10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 2, 2014
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, 2014
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 |
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:
129,609,154 shares of common stock, par value $0.01 per share, were outstanding as of April 30, 2014
AVALONBAY COMMUNITIES, INC.
FORM 10-Q
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PAGE | |
PART I - FINANCIAL INFORMATION |
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ITEM 1. |
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
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CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2014 (UNAUDITED) AND DECEMBER 31, 2013 |
1 |
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2 | |
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3 | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
5 |
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
21 | |
|
| |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
46 | |
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46 | ||
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| |
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46 | ||
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46 | ||
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
47 | |
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47 | ||
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47 | ||
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47 | ||
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47 | ||
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50 |
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
|
|
3-31-14 |
|
12-31-13 |
| ||
|
|
(unaudited) |
|
|
| ||
ASSETS |
|
|
|
|
| ||
Real estate: |
|
|
|
|
| ||
Land |
|
$ |
3,346,202 |
|
$ |
3,315,521 |
|
Buildings and improvements |
|
11,460,239 |
|
11,230,813 |
| ||
Furniture, fixtures and equipment |
|
357,527 |
|
343,802 |
| ||
|
|
15,163,968 |
|
14,890,136 |
| ||
Less accumulated depreciation |
|
(2,608,172 |
) |
(2,503,902 |
) | ||
Net operating real estate |
|
12,555,796 |
|
12,386,234 |
| ||
Construction in progress, including land |
|
1,646,361 |
|
1,583,120 |
| ||
Land held for development |
|
250,204 |
|
300,364 |
| ||
Operating real estate assets held for sale, net |
|
|
|
14,491 |
| ||
Total real estate, net |
|
14,452,361 |
|
14,284,209 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
|
386,190 |
|
281,541 |
| ||
Cash in escrow |
|
90,663 |
|
98,481 |
| ||
Resident security deposits |
|
27,232 |
|
26,672 |
| ||
Investments in unconsolidated real estate entities |
|
353,510 |
|
367,866 |
| ||
Deferred financing costs, net |
|
42,181 |
|
40,677 |
| ||
Deferred development costs |
|
34,305 |
|
31,592 |
| ||
Prepaid expenses and other assets |
|
183,797 |
|
197,105 |
| ||
Total assets |
|
$ |
15,570,239 |
|
$ |
15,328,143 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
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Unsecured notes, net |
|
$ |
2,844,917 |
|
$ |
2,594,709 |
|
Variable rate unsecured credit facility |
|
|
|
|
| ||
Mortgage notes payable |
|
3,536,881 |
|
3,550,682 |
| ||
Dividends payable |
|
150,309 |
|
138,476 |
| ||
Payables for construction |
|
94,133 |
|
94,472 |
| ||
Accrued expenses and other liabilities |
|
241,148 |
|
243,045 |
| ||
Accrued interest payable |
|
33,285 |
|
43,353 |
| ||
Resident security deposits |
|
46,493 |
|
45,485 |
| ||
Liabilities related to real estate assets held for sale |
|
|
|
874 |
| ||
Total liabilities |
|
6,947,166 |
|
6,711,096 |
| ||
|
|
|
|
|
| ||
Redeemable noncontrolling interests |
|
16,002 |
|
17,320 |
| ||
|
|
|
|
|
| ||
Equity: |
|
|
|
|
| ||
Preferred stock, $0.01 par value; $25 liquidation preference; 50,000,000 shares authorized at both March 31, 2014 and December 31, 2013; zero shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively |
|
|
|
|
| ||
Common stock, $0.01 par value; 280,000,000 shares authorized at March 31, 2014 and December 31, 2013; 129,572,864 and 129,416,695 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively |
|
1,296 |
|
1,294 |
| ||
Additional paid-in capital |
|
9,002,260 |
|
8,988,723 |
| ||
Accumulated earnings less dividends |
|
(353,029 |
) |
(345,254 |
) | ||
Accumulated other comprehensive loss |
|
(47,058 |
) |
(48,631 |
) | ||
Total stockholders equity |
|
8,603,469 |
|
8,596,132 |
| ||
Noncontrolling interest |
|
3,602 |
|
3,595 |
| ||
Total equity |
|
8,607,071 |
|
8,599,727 |
| ||
Total liabilities and equity |
|
$ |
15,570,239 |
|
$ |
15,328,143 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(unaudited)
(Dollars in thousands, except per share data)
|
|
For the three months ended |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
Revenue: |
|
|
|
|
| ||
Rental and other income |
|
$ |
396,998 |
|
$ |
299,085 |
|
Management, development and other fees |
|
3,077 |
|
2,272 |
| ||
Total revenue |
|
400,075 |
|
301,357 |
| ||
|
|
|
|
|
| ||
Expenses: |
|
|
|
|
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Operating expenses, excluding property taxes |
|
98,542 |
|
71,828 |
| ||
Property taxes |
|
44,485 |
|
31,902 |
| ||
Interest expense, net |
|
42,533 |
|
38,174 |
| ||
Depreciation expense |
|
106,367 |
|
105,559 |
| ||
General and administrative expense |
|
9,236 |
|
10,039 |
| ||
Expensed acquisition, development and other pursuit costs |
|
715 |
|
40,059 |
| ||
Total expenses |
|
301,878 |
|
297,561 |
| ||
|
|
|
|
|
| ||
Equity in income (loss) of unconsolidated entities |
|
5,223 |
|
(18,564 |
) | ||
|
|
|
|
|
| ||
Income (loss) from continuing operations |
|
103,420 |
|
(14,768 |
) | ||
|
|
|
|
|
| ||
Discontinued operations: |
|
|
|
|
| ||
Income from discontinued operations |
|
310 |
|
5,746 |
| ||
Gain on sale of communities |
|
37,869 |
|
84,491 |
| ||
Total discontinued operations |
|
38,179 |
|
90,237 |
| ||
|
|
|
|
|
| ||
Net income |
|
141,599 |
|
75,469 |
| ||
Net loss (gain) attributable to noncontrolling interests |
|
140 |
|
(42 |
) | ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
141,739 |
|
$ |
75,427 |
|
|
|
|
|
|
| ||
Other comprehensive income: |
|
|
|
|
| ||
Cash flow hedge losses reclassified to earnings |
|
1,573 |
|
1,391 |
| ||
Comprehensive income |
|
$ |
143,312 |
|
$ |
76,818 |
|
|
|
|
|
|
| ||
Earnings per common share - basic: |
|
|
|
|
| ||
Income (loss) from continuing operations attributable to common stockholders |
|
$ |
0.80 |
|
$ |
(0.12 |
) |
Discontinued operations attributable to common stockholders |
|
0.29 |
|
0.75 |
| ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
1.09 |
|
$ |
0.63 |
|
|
|
|
|
|
| ||
Earnings per common share - diluted: |
|
|
|
|
| ||
Income (loss) from continuing operations attributable to common stockholders |
|
$ |
0.80 |
|
$ |
(0.12 |
) |
Discontinued operations attributable to common stockholders |
|
0.29 |
|
$ |
0.75 |
| |
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
1.09 |
|
$ |
0.63 |
|
|
|
|
|
|
| ||
Dividends per common share |
|
$ |
1.16 |
|
$ |
1.07 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
AVALONBAY COMMUNITIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
|
|
For the three months ended |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
141,599 |
|
$ |
75,469 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
| ||
Depreciation expense |
|
106,367 |
|
105,559 |
| ||
Depreciation expense from discontinued operations |
|
|
|
4,270 |
| ||
Amortization of deferred financing costs |
|
1,518 |
|
1,934 |
| ||
Amortization of debt premium/discount |
|
(8,774 |
) |
(3,538 |
) | ||
Amortization of stock-based compensation |
|
3,615 |
|
2,099 |
| ||
Equity in (income) loss of, and return on, unconsolidated entities and noncontrolling interests, net of eliminations |
|
(547 |
) |
16,734 |
| ||
Cash flow hedge losses reclassified to earnings |
|
1,573 |
|
1,391 |
| ||
Gain on sale of real estate assets |
|
(37,869 |
) |
(84,491 |
) | ||
Decrease (increase) in cash in operating escrows |
|
6,831 |
|
(6,758 |
) | ||
Decrease (increase) in resident security deposits, prepaid expenses and other assets |
|
13,655 |
|
(23,299 |
) | ||
Decrease in accrued expenses, other liabilities and accrued interest payable |
|
(7,651 |
) |
(7,982 |
) | ||
Net cash provided by operating activities |
|
220,317 |
|
81,388 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Development/redevelopment of real estate assets including land acquisitions and deferred development costs |
|
(266,930 |
) |
(221,274 |
) | ||
Acquisition of real estate assets, including partnership interest |
|
|
|
(749,275 |
) | ||
Capital expenditures - existing real estate assets |
|
(13,709 |
) |
(1,852 |
) | ||
Capital expenditures - non-real estate assets |
|
(9,300 |
) |
(1,764 |
) | ||
Proceeds from sale of real estate, net of selling costs |
|
52,147 |
|
327,922 |
| ||
Decrease in payables for construction |
|
(339 |
) |
(360 |
) | ||
Decrease (increase) in investments in unconsolidated real estate entities |
|
13,767 |
|
(2,978 |
) | ||
Net cash used in investing activities |
|
(224,364 |
) |
(649,581 |
) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Issuance of common stock |
|
7,234 |
|
253 |
| ||
Dividends paid |
|
(138,393 |
) |
(110,891 |
) | ||
Repayments of mortgage notes payable, including prepayment penalties |
|
(3,832 |
) |
(1,507,243 |
) | ||
Issuance of unsecured notes |
|
250,000 |
|
|
| ||
Repayment of unsecured notes |
|
|
|
(100,000 |
) | ||
Payment of deferred financing costs |
|
(3,022 |
) |
|
| ||
Distributions to DownREIT partnership unitholders |
|
(9 |
) |
(8 |
) | ||
Distributions to joint venture and profit-sharing partners |
|
(82 |
) |
(80 |
) | ||
Redemption of preferred interest obligation |
|
(3,200 |
) |
|
| ||
Net cash provided by (used in) financing activities |
|
108,696 |
|
(1,717,969 |
) | ||
Net increase (decrease) in cash and cash equivalents |
|
104,649 |
|
(2,286,162 |
) | ||
Cash and cash equivalents, beginning of period |
|
281,541 |
|
2,733,618 |
| ||
Cash and cash equivalents, end of period |
|
$ |
386,190 |
|
$ |
447,456 |
|
Cash paid during the period for interest, net of amount capitalized |
|
$ |
55,140 |
|
$ |
45,765 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Supplemental disclosures of non-cash investing and financing activities:
During the three months ended March 31, 2014:
· As described in Note 4, Equity, 104,060 shares of common stock valued at $13,331,000 were issued in connection with stock grants; 638 shares valued at $78,000 were issued through the Companys dividend reinvestment plan; and 33,365 shares valued at $3,567,000 were withheld to satisfy employees tax withholding and other liabilities.
· Common dividends declared but not paid totaled $150,304,000.
· The Company recorded a decrease of $1,081,000 in redeemable noncontrolling interest with a corresponding increase 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 reclassified $1,573,000 of cash flow hedge losses from other comprehensive income to interest expense, net, to record the impact of the Companys derivative and hedge accounting activity.
During the three months ended March 31, 2013:
· The Company issued 14,889,706 shares of common stock valued at $1,875,210,000 as partial consideration for the Archstone Acquisition (as defined in this Form 10-Q); 119,292 shares of common stock valued at $15,394,000 were issued in connection with stock grants; 550 shares valued at $76,000 were issued through the Companys dividend reinvestment plan; 29,219 shares valued at $3,590,000 were withheld to satisfy employees tax withholding and other liabilities; and 9,226 shares and options valued at $780,000 previously issued in connection with employee compensation were forfeited. In addition, the Company granted 215,230 options for common stock at a value of $5,768,000.
· The Company recorded a decrease to other liabilities and a corresponding decrease to interest expense, net of $1,414,000; and reclassified $1,391,000 of cash flow hedge losses from other comprehensive income to interest expense, net to record the impact of the Companys derivative and hedge accounting activity.
· Common dividends declared but not paid totaled $138,438,000.
· The Company recorded $13,262,000 in redeemable noncontrolling interests associated with the acquisition of consolidated joint ventures as part of the Archstone Acquisition. The Company also recorded an increase of $526,000 in redeemable noncontrolling interest with a corresponding decrease to accumulated earnings less dividends to adjust the redemption value associated with the put option held by a joint venture partner and DownREIT partnership units.
· The Company assumed secured indebtedness with a principal amount of $3,512,202,000 in conjunction with the Archstone Acquisition. The Company also assumed an obligation related to outstanding preferred interests of approximately $67,500,000, included in accrued expenses and other liabilities.
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 has 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 New England, the New York/New Jersey Metro area, the Mid-Atlantic, the Pacific Northwest and the Northern and Southern California regions of the United States.
At March 31, 2014, the Company owned or held a direct or indirect ownership interest in 245 operating apartment communities containing 73,195 apartment homes in 12 states and the District of Columbia, of which five communities containing 2,248 apartment homes were under reconstruction. In addition, the Company owned or held a direct or indirect ownership interest in 31 communities under construction that are expected to contain an aggregate of 9,179 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 12,632 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 2013 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the operating results for the full year. Management believes the disclosures are adequate to ensure the information presented is not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments necessary for a fair presentation of the financial statements for the interim periods, have been included.
Capitalized terms used without definition have the meaning as provided elsewhere in this Form 10-Q.
Earnings per Common Share
Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of shares outstanding during the period. All outstanding unvested restricted share awards contain rights to non-forfeitable dividends and participate in undistributed earnings with common shareholders and, accordingly, are considered participating securities that are included in the two-class method of computing basic earnings per share (EPS). Both the unvested restricted shares and other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Companys earnings per common share are determined as follows (dollars in thousands, except per share data):
|
|
For the three months ended |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
Basic and diluted shares outstanding |
|
|
|
|
| ||
|
|
|
|
|
| ||
Weighted average common shares - basic |
|
129,288,771 |
|
119,680,510 |
| ||
|
|
|
|
|
| ||
Weighted average DownREIT units outstanding |
|
7,500 |
|
7,500 |
| ||
|
|
|
|
|
| ||
Effect of dilutive securities |
|
333,286 |
|
423,118 |
| ||
|
|
|
|
|
| ||
Weighted average common shares - diluted |
|
129,629,557 |
|
120,111,128 |
| ||
|
|
|
|
|
| ||
Calculation of Earnings per Share - basic |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
141,739 |
|
$ |
75,427 |
|
Net income allocated to unvested restricted shares |
|
(232 |
) |
(139 |
) | ||
Net income attributable to common stockholders, adjusted |
|
$ |
141,507 |
|
$ |
75,288 |
|
|
|
|
|
|
| ||
Weighted average common shares - basic |
|
129,288,771 |
|
119,680,510 |
| ||
|
|
|
|
|
| ||
Earnings per common share - basic |
|
$ |
1.09 |
|
$ |
0.63 |
|
|
|
|
|
|
| ||
Calculation of Earnings per Share - diluted |
|
|
|
|
| ||
|
|
|
|
|
| ||
Net income attributable to common stockholders |
|
$ |
141,739 |
|
$ |
75,427 |
|
Add: noncontrolling interests of DownREIT unitholders in consolidated partnerships, including discontinued operations |
|
9 |
|
8 |
| ||
|
|
|
|
|
| ||
Adjusted net income available to common stockholders |
|
$ |
141,748 |
|
$ |
75,435 |
|
|
|
|
|
|
| ||
Weighted average common shares - diluted |
|
129,629,557 |
|
120,111,128 |
| ||
|
|
|
|
|
| ||
Earnings per common share - diluted |
|
$ |
1.09 |
|
$ |
0.63 |
|
Certain options to purchase shares of common stock in the amounts of 605,899 and 608,148 were outstanding at March 31, 2014 and 2013, 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, 2014 is based on the average forfeiture activity over a period equal to the estimated life of the stock options, and was 1.0%. The application of estimated forfeitures did not materially impact compensation expense for the three months ended March 31, 2014 or 2013.
Derivative Instruments and Hedging Activities
The Company enters into interest rate swap and interest rate cap agreements (collectively, 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 Hedging Derivatives 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 Hedging Derivatives that are in an asset position are recorded in prepaid expenses and other assets. The fair value of 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 Hedging Derivatives 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 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 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 requires 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 or 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 years financial statements to conform to current year presentations as a result of discontinued operations as described in Note 7, Real Estate Disposition Activity.
Recently Adopted Accounting Standards
In April 2014, the Financial Accounting Standards Board issued guidance updating the accounting and reporting for discontinued operations. Under the recently issued guidance, only disposals representing a strategic shift in operations (e.g., a disposal of a major geographic area, a major line of business or a major equity method investment) will be presented as discontinued operations. Additionally, the final standard requires expanded disclosures about dispositions that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations, as well as disposals of a significant part of an entity that does not qualify for discontinued operations reporting. The final standard is effective in the first quarter of 2015 and allows for early adoption. The Company adopted the guidance as of January 1, 2014.
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 $19,679,000 and $13,139,000 for the three months ended March 31, 2014 and 2013, respectively.
3. Notes Payable, Unsecured Notes and Credit Facility
The Companys mortgage notes payable, unsecured notes, Term Loan and Credit Facility, both as defined below, as of March 31, 2014 and December 31, 2013, 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, 2014 and December 31, 2013, as shown in the Condensed Consolidated Balance Sheets (dollars in thousands) (see Note 7, Real Estate Disposition Activities).
|
|
3-31-14 |
|
12-31-13 |
| ||
|
|
|
|
|
| ||
Fixed rate unsecured notes (1) |
|
$ |
2,600,000 |
|
$ |
2,600,000 |
|
Term Loan |
|
250,000 |
|
|
| ||
Fixed rate mortgage notes payable - conventional and tax-exempt (2) |
|
2,414,295 |
|
2,418,389 |
| ||
Variable rate mortgage notes payable - conventional and tax-exempt |
|
1,010,883 |
|
1,011,609 |
| ||
|
|
|
|
|
| ||
Total notes payable and unsecured notes |
|
6,275,178 |
|
6,029,998 |
| ||
|
|
|
|
|
| ||
Credit Facility |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total mortgage notes payable, unsecured notes and Credit Facility |
|
$ |
6,275,178 |
|
$ |
6,029,998 |
|
(1) Balances at March 31, 2014 and December 31, 2013 exclude $5,082 and $5,291 of debt discount, respectively, as reflected in unsecured notes, net on the Companys Condensed Consolidated Balance Sheets.
(2) Balances at March 31, 2014 and December 31, 2013 exclude $111,702 and $120,684 of debt premium, respectively, as reflected in mortgage notes payable on the Companys Condensed Consolidated Balance Sheets.
In March 2014, the Company entered into a $300,000,000 variable rate unsecured term loan that matures in March 2021 (the Term Loan). At March 31, 2014, the Company had drawn $250,000,000 of the available $300,000,000, with the option to draw the additional $50,000,000 until March 2015.
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 under two, six month extension options for an aggregate 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 the unsecured notes and on a maturity schedule selected by the Company. The current stated pricing is LIBOR plus 1.05% (1.20% at March 31, 2014), 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 the Companys current credit rating.
The Company had no borrowings outstanding under the Credit Facility and had $52,300,000 and $65,018,000 outstanding in letters of credit that reduced the borrowing capacity as of March 31, 2014 and December 31, 2013, respectively.
In the aggregate, secured notes payable mature at various dates from November 2015 through July 2066, and are secured by certain apartment communities and improved land parcels (with a net carrying value of $4,445,256,000 excluding communities classified as held for sale, as of March 31, 2014).
As of March 31, 2014, the Company has guaranteed approximately $289,597,000 of mortgage notes payable held 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 4.5% at both March 31, 2014 and December 31, 2013, respectively. The weighted average interest rate of the Companys variable rate mortgage notes payable (conventional and tax exempt), the Term Loan and its Credit Facility, including the effect of certain financing related fees, was 1.8% at both March 31, 2014 and December 31, 2013, respectively.
Scheduled payments and maturities of mortgage notes payable and unsecured notes outstanding at March 31, 2014 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Stated |
| |||
|
|
Secured |
|
Secured |
|
Unsecured |
|
interest rate |
| |||
|
|
notes |
|
notes |
|
notes |
|
of unsecured |
| |||
Year |
|
payments |
|
maturities |
|
maturities |
|
notes |
| |||
|
|
|
|
|
|
|
|
|
| |||
2014 |
|
$ |
12,753 |
|
$ |
|
|
$ |
150,000 |
|
5.375 |
% |
|
|
|
|
|
|
|
|
|
| |||
2015 |
|
16,743 |
|
603,044 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2016 |
|
17,874 |
|
16,255 |
|
250,000 |
|
5.750 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2017 |
|
19,060 |
|
710,491 |
|
250,000 |
|
5.700 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2018 |
|
18,413 |
|
76,928 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2019 |
|
7,145 |
|
610,811 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
2020 |
|
6,205 |
|
50,824 |
|
250,000 |
|
6.100 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
400,000 |
|
3.625 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2021 |
|
5,985 |
|
27,844 |
|
250,000 |
|
3.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
250,000 |
|
LIBOR + 1.45 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2022 |
|
6,352 |
|
|
|
450,000 |
|
2.950 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
2023 |
|
6,596 |
|
|
|
350,000 |
|
4.300 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
250,000 |
|
3.000 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Thereafter |
|
85,878 |
|
1,125,977 |
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
|
|
$ |
203,004 |
|
$ |
3,222,174 |
|
$ |
2,850,000 |
|
|
|
The Company was in compliance at March 31, 2014 with certain customary financial and other covenants under the Credit Facility, the Term Loan, and the Companys fixed-rate unsecured notes.
4. Equity
The following summarizes the changes in equity for the three months ended March 31, 2014 (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, 2013 |
|
$ |
1,294 |
|
$ |
8,988,723 |
|
$ |
(345,254 |
) |
$ |
(48,631 |
) |
$ |
8,596,132 |
|
$ |
3,595 |
|
$ |
8,599,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Net income attributable to common stockholders |
|
|
|
|
|
141,739 |
|
|
|
141,739 |
|
|
|
141,739 |
| |||||||
Cash flow hedge loss reclassified to earnings |
|
|
|
|
|
|
|
1,573 |
|
1,573 |
|
|
|
1,573 |
| |||||||
Change in redemption value of redeemable noncontrolling interest |
|
|
|
|
|
1,081 |
|
|
|
1,081 |
|
|
|
1,081 |
| |||||||
Noncontrolling interests income allocation |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
7 |
| |||||||
Dividends declared to common stockholders |
|
|
|
|
|
(150,304 |
) |
|
|
(150,304 |
) |
|
|
(150,304 |
) | |||||||
Issuance of common stock, net of withholdings |
|
2 |
|
4,033 |
|
(291 |
) |
|
|
3,744 |
|
|
|
3,744 |
| |||||||
Amortization of deferred compensation |
|
|
|
9,504 |
|
|
|
|
|
9,504 |
|
|
|
9,504 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2014 |
|
$ |
1,296 |
|
$ |
9,002,260 |
|
$ |
(353,029 |
) |
$ |
(47,058 |
) |
$ |
8,603,469 |
|
$ |
3,602 |
|
$ |
8,607,071 |
|
As of March 31, 2014 and December 31, 2013, the Companys charter had authorized for issuance a total of 280,000,000 shares of common stock and 50,000,000 shares of preferred stock.
During the three months ended March 31, 2014, the Company:
(i) issued 84,836 shares of common stock in connection with stock options exercised;
(ii) issued 638 common shares through the Companys dividend reinvestment plan;
(iii) issued 104,060 common shares in connection with stock grants; and
(iv) withheld 33,365 common shares to satisfy employees tax withholding and other liabilities.
Any deferred compensation related to the Companys stock option and restricted stock grants during the three months ended March 31, 2014 is not reflected on the Companys Condensed Consolidated Balance Sheet as of March 31, 2014, 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 may sell up to $750,000,000 of shares of its common stock from time to time during a 36-month period. Actual sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Companys common stock and determinations by the Company of the appropriate sources of funding for the Company. In conjunction with CEP III, the Company engaged sales agents who receive compensation of approximately 1.5% of the gross sales price for shares sold. The Company had no sales under CEP III during the three months ended March 31, 2014, and has $646,274,000 of shares that remain authorized for issuance under this program as of March 31, 2014.
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, the value of in-places leases, and acquired management fees, at their fair values.
During the three months ended March 31, 2013, the Company recognized $69,271,000 in acquisition related expenses associated with the Archstone Acquisition, with $29,457,000 reported as a component of equity in income (loss) of unconsolidated entities, and the balance in expensed acquisition, development, and other pursuit costs on the accompanying 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 the closing date, February 27, 2013;
· cash payment of approximately $760,000,000;
· the assumption of consolidated indebtedness with a fair value of approximately $3,732,980,000, as of February 27, 2013, 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 $1,477,720,000 principal amount of 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 obligations, including accrued dividends on these outstanding Archstone preferred units as of February 27, 2013, was approximately $67,500,000; and
· the assumption with Equity Residential of all other liabilities, known or unknown, of Archstone, other than certain excluded liabilities. The Company shares 40% of the responsibility for these liabilities.
The following table presents information for assets acquired in the Archstone Acquisition that are included in the Companys Consolidated Statement of Comprehensive Income from the closing date of the acquisition, February 27, 2013, through March 31, 2013 (in thousands).
|
|
For the period including |
| |
Revenues |
|
$ |
36,624 |
|
Loss attributable to common shareholders (1) |
|
$ |
(22,635 |
) |
(1) Amounts exclude acquisition costs for the Archstone Acquisition.
Pro Forma Information
The following table presents the Companys supplemental consolidated pro forma information for the three months ended March 31, 2013, as if the acquisition had occurred on January 1, 2012 (unaudited) (in thousands):
|
|
For the three months |
| |
Revenues |
|
$ |
384,078 |
|
Income from continuing operations |
|
$ |
106,853 |
|
Earnings per common share - diluted (from continuing operations) |
|
$ |
0.84 |
|
The pro forma 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.
6. Investments in Real Estate Entities
Investment in unconsolidated entities
As of March 31, 2014, the Company had investments in seven unconsolidated real estate entities, excluding interest in the Residual JV (as defined in this Form 10-Q), 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.
The following is a combined summary of the financial position of the entities accounted for using the equity method as of the dates presented (dollars in thousands):
|
|
3-31-14 |
|
12-31-13 |
| ||
|
|
(unaudited) |
|
(unaudited) |
| ||
Assets: |
|
|
|
|
| ||
Real estate, net |
|
$ |
1,883,464 |
|
$ |
1,890,496 |
|
Other assets |
|
355,135 |
|
402,644 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
2,238,599 |
|
$ |
2,293,140 |
|
|
|
|
|
|
| ||
Liabilities and partners capital: |
|
|
|
|
| ||
Mortgage notes payable and credit facility |
|
$ |
1,249,276 |
|
$ |
1,251,067 |
|
Other liabilities |
|
39,532 |
|
29,677 |
| ||
Partners capital |
|
949,791 |
|
1,012,396 |
| ||
|
|
|
|
|
| ||
Total liabilities and partners capital |
|
$ |
2,238,599 |
|
$ |
2,293,140 |
|
The following is a combined summary of the operating results of the entities accounted for using the equity method for the periods presented (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
(unaudited) |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
|
|
|
|
|
| ||
Rental and other income |
|
$ |
51,132 |
|
$ |
43,827 |
|
Operating and other expenses |
|
(21,171 |
) |
(17,705 |
) | ||
Gain on sale of communities |
|
|
|
54,051 |
| ||
Interest expense, net |
|
(13,890 |
) |
(15,269 |
) | ||
Depreciation expense |
|
(14,417 |
) |
(13,151 |
) | ||
Net income |
|
$ |
1,654 |
|
$ |
51,753 |
|
In conjunction with the formation of AvalonBay Value Added Fund, L.P. (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 $5,404,000 at March 31, 2014 and $5,439,000 at December 31, 2013 of the respective investment balances.
As part of the formation of Fund I and Fund II, the Company provided separate and distinct guarantees to one of the limited partners in each of the ventures. These guarantees are specific to the respective fund and any impacts or obligation of the Company to perform under one of the guarantees has no impact on the Companys obligations with respect to the other guarantee. The guarantees provide that, if, upon final liquidation of Fund I or Fund II, the total amount of all distributions to the guaranteed partner during the life of the respective fund (whether from operating cash flow or property sales) does not equal the total capital contributions made by that partner, then the Company will pay the guaranteed partner an amount equal to the shortfall, but in no event more than 10% of the total capital contributions made by the guaranteed partner (maximum of approximately $7,500,000 for Fund I and approximately $8,910,000 for Fund II as of March 31, 2014). As of March 31, 2014, the total amount of all distributions made by Fund I to that partner exceeds the minimum of the total capital contributions made by that partner, satisfying the Companys guarantee. As of March 31, 2014, the expected realizable value of the real estate assets owned by Fund II is considered adequate to cover such potential payments under a liquidation scenario. The estimated fair value of, and the Companys obligation under, these guarantees, both at inception and as of March 31, 2014, was not significant and therefore the Company has not recorded any obligation for either of these guarantees as of March 31, 2014.
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 $702,000 and $245,000 for the three months ended March 31, 2014 and 2013, 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 months ended March 31, 2014 and 2013.
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 months ended March 31, 2014 and 2013.
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 months ended March 31, 2014 and 2013.
7. Real Estate Disposition Activities
During the three months ended March 31, 2014, the Company sold Avalon Valley located in Danbury, CT. Avalon Valley, containing 268 homes, was sold for $53,325,000. The Companys gain in accordance with GAAP for the disposition was $37,869,000.
During the three months ended March 31, 2014, the limited partnership that owned Arna Valley View, a 101 apartment home community in Arlington, VA, sold the apartment community. In conjunction with the sale of Arna Valley View, the Company received amounts due for its residual ownership interest of approximately $2,195,000, reported as a component of equity in income (loss) of unconsolidated entities on its Condensed Consolidated Statements of Comprehensive Income, included in this Form 10-Q.
The operations for any real estate assets sold from January 1, 2013 through March 31, 2014, which were classified as held for sale and discontinued operations as of and for the period ended December 31, 2013, have been presented as income from discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income. Accordingly, certain reclassifications have been made to prior years to reflect discontinued operations consistent with current year presentation.
The following is a summary of income from discontinued operations for the periods presented (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
(unaudited) |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
|
|
|
|
|
| ||
Rental income |
|
$ |
579 |
|
$ |
14,002 |
|
Operating and other expenses |
|
(269 |
) |
(3,986 |
) | ||
Depreciation expense |
|
|
|
(4,270 |
) | ||
Income from discontinued operations |
|
$ |
310 |
|
$ |
5,746 |
|
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 generally maintains that classification throughout the year for the purpose of reporting segment operations, unless disposition or redevelopment plans regarding a community change. The Company expects to update its operating segments on April 1, 2014, primarily to include communities acquired as part of the Archstone Acquisition, as described in Note 5, Archstone Acquisition, in its Established Community portfolio.
In addition, the Company owns land for future development and has other corporate assets that are not allocated to an operating segment.
The Companys segment disclosures present the measure(s) used by the chief operating decision maker for purposes of assessing each segments performance. The Companys chief operating decision maker is comprised of several members of its executive management team who use net operating income (NOI) as the primary financial measure for Established Communities and Other Stabilized Communities. NOI is defined by the Company as total revenue less direct property operating expenses. Although the Company considers NOI a useful measure of a communitys or communities operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities, as determined in accordance with GAAP. NOI excludes a number of income and expense categories as detailed in the reconciliation of NOI to net income.
A reconciliation of NOI to net income for the three months ended March 31, 2014 and 2013 is as follows (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
141,599 |
|
$ |
75,469 |
|
Indirect operating expenses, net of corporate income |
|
10,818 |
|
9,041 |
| ||
Investments and investment management expense |
|
979 |
|
1,015 |
| ||
Expensed acquisition, development and other pursuit costs |
|
715 |
|
40,059 |
| ||
Interest expense, net |
|
42,533 |
|
38,174 |
| ||
General and administrative expense |
|
9,236 |
|
10,039 |
| ||
Equity in loss (income) of unconsolidated entities |
|
(5,223 |
) |
18,564 |
| ||
Depreciation expense |
|
106,367 |
|
105,559 |
| ||
Gain on sale of real estate assets |
|
(37,869 |
) |
(84,491 |
) | ||
Income from discontinued operations |
|
(310 |
) |
(5,746 |
) | ||
Net operating income |
|
$ |
268,845 |
|
$ |
207,683 |
|
The primary performance measure for communities under development or redevelopment depends on the stage of completion. While under development, management monitors actual construction costs against budgeted costs as well as lease-up pace and rent levels compared to budget.
The following table provides details of the Companys segment information as of the dates specified (dollars in thousands). The segments are classified based on the individual communitys status as of the beginning of the given calendar year. Therefore, each year the composition of communities within each business segment is adjusted. Accordingly, the amounts between years are not directly comparable. Segment information for the three months ended March 31, 2014 and 2013 has been adjusted for the real estate assets that were both sold between January 1, 2013 and March 31, 2014, and qualified as discontinued operations as of December 31, 2013, as described in Note 7, Real Estate Disposition Activities.
|
|
For the three months ended |
| |||||||||
|
|
Total |
|
|
|
% NOI change |
|
Gross |
| |||
|
|
revenue |
|
NOI |
|
from prior year |
|
real estate (1) |
| |||
|
|
|
|
|
|
|
|
|
| |||
For the period ended March 31, 2014 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Established |
|
|
|
|
|
|
|
|
| |||
New England |
|
$ |
48,630 |
|
$ |
29,904 |
|
(2.0 |
)% |
$ |
1,489,948 |
|
Metro NY/NJ |
|
72,354 |
|
50,019 |
|
1.3 |
% |
2,187,554 |
| |||
Mid-Atlantic |
|
24,647 |
|
17,455 |
|
(3.0 |
)% |
644,657 |
| |||
Pacific Northwest |
|
13,129 |
|
9,134 |
|
3.2 |
% |
498,710 |
| |||
Northern California |
|
42,219 |
|
32,834 |
|
11.4 |
% |
1,400,087 |
| |||
Southern California |
|
34,149 |
|
23,352 |
|
4.2 |
% |
1,217,764 |
| |||
Total Established |
|
235,128 |
|
162,698 |
|
2.6 |
% |
7,438,720 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Other Stabilized |
|
132,320 |
|
90,071 |
|
N/A |
|
6,543,948 |
| |||
Development / Redevelopment |
|
29,550 |
|
16,076 |
|
N/A |
|
2,786,334 |
| |||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
250,204 |
| |||
Non-allocated (2) |
|
3,077 |
|
N/A |
|
N/A |
|
41,327 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total |
|
$ |
400,075 |
|
$ |
268,845 |
|
29.3 |
% |
$ |
17,060,533 |
|
|
|
|
|
|
|
|
|
|
| |||
For the period ended March 31, 2013 |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Established |
|
|
|
|
|
|
|
|
| |||
New England |
|
$ |
43,350 |
|
$ |
27,712 |
|
1.7 |
% |
$ |
1,360,858 |
|
Metro NY/NJ |
|
61,244 |
|
42,439 |
|
5.5 |
% |
1,915,890 |
| |||
Mid-Atlantic |
|
25,035 |
|
18,188 |
|
1.6 |
% |
631,207 |
| |||
Pacific Northwest |
|
11,376 |
|
7,850 |
|
10.5 |
% |
443,564 |
| |||
Northern California |
|
34,064 |
|
25,609 |
|
11.4 |
% |
1,231,893 |
| |||
Southern California |
|
26,910 |
|
18,463 |
|
5.9 |
% |
987,209 |
| |||
Total Established |
|
201,979 |
|
140,261 |
|
5.5 |
% |
6,570,621 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Other Stabilized |
|
73,932 |
|
51,433 |
|
N/A |
|
6,733,024 |
| |||
Development / Redevelopment |
|
23,174 |
|
15,989 |
|
N/A |
|
1,915,146 |
| |||
Land Held for Future Development |
|
N/A |
|
N/A |
|
N/A |
|
359,029 |
| |||
Non-allocated (2) |
|
2,272 |
|
N/A |
|
N/A |
|
69,318 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Total |
|
$ |
301,357 |
|
$ |
207,683 |
|
29.1 |
% |
$ |
15,647,138 |
|
(1) Does not include gross real estate assets held for sale of $510,623 as of March 31, 2013.
(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, 2013 |
|
501,568 |
|
$ |
120.77 |
|
691,526 |
|
$ |
106.19 |
|
Exercised |
|
(37,572 |
) |
111.34 |
|
(47,264 |
) |
80.37 |
| ||
Forfeited |
|
|
|
|
|
(550 |
) |
49.09 |
| ||
Options Outstanding, March 31, 2014 |
|
463,996 |
|
$ |
121.53 |
|
643,712 |
|
$ |
108.13 |
|
Options Exercisable March 31, 2014 |
|
285,517 |
|
$ |
116.32 |
|
643,712 |
|
$ |
108.13 |
|
During the three months ended March 31, 2014, the Company issued 104,060 shares of restricted stock with a fair value of $13,331,000. The Company granted 131,941 restricted stock units with an estimated aggregate compensation cost of $15,627,000, as part of its stock-based compensation plan, during the three months ended March 31, 2014. The amount of restricted stock ultimately earned is based on the total shareholder return metrics related to the Companys common stock for 57,493 restricted units, with the remaining amount to be earned for the balance of the grant determined by operating performance metrics. For the portion of the grant for which the award is determined by the total shareholder return of the Companys common stock, the Company used a Monte Carlo model to assess the compensation cost associated with the restricted stock units. The estimated compensation cost was derived using the following assumptions: baseline share value of $128.97; dividend yield of approximately 3.5%; estimated volatility figures ranging from 17.6% to 18.6% over the life of the plan for the Company using 50% historical volatility and 50% implied volatility; and risk free rates over the life of the plan ranging from 0.04% to 0.72%, resulting in an average estimated fair value per restricted stock unit of $104.80.
At March 31, 2014, the Company had 211,967 outstanding unvested shares granted under restricted stock awards. Restricted stock vesting during the three months ended March 31, 2014 totaled 74,091 shares and had fair values at the grant date ranging from $74.20 to $149.05 per share. The total grant date fair value of shares vested was $8,763,000 and $8,981,000 for the three months ended March 31, 2014 and 2013, respectively.
Total employee stock-based compensation cost recognized in income was $3,154,000 and $5,617,000 for the three months ended March 31, 2014 and 2013, respectively, and total capitalized stock-based compensation cost was $1,435,000 and $1,860,000 for the three months ended March 31, 2014 and 2013, respectively. At March 31, 2014, there was a total of $2,242,000 and $32,631,000 in unrecognized compensation cost for unvested stock options and unvested restricted stock and restricted stock units, respectively, which does not include estimated forfeitures. The unrecognized compensation cost for unvested stock options, and restricted stock and restricted stock units is expected to be recognized over a weighted average period of 1.65 years and 4.16 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 $3,077,000 and $2,272,000 in the three months ended March 31, 2014 and 2013, respectively. These fees are included in management, development and other fees on the accompanying Condensed Consolidated Statements of Comprehensive Income. In addition, the Company has outstanding receivables associated with its management role of $7,595,000 and $7,004,000 as of March 31, 2014 and December 31, 2013, respectively.
Director Compensation
The Company recorded non-employee director compensation expense relating to restricted stock grants and deferred stock awards in the amount of $156,000 and $256,000, in the three months ended March 31, 2014 and 2013, 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 $167,000 and $417,000 on March 31, 2014 and December 31, 2013, respectively.
11. Fair Value
Financial Instruments Carried at Fair Value
Derivative Financial Instruments
Currently, the Company uses interest rate cap agreements to manage its interest rate risk. These instruments are carried at fair value in the Companys financial statements. In adjusting the fair value of its derivative contracts for the effect of counterparty nonperformance risk, the Company has considered the impact of its net position with a given counterparty, as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company minimizes its credit risk on these transactions by dealing with major, creditworthy financial institutions which have an A or better credit rating by the Standard & Poors Ratings Group. As part of its on-going control procedures, the Company monitors the credit ratings of counterparties and the exposure of the Company to any single entity, thus reducing credit risk concentration. The Company believes the likelihood of realizing losses from counterparty nonperformance is remote. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives use Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. As of March 31, 2014, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined it is not significant. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
Hedge ineffectiveness did not have a material impact on earnings of the Company for the three months ended March 31, 2014, or any prior period, and the Company does not anticipate that it will have a material effect in the future.
The following table summarizes the consolidated Hedging Derivatives at March 31, 2014, excluding derivatives executed to hedge debt on communities classified as held for sale (dollars in thousands):
|
|
Non- |
|
|
| ||
|
|
designated |
|
Cash Flow |
| ||
|
|
Hedges |
|
Hedges |
| ||
|
|
Interest |
|
Interest |
| ||
|
|
Rate Caps |
|
Rate Caps |
| ||
|
|
|
|
|
| ||
Notional balance |
|
$ |
610,685 |
|
$ |
133,945 |
|
Weighted average interest rate (1) |
|
1.7% |
|
2.5% |
| ||
Weighted average capped interest rate |
|
5.9% |
|
4.9% |
| ||
Earliest maturity date |
|
Aug-14 |
|
Apr-15 |
| ||
Latest maturity date |
|
Aug-18 |
|
Jun-15 |
| ||
|
|
|
|
|
| ||
(1)Represents the weighted average interest rate on the hedged debt.
Excluding derivatives executed to hedge secured debt on communities classified as held for sale, the Company had three derivatives designated as cash flow hedges and 14 derivatives not designated as hedges at March 31, 2014. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended at March 31, 2014 were not material. Fair value changes for derivatives not in qualifying hedge relationships for the three months ended March 31, 2013 resulted in an unrecognized gain of approximately $1,414,000, included in interest expense, net in the Condensed Consolidated Statements of Comprehensive Income. The Company reclassified $1,573,000 and $1,391,000 of deferred losses from accumulated other comprehensive income as a charge to earnings, for the three months ended March 31, 2014 and 2013, respectively. The Company anticipates reclassifying approximately $5,493,000 of hedging losses from accumulated other comprehensive income into earnings within the next 12 months to offset the variability of cash flows of the hedged items during this period.
Redeemable Noncontrolling Interests
The Company provided redemption options (the Puts) that allow joint venture partners of the Company to require the Company to purchase their interests in the investment at a guaranteed minimum amount related to three ventures. The Puts are payable in cash. The Company determines the fair value of the Puts based on unobservable inputs considering the assumptions that market participants would make in pricing the obligations, applying a guaranteed rate of return to the joint venture partners net capital contribution balances as of period end. Given the significance of the unobservable inputs, the valuations are classified in Level 3 of the fair value hierarchy.
The Company issued units of limited partnership interest in DownREITs which provide the DownREIT limited partners the ability to present all or some of their units for redemption for cash as determined by the partnership agreement. Under the DownREIT agreements, for each limited partnership unit, the limited partner is entitled to receive cash in the amount equal to the fair value of the Companys common stock on or about the date of redemption. In lieu of cash redemption, the Company may elect to exchange such units for an equal number of shares of the Companys common stock. The limited partnership units in the DownREITs are valued using the market price of the Companys common stock, a Level 1 price under the fair value hierarchy.
Financial Instruments Not Carried at Fair Value
Cash and Cash Equivalents
Cash and cash equivalent balances are held with various financial institutions within principal protected accounts. The Company monitors credit ratings of these financial institutions and the concentration of cash and cash equivalent balances with any one financial institution and believes the likelihood of realizing material losses related to cash and cash equivalent balances is remote. Cash and cash equivalents are carried at their face amounts, which reasonably approximate their fair values and are Level 1 within the fair value hierarchy.
Other Financial Instruments
The Company values its unsecured notes using quoted market prices, a Level 1 price within the fair value hierarchy. The Company values its notes payable and outstanding amounts under the Credit Facility using a discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the instrument, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The process also considers credit valuation adjustments to appropriately reflect the Companys nonperformance risk. The Company has concluded that the value of its notes payable and amounts outstanding under its Credit Facility and Term Loan are Level 2 prices as the majority of the inputs used to value its positions fall within Level 2 of the fair value hierarchy.
Financial Instruments Measured/Disclosed at Fair Value on a Recurring Basis
The following table summarizes the classification between the three levels of the fair value hierarchy of the Companys financial instruments measured/disclosed at fair value on a recurring basis (dollars in thousands):
|
|
|
|
Quoted Prices |
|
Significant |
|
|
| ||||
|
|
|
|
in Active |
|
Other |
|
Significant |
| ||||
|
|
Total Fair Value |
|
Markets for |
|
Observable |
|
Unobservable |
| ||||
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
| ||||
Description |
|
3/31/2014 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest Rate Caps |
|
$ |
65 |
|
$ |
|
|
$ |
65 |
|
$ |
|
|
Puts |
|
(14,582 |
) |
|
|
|
|
(14,582 |
) | ||||
DownREIT units |
|
(985 |
) |
(985 |
) |
|
|
|
| ||||
Indebtedness |
|
(6,604,144 |
) |
(2,698,092 |
) |
(3,906,052 |
) |
|
| ||||
Total |
|
$ |
(6,619,646 |
) |
$ |
(2,699,077 |
) |
$ |
(3,905,987 |
) |
$ |
(14,582 |
) |
12. Subsequent Events
The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.
In April 2014:
· Fund I sold Weymouth Place, located in Weymouth, MA. Weymouth Place, containing 211 apartment homes, was sold for $25,750,000.
· In conjunction with certain requirements associated with the development of an apartment community, the Company entered into a $53,000,000 secured mortgage maturing in 2019, with an option to extend the maturity to 2024. The mortgage is comprised of a $15,000,000 fixed rate note and a $38,000,000 variable rate note.
· The Company repaid $150,000,000 principal amount of its 5.375% coupon unsecured notes pursuant to their scheduled maturity.
In 2014, through April 30, 2014, the Residual JV completed the disposition of substantially all of its indirect interest in German multifamily real estate assets as well as the associated property management company. The Companys pro rata share of the proceeds that have been repatriated to the Residual JV as a result of these dispositions was approximately $40,100,000.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help provide an understanding of our business and results of operations. This MD&A should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements included elsewhere in this report. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under Forward-Looking Statements included in this report. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under Forward-Looking Statements as well as the risk factors described in Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 2013 (the Form 10-K).
Capitalized terms have the meanings provided elsewhere in this Form 10-Q.
Executive Overview
Business Description
We are primarily engaged in developing, acquiring, owning and operating apartment communities in high barrier to entry markets of the United States. We believe that apartment communities are an attractive long-term investment opportunity compared to other real estate investments because a broad potential resident base should help reduce demand volatility over a real estate cycle. We seek to create long-term shareholder value by accessing capital on cost effective terms; deploying that capital to develop, redevelop and acquire apartment communities in high barrier to entry markets; operating apartment communities; and selling communities when they no longer meet our long-term investment strategy or when pricing is attractive. Barriers to entry in our markets generally include a difficult and lengthy entitlement process with local jurisdictions and dense urban or suburban areas where zoned and entitled land is in limited supply.
Our strategy is to be leaders in market research and capital allocation, delivering a range of multifamily offerings tailored to serve the needs of the most attractive customer segments in the best-performing submarkets of the United States. Our communities are predominately upscale, which generally command among the highest rents in their markets. However, we also pursue the ownership and operation of apartment communities that target a variety of customer segments and price points, consistent with our goal of offering a broad range of products and services.
We regularly evaluate the allocation of our investments by the amount of invested capital and by product type within our individual markets, which are primarily located in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and the Northern and Southern California regions of the United States.
First Quarter 2014 Highlights
We experienced strong operating performance in the first quarter of 2014.
· Net income attributable to common stockholders for the quarter ended March 31, 2014 was $141,739,000, an increase of $66,312,000, or 87.9%, over the prior year period. The increase is attributable primarily to increased revenue from communities acquired in the Archstone Acquisition, as well as newly developed communities and a decrease in expensed acquisition costs, partially offset by a decrease in gain on sale of communities.
· For the quarter ended March 31, 2014, Established Communities NOI increased by $4,096,000 or 2.6% over the prior year period. This year-over-year increase was driven by an increase in rental revenue of 3.7%, partially offset by an increase in operating expenses of 6.5% as compared to the prior year period.
Our consolidated operating results for the quarter ended March 31, 2014 include operations from the communities acquired as part of the Archstone Acquisition, as described in Note 5, Archstone Acquisition, and reflect year-over-year revenue growth, as well as continued sequential rental revenue growth. The overall increase in revenues was driven by the communities acquired in the Archstone Acquisition and strong leasing activity for new development. We expect year-over-year revenue growth to continue for the balance of 2014, supported by communities acquired as part of the Archstone Acquisition as well as our Established Communities. We also expect that revenue and NOI from newly constructed communities will contribute significantly to our growth for the remainder of 2014.
During the three months ended March 31, 2014, we completed the construction of two communities with an aggregate of 648 apartment homes for a total capitalized cost of $119,000,000. We also started construction of four communities expected to contain 1,119 apartment homes with an expected aggregate total capitalized cost of $314,500,000. At March 31, 2014, 31 communities were under construction with a projected total capitalized cost of approximately $2,992,700,000. In addition, as of March 31, 2014, we held a direct or indirect ownership interest in land or rights to land on which we expect to develop an additional 45 apartment communities that, if developed as expected, will contain an estimated 12,632 apartment homes, and will be developed for an aggregate total capitalized cost of $3,613,000,000, a decline of $165,000,000 from our position as of December 31, 2013.
During the three months ended March 31, 2014, we started the redevelopment of two communities containing 1,122 apartment homes, which are expected to be redeveloped for a total capitalized cost of $32,600,000, excluding costs incurred prior to redevelopment. At March 31, 2014, there were five communities under redevelopment, with an expected investment of approximately $69,900,000, excluding costs incurred prior to the start of redevelopment.
During the three months ended March 31, 2014, we sold Avalon Valley located in Danbury, CT. Avalon Valley, containing 268 homes, was sold for $53,325,000. Our gain in accordance with GAAP for the disposition was $37,869,000.
We believe that our balance sheet strength, as measured by our current level of indebtedness, our current ability to service interest and other fixed charges, and our current moderate use of financial encumbrances (such as secured financing) provide us with adequate access to liquidity from the capital markets. We expect to be able to meet our reasonably foreseeable liquidity needs, as they arise, through a combination of one or more of the following sources: operating cash flows; borrowings under our Credit Facility; secured debt; the issuance of corporate securities (which could include unsecured debt, preferred equity and/or common equity); the sale of apartment communities; available remaining capacity under the Term Loan, or through the formation of joint ventures. See the discussion under Liquidity and Capital Resources.
Communities Overview
Our real estate investments consist primarily of current operating apartment communities, communities in various stages of development (Development Communities) and Development Rights (as defined below). Our current operating communities are further distinguished as Established Communities, Other Stabilized Communities, Lease-Up Communities and Redevelopment Communities, and exclude communities owned by the Residual JV. While we generally establish the classification of communities on an annual basis, we intend to update the classification of communities during the calendar year to the extent that our plans with regard to the disposition or redevelopment of a community change during the year. The following is a description of each category:
Current Communities are categorized as Established, Other Stabilized, Lease-Up, or Redevelopment according to the following attributes:
· Established Communities (also known as Same Store Communities) are consolidated communities where a comparison of operating results from the prior year to the current year is meaningful, as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year. For the period ended March 31, 2014, the Established Communities are communities that are consolidated for financial reporting purposes, had stabilized occupancy and operating expenses as of January 1, 2013, are not conducting or planning to conduct substantial redevelopment activities and are not held for sale or planned for disposition within the current year. A community is considered to have stabilized occupancy at the earlier of (i) attainment of 95% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment.
· Other Stabilized Communities are all other completed communities that we own or have a direct or indirect ownership interest in, and that have stabilized occupancy, as defined above. Other Stabilized Communities do not include communities that are conducting or planning to conduct substantial redevelopment activities within the current year. Our Other Stabilized Communities as of March 31, 2014 included the operating communities acquired as part of the Archstone Acquisition.
· Lease-Up Communities are communities where construction has been complete for less than one year and where physical occupancy has not reached 95%.
· Redevelopment Communities are communities where substantial redevelopment is in progress or is planned to begin during the current year. Redevelopment is considered substantial when capital invested during the reconstruction effort is expected to exceed the lesser of $5,000,000 or 10% of the communitys pre-redevelopment basis and is expected to have a material impact on the operations of the community, including occupancy levels and future rental rates.
Development Communities are communities that are under construction and for which a final certificate of occupancy has not been received. These communities may be partially complete and operating.
Development Rights are development opportunities in the early phase of the development process for which we either have an option to acquire land or enter into a leasehold interest, for which we are the buyer under a long-term conditional contract to purchase land or where we control the land through a ground lease or own land to develop a new community. We capitalize related pre-development costs incurred in pursuit of new developments for which we currently believe future development is probable.
We have updated our operating segments effective April 1, 2014, for financial reporting periods beginning after March 31, 2014. This update was done primarily to include communities acquired as part of the Archstone Acquisition, in our Established Community portfolio for quarterly results of operations for the balance of the year.
We currently lease our corporate headquarters located in Arlington, Virginia under an operating lease. The lease term ends in 2020, subject to two five year renewal options. All other regional and administrative offices are leased under operating leases.
As of March 31, 2014, communities that we owned or held a direct or indirect interest in were classified as follows:
|
|
Number of |
|
Number of |
|
|
|
communities |
|
apartment homes |
|
|
|
|
|
|
|
Current Communities |
|
|
|
|
|
|
|
|
|
|
|
Established Communities: |
|
|
|
|
|
New England |
|
34 |
|
7,749 |
|
Metro NY/NJ |
|
29 |
|
9,480 |
|
Mid-Atlantic |
|
12 |
|
4,370 |
|
Pacific Northwest |
|
11 |
|
2,591 |
|
Northern California |
|
21 |
|
5,978 |
|
Southern California |
|
26 |
|
6,468 |
|
Total Established |
|
133 |
|
36,636 |
|
|
|
|
|
|
|
Other Stabilized Communities: |
|
|
|
|
|
New England |
|
13 |
|
3,611 |
|
Metro NY/NJ |
|
16 |
|
5,197 |
|
Mid-Atlantic |
|
24 |
|
8,192 |
|
Pacific Northwest |
|
5 |
|
1,204 |
|
Northern California |
|
15 |
|
4,832 |
|
Southern California |
|
28 |
|
9,357 |
|
Non Core |
|
3 |
|
1,030 |
|
Total Other Stabilized |
|
104 |
|
33,423 |
|
|
|
|
|
|
|
Lease-Up Communities |
|
3 |
|
888 |
|
|
|
|
|
|
|
Redevelopment Communities |
|
5 |
|
2,248 |
|
|
|
|
|
|
|
Total Current Communities |
|
245 |
|
73,195 |
|
|
|
|
|
|
|
Development Communities |
|
31 |
|
9,179 |
|
|
|
|
|
|
|
Development Rights |
|
45 |
|
12,632 |
|
Results of Operations
Our year-over-year operating performance is primarily affected by both overall and individual geographic market conditions and apartment fundamentals and is reflected in changes in NOI of our Established Communities; NOI derived from acquisitions and development completions; the loss of NOI related to disposed communities; and capital market and financing activity. A comparison of our operating results for the three months ended March 31, 2014 and 2013 follows (unaudited, dollars in thousands):
|
|
For the three months ended |
| |||||||||
|
|
3-31-14 |
|
3-31-13 |
|
$ Change |
|
% Change |
| |||
|
|
|
|
|
|
|
|
|
| |||
Revenue: |
|
|
|
|
|
|
|
|
| |||
Rental and other income |
|
$ |
396,998 |
|
$ |
299,085 |
|
$ |
97,913 |
|
32.7 |
% |
Management, development and other fees |
|
3,077 |
|
2,272 |
|
805 |
|
35.4 |
% | |||
Total revenue |
|
400,075 |
|
301,357 |
|
98,718 |
|
32.8 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Expenses: |
|
|
|
|
|
|
|
|
| |||
Direct property operating expenses, excluding property taxes |
|
83,634 |
|
59,491 |
|
24,143 |
|
40.6 |
% | |||
Property taxes |
|
44,485 |
|
31,902 |
|
12,583 |
|
39.4 |
% | |||
Total community operating expenses |
|
128,119 |
|
91,393 |
|
36,726 |
|
40.2 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Corporate-level property management and other indirect operating expenses |
|
13,929 |
|
11,322 |
|
2,607 |
|
23.0 |
% | |||
Investments and investment management expense |
|
979 |
|
1,015 |
|
(36 |
) |
(3.5 |
)% | |||
Expensed acquisition, development and other pursuit costs |
|
715 |
|
40,059 |
|
(39,344 |
) |
(98.2 |
)% | |||
Interest expense, net |
|
42,533 |
|
38,174 |
|
4,359 |
|
11.4 |
% | |||
Depreciation expense |
|
106,367 |
|
105,559 |
|
808 |
|
0.8 |
% | |||
General and administrative expense |
|
9,236 |
|
10,039 |
|
(803 |
) |
(8.0 |
)% | |||
Total other expenses |
|
173,759 |
|
206,168 |
|
(32,409 |
) |
(15.7 |
)% | |||
|
|
|
|
|
|
|
|
|
| |||
Equity in income (loss) of unconsolidated entities |
|
5,223 |
|
(18,564 |
) |
23,787 |
|
128.1 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Income (loss) from continuing operations |
|
103,420 |
|
(14,768 |
) |
118,188 |
|
(800.3 |
)% | |||
|
|
|
|
|
|
|
|
|
| |||
Discontinued operations: |
|
|
|
|
|
|
|
|
| |||
Income from discontinued operations |
|
310 |
|
5,746 |
|
(5,436 |
) |
(94.6 |
)% | |||
Gain on sale of communities |
|
37,869 |
|
84,491 |
|
(46,622 |
) |
(55.2 |
)% | |||
Total discontinued operations |
|
38,179 |
|
90,237 |
|
(52,058 |
) |
(57.7 |
)% | |||
|
|
|
|
|
|
|
|
|
| |||
Net income |
|
141,599 |
|
75,469 |
|
66,130 |
|
87.6 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Net loss (income) attributable to noncontrolling interests |
|
140 |
|
(42 |
) |
182 |
|
433.3 |
% | |||
|
|
|
|
|
|
|
|
|
| |||
Net income attributable to common stockholders |
|
$ |
141,739 |
|
$ |
75,427 |
|
$ |
66,312 |
|
87.9 |
% |
Net income attributable to common stockholders increased $66,312,000 or 87.9%, to $141,739,000 for the three months ended March 31, 2014 as compared to the prior year period. The increase for the three months ended March 31, 2014 is primarily due to increased revenue from communities acquired in the Archstone Acquisition and newly developed communities, and a decrease in expensed acquisition costs, partially offset by a decrease in gain on sale of communities.
NOI is considered by management to be an important and appropriate supplemental performance measure to net income because it helps both investors and management to understand the core operations of a community or communities prior to the allocation of any corporate-level or financing-related costs. NOI reflects the operating performance of a community and allows for an easy comparison of the operating performance of individual assets or groups of assets. In addition, because prospective buyers of real estate have different financing and overhead structures, with varying marginal impacts to overhead as a result of acquiring real estate, NOI is considered by many in the real estate industry to be a useful measure for determining the value of a real estate asset or group of assets. We define NOI as total property revenue less direct property operating expenses, including property taxes, and excluding corporate-level income (including management, development and other fees), corporate-level property management and other indirect operating expenses, investments and investment management expenses, expensed acquisition, development and other pursuit costs, net interest expense, gain (loss) on extinguishment of debt, general and administrative expense, joint venture income (loss), depreciation expense, impairment loss on land holdings, gain on sale of real estate assets and income from discontinued operations.
NOI does not represent cash generated from operating activities in accordance with GAAP. Therefore, NOI should not be considered an alternative to net income as an indication of our performance. NOI should also not be considered an alternative to net cash flow from operating activities, as determined by GAAP, as a measure of liquidity, nor is NOI indicative of cash available to fund cash needs. Reconciliations of NOI for the three months ended March 31, 2014 and 2013 to net income for each period are as follows (dollars in thousands):
|
|
For the three months ended |
| ||||
|
|
3-31-14 |
|
3-31-13 |
| ||
|
|
|
|
|
| ||
Net income |
|
$ |
141,599 |
|
$ |
75,469 |
|
Indirect operating expenses, net of corporate income |
|
10,818 |
|
9,041 |
| ||
Investments and investment management expense |
|
979 |
|
1,015 |
| ||
Expensed acquisition, development and other pursuit costs |
|
715 |
|
40,059 |
| ||
Interest expense, net |
|
42,533 |
|
38,174 |
| ||
General and administrative expense |
|
9,236 |
|
10,039 |
| ||
Equity in loss (income) of unconsolidated entities |
|
(5,223 |
) |
18,564 |
| ||
Depreciation expense |
|
106,367 |
|
105,559 |
| ||
Gain on sale of real estate assets |
|
(37,869 |
) |
(84,491 |
) | ||
Income from discontinued operations |
|
(310 |
) |
(5,746 |
) | ||
Net operating income |
|
$ |
268,845 |
|
$ |
207,683 |
|
The NOI changes for the three months ended March 31, 2014, as compared to the prior year period, consist of changes in the following categories (unaudited, dollars in thousands):
|
|
For the three months ended |
| |
|
|
3-31-14 |
| |
|
|
|
| |
Established Communities |
|
$ |
4,096 |
|
|
|
|
| |
Other Stabilized Communities (1) |
|
50,765 |
| |
|
|
|
| |
Development and Redevelopment Communities |
|
6,301 |
| |
|
|
|
| |
Total |
|
$ |
61,162 |
|