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EX-31.1 - EXHIBIT - Monogram Residential Trust, Inc.exhibit311093014.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[Mark One]
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended September 30, 2014
 
OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                         
 
Commission File Number: 000-53195
 
Monogram Residential Trust, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland
 
20-5383745
(State or other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
5800 Granite Parkway, Suite 1000, Plano, Texas 75024
(Address of Principal Executive Offices) (ZIP Code)

 (469) 250-5500
(Registrant’s Telephone Number, Including Area Code)

NONE
(Former name, former address and former fiscal year, 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 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 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 (§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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
 
Accelerated filer o
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No x
 
As of October 31, 2014, the Registrant had 168,878,472 shares of common stock outstanding.
 



MONOGRAM RESIDENTIAL TRUST, INC.
Form 10-Q
Quarter Ended September 30, 2014
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Monogram Residential Trust, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(Unaudited)
 
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 

 
 

Real estate
 
 

 
 

Land ($52,484 related to VIEs as of September 30, 2014)
 
$
383,431

 
$
337,295

Buildings and improvements ($180,558 related to VIEs as of September 30, 2014)
 
1,985,313

 
1,833,452

 
 
2,368,744

 
2,170,747

Less accumulated depreciation ($2,241 related to VIEs as of September 30, 2014)
 
(257,121
)
 
(195,048
)
Net operating real estate
 
2,111,623

 
1,975,699

Construction in progress, including land ($530,416 and $279,554 related to VIEs as of September 30, 2014 and December 31, 2013, respectively)
 
646,606

 
479,214

Total real estate, net
 
2,758,229

 
2,454,913

 
 
 
 
 
Cash and cash equivalents
 
156,137

 
319,368

Intangibles, net
 
22,531

 
25,753

Other assets, net
 
109,693

 
98,567

Total assets
 
$
3,046,590

 
$
2,898,601

 
 
 
 
 
Liabilities and equity
 
 

 
 

 
 
 
 
 
Liabilities
 
 

 
 

Mortgages and notes payable ($137,451 and $32,168 related to VIEs as of September 30, 2014 and December 31, 2013, respectively)
 
$
1,091,873

 
$
1,029,111

Credit facility payable
 
10,000

 
10,000

Construction costs payable ($70,670 and $27,054 related to VIEs as of September 30, 2014 and December 31, 2013, respectively)
 
80,060

 
44,684

Accounts payable and other liabilities
 
28,706

 
30,972

Deferred revenues, primarily lease revenues, net
 
17,308

 
18,382

Distributions payable
 
4,936

 
5,023

Tenant security deposits
 
4,483

 
4,122

Total liabilities
 
1,237,366

 
1,142,294

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable noncontrolling interests ($25,515 and $13,007 related to VIEs as of September 30, 2014 and December 31, 2013, respectively)
 
30,051

 
21,984

 
 
 
 
 
Equity
 
 

 
 

Preferred stock, $0.0001 par value per share; 125,000,000 and 124,999,000 shares authorized as of September 30, 2014 and December 31, 2013, respectively:
 
 
 
 
7.0% Series A non-participating, voting, cumulative, convertible preferred stock, liquidation preference $10 per share, 10,000 shares issued and outstanding as of September 30, 2014 and December 31, 2013
 

 

Common stock, $0.0001 par value per share; 875,000,000 shares authorized, 168,878,472 and 168,320,207 shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
 
17

 
17

Additional paid-in capital
 
1,514,910

 
1,508,655

Cumulative distributions and net income (loss)
 
(274,709
)
 
(230,554
)
Total equity attributable to common stockholders
 
1,240,218

 
1,278,118

Non-redeemable noncontrolling interests
 
538,955

 
456,205

Total equity
 
1,779,173

 
1,734,323

Total liabilities and equity
 
$
3,046,590

 
$
2,898,601

 
See Notes to Consolidated Financial Statements.

3


Monogram Residential Trust, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
 
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Rental revenues
 
$
53,091

 
$
48,412

 
$
154,320

 
$
140,878

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Property operating expenses
 
14,282

 
13,349

 
41,220

 
37,821

Real estate taxes
 
7,429

 
6,231

 
21,995

 
18,177

Asset management fees
 

 
1,850

 
3,843

 
5,521

General and administrative expenses
 
4,486

 
3,652

 
11,396

 
7,870

Acquisition expenses
 

 
3,688

 
(17
)
 
3,688

   Transition expenses
 
1,016

 
8,157

 
6,666

 
8,605

Investment and development expenses
 
375

 
265

 
840

 
265

Interest expense
 
5,068

 
5,875

 
15,339

 
18,597

Depreciation and amortization
 
24,278

 
22,050

 
70,580

 
63,259

Total expenses
 
56,934

 
65,117

 
171,862

 
163,803

 
 
 
 
 
 
 
 
 
Interest income
 
2,721

 
2,271

 
7,817

 
6,402

Loss on early extinguishment of debt
 

 

 
(230
)
 

Equity in income of investments in unconsolidated real estate joint ventures
 
187

 
449

 
581

 
810

Other income (expense)
 
77

 
(129
)
 
(45
)
 
177

Loss from continuing operations before gain on sale of real estate
 
(858
)
 
(14,114
)
 
(9,419
)
 
(15,536
)
Gain on sale of real estate
 

 

 
16,167

 

Income (loss) from continuing operations
 
(858
)
 
(14,114
)
 
6,748

 
(15,536
)
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations
 

 
129

 

 
(700
)
Gain on sale of real estate in discontinued operations
 

 
12,722

 

 
50,941

Income from discontinued operations
 

 
12,851

 

 
50,241

 
 
 
 
 
 
 
 
 
Net income (loss)
 
(858
)
 
(1,263
)
 
6,748

 
34,705

 
 
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
Non-redeemable noncontrolling interests in continuing operations
 
241

 
792

 
(6,714
)
 
2,983

Non-redeemable noncontrolling interests in discontinued operations
 

 
11

 

 
(6,905
)
Net income (loss) available to the Company
 
(617
)
 
(460
)
 
34

 
30,783

Dividends to preferred stockholders
 
(2
)
 
(1
)
 
(5
)
 
(1
)
Net income (loss) attributable to common stockholders
 
$
(619
)
 
$
(461
)
 
$
29

 
$
30,782

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
 
168,780

 
168,881

 
168,784

 
168,620

Weighted average number of common shares outstanding - diluted
 
169,028

 
168,881

 
169,015

 
168,620

 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per common share:
 
 
 
 
 
 
 
 
Continuing operations
 
$

 
$
(0.08
)
 
$

 
$
(0.07
)
Discontinued operations
 

 
0.08

 

 
0.26

Basic and diluted earnings (loss) per common share
 
$

 
$

 
$

 
$
0.19

 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.09

 
$
0.09

 
$
0.26

 
$
0.26

 
 
 
 
 
 
 
 
 
Amounts attributable to common stockholders:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(619
)
 
$
(13,323
)
 
$
29

 
$
(12,554
)
Discontinued operations
 

 
12,862

 

 
43,336

Net income (loss) attributable to common stockholders
 
$
(619
)
 
$
(461
)
 
$
29

 
$
30,782

 
See Notes to Consolidated Financial Statements.

4


Monogram Residential Trust, Inc.
Consolidated Statements of Equity
(in thousands)
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative
Distributions and Net
 
 
 
 
Preferred Stock
 
Common Stock
 
Additional
 
 
 
Income (Loss)
 
 
 
 
Number
 
Par
 
Number
 
Par
 
Paid-in
 
Noncontrolling
 
available to 
 
Total
 
 
of Shares
 
Value
 
of Shares
 
Value
 
Capital
 
Interests
 
the Company
 
Equity
Balance at January 1, 2013
 

 
$

 
167,542

 
$
17

 
$
1,523,646

 
$
365,350

 
$
(201,211
)
 
$
1,687,802

Net income
 

 

 

 

 

 
3,922

 
30,783

 
34,705

Redemptions of common stock
 

 

 
(1,685
)
 

 
(15,936
)
 

 

 
(15,936
)
Acquisition of a noncontrolling interest
 

 

 

 

 
(23,210
)
 
(12,761
)
 

 
(35,971
)
Sale of a noncontrolling interest
 

 

 

 

 
1,459

 
4,437

 

 
5,896

Contributions by noncontrolling interests
 

 

 

 

 

 
(93
)
 

 
(93
)
Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common stock - regular
 

 

 

 

 

 

 
(44,144
)
 
(44,144
)
Noncontrolling interests
 

 

 

 

 

 
(45,326
)
 

 
(45,326
)
Issuance of preferred stock
 
10

 

 

 

 

 

 

 

Stock issued pursuant to distribution reinvestment plan, net
 

 

 
2,452

 

 
23,297

 

 

 
23,297

Balance at September 30, 2013
 
10

 
$

 
168,309

 
$
17

 
$
1,509,256

 
$
315,529

 
$
(214,572
)
 
$
1,610,230

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
 
10

 
$

 
168,320

 
$
17

 
$
1,508,655

 
$
456,205

 
$
(230,554
)
 
$
1,734,323

Net income
 

 

 

 

 

 
6,714

 
34

 
6,748

Redemptions of common stock
 

 

 
(1,592
)
 

 
(13,975
)
 

 

 
(13,975
)
Sale of noncontrolling interests
 

 

 

 

 
(842
)
 
15,008

 

 
14,166

Contributions by noncontrolling interests
 

 

 

 

 

 
92,142

 

 
92,142

Amortization of stock-based compensation
 

 

 

 

 
582

 

 

 
582

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Common stock - regular
 

 

 

 

 

 

 
(44,184
)
 
(44,184
)
Noncontrolling interests
 

 

 

 

 

 
(31,114
)
 

 
(31,114
)
Preferred stock
 

 

 

 

 

 

 
(5
)
 
(5
)
Stock issued pursuant to distribution reinvestment plan, net
 

 

 
2,150

 

 
20,490

 

 

 
20,490

Balance at September 30, 2014
 
10

 
$

 
168,878

 
$
17

 
$
1,514,910

 
$
538,955

 
$
(274,709
)
 
$
1,779,173

 
See Notes to Consolidated Financial Statements.





5


Monogram Residential Trust, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
 
For the Nine Months Ended 
 September 30,
 
 
2014
 
2013
Cash flows from operating activities
 
 

 
 

Net income
 
$
6,748

 
$
34,705

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Gain on sale of real estate
 
(16,167
)
 
(50,941
)
Loss on early extinguishment of debt
 
230

 

Equity in income of investments in unconsolidated real estate joint ventures
 
(581
)
 
(810
)
Distributions received from investment in unconsolidated real estate joint venture
 
80

 
460

Depreciation
 
65,730

 
63,763

Amortization of deferred financing costs and debt premium/discount
 
(158
)
 
(1,861
)
Amortization of intangibles
 
3,139

 
1,332

Amortization of deferred revenues, primarily lease revenues, net
 
(1,076
)
 
(1,127
)
Amortization of stock-based compensation
 
582

 

Other, net
 
367

 
591

Changes in operating assets and liabilities:
 
 

 
 

Accounts payable and other liabilities
 
(1,838
)
 
10,745

Other assets
 
(9,313
)
 
283

Cash provided by operating activities
 
47,743

 
57,140

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Additions to real estate:
 
 

 
 

Acquisition of real estate
 

 
(108,014
)
Additions to existing real estate
 
(4,872
)
 
(5,674
)
Construction in progress, including land
 
(349,203
)
 
(259,533
)
Proceeds from sale of real estate, net
 
33,134

 
205,498

Investments in unconsolidated real estate joint ventures
 
(6,150
)
 
(4,810
)
Acquisition of a controlling interest, net of cash acquired of $0.6 million for the nine months ended September 30, 2013
 

 
(8,643
)
Acquisitions of noncontrolling interests
 

 
(48,483
)
Sale of noncontrolling interest
 

 
7,272

Advances on notes receivable
 
(6,012
)
 
(29,107
)
Collection on note receivable
 

 
7,900

Escrow deposits
 
3,620

 
(2,212
)
Other, net
 
(26
)
 
(377
)
Cash used in investing activities
 
(329,509
)
 
(246,183
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Mortgage and notes payable proceeds
 
111,732

 
41,379

Mortgage and notes payable principal payments
 
(27,868
)
 
(74,203
)
Contributions from noncontrolling interests
 
107,870

 
7,126

Distributions paid on common stock - regular
 
(23,859
)
 
(20,963
)
Distributions paid to noncontrolling interests
 
(31,035
)
 
(45,277
)
Dividends paid on preferred stock
 
(3
)
 

Redemptions of common stock
 
(13,975
)
 
(15,936
)
Other, net
 
(4,327
)
 
(4,862
)
Cash provided by (used in) financing activities
 
118,535

 
(112,736
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(163,231
)
 
(301,779
)
Cash and cash equivalents at beginning of period
 
319,368

 
450,644

Cash and cash equivalents at end of period
 
$
156,137

 
$
148,865

 
See Notes to Consolidated Financial Statements.



6


Monogram Residential Trust, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
1.                                      Organization and Business
 
Organization
 
Monogram Residential Trust, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us,” or “our”) was organized in Maryland on August 4, 2006.  Effective as of June 30, 2014, we became a self-managed real estate investment trust (“REIT”) as further described below. We invest in, develop and operate high quality multifamily communities. These multifamily communities include conventional multifamily assets, such as mid-rise, high-rise, garden style, and age-restricted properties, which typically require residents to be age 55 or older.  Our targeted communities include existing “core” properties, which we define as properties that are already stabilized and producing rental income, as well as properties in various phases of development, redevelopment, lease up or repositioning with the intent to transition those properties to core properties.  Further, we may invest in other types of commercial real estate, real estate-related securities, and mortgage, bridge, mezzanine or other loans, or in entities that make investments similar to the foregoing.  We completed our first investment in April 2007.
 
From our inception to July 31, 2013, we had no employees and were externally managed by Behringer Harvard Multifamily Advisors I, LLC, our former external advisor, and were supported by related party service agreements with our former external advisor and its affiliates (collectively “Behringer”). Through July 31, 2013, we exclusively relied on Behringer to provide certain services and personnel for management and day-to-day operations, including advisory services and property management services.

Effective July 31, 2013, we entered into a series of agreements with Behringer beginning our transition to self-management (the “Self-Management Transition Agreements”). On August 1, 2013, we hired five executives who were previously employees of Behringer and subsequently began hiring additional employees. We closed the Self-Management Transition Agreements on June 30, 2014, paying $5.2 million and effectively terminating substantially all advisory and property management services provided by Behringer. Effective July 1, 2014, we hired the remaining professionals and staff providing advisory and property management services to us that were previously employees of Behringer. On November 4, 2014, our board of directors approved our listing on the New York Stock Exchange (the “NYSE”) and we expect to list our shares of common stock on the NYSE under the ticker symbol “MORE” on or about November 21, 2014. See further discussion at Note 13, “Transition Expenses.”

We invest in multifamily communities that may be wholly owned by us or held through joint venture arrangements with third-party institutional or other national or regional real estate developers/owners which we define as “Co-Investment Ventures” or “CO-JVs.”  These are predominately equity investments but may also include debt investments, consisting of mezzanine and land loans.  If a Co-Investment Venture makes an equity or debt investment in a separate entity with additional third parties, we refer to such a separate entity as a “Property Entity” and when applicable may name the multifamily community related to the Property Entity or CO-JV.
 
As of September 30, 2014, we have equity and debt investments in 56 multifamily communities, of which 33 are stabilized operating multifamily communities, four are in lease up and 19 are in various stages of pre-development and construction. Of the 56 multifamily communities, we wholly own seven multifamily communities and three debt investments for a total of 10 wholly owned investments.  The remaining 46 investments are held through Co-Investment Ventures, 45 of which are consolidated and one is reported on the equity method of accounting. The one unconsolidated Co-Investment Venture holds a debt investment. 
 
As of September 30, 2014, we are the general partner and/or managing member for each of the separate Co-Investment Ventures. Our two largest Co-Investment Venture partners are Stichting Depositary PGGM Private Real Estate Fund, a Dutch foundation acting in its capacity as depositary of and for the account and risk of PGGM Private Real Estate Fund and its affiliates, a real estate investment vehicle for Dutch pension funds (“PGGM” or the “PGGM Co-Investment Partner”), and Milky Way Partners, L.P. (the “MW Co-Investment Partner”), the primary partner of which is Korea Exchange Bank, as Trustee for and on behalf of National Pension Service (acting for and on behalf of the National Pension Fund of the Republic of Korea Government) (“NPS”). Our other Co-Investment Venture partners include national or regional real estate developers/owners (“Developer Partners.”) When applicable, we refer to individual investments by referencing the individual co-investment partner or the underlying multifamily community. We refer to our Co-Investment Ventures with the PGGM Co-Investment Partner as “PGGM CO-JVs,” those with the MW Co-Investment Partner as “MW CO-JVs,” and those with

7


Developer Partners as “Developer CO-JVs.” Certain PGGM CO-JVs that also include Developer Partners are referred to as PGGM CO-JVs.

Prior to July 31, 2013, PGGM’s interest in the PGGM CO-JVs was held through Monogram Residential Master Partnership I LP (the “Master Partnership”), in which PGGM held a 99% limited partner interest and an affiliate of Behringer held the 1% general partner interest (the “GP Master Interest”). Our interest in the PGGM CO-JVs was generally 55% and the Master Partnership’s interest was generally 45%. On July 31, 2013, we acquired the GP Master Interest from Behringer for $23.1 million (effectively increasing our ownership interest in each applicable PGGM CO-JV) and consolidated the Master Partnership. Our acquisition of the BHMP GP Interest on July 31, 2013, resulted in the PGGM Co-Investment Partner becoming our partner in these Co-Investment Ventures as of July 31, 2013.  Due to PGGM’s existing 99% ownership interest in the Master Partnership and because this transaction did not have a significant effect on the amount of noncontrolling interests in such Co-Investment Ventures, PGGM’s ownership interest in each applicable Co-Investment Venture was unchanged. Accordingly, we now consider PGGM to be our co-investment partner in these Co-Investment Ventures. We now refer to these Co-Investment Ventures as “PGGM CO-JVs” and to PGGM as the “PGGM Co-Investment Partner.” In addition, on December 20, 2013, the Master Partnership was restructured to increase the maximum potential capital commitment of PGGM by $300 million (plus any amount distributed to PGGM from sales or financings of new PGGM CO-JVs) and we sold a noncontrolling interest in 13 Developer CO-JVs to PGGM for $146.4 million. For the nine months ended September 30, 2014, we also sold a non-controlling interest in two additional Developer CO-JVs to PGGM for $13.2 million and sold our entire interest in the Tupelo PGGM CO-JV to an unaffiliated third party.
 
The table below presents a summary of our Co-Investment Ventures. The effective ownership ranges are based on our share of contributed capital in the multifamily investment. This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture.  Unless otherwise noted, all are reported on the consolidated basis of accounting.
 
 
September 30, 2014
 
December 31, 2013
Co-Investment Structure
 
Number of Multifamily Communities
 
Our Effective
Ownership
 
Number of Multifamily Communities
 
Our Effective
Ownership
PGGM CO-JVs (a)
 
30

 
50% to 74%
 
27

 
44% to 74%
MW CO-JVs
 
14

 
55%
 
14

 
55%
Developer CO-JVs
 
2

 
100%
 
4

 
90% to 100%
Total
 
46

 
 
 
45

 
 
 
 
 
 
 
 
 
 
 
 

(a)
Includes one unconsolidated investment as of September 30, 2014 and December 31, 2013. Also, as of September 30, 2014 and December 31, 2013, includes Developer Partners in 19 and 16 multifamily communities, respectively.  

We have elected to be taxed, and currently qualify, as a REIT for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.  As of September 30, 2014, we believe we are in compliance with all applicable REIT requirements.
 

2.                                      Summary of Significant Accounting Policies
 
Interim Unaudited Financial Information
 
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013 which was filed with the Securities and Exchange Commission (“SEC”) on March 12, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from this report.

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet as of September 30, 2014 and consolidated statements of operations, equity and cash

8


flows for the periods ended September 30, 2014 and 2013 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2014 and December 31, 2013 and our consolidated results of operations and cash flows for the periods ended September 30, 2014 and 2013. Such adjustments are of a normal recurring nature.
 
We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements.
 
Basis of Presentation
 
The accompanying consolidated financial statements include our consolidated accounts and the accounts of our wholly owned subsidiaries.  We also consolidate other entities in which we have a controlling financial interest or other entities (referred to as variable interest entities or “VIEs”) where we are determined to be the primary beneficiary.  VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability.  The primary beneficiary is required to consolidate a VIE for financial reporting purposes.  The determination of the primary beneficiary requires management to make significant estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners.  See Note 6, “Variable Interest Entities” for further information about our VIEs.  For entities in which we have less than a controlling financial interest or entities with respect to which we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting.  Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income.  See Note 7, “Other Assets” for further information on our unconsolidated investment.  All inter-company accounts and transactions have been eliminated in consolidation.
 
Real Estate and Other Related Intangibles
 
Acquisitions
 
For real estate properties acquired by us or our Co-Investment Ventures classified as business combinations, we determine the purchase price, after adjusting for contingent consideration and settlement of any pre-existing relationships. We record the acquired assets and liabilities based on their fair values, including tangible assets (consisting of land, any associated rights, buildings and improvements), identified intangible assets and liabilities, asset retirement obligations, assumed debt, other liabilities and noncontrolling interests.  Identified intangible assets and liabilities primarily consist of the fair value of in-place leases and contractual rights.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree are less than the fair value of the identifiable net assets acquired.
 
The fair value of any tangible real estate assets acquired is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles.  Intangible assets are evaluated at each reporting period to determine whether the indefinite and finite useful lives are appropriate.
 
We determine the value of in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease up periods for the respective leasable area considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease up period.  The estimate of the fair value of tenant relationships also includes our estimate of the likelihood of renewal. We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The value of tenant relationship intangibles will be amortized to expense over the initial term and any anticipated renewal periods, but in no event will the amortization period for intangible

9


assets exceed the remaining depreciable life of the building. The in-place leases are amortized over the remaining term of the in-place leases, approximately a six month term for multifamily in-place leases and terms ranging from three to 20 years for retail in-place leases.   

We determine the value of above-market and below-market in-place leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (i) the remaining non-cancelable lease term for above-market leases, or (ii) the remaining non-cancelable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the above determined lease term.  Given the short-term nature of multifamily leases, the value of above-market or below-market in-place leases are generally not material.
 
We determine the value of other contractual rights based on our evaluation of the specific characteristics of the underlying contracts and by applying a fair value model to the projected cash flows or usage rights that considers the timing and risks associated with the cash flows or usage. We amortize the value of finite contractual rights over the remaining contract period. Indefinite-lived contractual rights are not amortized but are evaluated for impairment.
 
We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.
 
Initial valuations are subject to change until our information is finalized, which is no later than 12 months from the acquisition date.  We have had no significant valuation changes for acquisitions prior to September 30, 2014.
 
Developments
 
We capitalize project costs related to the development and construction of real estate (including interest, property taxes, insurance, and other direct costs associated with the development) as a cost of the development. Indirect project costs not clearly related to development and construction are expensed as incurred.  Indirect project costs that clearly relate to development and construction are capitalized and allocated to the developments to which they relate.  For each development, capitalization begins when we determine that the development is probable and significant development activities are underway.  We suspend capitalization at such time as significant development activity ceases, but future development is still probable.  We cease capitalization when the developments or other improvements, including any portion, are completed and ready for their intended use, or if the intended use changes such that capitalization is no longer appropriate.  Developments or improvements are generally considered ready for intended use when the certificates of occupancy have been issued and the units become ready for occupancy.

Depreciation
 
Buildings are depreciated over their estimated useful lives ranging from 25 to 35 years using the straight-line method.  Improvements are depreciated over their estimated useful lives ranging from 3 to 15 years using the straight-line method.  Properties classified as held for sale are not depreciated.  Depreciation of developments begins when the development is substantially completed and ready for its intended use.
 
Repairs and Maintenance
 
Expenditures for ordinary repairs and maintenance costs are charged to expense as incurred.

Investment in Unconsolidated Real Estate Joint Venture
 
We and our Co-Investment Ventures account for investments in unconsolidated real estate joint ventures using the equity method of accounting because we exercise significant influence over, but do not control, these entities.  These investments are initially recorded at cost, including any acquisition costs, and are adjusted for our share of equity in earnings and distributions.  We report our share of income and losses based on our economic interests in the entities.
 

10


We capitalize interest expense to investments in unconsolidated real estate joint ventures for our share of qualified expenditures during their development phase. We did not capitalize any interest expense related to investments in unconsolidated real estate joint ventures for the three and nine months ended September 30, 2014 or 2013.
 
We amortize any excess of the carrying value of our investments in joint ventures over the book value of the underlying equity over the estimated useful lives of the underlying operating property, which represents the assets to which the excess is most clearly related.
 
When we or our Co-Investment Ventures acquire a controlling interest in a previously noncontrolled investment, a gain or loss on revaluation of equity is recognized for the differences between the investment’s carrying value and fair value.
  
Impairment of Real Estate Related Assets and Investments in Unconsolidated Real Estate Joint Ventures
 
If events or circumstances indicate that the carrying amount of the property may not be recoverable, we make an assessment of the property’s recoverability by comparing the carrying amount of the asset to our estimate of the undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition.  If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  The fair value of intangibles is generally estimated by valuation of similar assets.
 
For real estate we own through an investment in an unconsolidated real estate joint venture or other similar real estate investment structure, at each reporting date we compare the estimated fair value of our real estate investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our real estate investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline. 

We did not record any impairment losses for the three and nine months ended September 30, 2014 or 2013.
 
Assets Held for Sale and Discontinued Operations
 
Prior to January 1, 2014, when we had no involvement after the sale of a multifamily community, the multifamily community sold was reported as a discontinued operation.  Effective as of January 1, 2014, we adopted the revised guidance regarding discontinued operations as further discussed in Note 3, “New Accounting Pronouncements.” For sales of real estate or assets classified as held for sale after January 1, 2014, we evaluate whether the disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
 
Cash and Cash Equivalents
 
We consider investments in bank deposits, money market funds and highly-liquid cash investments with original maturities of three months or less to be cash equivalents.
 
As of September 30, 2014 and December 31, 2013, cash and cash equivalents include $33.2 million and $25.6 million, respectively, held by the Master Partnership and individual Co-Investment Ventures that are available only for use in the business of the Master Partnership and the related Co-Investment Venture.  Cash held by individual Co-Investment Ventures is not restricted to specific uses within those entities. However, the terms of the joint venture agreements limit the ability to distribute those funds to us or use them for our general corporate purposes.  Cash held by individual Co-Investment Ventures is distributed from time to time to the Company and to the other Co-Investment Venture partners in accordance with the applicable Co-Investment Venture governing agreement, which may not be the same as the stated effective ownership interest.  Cash distributions received by the Company from the individual Co-Investment Ventures are then available for our general corporate purposes.
 
Noncontrolling Interests

 Redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities where we believe it is probable that we will be required to purchase the partner’s noncontrolling interest.  We record obligations under the redeemable noncontrolling interest initially at the higher of (a) fair value, increased or

11


decreased for the noncontrolling interest’s share of net income or loss and equity contributions and distributions or (b) the redemption value.  The redeemable noncontrolling interests are temporary equity not within our control, and presented in our consolidated balance sheet outside of permanent equity between debt and equity.  The determination of the redeemable classification requires analysis of contractual provisions and judgments of redemption probabilities.
 
Non-redeemable noncontrolling interests are comprised of our consolidated Co-Investment Venture partners’ interests in multifamily communities as well as preferred cumulative, non-voting membership units (“Preferred Units”) issued by subsidiary REITs.  We record these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss or equity contributions and distributions.  These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity.

Income and losses are allocated to the noncontrolling interest holder based on its economic interests.
 
Transactions involving a partial sale or acquisition of a noncontrolling interest that does not result in a change of control are recorded at carrying value with no recognition of gain or loss.  Any differences between the cash received or paid (net of any direct expenses) and the change in noncontrolling interest is recorded as a direct charge to additional paid-in capital.  Transactions involving a partial sale or acquisition of a controlling interest resulting in a change in control are recorded at fair value with recognition of a gain or loss.
 
Other Assets
 
Other assets primarily include deferred financing costs, notes receivable, equity method investments, accounts receivable, restricted cash, interest rate caps, prepaid assets and deposits.  Deferred financing costs are recorded at cost and are amortized using a straight-line method that approximates the effective interest method over the life of the related debt.  We evaluate whether notes receivable are loans, investments in joint ventures or acquisitions of real estate based on a review of any rights to participate in expected residual profits and other equity and loan characteristics.  As of and for the nine months ended September 30, 2014 and 2013, all of our notes receivable were appropriately accounted for as loans.  We account for our derivative financial instruments, all of which are interest rate caps, at fair value.  We use interest rate cap arrangements to manage our exposure to interest rate changes.  We have not designated any of these derivatives as hedges for accounting purposes, and accordingly, changes in fair value are recognized in earnings.
 
Revenue Recognition
 
Rental income related to leases is recognized on an accrual basis when due from residents or commercial tenants, generally on a monthly basis.  Rental revenues for leases with uneven payments and terms greater than one year are recognized on a straight-line basis over the term of the lease.  Any deferred revenue is classified as a liability on the consolidated balance sheet and recognized on a straight-line basis as income over its contractual term.

Interest income is generated primarily on notes receivable and cash balances. Interest income is recorded on an accrual basis as earned.
 
Acquisition Costs
 
Acquisition costs for business combinations, which are expected to include most consolidated property acquisitions other than land acquisitions, are expensed when it is probable that the transaction will be accounted for as a business combination and the purchase will be consummated. Our acquisition costs related to investments in unconsolidated real estate joint ventures are capitalized as a part of our basis in the investment. Acquisition costs related to unimproved or non-operating land, primarily related to developments, are capitalized.  Through June 30, 2014, pursuant to our advisory management agreement, Behringer was obligated to reimburse us for all investment-related expenses that the Company pursued but ultimately did not consummate.  Prior to the determination of its status, amounts incurred were recorded in other assets.  Acquisition costs and expenses include amounts incurred with Behringer and with third parties.

Transition Expenses

Transition expenses include expenses related to our transition to self-management, primarily including legal, financial advisors, consultants, costs of the Company’s special committee of the board of directors, comprised of all of the Company’s independent directors (the “Special Committee”), general transition services (primarily related to staffing, name change, notices, transition-related insurance, information technology and facilities), expenses related to a listing on the NYSE and

12


payments to Behringer in connection with the transition to self-management discussed further in Note 13, “Transition Expenses.”
 
Income Taxes
 
We have elected to be taxed as a REIT under the Code and have qualified as a REIT since the year ended December 31, 2007.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We intend to operate in such a manner as to continue to qualify for taxation as a REIT, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT. Beginning in 2013, taxable income from certain non-REIT activities is managed through a taxable REIT subsidiary (“TRS”) and is subject to applicable federal, state, and local income and margin taxes. We have no significant taxes associated with our TRS for the three and nine months ended September 30, 2014 or 2013.
 
We have evaluated the current and deferred income tax related to state taxes, with respect to which we do not have a REIT exemption, and we have no significant tax liability or benefit as of September 30, 2014 or December 31, 2013.
 
The carrying amounts of our assets and liabilities for financial statement purposes differ from our basis for federal income taxes due to tax accounting in Co-Investment Ventures, fair value accounting for business combinations, straight lining of lease and related agreements and differing depreciation methods.  The primary asset and liability balance sheet accounts with differences are real estate, intangibles, other assets, mortgages and notes payable and deferred revenues, primarily lease revenues, net.
 
We recognize the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. As of September 30, 2014 and December 31, 2013, we had no significant uncertain tax positions.
 
Concentration of Credit Risk
 
We invest our cash and cash equivalents among several banking institutions and money market accounts in an attempt to minimize exposure to any one of these entities.  As of September 30, 2014 and December 31, 2013, we had cash and cash equivalents deposited in certain financial institutions in excess of federally-insured levels.  We regularly monitor the financial condition of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.
 
Share-based Compensation

We have a stock-based incentive award plan for our employees and directors. Compensation expense associated with restricted stock units is recognized in general and administrative expenses in our consolidated statements of operations. We measure stock-based compensation at the estimated fair value on the grant date, net of estimated forfeitures, and recognize the amortization of compensation expense over the requisite service period.

Earnings per Share
 
Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting basic earnings per share for the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under our preferred stock and our stock-based incentive plans.  Our unvested share-based awards are considered participating securities and are reflected in the calculation of diluted earnings per share. During periods of net loss, the assumed exercise of securities is anti-dilutive and is not included in the calculation of earnings per share. During 2014, the dilutive impact was less than $0.01 and during 2013 any common stock equivalents were anti-dilutive.

For all periods presented, the preferred stock and the convertible stock, with respect to periods each were outstanding, were excluded from the calculation of earnings per share because the effect would not be dilutive. However, based on changing market conditions, the outstanding preferred stock could be dilutive in future periods.
 

13


Redemptions of Common Stock
 
We account for the possible redemption of our shares by classifying securities that are convertible for cash at the option of the holder outside of equity.  We do not reclassify the shares to be redeemed from equity to a liability until such time as the redemption has been formally approved by our board of directors.  The portion of the redeemed common stock in excess of the par value is charged to additional paid-in capital.

Reportable Segments
 
Our current business primarily consists of investing in and operating multifamily communities. Substantially all of our consolidated net income (loss) is from investments in real estate properties that we wholly own or own through Co-Investment Ventures, the latter of which may be accounted for under the equity method of accounting. Our management evaluates operating performance on an individual investment level. However, as each of our investments has similar economic characteristics in our consolidated financial statements, the Company is managed on an enterprise-wide basis with one reportable segment.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes to consolidated financial statements.  These estimates include such items as: the purchase price allocations for real estate and other acquisitions; impairment of long-lived assets, notes receivable and equity-method real estate investments; fair value evaluations; earning recognition of note receivable interest income, noncontrolling interests and equity in earnings of investments in unconsolidated real estate joint ventures; depreciation and amortization; share-based compensation measurements; and recognition and timing of transition expenses.  Actual results could differ from those estimates.

3.                                      New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance for the reporting of discontinued operations and disposals of components of an entity. The guidance revised the definition of a discontinued operation to include those disposals that represent a strategic shift that has or will have a major effect on an entity’s operations and financial results when a component of an entity or a group of components of an entity are classified as held for sale or disposed of by sale or by means other than a sale, such as an abandonment. Examples of a strategic shift could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity. We have adopted this guidance as of January 1, 2014. As a result of this adoption, the results of operations and gains on sales of real estate from January 1, 2014 forward which do not meet the criteria of a strategic shift that has or will have a major effect on our operations and financial results will be presented as continuing operations in our consolidated statements of operations. Any sales of real estate prior to January 1, 2014 which have been reported in discontinued operations in prior reporting periods will continue to be reported as discontinued operations. We believe future sales of our individual operating properties will no longer qualify as discontinued operations.

In May 2014, the FASB issued updated guidance with respect to revenue recognition. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance.  The revised guidance will replace most existing revenue and real estate sale recognition guidance in GAAP when it becomes effective. The standard specifically excludes lease contracts, which for us is our primary recurring revenue source. The revised guidance allows for the use of either the full or modified retrospective transition method and is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. Early adoption is not permitted.  We have not yet selected a transition method and are currently evaluating the effect that the adoption of the revised guidance will have on our consolidated financial statements and related disclosures.

In August 2014, the FASB issued guidance with respect to management’s responsibility related to evaluating whether there is a substantial doubt about an entity’s ability to continue as a going concern as well as to provide related footnote disclosures. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016. We are currently evaluating the effects of the newly issued guidance, but we do not believe the adoption of this guidance will have material impact on our disclosures.



14


4.    Business Combinations

Acquisitions of Real Estate and Other Related Party Interests

As discussed in Note 1, “Organization and Business,” on July 31, 2013, we acquired the GP Master Interest in a related party transaction with Behringer for $23.1 million in cash, excluding closings costs, of which $9.3 million related to an acquisition of the general partner’s asset management and related fee revenue services and contracts and has been accounted for as a business combination. The remaining $13.8 million was accounted for as an acquisition of a noncontrolling interest in the PGGM CO-JVs. See Note 11, “Noncontrolling Interests” for additional discussion.

In July 2013, we acquired Vara, a 202 unit multifamily community located in San Francisco, California, from an unaffiliated seller, for an aggregate gross purchase price of $108.7 million, excluding closing costs. Vara was unoccupied at the date of acquisition and as of September 30, 2014, the community was 96% occupied.

Business Combination Summary Information

The following tables present certain additional information regarding our business combinations during the nine months ended September 30, 2013. There were no business combinations during the nine months ended September 30, 2014.

The amounts recognized for major assets acquired and liabilities assumed, including a reconciliation to cash consideration as of the business combination date are as follows (in millions):

 
 
2013 Acquisitions
Land
 
$
20.2

Building and improvements
 
88.5

Cash acquired
 
0.6

Intangibles (a)
 
9.2

Investment in unconsolidated real estate joint venture
 
6.4

Other assets
 
0.1

Accrued liabilities
 
(0.9
)
Noncontrolling interest
 
(6.8
)
Cash consideration
 
$
117.3

 
 
 

(a)
The intangibles are $9.2 million of other contractual intangibles, primarily asset management and related fee revenue services and contracts.

Certain operating information for the periods from the business combination dates to September 30, 2013 is as follows (in millions):
 
 
For the Periods to September 30, 2013
Rental revenues
 
$
0.6

Acquisition expenses
 
$
3.3

Depreciation and amortization
 
$
1.3

Net loss attributable to common stockholders
 
$
(2.2
)

The following unaudited consolidated pro forma information is presented as if the acquisitions were acquired on January 1, 2013. The information excludes activity that is non-recurring and not representative of our future activity, primarily transition expenses of $8.2 million and $8.6 million for the three and nine months ended September 30, 2013, respectively, and acquisition expenses of $3.7 million for both the three and nine months ended September 30, 2013. The information presented below is not necessarily indicative of what the actual results of operations would have been had we completed these transactions on January 1, 2013, nor does it purport to represent our future operations (in millions, except per share):

15


 
 
Pro Forma
 
Pro Forma
 
 
For the Three Months Ended September 30, 2013
 
For the Nine Months Ended September 30, 2013
Revenues
 
$
48.4

 
$
140.9

Depreciation and amortization
 
$
22.7

 
$
65.8

Loss from continuing operations
 
$
(2.4
)
 
$
(6.1
)
Loss from continuing operations per share
 
$
(0.01
)
 
$
(0.04
)
 
 
 
 
 


5.                                      Real Estate Investments
 
Real Estate Investments and Intangibles and Related Depreciation and Amortization
 
As of September 30, 2014 and December 31, 2013, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):
 
 
 
September 30, 2014
 
December 31, 2013
 
 
Buildings
 
Intangibles
 
Buildings
 
Intangibles
 
 
and
 
In-Place
 
Other
 
and
 
In-Place
 
Other
 
 
Improvements
 
Leases
 
Contractual
 
Improvements
 
Leases
 
Contractual
Cost
 
$
1,985.3

 
$
41.0

 
$
25.5

 
$
1,833.4

 
$
41.9

 
$
25.6

Less: accumulated depreciation and amortization
 
(257.1
)
 
(38.5
)
 
(5.5
)
 
(195.0
)
 
(39.1
)
 
(2.6
)
Net
 
$
1,728.2

 
$
2.5

 
$
20.0

 
$
1,638.4

 
$
2.8

 
$
23.0

 
Depreciation expense for the three months ended September 30, 2014 and 2013 was approximately $22.5 million and $20.1 million, respectively. Depreciation expense for the nine months ended September 30, 2014 and 2013 was approximately $65.5 million and $60.8 million, respectively.
 
Cost of intangibles relates to the value of in-place leases and other contractual intangibles.  Other contractual intangibles as of both September 30, 2014 and December 31, 2013 include $9.2 million of intangibles, primarily asset management and related fee revenue services and contracts related to our acquisition of the GP Master Interest on July 31, 2013, $6.8 million related to the use rights of a parking garage and site improvements and $9.5 million of indefinite-lived contractual rights related to land air rights.
 
Amortization expense associated with our lease and other contractual intangibles for the three months ended September 30, 2014 and 2013 was approximately $1.0 million and $0.8 million, respectively. Amortization expense associated with our lease and other contractual intangibles for the nine months ended September 30, 2014 and 2013 was approximately $3.1 million and $1.3 million, respectively.
 
Anticipated amortization associated with lease and other contractual intangibles for each of the following five years is as follows (in millions):
 
 
Anticipated Amortization
Year
 
of Intangibles
October through December 2014
 
$
1.0

2015
 
2.8

2016
 
1.4

2017
 
1.4

2018
 
0.5



16


Developments 

For the three and nine months ended September 30, 2014 and 2013, we capitalized the following amounts of interest, real estate taxes and overhead related to our developments (in millions):
 
 
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest
 
$
4.8

 
$
2.8

 
$
13.5

 
$
6.7

Real estate taxes
 
0.8

 
0.8

 
3.6

 
1.9

Overhead
 
0.3

 
0.2

 
0.6

 
0.4


Sales of Real Estate Reported in Continuing Operations
 
The following table presents our sale of real estate for the nine months ended September 30, 2014 (in millions):

Date of Sale
 
Multifamily Community
 
Sales Contract Price
 
Net Cash Proceeds
 
Gain on Sale of Real Estate
February 2014
 
Tupelo Alley
 
$
52.9

 
$
33.1

 
$
16.2

 
 
 
 
 
 
 
 
 

The following table presents net income related to the Tupelo Alley multifamily community, sold in the first quarter of 2014, for the nine months ended September 30, 2014 and 2013. Net income for the three months ended September 30, 2013 was not significant. Net income for the nine months ended September 30, 2014 includes the gain on sale of real estate (in millions):
 
 
For the Nine Months Ended 
 September 30,
 
 
2014
 
2013
Net income (loss) from multifamily community sold in 2014
 
$
15.8

 
$
(0.1
)
Less: net income attributable to noncontrolling interest
 
(7.2
)
 

Net income (loss) attributable to common stockholders
 
$
8.6

 
$
(0.1
)
 
 
 
 
 

Discontinued Operations

As discussed in Note 3, “New Accounting Pronouncements,” we have adopted the provisions of the recently issued FASB guidance regarding the reporting of discontinued operations. Accordingly, we have no discontinued operations for the three and nine months ended September 30, 2014. The following table presents our sales of real estate for the nine months ended September 30, 2013 (in millions), all of which are reported as discontinued operations:
Date of Sale
 
Multifamily Community
 
Sales Contract Price
 
Net Cash Proceeds
 
Gain on Sale of Real Estate
September 2013
 
Grand Reserve Orange
 
$
35.3

 
$
34.3

 
$
12.7

June 2013
 
Halstead
 
43.5

 
42.4

 
12.0

May 2013
 
Cyan/PDX (“Cyan”)
 
95.8

 
95.5

 
19.2

March 2013
 
The Reserve at John’s Creek Walk (“Johns Creek”)
 
37.3

 
33.3

 
7.0

 
 
     Total
 
$
211.9

 
$
205.5

 
$
50.9

 
 
 
 
 
 
 
 
 


17


The table below includes the major classes of line items constituting net loss from discontinued operations, gains on sale of real estate, and depreciation and amortization and capital expenditures for the three and nine months ended September 30, 2013 for these communities (in millions):
 
 
For the Three Months Ended 
September 30, 2013
 
For the Nine Months Ended 
September 30, 2013
Rental revenue
 
$
0.8

 
$
8.0

 
 
 
 
 
Expenses
 
 

 
 
Property operating expenses
 
0.3

 
2.6

Real estate taxes
 
0.1

 
1.0

Interest expense
 

 
1.0

Depreciation and amortization
 
0.3

 
3.3

Total expenses
 
0.7

 
7.9

 
 
 
 
 
Loss on early extinguishment of debt
 

 
(0.8
)
 
 
 
 
 
Loss from discontinued operations
 
0.1

 
(0.7
)
Income attributable to noncontrolling interests
 

 
(6.9
)
Loss from discontinued operations attributable to common stockholders
 
$
0.1

 
$
(7.6
)
 
 
 
 
 
Gain on sale of real estate
 
$
12.7

 
$
50.9

 
 
 
 
 
Capital expenditures
 
$

 
$
0.2

 
 
 
 
 

Changes in operating and investing noncash items related to discontinued operations were not significant for the three and nine months ended September 30, 2013.

6.                                      Variable Interest Entities
 
As of September 30, 2014 and December 31, 2013, we have concluded that we are the primary beneficiary of 15 and 10 VIEs, respectively.  All of these VIEs are the property entities of PGGM CO-JVs or Developer CO-JVs created for the purpose of developing and operating multifamily communities. At inception, we had determined that none of the Co-Investment Ventures were VIEs and because we were the general partner (directly or indirectly) of each Co-Investment Venture and had control of their operations and business affairs, we consolidated each Co-Investment Venture.  After separate reconsideration events during 2012 through 2014, all of which were related to new financings or capital restructuring, we have concluded that all of these Co-Investment Ventures are now VIEs.  Because these Co-Investment Ventures were previously consolidated, the VIE determination did not affect our financial position, financial operations or cash flows.  Our ownership interest in each of the Co-Investment Ventures based upon contributed capital ranges from 55% to 100%.

Any significant amounts of assets and liabilities related to our consolidated VIEs are identified parenthetically on our accompanying consolidated balance sheets. Eight VIEs, all of which are actively developing multifamily communities, have closed aggregate construction financing of $312.7 million as of September 30, 2014, which will be drawn on during the construction of the developments. As of September 30, 2014, $137.5 million has been drawn under these construction loans. For six of these construction loans, we have provided partial payment guarantees. The total commitment of these six construction loans is $259.5 million, of which $90.4 million is outstanding as of September 30, 2014. Each guarantee may terminate or be reduced upon completion of the development or if the development achieves certain operating results. On the other two construction loans, the lenders have no recourse to us other than a guaranty provided by the Company with respect to the construction of the project (a completion guaranty). The construction loans are secured by a first mortgage in each development. See Note 9, “Mortgages and Notes Payable” for further information on our construction loans.  The total assets of the VIEs are $786.5 million and $288.0 million as of September 30, 2014 and December 31, 2013, respectively, $530.4 million and $279.6 million of which is reflected in construction in progress, respectively. 
 

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7.                                      Other Assets
 
The components of other assets are as follows (in millions):
 
 
September 30, 2014
 
December 31, 2013
Notes receivable, net (a)
 
$
59.7

 
$
52.8

Escrows and restricted cash
 
10.6

 
12.4

Deferred financing costs, net
 
13.4

 
12.1

Resident, tenant and other receivables (b)
 
14.1

 
8.3

Prepaid assets, deposits and other assets
 
6.7

 
7.3

Investment in unconsolidated real estate joint venture
 
5.1

 
5.5

Interest rate caps
 
0.1

 
0.2

Total other assets
 
$
109.7

 
$
98.6

 
 

(a)
Notes receivable include mezzanine loans, primarily related to multifamily development projects.  As of September 30, 2014, the weighted average interest rate is 14.7% and the remaining years to scheduled maturity is 1.3 years.

(b)
Includes a receivable from Behringer of $1.8 million as of December 31, 2013. The balance was repaid in February 2014.
 
As of September 30, 2014 and December 31, 2013, we had a $5.1 million and $5.5 million, respectively, investment in an unconsolidated joint venture, the Custer PGGM CO-JV, in which our effective ownership is 55%. Distributions are made pro rata in accordance with ownership interests. The primary asset of the Custer PGGM CO-JV is a mezzanine loan collateralized by the development of a 444 unit multifamily community in Allen, Texas, a suburb of Dallas.  The mezzanine loan, which as of September 30, 2014 has been fully funded, has an interest rate of 14.5% and matures in 2015. 
 
We enter into interest rate cap agreements for interest rate risk management purposes and not for trading or other speculative purposes.  These interest rate cap agreements have not been designated as hedges. The following table provides a summary of our interest rate caps as of September 30, 2014 (dollar amounts in millions):
 
Notional amount
$
162.7

Range of LIBOR cap rate
2.0% to 4.0%
Range of maturity dates
2016 to 2017
Estimated fair value
$
0.1

 

8.                                      Leasing Activity
 
In addition to multifamily resident units, certain of our consolidated multifamily communities have retail areas, representing approximately 2% of total rentable area of our consolidated multifamily communities.  Future minimum base rental receipts due to us under these non-cancelable retail leases in effect as of September 30, 2014 are as follows (in millions): 
 
 
Future Minimum
Year
 
Lease Receipts
October through December 2014
 
$
0.9

2015
 
3.7

2016
 
3.7

2017
 
3.7

2018
 
3.5

Thereafter
 
29.8

Total
 
$
45.3



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9.                                      Mortgages and Notes Payable

The following table summarizes the carrying amounts of the mortgages and notes payable classified by whether the obligation is ours or that of the applicable consolidated Co-Investment Venture as of September 30, 2014 and December 31, 2013 (dollar amounts in millions and monthly LIBOR at September 30, 2014 is 0.16%):
 
 
 
 
 
 
 
As of September 30, 2014
 
 
September 30,
 
December 31,
 
Wtd. Average
 
 
 
 
2014
 
2013
 
Interest Rates
 
Maturity Dates
Company level (a)
 
 

 
 

 
 
 
 
Fixed rate mortgage payable
 
$
87.3

 
$
87.3

 
3.95%
 
2018 to 2020
Variable rate mortgage payable
 

 
24.0

 
 
Variable rate construction loans payable (b)
 
14.9

 
3.1

 
Monthly LIBOR + 2.10%
 
2017 to 2018
Total Company level
 
102.2

 
114.4

 
 
 
 
Co-Investment Venture level - consolidated (c)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
829.4

 
852.3

 
3.73%
 
2015 to 2020
Variable rate mortgage payable
 
12.0

 
12.2

 
Monthly LIBOR + 2.35%
 
2017
Fixed rate construction loans payable (d)
 
47.6

 
24.6

 
4.17%
 
2016 to 2018
Variable rate construction loan payable (e)
 
95.8

 
18.9

 
Monthly LIBOR + 2.10%
 
2016 to 2018
 
 
984.8

 
908.0

 
 
 
 
Plus: unamortized adjustments from business combinations
 
4.9

 
6.7

 
 
 
 
Total Co-Investment Venture level - consolidated
 
989.7

 
914.7

 
 
 
 
Total consolidated mortgages and notes payable
 
$
1,091.9

 
$
1,029.1

 
 
 
 
 

(a)
Company level debt is defined as debt that is a direct or indirect obligation of the Company or its wholly owned subsidiaries. Company level debt includes the applicable portion of Co-Investment debt where the Company has provided full or partial guarantees for the repayment of the debt.
 
(b)
Includes the amount of the Co-Investment Venture level construction loans payable that is guaranteed by the Company. As of September 30, 2014, the Company has partially guaranteed six loans with total commitments of $259.5 million. These loans include one to two year extension options. Our percentage guarantee on each of these loans ranges from 10% to 25%. The non-recourse portion of the loans outstanding as of September 30, 2014 is reported in the Co-Investment Venture level construction loans payable.

(c)
Co-Investment Venture level debt is defined as debt that is an obligation of the Co-Investment Venture and
not an obligation or contingency for us.

(d)
Includes two loans with total commitments of $84.8 million. One of the construction loans has an option to convert into a permanent loan with a maturity of 2023.

(e)
Includes seven loans with total commitments of $281.4 million. These loans include one to two year extension options. The amount guaranteed by the Company is reported as Company level debt as discussed in footnote (b) above.

As of September 30, 2014, $2.0 billion of the net consolidated carrying value of real estate collateralized the mortgages and notes payable.  We believe we are in compliance with all financial covenants as of September 30, 2014.
 

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As of September 30, 2014, contractual principal payments for our mortgages and notes payable for the five subsequent years and thereafter are as follows (in millions):
 
 
 
 
Co-Investment
 
Total
Year
 
Company Level
 
Venture Level
 
Consolidated
October through December 2014
 
$

 
$
1.7

 
$
1.7

2015
 
0.2

 
83.6

 
83.8

2016
 
0.6

 
182.8

 
183.4

2017
 
8.6

 
231.7

 
240.3

2018
 
37.8

 
191.7

 
229.5

Thereafter
 
55.0

 
293.3

 
348.3

Total
 
$
102.2

 
$
984.8

 
1,087.0

Add: unamortized adjustments from business combinations
 
 

 
 

 
4.9

Total mortgages and notes payable
 
 

 
 

 
$
1,091.9

 
10.                               Credit Facility Payable
 
The $150.0 million credit facility matures on April 1, 2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facility bear interest at a “base rate” based on either the one-month or three-month LIBOR rate, selected at our option, plus an applicable margin which adjusts based on the facility’s debt service requirements. As of September 30, 2014, the applicable margin was 2.08% and the base rate was 0.15% based on one-month LIBOR.  The credit facility also provides for fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% per annum of the total commitment less the greater of 75% of the total commitment or the actual amount outstanding. The minimum usage fee is equal to 75% of the total credit facility times the lowest applicable margin less the margin portion of interest paid during the calculation period.  The loan requires minimum borrowing of $10.0 million and monthly interest-only payments and monthly or annual payment of fees.  We may prepay borrowing tranches at the expiration of the LIBOR interest rate period without any penalty.  Prepayments during a LIBOR interest rate period are subject to a prepayment penalty generally equal to the interest due for the remaining term of the LIBOR interest rate period.
 
Draws under the credit facility are secured by a pool of certain wholly owned multifamily communities.  We have the ability to add and remove multifamily communities from the collateral pool, pursuant to the requirements under the credit facility agreement. We may also add multifamily communities in our discretion in order to increase amounts available for borrowing.  As of September 30, 2014, $166.8 million of the net carrying value of real estate collateralized the credit facility.  The aggregate borrowings under the credit facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting.  As of September 30, 2014, we may make total draws of $150.0 million under the credit facility based upon the value of the collateral pool.
 
The credit facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the credit facility agreement requires us to maintain a consolidated net worth of at least $150.0 million, liquidity of at least $15.0 million and net operating income of the collateral pool to be no less than 155% of the facility debt service cost. Certain prepayments may be required upon a breach of covenants or borrowing conditions.  We believe we are in compliance with all provisions as of September 30, 2014.
 

11.                               Noncontrolling Interests
 
Non-redeemable Noncontrolling Interests
 
Non-redeemable noncontrolling interests for the Co-Investment Venture partners represent their proportionate share of the equity in consolidated real estate ventures.  Each noncontrolling interest is not redeemable by the holder, and accordingly, is reported as equity. Income and losses are allocated to the noncontrolling interest holders based on their effective ownership percentage.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.   


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As of September 30, 2014 and December 31, 2013, non-redeemable noncontrolling interests (“NCI”) consisted of the following, including the direct and non-direct noncontrolling interests ownership ranges where applicable (dollar amounts in millions):
 
 
September 30, 2014
 
December 31, 2013
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
PGGM Co-Investment Partner
 
$
385.2

 
26% to 45%
 
$
293.5

 
26% to 45%
MW Co-Investment Partner
 
148.6

 
45%
 
157.8

 
45%
Developer Partners
 
3.3

 
0% to 10%
 
3.5

 
0% to 6%
Subsidiary preferred units
 
1.9

 
(b)
 
1.4

 
(b)
Total non-redeemable NCI
 
$
539.0

 
 
 
$
456.2

 
 
 

(a)        Effective noncontrolling percentage is based upon the noncontrolling interest’s share of contributed capital. This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements.

(b)
The preferred units have no voting rights.
 
Each noncontrolling interest relates to ownership interests in CO-JVs where we have substantial operational control rights. In the case of the PGGM Co-Investment Partner, their noncontrolling interest includes an interest in the Master Partnership and the PGGM CO-JVs. For PGGM CO-JVs and MW CO-JVs, capital contributions and distributions are generally made pro rata in accordance with these ownership interests; however, the Master Partnership’s and the PGGM CO-JV’s pro rata interests are subject to a promoted interest to us if certain performance returns are achieved. Developer CO-JVs generally have limited participation in contributions and generally only participate in distributions after certain preferred returns are collected by us or the PGGM CO-JVs, as applicable, which in some cases may not be until we have received all of our investment capital. None of these Co-Investment Venture partners have any rights to put or redeem their ownership interest; however, they generally provide for buy/sell rights after certain periods. In certain circumstances the governing documents of the PGGM CO-JV or MW CO-JV may require a sale of the Co-Investment Venture or its subsidiary REIT rather than as an asset sale. For PGGM CO-JVs we have rights in limited circumstances generally related to a listing of our shares or a merger to acquire the PGGM Co-Investment Partner’s interest at the greater of fair value or an amount that would provide the PGGM Co-Investment Partner certain minimum returns on its invested equity.
 
Noncontrolling interests also include between 121 to 125  preferred units issued by a subsidiary of each of the PGGM CO-JVs and the MW CO-JVs in order for such subsidiaries to qualify as a REIT for federal income tax purposes.  The subsidiary preferred units pay an annual distribution of 12.5% on their face value and are senior in priority to all other members’ equity. The PGGM CO-JVs and MW CO-JVs may cause the subsidiary REIT, at their option, to redeem the subsidiary preferred units in whole or in part, at any time for cash at a redemption price of $500 per unit (the face value), plus all accrued and unpaid distributions thereon to and including the date fixed for redemption, plus a premium per unit generally of $50 to $100 for the first year which generally declines in value $25 per unit each year until there is no redemption premium remaining.  The subsidiary preferred units are not redeemable by the unit holders and we have no current intent to exercise our redemption option.  Accordingly, these noncontrolling interests are reported as equity.
 
For the nine months ended September 30, 2014, we paid distributions to noncontrolling interests of $31.0 million, of which $15.9 million was related to operating activity.  For the nine months ended September 30, 2013, we paid distributions to noncontrolling interests of $45.3 million, of which $19.0 million was related to operating activity. The remaining distributions resulted from investing and financing activities, generally related to property sales or proceeds from financings.

On February 28, 2014, we sold approximately 37% noncontrolling interest in two Developer CO-JVs to PGGM for $13.2 million. No gain or loss was recognized in recording these transactions, but a net decrease to additional paid-in capital of $0.8 million was recorded.
 
During the nine months ended September 30, 2014, we formed two new PGGM CO-JVs to develop two separate multifamily communities in California.

On July 31, 2013, we acquired the GP Master Interest in a related party transaction with Behringer for $23.1 million in cash, excluding closing costs, of which $13.8 million related to the partial acquisition of an approximate 1% noncontrolling

22


interest in the Master Partnership’s interest in the PGGM CO-JVs. The remaining $9.3 million was accounted for as a business combination. Additionally, during the nine months ended September 30, 2013, we acquired all of the noncontrolling interests in the Cyan MW CO-JV for cash of $27.9 million and sold a portion of our noncontrolling interest in the Cameron PGGM CO-JV to PGGM for $7.3 million in cash. No gain or loss was recognized in recording these transactions, but a net decrease to additional paid-in capital of $21.8 million was recorded. (See Note 4, “Business Combinations” for a discussion of the acquisition of the GP Master Interest and Note 5, “Real Estate Investments” for a discussion of the subsequent sale of the Cyan multifamily community.)

Redeemable Noncontrolling Interests
 
As of September 30, 2014 and December 31, 2013, redeemable noncontrolling interests (“NCI”) consisted of the following (dollar amounts in millions):
 
 
September 30, 2014
 
December 31, 2013
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
Developer Partners
 
$
30.0

 
0% to 10%
 
$
22.0

 
0% to 20%
 

(a) Effective noncontrolling interest percentage is based upon the noncontrolling interest’s share of contributed capital.  This effective ownership is indicative of, but may differ from, percentages for distributions, contributions or financing requirements. For Co-Investment Ventures where the developer’s equity has been returned, the effective noncontrolling interest percentage is shown as zero.

Developer Partners included in redeemable noncontrolling interests represent ownership interests in Developer CO-JVs by regional or national multifamily developers, which may require that we pay or reimburse our Developer Partners upon certain events.  These amounts include reimbursing partners once certain development milestones are achieved, generally related to entitlements, permits or final budgeted construction costs. They also generally have put options, usually exercisable one year after completion of the development and thereafter, pursuant to which we would be required to acquire their ownership interest at a set price and options to require a sale of the development generally after the seventh year after completion of the development at the then current fair value.  These Developer CO-JVs also include buy/sell provisions, generally available after the tenth year after completion of the development.  Each of these Developer CO-JVs is managed by a subsidiary of ours. As manager, we have substantial operational control rights.  These Developer CO-JVs generally provide that we have a preferred cash flow distribution until we receive certain returns on and of our investment.  All of these Developer Partners also have a back end interest, generally only attributable to distributions related to a property sale or financing. Generally, these noncontrolling interests have no obligation to make any additional capital contributions.

12.                               Stockholders’ Equity
 
Capitalization
 
In connection with our transition to self-management, on July 31, 2013, we issued 10,000 shares of a new Series A non-participating, voting, cumulative, 7.0% convertible preferred stock, par value $0.0001 per share (the “Series A Preferred Stock”), to Behringer. The shares of Series A Preferred Stock entitle the holder to one vote per share on all matters submitted to the holders of the common stock, a liquidation preference equal to $10.00 per share before the holders of common stock are paid any liquidation proceeds, and 7.0% cumulative cash dividends on the liquidation preference and any accrued and unpaid dividends.

As determined and limited pursuant to the Articles Supplementary establishing the Series A Preferred Stock, the Series A Preferred Stock will automatically convert into shares of our common stock upon any of the following triggering events: (a) in connection with a listing of our common stock on a national exchange, (b) upon a change of control of the Company or (c) upon election by the holders of a majority of the then outstanding shares of Series A Preferred Stock on or before July 31, 2018. Notwithstanding the foregoing, if a listing occurs prior to December 31, 2016, such listing (and the related triggering event) will be deemed to occur on December 31, 2016 and if a change of control transaction occurs prior to December 31, 2016, such change of control transaction will not result in a change of control triggering event. Upon a triggering event, all of the shares of Series A Preferred Stock will, in total, generally convert into an amount of shares of our common stock equal in value to 15% of the excess of (i) (a) the per share value of our common stock at the time of the applicable triggering event, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock and assuming no shares of the Series A

23


Preferred Stock are outstanding, multiplied by the number of shares of common stock outstanding on July 31, 2013, plus (b) the aggregate value of distributions (including distributions constituting a return of capital) paid through such time on the shares of common stock outstanding on July 31, 2013 over (ii) the aggregate issue price of those outstanding shares plus a 7% cumulative, non-compounded, annual return on the issue price of those outstanding shares. In the case of a triggering event based on a listing or change of control only, this amount will be multiplied by another 1.15 to arrive at the conversion value.

Stock Plans
 
The Monogram Residential Trust, Inc. Amended and Restated 2006 Incentive Award Plan (the “Incentive Award Plan”) authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards.  A total of 10 million shares has been authorized and reserved for issuance under the Incentive Award Plan as of September 30, 2014.

During 2014, our independent directors and certain executive employees have been granted 248,691 restricted stock units. These restricted stock units generally vest over a three year period. Compensation cost is measured at the grant date based on the estimated fair value at the time of the award being granted ($10.03 per share) and will be recognized as expense over the service period based on the tiered lapse schedule and estimated forfeiture rates. No shares were granted in 2013.

For the three and nine months ended September 30, 2014, we had approximately $0.2 million and $0.6 million, respectively, in compensation costs related to share-based payments including dividend equivalent payments. For the three and nine months ended September 30, 2013, we had no compensation cost related to share-based payments.
 
Distributions 

On August 12, 2014, in connection with the Company’s exploration of a potential listing on a national securities exchange, our board of directors elected to suspend our distribution reinvestment plan (“DRIP”) effective August 24, 2014. On November 4, 2014 in connection with our intent to list our shares of common stock on the NYSE, our board of directors approved the termination of the DRIP. As a result, all distributions paid subsequent to August 24, 2014 were paid in cash and not reinvested in shares of our common stock.
 
Distributions, including those paid by issuing shares under the DRIP (prior to the suspension and subsequent termination of the DRIP) for the three and nine months ended September 30, 2014 and 2013 were as follows (in millions):  
 
 
For the Nine Months Ended September 30,
 
 
2014
 
2013
 
 
Declared (a)
 
Paid (b)
 
Declared (a)
 
Paid (b)
Third quarter
 
$
14.9

 
$
14.9

 
$
14.9

 
$
14.9

Second quarter
 
14.7

 
14.9

 
14.7

 
14.9

First quarter
 
14.6

 
14.6

 
14.5

 
14.5

Total distributions
 
$
44.2

 
$
44.4

 
$
44.1

 
$
44.3

 

(a)         Represents distributions accruing during the period on a daily basis.
 
(b)         The regular distributions that accrued each month were paid in the following month.  Amounts paid include both distributions paid in cash and reinvested pursuant to our DRIP (prior to the suspension and subsequent termination of the DRIP).
 
Our distributions were at a daily amount of $0.000958904 ($0.35 annualized) per share of common stock for all of 2013 and through September 30, 2014. However, starting with the fourth quarter of 2014, we now expect the board of directors will authorize regular distributions to be paid to stockholders of record with respect to a single record date each quarter. Our board of directors has authorized a distribution in the amount of $0.075 per share on all outstanding shares of common stock of the Company for the fourth quarter of 2014. The distribution is payable January 5, 2015 to stockholders of record at the close of business on December 29, 2014.
 
 


24


Share Redemption Program

On August 12, 2014, in connection with the Company’s exploration of a potential listing on a national securities exchange, our board of directors also elected to suspend our share redemption program (“SRP”), effective August 14, 2014. On November 4, 2014 in connection with our intent to list our shares on the NYSE, our board of directors approved the termination of the SRP.

Prior to the suspension and subsequent termination of our SRP, the purchase price per share redeemed under the SRP was generally set at 85% of the current estimated share value pursuant to our valuation policy for ordinary redemptions and at the lesser of the current estimated share value pursuant to our valuation policy and the average price per share paid by the original purchaser of the shares being redeemed, less any special distributions, pursuant to our valuation policy for redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility. Prior to the suspension of our SRP in August 2014 and subsequent termination, we redeemed approximately 1,591,952 common shares at an average price of $8.78 per share for $14.0 million for the nine months ended September 30, 2014. For the nine months ended September 30, 2013, we redeemed approximately 1,684,962 common shares at an average price of $9.46 per share for $15.9 million.

13.                               Transition Expenses
 
On July 31, 2013 (the “Initial Closing”), we entered into a series of agreements and amendments to our existing agreements and arrangements with Behringer, setting forth various terms of and conditions to the modification of the business relationships between us and Behringer. We collectively refer to these agreements as the “Self-Management Transition Agreements.” With the entry into these transactions and the progression to self-management, over time, the Company expects to incur higher direct costs related to compensation and other administration and less reliance on and cost related to Behringer management agreements.

In connection with the Self-Management Transition Agreements, on August 1, 2013, we hired five executives who were previously employees of Behringer and subsequently began hiring other employees.

At the Initial Closing, we issued 10,000 shares of Series A Preferred Stock to Behringer. As part of the consideration for issuing the Series A Preferred Stock, Behringer surrendered all existing 1,000 convertible shares of non-participating, non-voting stock, par value $0.0001 per share, of the Company, which we immediately canceled.

At the Initial Closing, we acquired from Behringer the GP Master Interest in the PGGM Co-Investment Partner for a purchase price of $23.1 million. This acquisition entitles us to a 1% ownership interest and a promoted interest in the cash flows of the Master Partnership and the advisory and incentive fees specified in the PGGM Co-Investment Partner agreements that Behringer would have otherwise been entitled to receive.

At the Initial Closing, we also paid Behringer $2.5 million as reimbursement for its costs and expenses related to the negotiation of the Self-Management Transition Agreements. These expenses are in addition to the expenses that we have incurred on our own behalf for legal and financial advisors in connection with this transaction, which are described below.

Commencing at the Initial Closing and lasting through December 31, 2014, Behringer will be entitled to additional fees with respect to any new investment arrangements between us and certain specified funds or programs pursuant to which we receive an asset management or any similar fee and/or a promote interest or similar security, excluding PGGM (each, a “New Platform”). For each New Platform with certain specified potential future investors, Behringer will be entitled to a fee equal to 2.5% of the total aggregate amount of capital committed by such investor or its affiliates. During 2013 and for the nine months ended September 30, 2014, no New Platform fees were incurred.

Commencing at the Initial Closing, the Self-Management Transition Agreements provide that in certain circumstances, Behringer will rebate to us, or may provide us a credit with respect to, (a) acquisition fees paid pursuant to the amended and restated advisory management agreement and (b) acquisition and development fees paid pursuant to the Self-Management Transition Agreements, in the event that certain existing investments are subsequently structured as a joint venture or co-investment. For the nine months ended September 30, 2014, $2.5 million of acquisition fees was rebated to us. No amounts were credited for the three months ended September 30, 2014 or for the nine months ended September 30, 2013.

During the period from the Initial Closing through September 30, 2014, Behringer provided general transition services in support of our transition to self-management for a total cost of $7.2 million, which consisted of monthly installments of $0.4 million through September 30, 2014 and a payment of $1.25 million on June 30, 2014. For the three and

25


nine months ended September 30, 2014, these general transition payments totaled $1.3 million and $5.1 million, respectively. For both the three and nine months ended September 30, 2013, these general transition payments totaled $0.9 million.

For the period from August 1, 2013 through June 30, 2014, Behringer was paid fees and reimbursements under the terms of amended advisory and property management agreements that included a reduction of certain fees and expenses paid to Behringer under the prior agreements, which are described in Note 16, “Related Party Arrangements.” Regarding asset management fees and property management expense reimbursements, we received a monthly reduction of $150,000 and $50,000, respectively, from the amount that otherwise would have been payable.

We consummated the second and final closing of the Self-Management Transition Agreements on June 30, 2014 (the “Self-Management Closing”), terminating the advisory and property management services with Behringer and paying Behringer $3.5 million for certain intangible assets, rights and contracts, $1.25 million as part of the general transition services described above and a monthly installment of $0.4 million for general transition services. Effective July 1, 2014, we hired corporate and property management employees who were previously employees of Behringer. We also reconciled certain miscellaneous closing matters related to employee benefits of former Behringer employees hired by us, transfers of office equipment and similar items.

Behringer will continue to provide shareholder services from June 30, 2014 through June 30, 2016 at a monthly cost based on the number of stockholder accounts. We may also contract with Behringer for additional services.

In addition to the above transactions, the Company incurred other expenses related to our transition to self-management and the exploration of a listing on the NYSE, primarily related to Special Committee and Company legal and financial advisors and general transition (primarily staffing, name change, insurance, information technology and facilities).

The components of our transition expenses are as follows (in millions):