
|
|
|
| ||
Mortgage notes payable |
|
3,852,441 |
|
1,905,235 |
| ||
Dividends payable |
|
138,459 |
|
110,966 |
| ||
Payables for construction |
|
84,027 |
|
52,903 |
| ||
Accrued expenses and other liabilities |
|
254,144 |
|
217,259 |
| ||
Accrued interest payable |
|
23,965 |
|
33,056 |
| ||
Resident security deposits |
|
47,020 |
|
37,691 |
| ||
Liabilities related to real estate assets held for sale |
|
8,275 |
|
9,350 |
| ||
Total liabilities |
|
6,653,522 |
|
4,312,258 |
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|
|
|
|
|
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Redeemable noncontrolling interests |
|
18,255 |
|
7,027 |
| ||
|
|
|
|
|
| ||
Equity: |
|
|
|
|
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Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both September 30, 2013 and December 31, 2012; zero shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively |
|
|
|
|
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Common stock, $0.01 par value; 280,000,000 shares authorized at September 30, 2013 and 140,000,000 shares authorized at December 31, 2012; 129,402,556 and 114,403,472 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively |
|
1,294 |
|
1,144 |
| ||
Additional paid-in capital |
|
8,976,780 |
|
7,086,407 |
| ||
Accumulated earnings less dividends |
|
(458,229 |
) |
(142,329 |
) | ||
Accumulated other comprehensive loss |
|
(50,094 |
) |
(108,007 |
) | ||
Total equity |
|
8,469,751 |
|
6,837,215 |
| ||
Noncontrolling interest |
|
3,579 |
|
3,578 |
| ||
Total equity |
|
8,473,330 |
|
6,840,793 |
| ||
Total liabilities and equity |
|
$ |
15,145,107 |
|
$ |
11,160,078 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
(unaudited)
(Dollars in thousands, except per share data)
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
9-30-13 |
|
9-30-12 |
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9-30-13 |
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9-30-12 |
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Revenue: |
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|
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|
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|
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Rental and other income |
|
$ |
390,113 |
|
$ |
258,788 |
|
$ |
1,072,273 |
|
$ |
742,254 |
|
Management, development and other fees |
|
3,014 |
|
2,533 |
|
8,198 |
|
7,852 |
| ||||
Total revenue |
|
393,127 |
|
261,321 |
|
1,080,471 |
|
750,106 |
| ||||
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|
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Expenses: |
|
|
|
|
|
|
|
|
| ||||
Operating expenses, excluding property taxes |
|
97,650 |
|
67,471 |
|
258,605 |
|
196,325 |
| ||||
Property taxes |
|
42,678 |
|
25,475 |
|
116,515 |
|
73,171 |
| ||||
Interest expense, net |
|
43,945 |
|
33,985 |
|
127,772 |
|
100,804 |
| ||||
Loss on interest rate contract |
|
53,484 |
|
|
|
51,000 |
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|
| ||||
Loss on extinguishment of debt, net |
|
|
|
|
|
|
|
1,179 |
| ||||
Depreciation expense |
|
160,682 |
|
62,750 |
|
457,837 |
|
183,688 |
| ||||
General and administrative expense |
|
9,878 |
|
8,372 |
|
31,262 |
|
26,398 |
| ||||
Expensed acquisition, development and other pursuit costs |
|
2,176 |
|
608 |
|
46,041 |
|
1,749 |
| ||||
Total expenses |
|
410,493 |
|
198,661 |
|
1,089,032 |
|
583,314 |
| ||||
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|
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|
|
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|
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Equity in income (loss) of unconsolidated entities |
|
3,260 |
|
5,553 |
|
(16,244 |
) |
9,801 |
| ||||
Gain on sale of land |
|
|
|
|
|
240 |
|
280 |
| ||||
Gain on acquisition of unconsolidated real estate entity |
|
|
|
14,194 |
|
|
|
14,194 |
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|
|
|
|
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|
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(Loss) income from continuing operations |
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(14,106 |
) |
82,407 |
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(24,565 |
) |
191,067 |
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Discontinued operations: |
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|
|
|
|
|
|
|
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Income from discontinued operations |
|
3,221 |
|
4,340 |
|
7,073 |
|
15,062 |
| ||||
Gain on sale of real estate assets |
|
|
|
|
|
118,173 |
|
95,049 |
| ||||
Total discontinued operations |
|
3,221 |
|
4,340 |
|
125,246 |
|
110,111 |
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|
|
|
|
|
|
|
|
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Net (loss) income |
|
(10,885 |
) |
86,747 |
|
100,681 |
|
301,178 |
| ||||
Net loss attributable to noncontrolling interests |
|
170 |
|
97 |
|
248 |
|
334 |
| ||||
|
|
|
|
|
|
|
|
|
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Net (loss) income attributable to common stockholders |
|
$ |
(10,715 |
) |
$ |
86,844 |
|
$ |
100,929 |
|
$ |
301,512 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
Unrealized loss on cash flow hedges |
|
|
|
(6,977 |
) |
|
|
(23,767 |
) | ||||
Cash flow hedge losses reclassified to earnings |
|
54,948 |
|
|
|
57,913 |
|
|
| ||||
Comprehensive income |
|
$ |
44,233 |
|
$ |
79,867 |
|
$ |
158,842 |
|
$ |
277,745 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share - basic: |
|
|
|
|
|
|
|
|
| ||||
(Loss) income from continuing operations attributable to common stockholders |
|
$ |
(0.11 |
) |
$ |
0.85 |
|
$ |
(0.19 |
) |
$ |
1.99 |
|
Discontinued operations attributable to common stockholders |
|
0.03 |
|
0.04 |
|
0.99 |
|
1.15 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders |
|
$ |
(0.08 |
) |
$ |
0.89 |
|
$ |
0.80 |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share - diluted: |
|
|
|
|
|
|
|
|
| ||||
(Loss) income from continuing operations attributable to common stockholders |
|
$ |
(0.11 |
) |
$ |
0.85 |
|
$ |
(0.19 |
) |
$ |
1.99 |
|
Discontinued operations attributable to common stockholders |
|
0.03 |
|
$ |
0.04 |
|
$ |
0.99 |
|
$ |
1.14 |
| |
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders |
|
$ |
(0.08 |
) |
$ |
0.89 |
|
$ |
0.80 |
|
$ |
3.13 |
|
|
|
|
|
|
|
|
|
|
| ||||
Dividends per common share: |
|
$ |
1.07 |
|
$ |
0.97 |
|
$ |
3.21 |
|
$ |
2.91 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
|
|
For the nine months ended |
| ||||
|
|
9-30-13 |
|
9-30-12 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
100,681 |
|
$ |
301,178 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
| ||
Depreciation expense |
|
457,837 |
|
183,688 |
| ||
Depreciation expense from discontinued operations |
|
10,727 |
|
10,641 |
| ||
Amortization of deferred financing costs and debt (premium) discount |
|
(15,831 |
) |
4,122 |
| ||
Amortization of stock-based compensation |
|
8,720 |
|
8,548 |
| ||
Equity in (income) loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations |
|
45,215 |
|
(7,484 |
) | ||
Cash flow hedge losses reclassified to earnings |
|
57,913 |
|
|
| ||
Loss on extinguishment of debt, net |
|
|
|
1,781 |
| ||
Gain on sale of real estate assets |
|
(118,413 |
) |
(95,329 |
) | ||
Gain on sale of joint venture real estate assets |
|
(12,667 |
) |
|
| ||
Gain on acquisition of unconsolidated entity |
|
|
|
(14,194 |
) | ||
(Increase) decrease in cash in operating escrows |
|
(12,883 |
) |
6,644 |
| ||
Increase in resident security deposits, prepaid expenses and other assets |
|
(66,709 |
) |
(8,069 |
) | ||
Increase (decrease) in accrued expenses, other liabilities and accrued interest payable |
|
15,333 |
|
(16,353 |
) | ||
Net cash provided by operating activities |
|
469,923 |
|
375,173 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Development/redevelopment of real estate assets including land acquisitions and deferred development costs |
|
(908,215 |
) |
(567,867 |
) | ||
Acquisition of real estate assets, including partnership interest |
|
(749,275 |
) |
(105,904 |
) | ||
Capital expenditures - existing real estate assets |
|
(10,527 |
) |
(13,449 |
) | ||
Capital expenditures - non-real estate assets |
|
(7,286 |
) |
(1,094 |
) | ||
Proceeds from sale of real estate, net of selling costs |
|
432,380 |
|
182,225 |
| ||
Increase in payables for construction |
|
31,124 |
|
14,419 |
| ||
Decrease in cash in construction escrows |
|
|
|
16,944 |
| ||
Decrease (increase) in investments in unconsolidated real estate entities |
|
16,788 |
|
(8,006 |
) | ||
Net cash used in investing activities |
|
(1,195,011 |
) |
(482,732 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Issuance of common stock |
|
2,874 |
|
326,653 |
| ||
Dividends paid |
|
(387,658 |
) |
(270,866 |
) | ||
Issuance of mortgage notes payable |
|
71,210 |
|
|
| ||
Repayments of mortgage notes payable, including prepayment penalties |
|
(1,789,399 |
) |
(106,255 |
) | ||
Issuance of unsecured notes |
|
400,000 |
|
450,000 |
| ||
Settlement of interest rate contract |
|
(51,000 |
) |
(54,930 |
) | ||
Repayment of unsecured notes |
|
(100,000 |
) |
(179,400 |
) | ||
Payment of deferred financing costs and issuance discounts |
|
(6,093 |
) |
(6,744 |
) | ||
Acquisition of joint venture partner equity interest |
|
(1,965 |
) |
(3,350 |
) | ||
Redemption of preferred interest obligation |
|
(33,327 |
) |
|
| ||
Distributions to DownREIT partnership unitholders |
|
(24 |
) |
(22 |
) | ||
Distributions to joint venture and profit-sharing partners |
|
(238 |
) |
(247 |
) | ||
Net cash (used in) provided by financing activities |
|
(1,895,620 |
) |
154,839 |
| ||
|
|
|
|
|
| ||
Net (decrease) increase in cash and cash equivalents |
|
(2,620,708 |
) |
47,280 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, beginning of period |
|
2,733,618 |
|
616,853 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents, end of period |
|
$ |
112,910 |
|
$ |
664,133 |
|
|
|
|
|
|
| ||
Cash paid during the period for interest, net of amount capitalized |
|
$ |
137,081 |
|
$ |
101,121 |
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosures of non-cash investing and financing activities (amounts in whole dollars):
During the nine months ended September 30, 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); 123,977 shares of common stock valued at $16,019,000 were issued in connection with stock grants; 1,465 shares valued at $200,000 were issued through the Companys dividend reinvestment plan; 44,750 shares valued at $5,706,000 were withheld to satisfy employees tax withholding and other liabilities; and 5,214 shares and certain options valued at $780,000 previously issued in connection with employee compensation were cancelled upon forfeiture. In addition, the Company granted 215,230 options for common stock at a value of $5,768,000.
· The Company reclassified $4,429,000 of deferred cash flow hedge losses from other comprehensive income to interest expense, net, and $53,484,000 to loss on interest rate contract, to record the impact of the Companys derivative and hedge accounting activity.
· Common dividends declared but not paid totaled $138,459,000.
· The Company recorded $13,262,000 in redeemable noncontrolling interests associated with consolidated joint ventures acquired as part of the Archstone Acquisition. The Company also recorded an increase of $441,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put options held by joint venture partners 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.
During the nine months ended September 30, 2012:
· The Company issued 96,592 shares of common stock valued at $12,883,000 in connection with stock grants; 1,830 shares valued at $254,000 were issued through the Companys dividend reinvestment plan; 120,952 shares valued at $15,491,000 were withheld to satisfy employees tax withholding and other liabilities; and 7,558 shares and options valued at $393,000 previously issued in connection with employee compensation were cancelled upon forfeiture. In addition, the Company granted 115,303 options for common stock at a value of $3,357,000.
· The Company recorded an increase to other liabilities and a corresponding decrease to other comprehensive income of $23,767,000, 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 $94,778,000.
· The Company recorded an increase of $480,000 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 primarily in high barrier to entry markets of the United States. The Companys primary markets are located in the New England, Metro New York/New Jersey, Mid-Atlantic, Pacific Northwest, and Northern and Southern California regions of the country.
At September 30, 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 247 operating apartment communities containing 73,884 apartment homes in 12 states and the District of Columbia, of which five communities containing 1,712 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 29 communities under construction that are expected to contain an aggregate of 8,692 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 45 communities that, if developed as expected, will contain an estimated 13,089 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 and nine months ended September 30, 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 |
|
For the nine months ended |
| ||||||||
|
|
9-30-13 |
|
9-30-12 |
|
9-30-13 |
|
9-30-12 |
| ||||
Basic and diluted shares outstanding |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares - basic |
|
129,208,839 |
|
97,044,603 |
|
126,057,793 |
|
95,742,676 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average DownREIT units outstanding |
|
7,500 |
|
7,500 |
|
7,500 |
|
7,500 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Effect of dilutive securities (1) |
|
|
|
494,466 |
|
411,821 |
|
651,382 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares - diluted |
|
129,216,339 |
|
97,546,569 |
|
126,477,114 |
|
96,401,558 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Calculation of Earnings per Share - basic |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders |
|
$ |
(10,715 |
) |
$ |
86,844 |
|
$ |
100,929 |
|
$ |
301,512 |
|
Net loss (income) allocated to unvested restricted shares |
|
16 |
|
(186 |
) |
(166 |
) |
(1,003 |
) | ||||
Net (loss) income attributable to common stockholders, adjusted |
|
$ |
(10,699 |
) |
$ |
86,658 |
|
$ |
100,763 |
|
$ |
300,509 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares - basic |
|
129,208,839 |
|
97,044,603 |
|
126,057,793 |
|
95,742,676 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
(Loss) earnings per common share - basic |
|
$ |
(0.08 |
) |
$ |
0.89 |
|
$ |
0.80 |
|
$ |
3.14 |
|
|
|
|
|
|
|
|
|
|
| ||||
Calculation of Earnings per Share - diluted |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income attributable to common stockholders |
|
$ |
(10,715 |
) |
$ |
86,844 |
|
$ |
100,929 |
|
$ |
301,512 |
|
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations |
|
8 |
|
7 |
|
24 |
|
21 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Adjusted net (loss) income attributable to common stockholders |
|
$ |
(10,707 |
) |
$ |
86,851 |
|
$ |
100,953 |
|
$ |
301,533 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares - diluted |
|
129,216,339 |
|
97,546,569 |
|
126,477,114 |
|
96,401,558 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
(Loss) earnings per common share - diluted |
|
$ |
(0.08 |
) |
$ |
0.89 |
|
$ |
0.80 |
|
$ |
3.13 |
|
(1) Securities considered antidilutive for the three months ended September 30, 2013 due to recognition of net loss.
Certain options to purchase shares of common stock in the amounts of 605,899 and 418,177 were outstanding at September 30, 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 September 30, 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 and nine months ended September 30, 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 general and administrative expenses. 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 effective portion of 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 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.
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 $17,205,000 and $12,504,000 for the three months ended September 30, 2013 and 2012, respectively, and $47,168,000 and $37,449,000 for the nine months ended September 30, 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 September 30, 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 September 30, 2013 and December 31, 2012, as shown in the Condensed Consolidated Balance Sheets (see Note 7, Real Estate Disposition Activities).
|
|
9-30-13 |
|
12-31-12 |
| ||
|
|
|
|
|
| ||
Fixed rate unsecured notes (1) |
|
$ |
2,250,000 |
|
$ |
1,950,000 |
|
Fixed rate mortgage notes payable - conventional and tax-exempt (2) |
|
2,710,673 |
|
1,427,133 |
| ||
Variable rate mortgage notes payable - conventional and tax-exempt(2) |
|
1,011,609 |
|
476,935 |
| ||
|
|
|
|
|
| ||
Total notes payable and unsecured notes |
|
5,972,282 |
|
3,854,068 |
| ||
|
|
|
|
|
| ||
Credit Facility |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total mortgage notes payable, unsecured notes and Credit Facility |
|
$ |
5,972,282 |
|
$ |
3,854,068 |
|
(1) Balances at September 30, 2013 and December 31, 2012 exclude $4,809 and $4,202, respectively, of debt discount as reflected in unsecured notes on the Companys Condensed Consolidated Balance Sheets.
(2) Balances at September 30, 2013 and December 31, 2012 exclude $130,159 and $1,167, respectively of debt premium as reflected in mortgage notes payable on the Companys Condensed Consolidated Balance Sheets.
The following debt activity occurred during the nine months ended September 30, 2013:
· In February 2013, as a portion of the consideration for the Archstone Acquisition, the Company assumed $3,512,202,000 consolidated principal amount of Archstones existing secured indebtedness, repaying $1,477,720,000 principal amount of the indebtedness assumed concurrent with the closing of the Archstone Acquisition.
· In March 2013, the Company repaid $100,000,000 of its 4.95% unsecured notes in accordance with the scheduled maturity.
· In April 2013, the Company obtained a 3.06% fixed rate, secured mortgage loan in the amount of $15,000,000 that matures in April 2018.
· In April 2013, the Company repaid a 4.69% fixed rate, secured mortgage note in the amount of $170,125,000 pursuant to its scheduled maturity date.
· In May 2013, the Company repaid a $5,393,000 fixed rate secured mortgage note with an interest rate of 5.55% at par and without penalty in advance of its July 2028 scheduled maturity date.
· In May 2013, the Company obtained a 3.08% fixed rate secured mortgage loan that matures in May 2020 in the amount of $56,210,000, in association with the refinancing of an existing $47,000,000 variable rate secured mortgage note.
· In May 2013, the Company repaid a $52,806,000 fixed rate secured mortgage note with an interest rate of 5.24% pursuant to its scheduled maturity date.
· In September 2013, the Company issued $400,000,000 principal amount of unsecured notes in a public offering under its existing shelf registration statement for net proceeds of approximately $396,212,000. The notes mature in October 2020 and were issued at a 3.63% interest rate. The notes have an effective interest rate of 3.79% including the effect of offering costs.
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% (1.23% at September 30, 2013, assuming a one month borrowing rate). The annual facility fee is approximately $1,950,000 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 $72,610,000 and $44,883,000 outstanding in letters of credit that reduced the borrowing capacity as of September 30, 2013 and December 31, 2012, respectively.
In the aggregate, secured notes payable mature at various dates from May 2015 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $4,697,609,000, excluding communities classified as held for sale, as of September 30, 2013).
As of September 30, 2013, the Company has guaranteed approximately $309,358,000 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 4.6% and 5.8% at September 30, 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 2.4% and 2.7% at September 30, 2013 and December 31, 2012, respectively.
Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at September 30, 2013 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Stated |
| |||
|
|
Secured |
|
Secured |
|
Unsecured |
|
interest rate |
| |||
|
|
notes |
|
notes |
|
notes |
|
of unsecured |
| |||
Year |
|
payments |
|
maturities |
|
maturities |
|
notes |
| |||
|
|
|
|
|
|
|
|
|
| |||
2013 |
|
$ |
4,395 |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
2014 |
|
18,056 |
|
|
|
150,000 |
|
5.375 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2015 |
|
16,722 |
|
904,011 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2016 |
|
17,951 |
|
16,255 |
|
250,000 |
|
5.750 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2017 |
|
19,033 |
|
710,491 |
|
250,000 |
|
5.700 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2018 |
|
18,398 |
|
77,189 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2019 |
|
7,125 |
|
610,814 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2020 |
|
6,190 |
|
50,824 |
|
250,000 |
|
6.100 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
400,000 |
|
3.625 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2021 |
|
5,965 |
|
27,844 |
|
250,000 |
|
3.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2022 |
|
6,332 |
|
|
|
450,000 |
|
2.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2022 |
|
90,048 |
|
1,114,639 |
|
250,000 |
|
2.850 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
210,215 |
|
$ |
3,512,067 |
|
$ |
2,250,000 |
|
|
|
The Company was in compliance at September 30, 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 stockholders equity for the nine months ended September 30, 2013 (dollars in thousands):
|
|
|
|
|
|
Accumulated |
|
Accumulated |
|
Total |
|
|
|
|
| |||||||
|
|
|
|
Additional |
|
earnings |
|
other |
|
AvalonBay |
|
|
|
|
| |||||||
|
|
Common |
|
paid-in |
|
less |
|
comprehensive |
|
stockholders |
|
Noncontrolling |
|
Total |
| |||||||
|
|
stock |
|
capital |
|
dividends |
|
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 |
|
|
|
|
|
100,929 |
|
|
|
100,929 |
|
|
|
100,929 |
| |||||||
Cash flow hedge loss reclassified to earnings |
|
|
|
|
|
|
|
57,913 |
|
57,913 |
|
|
|
57,913 |
| |||||||
Change in redemption value of redeemable noncontrolling interest |
|
|
|
|
|
(441 |
) |
|
|
(441 |
) |
|
|
(441 |
) | |||||||
Noncontrolling interests income allocation |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
1 |
| |||||||
Dividends declared to common stockholders |
|
|
|
|
|
(415,353 |
) |
|
|
(415,353 |
) |
|
|
(415,353 |
) | |||||||
Issuance of common stock, net of withholdings |
|
150 |
|
1,872,684 |
|
(1,035 |
) |
|
|
1,871,799 |
|
|
|
1,871,799 |
| |||||||
Amortization of deferred compensation |
|
|
|
17,689 |
|
|
|
|
|
17,689 |
|
|
|
17,689 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at September 30, 2013 |
|
$ |
1,294 |
|
$ |
8,976,780 |
|
$ |
(458,229 |
) |
$ |
(50,094 |
) |
$ |
8,469,751 |
|
$ |
3,579 |
|
$ |
8,473,330 |
|
During the nine months ended September 30, 2013, the Company:
(i) issued 33,900 shares of common stock in connection with stock options exercised;
(ii) issued 1,465 common shares through the Companys dividend reinvestment plan;
(iii) issued 123,977 common shares in connection with stock grants;
(iv) withheld 44,750 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 the Companys common stock, Lehman will vote all of its shares of the Companys common stock (i) in accordance with the recommendations of the Companys 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 the Companys board of directors; and (iii) on all other matters, in its sole and absolute discretion. In May 2013, Lehman sold 7,870,000 of the Companys common shares it received as consideration for the Archstone Acquisition. Lehman received all of the net proceeds from the offering, and the sale did not impact the total number of the Companys common shares outstanding.
In addition, during the nine months ended September 30, 2013 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 nine months ended September 30, 2013 is not reflected on the Companys Condensed Consolidated Balance Sheet as of September 30, 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 nine months ended September 30, 2013, and has $646,274,000 of shares that remain authorized for issuance under this program as of September 30, 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, which term is sometimes used in this report to refer to Lehman Brothers Holdings, Inc., and/or its relevant subsidiary or subsidiaries), 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 (1) |
|
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 |
|
(1) Includes amounts for in-place leases for development communities.
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 Equity Residential in accordance with the terms of the Purchase Agreement. The Companys 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 is applying a weighted average depreciation period for the in-place lease intangibles of six months. During the three and nine months ended September 30, 2013, the Company recognized $60,162,000 and $184,763,000, respectively, of depreciation expense for in-place lease intangibles, recorded as a component of Depreciation expense on the accompanying Condensed Consolidated Statements of Comprehensive Income.
The Company used an internal model to determine the fair value for the development land parcels acquired. The internal model applied a discounted cash flow analysis on the expected cash flows for each land parcel as if the expected multifamily rental community is constructed. The cash flow analysis incorporated assumptions that market participants would make, including the application of (i) discount factors to the estimated future cash flows of the underlying asset, (ii) a compound annual growth rate for the revenue from the operating community, and (iii) an 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 and not yet in lease-up, invested capital was the relevant metric and was 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, relative to 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 comparable acquisition or disposition transactions, if available, as adjusted by the Company for differences in fundamentals 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.
During the nine months ended September 30, 2013, the Company recognized $82,544,000 in acquisition related expenses associated with the Archstone Acquisition, with $37,295,000 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 Residential 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 excess 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. During the nine months ended September 30, 2013, the Company paid approximately $33,300,000 to redeem its proportionate share of a portion of the preferred interest obligations assumed in conjunction with the Archstone Acquisition. The Company used the pricing for the settlement as the fair value at February 27, 2013.
Pro Forma Information
The following table presents information for assets acquired in the Archstone Acquisition that is included in our Condensed Consolidated Statement of Comprehensive Income from the acquisition date, February 27, 2013, through September 30, 2013 (in thousands).
|
|
For the period including |
| |
Revenues |
|
$ |
246,969 |
|
Loss attributable to common shareholders (1) |
|
$ |
(128,542 |
) |
(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):
|
|
For the nine months |
|
For the nine months |
| ||
Revenues |
|
$ |
1,152,418 |
|
$ |
1,053,169 |
|
Income from continuing operations |
|
$ |
242,647 |
|
$ |
82,584 |
|
Earnings per common share - diluted (from continuing operations) |
|
$ |
1.87 |
|
$ |
0.64 |
|
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 Consolidated 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. As of September 30, 2013, the Archstone Legacy Entities have outstanding preferred interests held by unrelated third parties with an aggregate liquidation preference of approximately $91,000,000 (including accrued but unpaid distributions), which are generally 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, and 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 of the Companys proportionate share of preferred redemption obligations of approximately $36,000,000 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 September 30, 2013, the Archstone U.S. Fund owns nine communities containing 1,728 apartment homes, one of which includes a marina containing 229 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 eight loans secured by individual assets with amounts outstanding in the aggregate of $330,315,000 with varying maturity dates, ranging from 2019 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) 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 September 30, 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. During the three months ended September 30, 2013, the Company provided the AC JV with the opportunity to acquire a parcel of land owned by the Company as required in the right of first offer provisions for the joint venture. The AC JV exercised its right to acquire the land parcel for development, where upon it commenced construction of an additional apartment community located in Cambridge, MA, which is expected to contain 103 apartment homes and be completed for a total capitalized cost of $28,000,000. The Company sold the parcel of land to the AC JV, in exchange for a cash payment and a capital account credit, and is overseeing the development in exchange for a developer fee. The Company owns one additional land parcel for the development of 301 apartment homes, classified as a Development Right in Cambridge, MA, acquired as part of the Archstone Acquisition that is subject to ROFO restrictions. The ROFO restriction expires in 2019.
As of September 30, 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 September 30, 2013, the Company now holds a 28.7% equity interest in the venture.
Brandywine has an outstanding $24,960,000 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 generally 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, and claims which may arise due to changes in the capital structure of Archstone that occurred prior to closing, 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 generally holds a 40% economic interest in the assets and liabilities of the Residual JV.
6. Investments in Real Estate Entities
Investment in unconsolidated entities
As of September 30, 2013, including the interests in joint ventures acquired in the Archstone Acquisition, and excluding 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 September 30, 2013, AvalonBay Value Added Fund, LP (Fund I), a real estate discretionary investment fund in which the Company has an interest of approximately 15.2%, sold Avalon at Cedar Place, located in Columbia, MD. Avalon at Cedar Place, containing 156 homes, was sold for $26,000,000. The Companys share of the gain in accordance with GAAP for the disposition was $688,000.
During the three months ended September 30, 2013, the Company disposed of its interest in a for-sale joint venture, which held non-depreciable real estate assets, recognizing a gain in accordance with GAAP of $975,000, reported as a component of Equity in income (loss) of unconsolidated entities on the accompanying Condensed Consolidated Statements of Comprehensive Income. Previously, the Company recognized an impairment charge of $1,955,000 associated with this venture.
The following is a combined summary of the financial position of the entities accounted for using the equity method, excluding those owned by the Residual JV, as of the dates presented (dollars in thousands):
|
|
9-30-13 |
|
12-31-12 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
Assets: |
|
|
|
|
| ||
Real estate, net |
|
$ |
2,053,602 |
|
$ |
1,337,084 |
|
Other assets |
|
100,304 |
|
73,252 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
2,153,906 |
|
$ |
1,410,336 |
|
|
|
|
|
|
| ||
Liabilities and partners capital: |
|
|
|
|
| ||
Mortgage notes payable and credit facility |
|
$ |
1,358,891 |
|
$ |
943,259 |
|
Other liabilities |
|
47,717 |
|
20,405 |
| ||
Partners capital |
|
747,298 |
|
446,672 |
| ||
|
|
|
|
|
| ||
Total liabilities and partners capital |
|
$ |
2,153,906 |
|
$ |
1,410,336 |
|
The following is a combined summary of the operating results of the entities accounted for using the equity method, excluding those owned by the Residual JV, for the periods presented (dollars in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
(unaudited) |
|
(unaudited) |
| ||||||||
|
|
9-30-13 |
|
9-30-12 |
|
9-30-13 |
|
9-30-12 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Rental and other income |
|
$ |
56,240 |
|
$ |
43,168 |
|
$ |
157,456 |
|
$ |
130,300 |
|
Operating and other expenses |
|
(22,866 |
) |
(18,733 |
) |
(63,575 |
) |
(56,533 |
) | ||||
Gain on sale of communities |
|
5,395 |
|
44,723 |
|
70,662 |
|
57,457 |
| ||||
Interest expense, net |
|
(15,376 |
) |
(12,742 |
) |
(46,474 |
) |
(38,468 |
) | ||||
Depreciation expense |
|
(15,668 |
) |
(11,947 |
) |
(46,602 |
) |
(37,244 |
) | ||||
Net income |
|
$ |
7,725 |
|
$ |
44,469 |
|
$ |
71,467 |
|
$ |
55,512 |
|
In conjunction with the formation of Fund I and AvalonBay Value Added Fund II, L.P. (Fund II), the Company incurred costs in excess of its equity in the underlying net assets of the respective investments. These costs represent $6,237,000 at September 30, 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 September 30, 2013). As of September 30, 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 September 30, 2013, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of September 30, 2013.
Expensed Acquisition, Development and Other 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 the abandonment of Development Rights as well as costs incurred in pursuing the acquisition of assets or costs incurred pursuing the disposition of assets for which such disposition activity did not occur, in the amounts of $351,000 and $608,000 for the three months ended September 30, 2013 and 2012, respectively, and $792,000 and $1,749,000 for the nine months ended September 30, 2013 and 2012, respectively. These costs are included in Expensed acquisition, development, and other pursuit costs 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 and nine months ended September 30, 2013 and 2012.
The Company assesses its portfolio of land held for both development and investment for impairment if the intent of the Company changes with respect to either the development of, or the expected holding period for, the land. The Company did not recognize any impairment charges on its investment in land for the three and nine months ended September 30, 2013 and 2012.
The Company also evaluates its unconsolidated investments for impairment, considering both the 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 and nine months ended September 30, 2013 and 2012.
7. Real Estate Disposition Activities
During the three months ended September 30, 2013, the Company did not sell any consolidated communities.
As of September 30, 2013, the Company had three communities that qualified as held for sale.
The operations for any real estate assets sold from January 1, 2012 through September 30, 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 from discontinued operations for the periods presented (dollars in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
(unaudited) |
|
(unaudited) |
| ||||||||
|
|
9-30-13 |
|
9-30-12 |
|
9-30-13 |
|
9-30-12 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Rental income |
|
$ |
7,176 |
|
$ |
10,583 |
|
$ |
25,321 |
|
$ |
38,156 |
|
Operating and other expenses |
|
(2,229 |
) |
(2,995 |
) |
(7,521 |
) |
(11,718 |
) | ||||
Interest expense, net |
|
|
|
|
|
|
|
(133 |
) | ||||
Loss on extinguishment of debt |
|
|
|
|
|
|
|
(602 |
) | ||||
Depreciation expense |
|
(1,726 |
) |
(3,248 |
) |
(10,727 |
) |
(10,641 |
) | ||||
Income from discontinued operations |
|
$ |
3,221 |
|
$ |
4,340 |
|
$ |
7,073 |
|
$ |
15,062 |
|
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 unless disposition or redevelopment plans regarding a community change, maintains that classification 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 and nine months ended September 30, 2013 and 2012 is as follows (dollars in thousands):
|
|
For the three months ended |
|
For the nine months ended |
| ||||||||
|
|
9-30-13 |
|
9-30-12 |
|
9-30-13 |
|
9-30-12 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net (loss) income |
|
$ |
(10,885 |
) |
$ |
86,747 |
|
$ |
100,681 |
|
$ |
301,178 |
|
Indirect operating expenses, net of corporate income |
|
10,780 |
|
7,396 |
|
30,673 |
|
24,049 |
| ||||
Investments and investment management expense |
|
1,043 |
|
1,582 |
|
3,154 |
|
4,526 |
| ||||
Expensed acquisition, development and other pursuit costs |
|
2,176 |
|
608 |
|
46,041 |
|
1,749 |
| ||||
Interest expense, net |
|
43,945 |
|
33,985 |
|
127,772 |
|
100,804 |
| ||||
Loss on interest rate contract |
|
53,484 |
|
|
|
51,000 |
|
|
| ||||
Loss on extinguishment of debt, net |
|
|
|
|
|
|
|
1,179 |
| ||||
General and administrative expense |
|
9,878 |
|
8,372 |
|
31,262 |
|
26,398 |
| ||||
Equity in (income) loss of unconsolidated entities |
|
(3,260 |
) |
(5,553 |
) |
16,244 |
|
(9,801 |
) | ||||
Depreciation expense |
|
160,682 |
|
62,750 |
|
457,837 |
|
183,688 |
| ||||
Gain on sale of real estate assets |
|
|
|
|
|
(118,413 |
) |
(95,329 |
) | ||||
Income from discontinued operations |
|
(3,221 |
) |
(4,340 |
) |
(7,073 |
) |
(15,062 |
) | ||||
Gain on acquisition of unconsolidated real estate entity |
|
|
|
(14,194 |
) |
|
|
(14,194 |
) | ||||
Net operating income |
|
$ |
264,622 |
|
$ |
177,353 |
|
$ |
739,178 |
|
$ |
509,185 |
|
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 and nine months ended September 30, 2013 and 2012 have been adjusted for the real estate assets that were sold from January 1, 2012 through September 30, 2013, or otherwise qualify as discontinued operations as of September 30, 2013, as described in Note 7, Real Estate Disposition Activities.
|
|
For the three months ended |
|
For the nine months ended |
| |||||||||||||||
|
|
Total |
|
|
|
% NOI change |
|
Total |
|
|
|
% NOI change |
|
Gross |
| |||||
|
|
revenue |
|
NOI |
|
from prior year |
|
revenue |
|
NOI |
|
from prior year |
|
real estate (1) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the period ended September 30, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Established |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
New England |
|
$ |
46,319 |
|
$ |
29,323 |
|
(0.6 |
)% |
$ |
136,528 |
|
$ |
88,220 |
|
2.0 |
% |
$ |
1,398,194 |
|
Metro NY/NJ |
|
63,103 |
|
43,327 |
|
3.4 |
% |
186,897 |
|
129,215 |
|
4.6 |
% |
1,919,151 |
| |||||
Mid-Atlantic |
|
25,262 |
|
17,652 |
|
(1.0 |
)% |
75,608 |
|
54,169 |
|
1.1 |
% |
632,102 |
| |||||
Pacific Northwest |
|
11,773 |
|
7,752 |
|
1.7 |
% |
34,752 |
|
23,539 |
|
7.4 |
% |
443,812 |
| |||||
Northern California |
|
38,491 |
|
29,905 |
|
15.0 |
% |
112,569 |
|
85,627 |
|
13.1 |
% |
1,313,694 |
| |||||
Southern California |
|
30,001 |
|
20,165 |
|
4.7 |
% |
88,873 |
|
60,640 |
|
5.7 |
% |
1,057,512 |
| |||||
Total Established |
|
214,949 |
|
148,124 |
|
4.2 |
% |
635,227 |
|
441,410 |
|
5.5 |
% |
6,764,465 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other Stabilized |
|
142,795 |
|
95,044 |
|
N/A |
|
357,342 |
|
243,626 |
|
N/A |
|
6,683,016 |
| |||||
Development / Redevelopment |
|
32,369 |
|
21,454 |
|
N/A |
|
79,704 |
|
54,142 |
|
N/A |
|
2,676,384 |
| |||||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
282,285 |
| |||||
Non-allocated (2) |
|
3,014 |
|
N/A |
|
N/A |
|
8,198 |
|
N/A |
|
N/A |
|
47,921 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
393,127 |
|
$ |
264,622 |
|
49.2 |
% |
$ |
1,080,471 |
|
$ |
739,178 |
|
45.2 |
% |
$ |
16,454,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
For the period ended September 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Established |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
New England |
|
$ |
42,755 |
|
$ |
27,374 |
|
2.7 |
% |
$ |
125,568 |
|
$ |
81,268 |
|
5.6 |
% |
$ |
1,287,578 |
|
Metro NY/NJ |
|
55,257 |
|
38,155 |
|
5.5 |
% |
162,608 |
|
112,757 |
|
7.4 |
% |
1,779,699 |
| |||||
Mid-Atlantic |
|
26,300 |
|
18,618 |
|
3.7 |
% |
77,825 |
|
56,156 |
|
4.2 |
% |
591,802 |
| |||||
Pacific Northwest |
|
8,401 |
|
5,984 |
|
19.6 |
% |
24,426 |
|
17,207 |
|
13.6 |
% |
304,381 |
| |||||
Northern California |
|
31,208 |
|
22,931 |
|
15.1 |
% |
90,853 |
|
66,646 |
|
14.5 |
% |
1,096,166 |
| |||||
Southern California |
|
25,131 |
|
17,224 |
|
6.2 |
% |
74,000 |
|
51,225 |
|
8.8 |
% |
946,802 |
| |||||
Total Established |
|
189,052 |
|
130,286 |
|
6.9 |
% |
555,280 |
|
385,259 |
|
8.1 |
% |
6,006,428 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other Stabilized |
|
34,469 |
|
22,384 |
|
N/A |
|
96,282 |
|
61,924 |
|
N/A |
|
1,249,203 |
| |||||
Development / Redevelopment |
|
35,267 |
|
24,683 |
|
N/A |
|
90,692 |
|
62,002 |
|
N/A |
|
1,871,336 |
| |||||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
N/A |
|
304,295 |
| |||||
Non-allocated (2) |
|
2,533 |
|
N/A |
|
N/A |
|
7,852 |
|
N/A |
|
N/A |
|
54,828 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
$ |
261,321 |
|
$ |
177,353 |
|
14.7 |
% |
$ |
750,106 |
|
$ |
509,185 |
|
14.6 |
% |
$ |
9,486,090 |
|
(1) Does not include gross real estate assets held for sale of $318,406 and $405,662 as of September 30, 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 its 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 |
|
(9,939 |
) |
94.73 |
|
(23,961 |
) |
79.84 |
| ||
Granted |
|
215,230 |
|
129.03 |
|
|
|
|
| ||
Forfeited |
|
(1,267 |
) |
131.56 |
|
(4,012 |
) |
127.56 |
| ||
Options Outstanding, September 30, 2013 |
|
511,578 |
|
$ |
119.85 |
|
691,857 |
|
$ |
106.16 |
|
Options Exercisable September 30, 2013 |
|
194,177 |
|
$ |
105.48 |
|
691,857 |
|
$ |
106.16 |
|
The weighted average fair value of the options granted under the 2009 Plan during the nine months ended September 30, 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 34.0%, risk-free interest rate of 0.9% and an expected life of approximately 5 years.
During 2013, 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 nine months ended September 30, 2013, the Company issued 123,977 shares of restricted stock with a fair value of $16,019,000. In addition, the Company granted awards for restricted stock units, with an estimated aggregate compensation cost of $21,011,000. The grant 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 September 30, 2013, the Company had 190,144 outstanding unvested shares granted under restricted stock awards. Restricted stock vesting during the nine months ended September 30, 2013 totaled 134,209 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 $13,857,000 and $36,232,000 for the nine months ended September 30, 2013 and 2012, respectively.
Total employee stock-based compensation cost recognized in income was $16,768,000 and $8,394,000 for the nine months ended September 30, 2013 and 2012, respectively, and total capitalized stock-based compensation cost was $5,911,000 and $3,877,000 for the nine months ended September 30, 2013 and 2012, respectively. At September 30, 2013, there was a total of $3,421,000 and $9,451,000 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 2.00 years and 2.62 years, respectively.
10. Related Party Arrangements
Unconsolidated Entities
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 earned fees of $3,014,000 and $2,533,000 in the three months ended September 30, 2013 and 2012, respectively, and $8,198,000 and $7,852,000 for the nine months ended September 30, 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 $3,670,000 and $3,484,000 as of September 30, 2013 and December 31, 2012, respectively.
The Company is currently acting as the general contractor for redevelopment activity in the Archstone U.S. Fund, in which the Company has a 28.6% interest, and has outstanding receivables associated with the redevelopment activity of $12,629,000 as of September 30, 2013.
Director Compensation
The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $250,000 and $240,000, in the three months ended September 30, 2013 and 2012, respectively, and $743,000 and $669,000 for the nine months ended September 30, 2013 and 2012, respectively, as a component of general and administrative expense. Deferred compensation relating to restricted stock grants and deferred stock awards to non-employee directors was $666,000 and $364,000 on September 30, 2013 and December 31, 2012, respectively.