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EX-31.2 - EXHIBIT 31.2 - Monogram Residential Trust, Inc.exhibit312033115.htm
EX-32.1 - EXHIBIT 32.1 - Monogram Residential Trust, Inc.exhibit321033115.htm
EX-31.1 - EXHIBIT 31.1 - Monogram Residential Trust, Inc.exhibit311033115.htm
EXCEL - IDEA: XBRL DOCUMENT - Monogram Residential Trust, Inc.Financial_Report.xls

 

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 March 31, 2015
 
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: 000-36750
 
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 April 30, 2015, the Registrant had 166,516,021 shares of common stock outstanding.
 



MONOGRAM RESIDENTIAL TRUST, INC.
Form 10-Q
Quarter Ended March 31, 2015
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Monogram Residential Trust, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)(Unaudited) 
 
 
March 31,
2015
 
December 31,
2014
Assets
 
 

 
 

Real estate
 
 

 
 

Land ($58,938 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
$
379,485

 
$
389,885

Buildings and improvements ($242,736 and $227,817 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
1,972,480

 
2,033,819

 
 
2,351,965

 
2,423,704

Less accumulated depreciation ($7,407 and $4,605 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
(291,366
)
 
(280,400
)
Net operating real estate
 
2,060,599

 
2,143,304

Construction in progress, including land ($654,679 and $582,299 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
811,735

 
716,930

Total real estate, net
 
2,872,334

 
2,860,234

 
 
 
 
 
Assets associated with real estate held for sale
 
76,601

 

Cash and cash equivalents
 
70,379

 
116,407

Intangibles, net
 
20,440

 
21,485

Other assets, net
 
114,496

 
110,282

Total assets
 
$
3,154,250

 
$
3,108,408

 
 
 
 
 
Liabilities and equity
 
 

 
 

 
 
 
 
 
Liabilities
 
 

 
 

Mortgages and notes payable ($322,033 and $227,310 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
$
1,232,200

 
$
1,186,481

Credit facilities payable
 
35,000

 
10,000

Construction costs payable ($70,698 and $63,393 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
85,097

 
75,623

Accounts payable and other liabilities
 
20,893

 
28,053

Deferred revenues, primarily lease revenues, net
 
18,587

 
18,955

Distributions payable
 
12,576

 
12,485

Tenant security deposits
 
4,580

 
4,586

Obligations associated with real estate held for sale
 
741

 

Total liabilities
 
1,409,674

 
1,336,183

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable noncontrolling interests ($27,444 related to VIEs as of March 31, 2015 and December 31, 2014, respectively)
 
32,043

 
32,012

 
 
 
 
 
Equity
 
 

 
 

Preferred stock, $0.0001 par value per share; 125,000,000 shares authorized as of March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014
 

 

Common stock, $0.0001 par value per share; 875,000,000 shares authorized, 166,517,649 and 166,467,726 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
17

 
17

Additional paid-in capital
 
1,493,184

 
1,492,799

Cumulative distributions and net income (loss)
 
(306,671
)
 
(293,350
)
Total equity attributable to common stockholders
 
1,186,530

 
1,199,466

Non-redeemable noncontrolling interests
 
526,003

 
540,747

Total equity
 
1,712,533

 
1,740,213

Total liabilities and equity
 
$
3,154,250

 
$
3,108,408

 
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 March 31,
 
 
2015
 
2014
Rental revenues
 
$
56,643

 
$
50,182

 
 
 
 
 
Expenses
 
 
 
 
Property operating expenses
 
15,675

 
13,041

Real estate taxes
 
8,569

 
7,153

Asset management fees
 

 
1,880

General and administrative expenses
 
4,776

 
3,360

Acquisition expenses
 

 
(17
)
   Transition expenses
 

 
520

Investment and development expenses
 
231

 
248

Interest expense
 
5,997

 
5,331

Depreciation and amortization
 
25,380

 
22,977

Total expenses
 
60,628

 
54,493

 
 
 
 
 
Interest income
 
2,597

 
2,446

Loss on early extinguishment of debt
 

 
(230
)
Equity in income of investments in unconsolidated real estate joint ventures
 
186

 
204

Other income
 
25

 
200

Loss from continuing operations before gain on sale of real estate
 
(1,177
)
 
(1,691
)
Gain on sale of real estate
 

 
16,167

 
 
 
 
 
Net income (loss)
 
(1,177
)
 
14,476

 
 
 
 
 
Net (income) loss attributable to non-redeemable noncontrolling interests
 
346

 
(7,051
)
Net income (loss) available to the Company
 
(831
)
 
7,425

Dividends to preferred stockholders
 
(2
)
 
(2
)
Net income (loss) attributable to common stockholders
 
$
(833
)
 
$
7,423

 
 
 
 
 
Weighted average number of common shares outstanding - basic
 
166,509

 
168,714

Weighted average number of common shares outstanding - diluted
 
166,509

 
168,919

 
 
 
 
 
Basic and diluted earnings (loss) per common share
 
$
(0.01
)
 
$
0.04

 
 
 
 
 
Distributions declared per common share
 
$
0.08

 
$
0.09

 
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, 2014
 
10

 
$

 
168,320

 
$
17

 
$
1,508,655

 
$
456,205

 
$
(230,554
)
 
$
1,734,323

Net income
 

 

 

 

 

 
7,051

 
7,425

 
14,476

Redemptions of common stock
 

 

 
(794
)
 

 
(7,000
)
 

 

 
(7,000
)
Sale of a noncontrolling interest
 

 

 

 

 
(842
)
 
15,008

 

 
14,166

Contributions by noncontrolling interests
 

 

 

 

 

 
19,453

 

 
19,453

Amortization of stock-based compensation
 

 

 

 

 
174

 

 

 
174

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common stock - regular
 

 

 

 

 

 

 
(14,561
)
 
(14,561
)
Noncontrolling interests
 

 

 

 

 

 
(20,714
)
 

 
(20,714
)
Stock issued pursuant to distribution reinvestment plan, net
 

 

 
798

 

 
7,602

 

 

 
7,602

Balance at March 31, 2014
 
10

 
$

 
168,324

 
$
17

 
$
1,508,589

 
$
477,003

 
$
(237,690
)
 
$
1,747,919

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
 
10

 
$

 
166,468

 
$
17

 
$
1,492,799

 
$
540,747

 
$
(293,350
)
 
$
1,740,213

Net loss
 

 

 

 

 

 
(346
)
 
(831
)
 
(1,177
)
Contributions by noncontrolling interests
 

 

 

 

 

 
8,725

 

 
8,725

Issuance of common and restricted shares, net
 

 

 
50

 

 
(119
)
 

 

 
(119
)
Amortization of stock-based compensation
 

 

 

 

 
504

 

 

 
504

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Common stock - regular
 

 

 

 

 

 

 
(12,488
)
 
(12,488
)
Noncontrolling interests
 

 

 

 

 

 
(23,123
)
 

 
(23,123
)
Preferred stock
 

 

 

 

 

 

 
(2
)
 
(2
)
Balance at March 31, 2015
 
10

 
$

 
166,518

 
$
17

 
$
1,493,184

 
$
526,003

 
$
(306,671
)
 
$
1,712,533

 
See Notes to Consolidated Financial Statements.





5


Monogram Residential Trust, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
 
For the Three Months Ended 
 March 31,
 
 
2015
 
2014
Cash flows from operating activities
 
 

 
 

Net income (loss)
 
$
(1,177
)
 
$
14,476

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Gain on sale of real estate
 

 
(16,167
)
Loss on early extinguishment of debt
 

 
230

Equity in income of investments in unconsolidated real estate joint ventures
 
(186
)
 
(204
)
Distributions received from investment in unconsolidated real estate joint venture
 
125

 

Depreciation
 
23,473

 
21,371

Amortization of deferred financing costs and debt premium/discount
 
284

 
(126
)
Amortization of intangibles
 
1,046

 
1,051

Amortization of deferred revenues, primarily lease revenues, net
 
(359
)
 
(357
)
Amortization of stock-based compensation
 
504

 
174

Other, net
 
(8
)
 
34

Changes in operating assets and liabilities:
 
 

 
 

Accounts payable and other liabilities
 
(6,681
)
 
(7,527
)
Other assets
 
(2,493
)
 
(2,278
)
Cash provided by operating activities
 
14,528

 
10,677

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Additions to real estate:
 
 

 
 

Additions to existing real estate
 
(1,551
)
 
(1,232
)
Construction in progress, including land
 
(99,418
)
 
(77,572
)
Proceeds from sale of real estate, net
 

 
33,134

Acquisitions of noncontrolling interests
 

 
(3,898
)
Advances on notes receivable
 

 
(3,608
)
Escrow deposits
 
(865
)
 
3,669

Other, net
 
(118
)
 
(87
)
Cash used in investing activities
 
(101,952
)
 
(49,594
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Mortgage and notes payable proceeds
 
100,747

 
24,356

Mortgage and notes payable principal payments
 
(54,489
)
 
(1,132
)
Proceeds from credit facilities
 
25,000

 

Finance costs paid
 
(2,945
)
 
(678
)
Contributions from noncontrolling interests
 
8,725

 
33,681

Distributions paid on common stock - regular
 
(12,485
)
 
(6,963
)
Distributions paid to noncontrolling interests
 
(23,038
)
 
(20,638
)
Redemptions of common stock
 

 
(7,000
)
Other, net
 
(119
)
 

Cash provided by financing activities
 
41,396

 
21,626

 
 
 
 
 
Net change in cash and cash equivalents
 
(46,028
)
 
(17,291
)
Cash and cash equivalents at beginning of period
 
116,407

 
319,368

Cash and cash equivalents at end of period
 
$
70,379

 
$
302,077

 
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 stabilized operating properties and properties in various phases of development, with a focus on communities in select markets across the United States. These include luxury mid-rise, high-rise and garden style multifamily communities.  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 real estate-related securities, including 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 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 and began operating as a self-managed, independent company. On November 21, 2014, we listed our shares of common stock on the New York Stock Exchange (the “NYSE”) under the ticker symbol “MORE.”

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, bridge 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 March 31, 2015, we have equity and debt investments in 56 multifamily communities, of which 38 are stabilized operating multifamily communities and 18 are in various stages of lease up, pre-development or 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 March 31, 2015, 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 Venture 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 Developer Partners as “Developer CO-JVs.” Certain PGGM CO-JVs that also include Developer Partners are referred to as

7


PGGM CO-JVs. We are the 1% general partner of Monogram Residential Master Partnership I LP (the “Master Partnership” or the PGGM Co-Investment Partner) and PGGM is the 99% limited partner.

The table below presents a summary of our Co-Investment Ventures as of both March 31, 2015 and December 31, 2014. The effective ownership ranges are based on our participation in the distributable operating cash from the multifamily investment. This effective ownership is indicative of, but may differ over time 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.
Co-Investment Structure
 
Number of Multifamily Communities
 
Our Effective
Ownership
PGGM CO-JVs (a)
 
30

 
50% to 74%
MW CO-JVs
 
14

 
55%
Developer CO-JVs
 
2

 
100%
Total
 
46

 
 
 
 
 
 
 
 

(a)
Includes one unconsolidated investment as of March 31, 2015 and December 31, 2014. Also, as of March 31, 2015 and December 31, 2014, includes Developer Partners in 19 multifamily communities.   In May 2015, we acquired noncontrolling interests and controlling interests in seven PGGM CO-JVs. See Note 17, “Subsequent Events” for further information.

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 March 31, 2015, 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, 2014 which was filed with the Securities and Exchange Commission (“SEC”) on March 26, 2015. 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 March 31, 2015 and consolidated statements of operations, equity and cash flows for the periods ended March 31, 2015 and 2014 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 March 31, 2015 and December 31, 2014 and our consolidated results of operations and cash flows for the periods ended March 31, 2015 and 2014. 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, as defined by GAAP, 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

8


estimates and judgments about our rights, obligations, and economic interests in such entities as well as the same of the other owners.  See Note 5, “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 6, “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 net operating income capitalization rates, 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 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

9


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 March 31, 2015.
 
Developments
 
We capitalize project costs related to the development and construction of real estate (including interest, real estate 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 when 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.
 
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 months ended March 31, 2015 or 2014.
 
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

10


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 months ended March 31, 2015 or 2014.
 
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 elected to early adopt 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 disposition will have a major effect on our operations and financial results and will therefore qualify as a strategic shift. If the disposition represents a strategic shift, it will be classified as discontinued operations in our consolidated statements of operations for all periods presented. If the disposition does not represent a strategic shift, it will be presented in continuing operations in our consolidated statements of operations.

We classify multifamily communities as held for sale when certain criteria are met, in accordance with GAAP. At that time, we present the assets and obligations associated with the real estate held for sale separately in our consolidated balance sheet, and we cease recording depreciation and amortization expense related to that multifamily community. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.
   
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 March 31, 2015 and December 31, 2014, cash and cash equivalents include $25.4 million and $42.0 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 other individual Co-Investment Ventures.  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 or (b) the redemption value with subsequent adjustments.  The redeemable noncontrolling interests are temporary equity not within our control and are 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.

11


 
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, 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 three months ended March 31, 2015 and 2014, 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.
 
Transition Expenses

Transition expenses include expenses directly and specifically 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 our listing on the NYSE and payments to our former external advisor in connection with the transition to self-management discussed further in Note 12, “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. 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 months ended March 31, 2015 or 2014.
 
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 March 31, 2015 or December 31, 2014.
 
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.
 

12


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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, 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, which includes restricted stock units and restricted stock awards. Compensation expense associated with the stock-based plan 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 excluding any unvested restricted stock awards. 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 2015 any common stock equivalents were anti-dilutive.

For all periods presented, the preferred stock was 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.
 
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.
 

13


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 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 May 2014, the Financial Accounting Standards Board (“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 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.

In January 2015, the FASB issued guidance simplifying income statement presentation by eliminating the concept of extraordinary items. An entity will no longer be allowed to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is unusual in nature and occurs infrequently. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015 with early adoption permitted and may be applied either prospectively or retrospectively. We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2015, the FASB issued updated guidance related to accounting for consolidation of certain limited partnerships. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2015, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements when adopted.

In April 2015, the FASB issued guidance requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this guidance is permitted for financial statements that have not been previously issued, and an entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. We are currently evaluating the impact this guidance will have on our consolidated financial statements when adopted.


4.                                      Real Estate Investments
 
Real Estate Investments and Intangibles and Related Depreciation and Amortization
 
As of March 31, 2015 and December 31, 2014, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):
 

14


 
 
March 31, 2015
 
December 31, 2014
 
 
Buildings
 
Intangibles
 
Buildings
 
Intangibles
 
 
and
 
In-Place
 
Other
 
and
 
In-Place
 
Other
 
 
Improvements
 
Leases
 
Contractual
 
Improvements
 
Leases
 
Contractual
Cost
 
$
1,972.5

 
$
40.7

 
$
25.6

 
$
2,033.8

 
$
40.7

 
$
25.6

Less: accumulated depreciation and amortization
 
(291.4
)
 
(38.4
)
 
(7.5
)
 
(280.4
)
 
(38.3
)
 
(6.5
)
Net
 
$
1,681.1

 
$
2.3

 
$
18.1

 
$
1,753.4

 
$
2.4

 
$
19.1

 
Depreciation expense for the three months ended March 31, 2015 and 2014 was approximately $23.4 million and $21.4 million, respectively.
 
Cost of intangibles relates to the value of in-place leases and other contractual intangibles.  Other contractual intangibles as of both March 31, 2015 and December 31, 2014 include $9.2 million of intangibles, primarily asset management and related fee revenue services and contracts related to our acquisition of a 1% general partner interest in 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 March 31, 2015 and 2014 was approximately $1.0 million and $1.1 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
April through December 2015
 
$
1.8

2016
 
1.4

2017
 
1.4

2018
 
0.5

2019
 
0.5


Developments 

For the three months ended March 31, 2015 and 2014, we capitalized the following amounts of interest, real estate taxes and overhead related to our developments (in millions):
 
 
For the Three Months Ended 
 March 31,
 
 
2015
 
2014
Interest
 
$
4.8

 
$
4.1

Real estate taxes
 
1.5

 
1.5

Overhead
 
0.2

 
0.2


Sales of Real Estate Reported in Continuing Operations
 
The following table presents our sale of real estate for the three months ended March 31, 2014 (in millions). There were no sales of real estate for the three months ended March 31, 2015.

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

 
 
 
 
 
 
 
 
 


15


The following table presents net income related to the Tupelo Alley multifamily community for the three months ended March 31, 2014 and includes the gain on sale of real estate (in millions):
 
 
For the Three Months Ended 
 March 31, 2014
Net income (loss) from multifamily community sold in 2014
 
$
15.8

Less: net income attributable to noncontrolling interest
 
(7.2
)
Net income (loss) attributable to common stockholders
 
$
8.6

 
 
 

Real Estate Held for Sale

As of March 31, 2015, we had a 298-unit multifamily community, Burnham Pointe, located in Chicago, IL, which was classified as real estate held for sale. A purchase and sale agreement was signed in February 2015 for a gross sales price of $126.0 million. The agreement is subject to various closing conditions. We had no real estate held for sale as of December 31, 2014. The major classes of assets and obligations associated with real estate held for sale are as follows (in millions):

 
 
 
March 31, 2015
Land
 
$
10.4

Buildings and improvements, net of approximately $12.4 million in accumulated depreciation
 
65.7

Other assets, net
 
0.5

 
Assets associated with real estate held for sale
 
$
76.6

 
 
 
 
Accounts payable and other liabilities
 
$
0.7

 
Obligations associated with real estate held for sale
 
$
0.7



5.                                      Variable Interest Entities
 
As of March 31, 2015 and December 31, 2014, we have concluded that we are the primary beneficiary of 15 VIEs.  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 the inception of each Property Entity, we had determined that none of the Co-Investment Ventures were VIEs and because we were the general partner and/or managing member (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 from 2012 through the present, 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%.

The significant amounts of assets and liabilities related to our consolidated VIEs are identified parenthetically on our accompanying consolidated balance sheets. Twelve VIEs, all of which are actively developing or operating multifamily communities, have closed aggregate construction financing commitments of $587.9 million as of March 31, 2015, which we expect to be substantially drawn on during the construction of the developments. As of March 31, 2015, $322.0 million has been drawn under these construction loans. For ten of these construction loans, we have provided partial payment guarantees ranging from 10% to 25% of the total construction loan. The total commitment of these ten construction loans is $534.7 million, of which $272.2 million is outstanding as of March 31, 2015. 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 multifamily community. See Note 8, “Mortgages and Notes Payable” for further information on our construction loans.  The total assets of the VIEs are $971.7 million and $906.9 million as of March 31, 2015 and December 31, 2014, respectively, $654.7 million and $582.3 million of which is reflected in construction in progress, respectively. The total net operating real estate of the VIEs is $294.3 million and $282.1 million as of March 31, 2015 and December 31, 2014, respectively. 
 

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6.                                      Other Assets
 
The components of other assets are as follows (in millions):
 
 
March 31, 2015
 
December 31, 2014
Notes receivable, net (a)
 
$
59.8

 
$
59.8

Escrows and restricted cash
 
7.9

 
8.0

Deferred financing costs, net
 
18.8

 
17.4

Resident, tenant and other receivables
 
16.2

 
14.0

Prepaid assets, deposits and other assets
 
6.7

 
6.1

Investment in unconsolidated real estate joint venture
 
5.1

 
5.0

Total other assets
 
$
114.5

 
$
110.3

 
 

(a)
Notes receivable include mezzanine loans, primarily related to multifamily development projects.  As of March 31, 2015, the weighted average interest rate is 14.7% and the remaining years to scheduled maturity is 0.8 years. Notes receivable are all generally pre-payable at the option of the borrowers.

7.                                      Leasing Activity
 
In addition to multifamily residential units, certain of our consolidated multifamily communities have retail areas representing approximately 1% of total rentable area of our consolidated multifamily communities. Future minimum base rental receipts due to us under these non-cancelable retail leases with initial terms greater than one year in effect as of March 31, 2015 are as follows (in millions): 
 
 
Future Minimum
Year
 
Lease Receipts
April through December 2015
 
$
2.9

2016
 
3.8

2017
 
3.8

2018
 
3.6

2019
 
3.6

Thereafter
 
26.4

Total
 
$
44.1



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8.                                      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 March 31, 2015 and December 31, 2014 (dollar amounts in millions and monthly LIBOR at March 31, 2015 is 0.18%):
 
 
 
 
 
 
 
As of March 31, 2015
 
 
March 31,
 
December 31,
 
Wtd. Average
 
 
 
 
2015
 
2014
 
Interest Rates
 
Maturity Dates
Company level (a)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
$
87.2

 
$
87.2

 
3.95%
 
2018 to 2020
Variable rate construction loans payable (b)
 
50.0

 
33.0

 
Monthly LIBOR + 2.12%
 
2017 to 2018
Total Company level
 
137.2

 
120.2

 
 
 
 
Co-Investment Venture level - consolidated (c)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
773.3

 
827.7

 
3.70%
 
2015 to 2020
Variable rate mortgage payable
 
11.9

 
12.0

 
Monthly LIBOR + 2.35%
 
2017
Fixed rate construction loans payable (d)
 
63.1

 
57.0

 
4.14%
 
2016 to 2018
Variable rate construction loans payable (e)
 
242.9

 
165.3

 
Monthly LIBOR + 2.10%
 
2016 to 2018
 
 
1,091.2

 
1,062.0

 
 
 
 
Plus: unamortized adjustments from business combinations
 
3.8

 
4.3

 
 
 
 
Total Co-Investment Venture level - consolidated
 
1,095.0

 
1,066.3

 
 
 
 
Total consolidated mortgages and notes payable
 
$
1,232.2

 
$
1,186.5

 
 
 
 
 

(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 March 31, 2015, the Company has partially guaranteed ten loans with total commitments of $534.7 million. These loans include one to two year extension options. Our percentage guarantee on each of these loans ranges from 10% to 25% and the amount of our current guarantee and the maximum guarantee based on the commitment as of March 31, 2015 is $50.0 million and $103.9 million, respectively. The non-recourse portion of the loans outstanding as of March 31, 2015 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 eleven loans with total commitments of $556.6 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 March 31, 2015, $2.5 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 March 31, 2015.
 

18


As of March 31, 2015, 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
April through December 2015
 
$
0.2

 
$
29.1

 
$
29.3

2016
 
0.6

 
185.5

 
186.1

2017
 
14.6

 
266.8

 
281.4

2018
 
66.8

 
316.4

 
383.2

2019
 
1.1

 
219.4

 
220.5

Thereafter
 
53.9

 
74.0

 
127.9

Total
 
$
137.2

 
$
1,091.2

 
1,228.4

Add: unamortized adjustments from business combinations
 
 

 
 

 
3.8

Total mortgages and notes payable
 
 

 
 

 
$
1,232.2

 
9.                               Credit Facilities Payable
 
We have two credit facilities as of March 31, 2015: a $150 million credit facility (the “$150 Million Facility”) and a $200 million revolving credit facility (the “$200 Million Facility”). The following table presents the amounts outstanding under the two credit facilities as of March 31, 2015 and December 31, 2014 (dollar amounts in millions, and monthly LIBOR at March 31, 2015 is 0.18%):
 
 
 
Balance Outstanding
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
 
Interest Rate as of March 31, 2015
 
Maturity Date
$150 Million Facility
 
$
35.0

 
$
10.0

 
Monthly LIBOR + 2.08%
 
April 1, 2017
$200 Million Facility
 

 

 
Monthly LIBOR + 2.50%
 
January 14, 2019
 
Total
 
$
35.0

 
$
10.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 

The $150 Million Facility matures on April 1, 2017, when all unpaid principal and interest is due.  Borrowing tranches under the $150 Million 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 March 31, 2015, the applicable margin was 2.08% and the base rate was 0.18% based on one-month LIBOR, which adjusts based on debt service coverage, as defined.  The $150 Million Facility also provides for fees based on unutilized amounts and minimum usage.  The loan requires minimum borrowing of $10.0 million and monthly interest-only payments and monthly or annual payment of fees. 
 
Draws under the $150 Million 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 March 31, 2015, $164.0 million of the net carrying value of real estate collateralized the $150 Million Facility.  The aggregate borrowings under the $150 Million 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 March 31, 2015, we may make total draws of $150 million under the $150 Million Facility based upon the value of the collateral pool. If the multifamily community classified as held for sale as of March 31, 2015, is sold, our availability to draw would be reduced to approximately $87 million, until such time as the collateral pool is restored. We currently intend to restore the collateral pool to the pre-sale availability.
 
The $150 Million Facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the $150 Million 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 March 31, 2015.


19


In January 2015, we entered into the $200 Million Facility. The $200 Million Facility matures on January 14, 2019, and may be extended for an additional one year term at our option. Borrowing tranches bear interest at rates based on defined leverage ratios, which as of March 31, 2015 would be LIBOR + 2.50%. The $200 Million Facility also provides for fees based on unutilized amounts and minimum usage. We may increase the size of the $200 Million Facility from $200 million up to a total of $400 million after satisfying certain conditions.

Draws under the $200 Million Facility are primarily supported by equity pledges of our wholly owned subsidiaries and are secured by a first mortgage lien and an assignment of leases and rents against two wholly owned multifamily communities and any properties later added by us, in addition to a first priority perfected assignment of a portion of certain of our notes receivable.

The $200 Million Facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions. In particular, the $200 Million Facility agreement requires us to maintain a consolidated net worth of at least $1.16 billion, consolidated total indebtedness to total gross asset value of less than 65%, and adjusted consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated fixed charges of not less than 1.50 to 1. Beginning December 31, 2015, our $200 Million Facility agreement may also limit our ability to pay distributions in excess of 95% of our funds from operations generally calculated in accordance with the current definition of funds from operations adopted by the National Association of Real Estate Investment Trusts. For the three months ended March 31, 2015, our declared distributions were 83% of such defined funds from operations during such period. We believe we are in compliance with all provisions of the $200 Million Facility agreement as of March 31, 2015.


10.                               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.   

As of March 31, 2015 and December 31, 2014, 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):
 
 
March 31, 2015
 
December 31, 2014
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
PGGM Co-Investment Partner
 
$
377.8

 
26% to 45%
 
$
390.5

 
26% to 45%
MW Co-Investment Partner
 
142.6

 
45%
 
144.9

 
45%
Developer Partners
 
3.5

 
0%
 
3.4

 
0%
Subsidiary preferred units
 
2.1

 
(b)
 
1.9

 
(b)
Total non-redeemable NCI
 
$
526.0

 
 
 
$
540.7

 
 
 

(a)        Effective noncontrolling percentage is based upon the noncontrolling interest’s participation in distributable operating cash. This effective ownership is indicative of, but may differ over time from, percentages for distributions, contributions or financing requirements.

(b)
The effective NCI for the preferred units is not meaningful and 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

20


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 an asset sale.

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 fixed 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 as of March 31, 2015, we have no current intent to exercise our redemption option.  Accordingly, these noncontrolling interests are reported as equity.

For the three months ended March 31, 2015 and 2014, we paid the following distributions to noncontrolling interests (in millions):
 
 
For the Three Months Ended 
 March 31,
 
 
2015
 
2014
Distributions paid to noncontrolling interests:
 
 
 
 
Operating activities
 
$
6.0

 
$
5.7

Investing and financing activities
 
17.0

 
14.9

Total
 
$
23.0

 
$
20.6

 
 
 
 
 

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.
 
In May 2015, we acquired noncontrolling interests and controlling interests in seven PGGM CO-JVs. See Note 17, “Subsequent Events” for further information.


Redeemable Noncontrolling Interests
 
As of March 31, 2015 and December 31, 2014, redeemable noncontrolling interests (“NCI”) consisted of the following (dollar amounts in millions):
 
 
March 31, 2015
 
December 31, 2014
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
Developer Partners
 
$
32.0

 
0% to 10%
 
$
32.0

 
0% to 10%
 

(a) Effective noncontrolling interest percentage is based upon the noncontrolling interest’s participation in distributable operating cash.  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

21


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.


11.                               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 on the earlier of December 31, 2016, or the election by the holders of a majority of the then outstanding shares of Series A Preferred Stock. At conversion, 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 17.25% of the excess, if any, of (i) (a) the per share value of our common stock at the time of conversion, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock and assuming no shares of the Series A 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. The conversion option terminates December 31, 2016.

Stock Plans
 
Our Second Amended and Restated 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 20 million shares has been authorized for issuance under the Incentive Award Plan as of March 31, 2015.

Restricted Stock Units

As of March 31, 2015, we had 638,800 restricted stock units outstanding, held by our directors and certain executive employees. These restricted stock units generally vest over a three year period. The following is a summary of the number of restricted stock units issued, exercised and outstanding as of March 31, 2015 and 2014:

 
 
March 31, 2015
 
March 31, 2014
Outstanding at the beginning of the period
254,691

 
6,000

Issued (a)
 
424,799

 
239,220

Exercised
 
(40,690
)
 

Outstanding at the end of the period
 
638,800

 
245,220

 
 
 
 
 

(a)
Units issued in 2015 had a grant price of $9.42 per unit. Units issued in 2014 had a grant price of $10.03 per unit. As of March 31, 2015, 82,897 units are vested.


22


Restricted Stock

As of March 31, 2015, we had 22,521 shares of restricted stock outstanding, held by employees. Restrictions on these shares lapse in equal increments over the three-year period following the grant date. Compensation cost is measured at the grant date, based on the estimated fair value of the award and is recognized as expense over the service period based on a tiered lapse schedule and estimated forfeiture rates. The following is a summary of the restricted stock issued, forfeited and outstanding as of March 31, 2015 and 2014:
 
 
March 31, 2015
 
March 31, 2014
Outstanding at the beginning of the year
 

 

Issued (a)
 
25,777

 

Forfeited
 
(3,256
)
 

Outstanding at the end of the period
 
22,521

 

 
 
 
 
 

(a)
Shares issued in 2015 had a grant price of $9.21 per share.

For the three months ended March 31, 2015 and 2014, we had approximately $0.5 million and $0.2 million, respectively, in compensation costs related to share-based payments including dividend equivalent payments.

Distributions 

On August 12, 2014, in anticipation of the Company’s 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, 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.

From April 1, 2012 through September 30, 2014, our distributions were in a daily amount of $0.000958904 ($0.35 annualized) per share of common stock. Beginning with the fourth quarter of 2014, the board of directors began to authorize regular distributions to be paid to stockholders of record with respect to a single record date each quarter. Our board of directors 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 was paid on January 5, 2015 to stockholders of record at the close of business on December 29, 2014. Our board of directors also authorized a distribution in the amount of $0.075 per share on all outstanding shares of common stock of the Company for the first quarter of 2015. The distribution was paid on April 8, 2015 to stockholders of record at the close of business on March 31, 2015.

Share Redemption Program

On August 12, 2014, in anticipation of the Company’s listing on a national securities exchange, our board of directors also elected to suspend our share redemption program (“SRP”), effective August 14, 2014, and on November 4, 2014, our board of directors approved the termination of the SRP. For the three months ended March 31, 2014, we redeemed approximately 794,188 common shares at an average price of $8.81 per share for $7.0 million.

12.                               Transition Expenses
 
On July 31, 2013 (the “Initial Closing”), we entered into a series of agreements and amendments to our then-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.” From the Initial Closing through June 30, 2014, we hired executives and staff who were previously employees of Behringer and began hiring other employees, completing our transition to a self-managed company.

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, acquisition fees paid pursuant to the amended and restated advisory management agreement. For the three months ended March 31, 2015 and 2014, $0.1 million and $2.5 million, respectively, of acquisition fees were credited to us.


23


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. For the three months ended March 31, 2014, $0.1 million was expensed.

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

The table below represents the components of our transition expenses for the three months ended March 31, 2014 (in millions). We did not incur any transition expenses for the three months ended March 31, 2015.
 
 
For the Three Months Ended 
 March 31, 2014
Special Committee and Company legal and financial advisors
 
$
0.2

General transition services:
 
 
Behringer
 
0.2

Other service providers
 
0.1

Total transition expenses
 
$
0.5


13.                               Commitments and Contingencies
 
All of our Co-Investment Ventures include buy/sell provisions.  Under most of these provisions and during specific periods, a partner could make an offer to purchase the interest of the other partner and the other partner would have the option to accept the offer or purchase the offering partner’s interest at that price.  As of March 31, 2015, no such buy/sell offers are outstanding.
 
In the ordinary course of business, the multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below market rent, which is determined by a local or national authority. In certain arrangements, a local or national housing authority makes payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the California housing authority will make level annual payments of approximately $2.0 million through 2028 and no reimbursement for the remaining 20-year period. We may also be required to reimburse the California housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of $14.0 million based on the fair value of the terms over the life of the agreement.  In addition, we record rental revenue from the California housing authority on a straight-line basis, deferring a portion of the collections as deferred lease revenues. As of March 31, 2015 and December 31, 2014, we have approximately $18.0 million and $18.3 million, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.

As of March 31, 2015, we have entered into construction and development contracts with $309.5 million remaining to be paid.  These construction costs are expected to be paid during the completion of the development and construction period, generally within 24 months.

Future minimum lease payments due on our lease commitment payables, primarily related to our corporate office lease which expires in 2024, are as follows (in millions):
 
 
Future Minimum Lease Payments
April 2015 through December 2015
 
$
0.5

2016
 
0.6

2017
 
0.8

2018
 
0.8

2019
 
0.8

Thereafter
 
4.0

Total
 
$
7.5



24


We are also subject to various legal proceedings and claims which arise in the ordinary course of business. Matters which relate to property damage or general liability claims are generally covered by insurance. While the resolution of these legal proceedings and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.

14.                               Fair Value of Derivatives and Financial Instruments
 
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
In connection with our measurements of fair value related to financial instruments, there are generally not available observable market price inputs for substantially the same items.  Accordingly, these are classified as Level 3, and we make assumptions and use various estimates and pricing models, including, but not limited to, the discount and interest rates used to determine present values. These estimates are from the perspective of market participants. A change in these estimates and assumptions could be material to our results of operations and financial condition.

For the three months ended March 31, 2015 and 2014, we had no fair value adjustments on a recurring or nonrecurring basis.

Financial Instruments Not Carried at Fair Value
 
Financial instruments held as of March 31, 2015 and December 31, 2014 and not measured at fair value on a recurring basis include cash and cash equivalents, notes receivable, credit facility payable and mortgages and notes payable.  With the exception of our mortgages and notes payable, the financial statement carrying amounts of these items approximate their fair values due to their short-term nature.  Because the credit facility payable bears interest at a variable rate and has a prepayment option, we believe its carrying amount approximates its fair value.
 
Estimated fair values for mortgages and notes payable have been determined using market pricing for similar mortgages payable, which are classified as Level 2 in the fair value hierarchy.  Carrying amounts and the related estimated fair value of our mortgages and notes payable as of March 31, 2015 and December 31, 2014 are as follows (in millions):  

 
 
March 31, 2015
 
December 31, 2014
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
Mortgages and notes payable
 
$
1,232.2

 
$
1,246.4

 
$
1,186.5

 
$
1,199.6



15.                               Related Party Arrangements
 
From our inception to July 31, 2013, we had no employees, were externally managed by Behringer and were supported by related party service agreements, as further described below.  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 provided or performed by Behringer. 

25



Effective July 31, 2013, we entered into the Self-Management Transition Agreements as discussed in Note 12, “Transition Expenses.” From the Initial Closing through June 30, 2014, we hired executives and staff who were previously employees of Behringer and began hiring other employees, completing our transition to a self-managed company. Behringer provides capital market services to the Company for a fee ranging from 0.9% to 1.0%. Such capital market services expire on June 30, 2015.

The services provided by Behringer included acquisition and advisory, property management, capital market, and asset management services. The table below shows the fees and expense reimbursements to Behringer in exchange for such services for the three months ended March 31, 2015 and 2014 (in millions):
 
 
For the Three Months Ended 
 March 31,
 
 
2015
 
2014
Acquisition and advisory fees
 
$

 
$
1.8

Property management fees
 

 
5.5

Debt financing fees
 
0.2

 
0.2

Asset management fees
 

 
1.9

Administrative expense reimbursements
 

 
0.4

    
 

16.                               Supplemental Disclosures of Cash Flow Information
 
Supplemental cash flow information is summarized below (in millions):

 
 
For the Three Months Ended 
 March 31,
 
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 

 
 

Interest paid, net of amounts capitalized of $4.8 million and $4.1 million in 2015 and 2014, respectively
 
$
7.8

 
$
6.8

Non-cash investing and financing activities:
 
 

 
 

Transfer of real estate from construction in progress to operating real estate
 
14.8

 
39.4

Transfer of assets to assets associated with real estate held for sale
 
76.6

 

Stock issued pursuant to our DRIP
 

 
7.6

Distributions payable - regular
 
12.5

 
5.0

Construction costs and other related payables
 
64.0

 
50.8



17.                               Subsequent Events
 
We have evaluated subsequent events for recognition or disclosure in our consolidated financial statements.

Acquisition of Noncontrolling Interests and Controlling Interest

On May 7, 2015, we acquired six noncontrolling interests in PGGM CO-JVs, which relate to equity investments in six multifamily communities, and one controlling interest in a PGGM CO-JV, which relates to a debt investment in a multifamily community. The net purchase price was $119.5 million, exclusive of closing costs, and is subject to final determination of certain working capital amounts. The consideration for the acquisitions was paid in cash, with $9.5 million funded from existing cash balances and the remaining $110.0 million from draws under our credit facilities. In connection with the acquisitions, we also received a disposition fee of $1.0 million from PGGM and a promoted interest payment of $3.5 million from PGGM.


26


The following table summarizes the acquisitions of each of the multifamily community interests in the PGGM CO-JVs:
 
 
 
 
Our Ownership Interest (a)
Community and Location
 
Total Units
 
Pre- Acquisition
 
Acquired Interest
 
Post- Acquisition
Equity investments:
 
 
 
 
 
 
 
 
The District Universal Boulevard, Orlando, FL
 
425

 
55.5
%
 
44.5
%
 
100
%
Veritas, Henderson, NV (b)
 
430

 
51.9
%
 
41.6
%
 
93.5
%
The Cameron, Silver Spring, MD
 
325

 
55.5
%
 
44.5
%
 
100
%
Skye 2905, Denver, CO
 
400

 
55.5
%
 
44.5
%
 
100
%
Grand Reserve, Dallas, TX
 
149

 
74.4
%
 
25.6
%
 
100
%
Stone Gate, Marlborough, MA
 
332

 
55.5
%
 
44.5
%
 
100
%
 
 
2,061

 
 
 
 
 
 
Debt investment:
 
 
 
 
 
 
 
 
Jefferson Creekside, Allen, TX
 
444

 
55.5
%
 
44.5
%
 
100
%
 
 
 
 
 
 
 
 
 

(a)
Our ownership interest is based on our share of contributed capital. This ownership interest may differ over time from percentages for distributions, contributions or financing requirements for each respective CO-JV. The post-acquisition effective ownership interests based on our participation in distributable cash from the CO-JVs are the same as those presented based on contributed capital, except for Veritas where our post-acquisition effective ownership based on our current participation in distributable cash is 100%. Each of the equity investments was previously accounted for on the consolidated method of accounting with the same accounting method post-acquisition. The debt investment was previously accounted for on the equity method of accounting and post-acquisition will be accounted for on the consolidated method of accounting.

(b)
The remaining 6.5% is owned by a Developer Partner.

Because the equity investments were previously accounted for on the consolidated method of accounting, the acquisition of the investment interests will not change the carrying value for the related assets or liabilities or reported consolidated operations for revenues and expenses included in reported net income. The acquisition of the equity investments will reduce noncontrolling interests for the related amounts of the CO-JVs with the difference between the noncontrolling interest amounts and the purchase price recorded to additional paid in capital. Net income attributable to common stockholders is expected to increase for our share of the acquired investments net income in future periods. Similarly, the collection of the disposition fee revenue and promoted interest payment will be eliminated in reporting consolidated net income but will be recorded as an increase to net income attributable to common stockholders. The acquisition of the debt investment will result in a change from equity method accounting to the consolidated method of accounting and accordingly, the underlying assets and liabilities will be recorded at fair value, which substantially approximates the net carrying value of the equity investment.

Distribution for the Second Quarter of 2015

Our board of directors has authorized a quarterly distribution in the amount of $0.075 per share on all outstanding shares of common stock of the Company for the second quarter of 2015. The quarterly distribution is payable July 7, 2015 to stockholders of record at the close of business on June 30, 2015.


* * * * *

27


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help provide an understanding of the business and results of operations of Monogram Residential Trust, Inc. (which, together with its subsidiaries as the context requires, may be referred to as the “Company,” “we,” “us” or “our”). This MD&A should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q. This report, including the following MD&A, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Forward-Looking Statements” in this MD&A. Actual results or developments could differ materially from those projected in such statements as a result of the factors described under “Forward-Looking Statements” as well as the risk factors described in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on March 26, 2015.

Capitalized terms have the meanings provided elsewhere in this Quarterly Report on Form 10-Q.
 
Overview
 
General

 The Company was organized in Maryland on August 4, 2006. We are a fully integrated self-managed real estate investment trust (“REIT”) that invests in, develops and operates high quality multifamily communities offering location and lifestyle amenities. We invest in stabilized operating properties and properties in various phases of development, with a focus on communities in select markets across the United States. As of March 31, 2015, our portfolio includes investments in 56 multifamily communities in 12 states comprising 16,126 apartment homes. These include luxury mid-rise, high-rise, and garden style multifamily communities.  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.

Our investments may be wholly owned by us or held through joint venture arrangements with third-party investors which we define as “Co-Investment Ventures” or “CO-JVs.”  These are predominately equity investments but may also include debt investments, consisting of mezzanine or bridge 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.

We target locations in primary markets and coastal regions with high job and rent growth urban markets, including transit oriented locations and vibrant areas offering cultural and retail amenities, and class A communities that are newer and highly amenitized with higher rents per unit for the sub market. Class A communities, where the rents are higher than the median for the sub market, have historically provided greater long-term returns than class B communities. Also, newer communities, with updated amenities and less capital and maintenance expenditures, have historically provided greater long-term returns than older communities. Further, because markets move in and out of favor, we mitigate our exposure to any given market by investing in a geographically diversified portfolio. As of March 31, 2015, our primary markets include Colorado, Northern California, Southern California, South Florida, New England, Mid-Atlantic, and Texas, representing 85% of the portfolio as measured by net operating income. We continuously review our portfolio for long-term growth prospects, scale and operating efficiencies and will reposition and redeploy capital to improve long-term returns.

Our principal goal is to increase earnings, long-term shareholder value and cash flow through the acquisition, development, and operation of our multifamily communities and, when appropriate, the disposition of selected multifamily communities in our portfolio. We plan to achieve this goal by allocating and repositioning capital in urban, high-density suburban and suburban-urban growth markets, with a high quality, diversified portfolio that is professionally managed.

 We focus on acquiring multifamily communities that we believe will produce increasing rental revenue and appreciate in value over our holding period. Our targeted acquisitions include existing core properties, as well as properties in various phases of development and lease up with the intent to transition those properties to core properties. Acquisitions provide us with immediate entries into markets, allowing more rapid earnings growth and re-balancing of our portfolio of assets than development investments. We may make investments in individual multifamily communities and portfolios and in the future, we may pursue a merger with another real estate company. As discussed below, we may also acquire interests through Co-Investment Ventures.

We intend to acquire high quality communities in high barrier coastal markets, which have long-term diversified economic drivers. We also invest in selected inland markets that have high job and rent growth fundamentals, such as Dallas,

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Austin, Houston, Denver and Atlanta. Within these markets, we primarily focus on urban, high-density suburban and suburban-urban areas with higher paying jobs, convenient transportation, retail and other lifestyle amenities. Our targets are typically focused on urban and infill locations but may also include suburban and suburban-urban areas, which are generally high density, lifestyle sub-markets with walkable locations, near public mass transportation and employment. We believe these locations attract affluent renters, who are generally older than the typical renter demographic, and who tend to experience lower turnover and are subject to less price elasticity.

When appropriate, we may also incorporate into our investment portfolio lease up properties, generally recently completed multifamily developments that have not started or have just started leasing, which may provide for better pricing relative to stabilized assets and a more timely realization of operating cash flow than traditional development projects. Generally, we make additional capital improvements to aesthetically improve the community and its amenities, when it allows us to increase rents, and stabilize occupancy with the goal of increasing yield and improving total returns.

We invest in developments where we believe we can create value and cash flow greater than through stabilized investments on a risk adjusted basis. We seek developments with characteristics similar to our stabilized multifamily investments, but at a lower cost per unit and in locations where there are limited acquisition opportunities. Our developments also allow us to build a portfolio that is tailored to our specifications for location with the latest amenities and operational efficiencies, which result in lower capital expenditures and maintenance costs. Investing in developments further allows us to maintain a younger portfolio.

In selecting development investment opportunities, we generally focus on sites that are already entitled and environmentally assessed. While entitled land carries a higher upfront cost, acquiring ready to develop land significantly shortens the development time cycle, and reduces the associated carrying costs and exposure to materials and labor cost escalations as well as the development risks. As of March 31, 2015, of the 13 developments in our pipeline, all are entitled and only two are currently not under construction. Because of our approach to development as described above, the average time from closing on the land to the start of vertical construction for these projects has historically averaged five months for our development pipeline since 2011.

As discussed further below under “Co-Investment Ventures”, we enter into strategic Co-Investment Ventures with institutional investors which we believe offers efficient, cost effective capital for growth. This capital does not carry priority or minimum returns and in some arrangements, we receive promoted interests if certain total returns are achieved. Equity from joint ventures allows us to expand the number and size of our investments, allowing us to obtain a more diversified portfolio and participation in investments that we may otherwise have deemed disproportionately too large for our current portfolio. However, as we grow, these joint ventures are expected to provide a very cost effective internal source of growth, if we elect to purchase our partner’s ownership interest in the multifamily communities. Joint ventures also allow us to earn fees for asset management, development and property management, which offset portions of our general and administrative expenses. We also seek joint venture structures with relatively straightforward distributable cash flow provisions and where we are the managing general partner subject to certain approval rights with respect to certain major decisions retained by the noncontrolling partners.

Co-Investment Ventures

We are the general partner and/or managing member of each of the separate Co-Investment Ventures. Our two institutional 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”). When applicable, we refer to individual investments by referencing the individual Co-Investment Venture partner or the underlying multifamily community. We refer to our Co-Investment Ventures with the PGGM Co-Investment Partner as “PGGM CO-JVs” and those with the MW Co-Investment Partner as “MW CO-JVs.”
  
Our arrangements with PGGM provide for additional sources of capital, fees and promoted interests over the term of the joint venture. Accordingly, we expect to continue to enter into additional CO-JVs with PGGM. On the other hand, while our MW CO-JVs do provide fee income, some degree of operational efficiency and the possibility of purchasing their interests, they do not generally provide additional capital. Accordingly, we expect our MW CO-JVs to decline over time as properties are sold or we buy out our partner’s ownership interest in the multifamily communities.


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Our other Co-Investment Ventures include strategic joint ventures with national or regional real estate developers/owners (“Developer Partners”). When we utilize third-party developers, we expect to be the controlling owner, partnering with experienced developers, but maintaining control over construction, operations, financing and disposition. When applicable, we refer to individual investments by referencing the individual co-investment partner or the underlying multifamily community. When applicable, we refer to individual investments by referencing those with Developer Partners as “Developer Co-JVs.” Certain PGGM CO-JVs that also include Developer Partners are referred to as PGGM CO-JVs. We are the 1% general partner of Monogram Residential Master Partnership I LP (the “Master Partnership” or the “PGGM Co-Investment Partner”) and PGGM is the 99% limited partner.

The table below presents a summary of our Co-Investment Ventures as of both March 31, 2015 and December 31, 2014.  The effective ownership ranges are based on our participation in distributable operating cash from the multifamily investment. This effective ownership is indicative of, but may differ over time from, percentages for distributions, contributions or financing requirements for each respective Co-Investment Venture. Unless otherwise noted, all of our Co-Investment Ventures are reported on the consolidated basis of accounting.
Co-Investment Structure
 
Number of Multifamily Communities
 
Our Effective
Ownership
PGGM CO-JVs (a)
 
30

 
50% to 74%
MW CO-JVs
 
14

 
55%
Developer CO-JVs
 
2

 
100%
 
 
46

 
 
 
 
(a)
Includes one unconsolidated investment as of March 31, 2015 and December 31, 2014. Also, as of March 31, 2015 and December 31, 2014, includes Developer Partners in 19 multifamily communities.
 

Property Portfolio
 
We invest in a geographically diversified multifamily portfolio which includes operating and development investments.  Our geographic regions are defined by state or by region. Our portfolio is comprised of the following geographic regions and markets:
 
Florida — Includes communities in the following markets: North Florida (Orlando markets) and South Florida (Miami and Fort Lauderdale markets).
 
Georgia — Includes communities in the Atlanta market.

Mid-Atlantic — Includes communities in the following markets: Washington, DC and Philadelphia.

Illinois — Includes a community in the Chicago market.
 
Nevada — Includes communities in the Las Vegas market.

Colorado — Includes communities in the Denver market.
 
New England — Includes communities in the following markets: Boston and Philadelphia - Camden.
 
Northern California — Includes communities in the San Francisco market. 

Southern California — Includes communities in the following markets: greater Los Angeles and San Diego.
 
Texas — Includes communities in the following markets: Austin, Dallas, and Houston.
 

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We consider a multifamily community to be stabilized generally when the multifamily community achieves 90% occupancy. The tables below present the number of communities and units, and the physical occupancy rates and monthly rental revenue per unit for our stabilized multifamily communities by geographic region as of March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
December 31, 2014
 
 
Number of
 
 
 
Number of
 
 
 
 
Stabilized
 
Number of
 
Stabilized
 
Number of
Geographic Region
 
Communities
 
Units
 
Communities
 
Units
Colorado
 
3

 
996

 
3

 
996

Florida
 
3

 
884

 
3

 
884

Georgia
 
1

 
283

 
1

 
283

Mid-Atlantic
 
5

 
1,412

 
5

 
1,412

Illinois
 
1

 
298

 
1

 
298

Nevada
 
2

 
598

 
2

 
598

New England
 
3

 
772

 
3

 
772

Northern California
 
5

 
953

 
5

 
953

Southern California
 
5

 
1,002

 
4

 
889

Texas
 
10

 
3,245

 
7

 
2,299

Totals
 
38

 
10,443

 
34

 
9,384

 
 
Physical Occupancy Rates (a)
 
Monthly Rental Revenue per Unit (b)
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
Geographic Region
 
2015
 
2014
 
2015
 
2014
Colorado
 
95
%
 
95
%
 
$
1,762

 
$
1,736

Florida
 
97
%
 
93
%
 
1,635

 
1,623

Georgia
 
96
%
 
98
%
 
1,422

 
1,409

Mid-Atlantic
 
93
%
 
90
%
 
1,996

 
2,016

Illinois
 
94
%
 
93
%
 
2,482