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EX-32.1 - EXHIBIT 32.1 - Monogram Residential Trust, Inc.exhibit321093016.htm
EX-31.2 - EXHIBIT 31.2 - Monogram Residential Trust, Inc.exhibit312093016.htm
EX-31.1 - EXHIBIT 31.1 - Monogram Residential Trust, Inc.exhibit311093016.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
[Mark One]
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended September 30, 2016
 
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 x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No x
 
As of October 31, 2016, the Registrant had 166,834,545 shares of common stock outstanding.
 



MONOGRAM RESIDENTIAL TRUST, INC.
Form 10-Q
Quarter Ended September 30, 2016
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Monogram Residential Trust, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)(Unaudited) 
 
 
September 30,
2016
 
December 31,
2015
Assets
 
 

 
 

Real estate
 
 

 
 

Land
 
$
504,479

 
$
497,360

Buildings and improvements
 
2,767,898

 
2,627,693

Gross operating real estate
 
3,272,377

 
3,125,053

Less accumulated depreciation
 
(440,894
)
 
(357,036
)
Net operating real estate
 
2,831,483

 
2,768,017

Construction in progress, including land
 
212,486

 
333,153

Total real estate, net
 
3,043,969

 
3,101,170

 
 
 
 
 
Cash and cash equivalents
 
65,470

 
83,727

Intangibles, net
 
17,244

 
18,066

Other assets, net
 
64,093

 
64,993

Total assets
 
$
3,190,776

 
$
3,267,956

 
 
 
 
 
Liabilities and equity
 
 

 
 

 
 
 
 
 
Liabilities
 
 

 
 

Mortgages and notes payable, net
 
$
1,520,008

 
$
1,461,349

Credit facilities payable, net
 
7,622

 
45,495

Construction costs payable
 
24,828

 
36,975

Accounts payable and other liabilities
 
36,784

 
28,922

Deferred revenues and other gains
 
22,343

 
19,451

Distributions payable
 
12,602

 
12,494

Tenant security deposits
 
6,335

 
5,616

Total liabilities
 
1,630,522

 
1,610,302

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable noncontrolling interests
 
29,073

 
29,073

 
 
 
 
 
Equity
 
 

 
 

Preferred stock, $0.0001 par value per share; 125,000,000 shares authorized as of September 30, 2016 and December 31, 2015, respectively:
 
 
 
 
7.0% Series A non-participating, voting, cumulative, convertible preferred stock, liquidation preference $10 per share, 10,000 shares issued and outstanding as of September 30, 2016 and December 31, 2015
 

 

Common stock, $0.0001 par value per share; 875,000,000 shares authorized, 166,835,631 and 166,611,549 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
17

 
17

Additional paid-in capital
 
1,438,450

 
1,436,254

Cumulative distributions and net income (loss)
 
(320,137
)
 
(269,523
)
Total equity attributable to common stockholders
 
1,118,330

 
1,166,748

Non-redeemable noncontrolling interests
 
412,851

 
461,833

Total equity
 
1,531,181

 
1,628,581

Total liabilities and equity
 
$
3,190,776

 
$
3,267,956

 
See Notes to Condensed Consolidated Financial Statements.

3


Monogram Residential Trust, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
 
 
 
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Rental revenues
 
$
72,181

 
$
59,191

 
$
206,279

 
$
174,939

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Property operating expenses
 
21,311

 
16,874

 
60,518

 
48,828

Real estate taxes
 
11,866

 
8,328

 
33,105

 
25,696

General and administrative expenses
 
5,248

 
5,199

 
19,111

 
14,683

Acquisition, investment and development expenses
 
54

 
730

 
432

 
4,496

Interest expense
 
11,192

 
8,196

 
32,621

 
20,866

Amortization of deferred financing costs
 
1,492

 
1,087

 
4,582

 
2,864

Depreciation and amortization
 
31,197

 
24,904

 
92,251

 
74,587

Total expenses
 
82,360

 
65,318

 
242,620

 
192,020

 
 
 
 
 
 
 
 
 
Interest income
 
2,068

 
2,596

 
5,526

 
7,956

Loss on early extinguishment of debt
 
(31
)
 

 
(31
)
 

Equity in income of investment in unconsolidated real estate joint venture
 

 

 

 
250

Other income (expense)
 
(12
)
 
34

 
(295
)
 
72

Loss from continuing operations before gains on sales of real estate
 
(8,154
)
 
(3,497
)
 
(31,141
)
 
(8,803
)
Gains on sales of real estate
 
17,510

 
34,373

 
17,510

 
82,975

 
 
 
 
 
 
 
 
 
Net income (loss)
 
9,356

 
30,876

 
(13,631
)
 
74,172

 
 
 
 
 
 
 
 
 
Net (income) loss attributable to non-redeemable noncontrolling interests
 
(4,902
)
 
488

 
563

 
5,558

Net income (loss) available to the Company
 
4,454

 
31,364

 
(13,068
)
 
79,730

Dividends to preferred stockholders
 
(2
)
 
(2
)
 
(5
)
 
(5
)
Net income (loss) attributable to common stockholders
 
$
4,452

 
$
31,362

 
$
(13,073
)
 
$
79,725

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
 
166,876

 
166,563

 
166,807

 
166,538

Weighted average number of common shares outstanding - diluted
 
167,649

 
167,260

 
166,807

 
167,191

 
 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per common share
 
$
0.03

 
$
0.19

 
$
(0.08
)
 
$
0.48

 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.075

 
$
0.075

 
$
0.225

 
$
0.225

 
See Notes to Condensed Consolidated Financial Statements.

4


Monogram Residential Trust, Inc.
Condensed 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, 2015
 
10

 
$

 
166,468

 
$
17

 
$
1,492,799

 
$
540,747

 
$
(293,350
)
 
$
1,740,213

Net income (loss)
 

 

 

 

 

 
(5,558
)
 
79,730

 
74,172

Acquisition of noncontrolling interest
 

 

 

 

 
(59,287
)
 
(60,641
)
 

 
(119,928
)
Contributions by noncontrolling interests
 

 

 

 

 

 
32,087

 

 
32,087

Issuance of common and restricted shares, net
 

 

 
48

 

 
(119
)
 

 

 
(119
)
Amortization of stock-based compensation
 

 

 

 

 
1,714

 

 

 
1,714

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common stock - regular
 

 

 

 

 

 

 
(37,466
)
 
(37,466
)
Noncontrolling interests
 

 

 

 

 

 
(41,955
)
 

 
(41,955
)
Preferred stock
 

 

 

 

 

 

 
(5
)
 
(5
)
Balance at September 30, 2015
 
10

 
$

 
166,516

 
$
17

 
$
1,435,107

 
$
464,680

 
$
(251,091
)
 
$
1,648,713

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
 
10

 
$

 
166,612

 
$
17

 
$
1,436,254

 
$
461,833

 
$
(269,523
)
 
$
1,628,581

Net loss
 

 

 

 

 

 
(563
)
 
(13,068
)
 
(13,631
)
Contributions by noncontrolling interests
 

 

 

 

 

 
6,183

 

 
6,183

Issuance of common and restricted shares, net
 

 

 
224

 

 
(341
)
 

 

 
(341
)
Amortization of stock-based compensation
 

 

 

 

 
2,537

 

 

 
2,537

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Common stock - regular
 

 

 

 

 

 

 
(37,530
)
 
(37,530
)
Other related to stock-based compensation
 

 

 

 

 

 

 
(11
)
 
(11
)
Noncontrolling interests
 

 

 

 

 

 
(54,602
)
 

 
(54,602
)
Preferred stock
 

 

 

 

 

 

 
(5
)
 
(5
)
Balance at September 30, 2016
 
10

 
$

 
166,836

 
$
17

 
$
1,438,450

 
$
412,851

 
$
(320,137
)
 
$
1,531,181

 
See Notes to Condensed Consolidated Financial Statements.





5


Monogram Residential Trust, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
Cash flows from operating activities
 
 

 
 

Net income (loss)
 
$
(13,631
)
 
$
74,172

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

 
 

Gains on sales of real estate
 
(17,510
)
 
(82,975
)
Loss on early extinguishment of debt
 
31

 

Impairment related to development
 

 
3,128

Depreciation
 
91,394

 
71,390

Amortization of deferred financing costs and debt premium/discount
 
3,066

 
1,368

Amortization of intangibles
 
821

 
3,141

Amortization of deferred revenues
 
(1,092
)
 
(1,102
)
Amortization of stock-based compensation
 
2,537

 
1,714

Equity in income of investment in unconsolidated real estate joint venture
 

 
(250
)
Distributions received from investment in unconsolidated real estate joint venture
 

 
242

Other, net
 
(98
)
 
803

Changes in operating assets and liabilities:
 
 

 
 

Accounts payable and other liabilities
 
11,178

 
4,793

Other assets
 
1,298

 
(5,010
)
Cash provided by operating activities
 
77,994

 
71,414

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Additions to real estate:
 
 

 
 

Acquisitions of real estate
 

 
(165,241
)
Additions to existing real estate
 
(7,142
)
 
(6,475
)
Construction in progress, including land
 
(82,511
)
 
(276,649
)
Proceeds from sale of real estate, net
 
65,024

 
250,311

Acquisitions of noncontrolling interests
 

 
(120,018
)
Advances on notes receivable
 
(17,294
)
 
(4,328
)
Collection on notes receivable
 
15,267

 
14,133

Tax like-kind exchange escrow deposits
 
624

 
(212,106
)
Tax like-kind exchange escrow disbursements
 

 
165,752

Other escrow deposits
 
(523
)
 
(4,338
)
Other, net
 
93

 
(97
)
Cash used in investing activities
 
(26,462
)
 
(359,056
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Mortgage and notes payable proceeds
 
191,499

 
334,948

Mortgage and notes payable principal payments
 
(136,091
)
 
(82,350
)
Proceeds from credit facilities
 
36,000

 
292,000

Credit facilities payments
 
(75,000
)
 
(247,438
)
Contributions from noncontrolling interests
 
6,183

 
32,087

Distributions paid on common stock - regular
 
(37,522
)
 
(37,461
)
Distributions paid to noncontrolling interests
 
(54,514
)
 
(41,872
)
Dividends paid on preferred stock
 
(3
)
 
(3
)
Other, net
 
(341
)
 
(119
)
Cash (used in) provided by financing activities
 
(69,789
)
 
249,792

 
 
 
 
 
Net change in cash and cash equivalents
 
(18,257
)
 
(37,850
)
Cash and cash equivalents at beginning of period
 
83,727

 
116,407

Cash and cash equivalents at end of period
 
$
65,470

 
$
78,557

 
See Notes to Condensed Consolidated Financial Statements.



6


Monogram Residential Trust, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 

1.                                      Organization and Business
 
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.  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 communities and communities in various phases of development, with a focus on communities in select markets across the United States. These include luxury high-rise, mid-rise, and garden style multifamily communities.  Our targeted communities include existing “core” communities, which we define as communities that are already stabilized and producing rental income, as well as communities in various phases of development, redevelopment, lease up or repositioning with the intent to transition those communities to core communities.  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 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. 
 
As of September 30, 2016, we have equity and debt investments in 53 multifamily communities, of which 43 are stabilized operating multifamily communities and 10 are in various stages of lease up, pre-development or construction. Of the 53 multifamily communities, we wholly own 13 multifamily communities and three debt investments for a total of 16 wholly owned investments. The remaining 37 investments are held through Co-Investment Ventures, all of which are consolidated. 
 
As of September 30, 2016, we are the 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”). 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 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. We are generally a 55% owner with control of day-to-day management and operations, and the Master Partnership is generally a 45% owner in the property owning CO-JVs, all of which are consolidated.

The table below presents a summary of our Co-Investment Ventures as of both September 30, 2016 and December 31, 2015. The effective ownership ranges are based on our participation in the distributable operating cash from our investment in the multifamily community. 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.  All are reported on the consolidated basis of accounting.
 
 
September 30, 2016
 
December 31, 2015
Co-Investment Structure
 
Number of Multifamily Communities
 
Our Effective
Ownership
 
Number of Multifamily Communities
 
Our Effective
Ownership
PGGM CO-JVs (a)
 
21

 
50% to 70%
 
23

 
50% to 70%
MW CO-JVs
 
14

 
55%
 
14

 
55%
Developer CO-JVs
 
2

 
100%
 
2

 
100%
Total
 
37

 
 
 
39

 
 
 
 
 
 
 
 
 
 
 
 

7



(a)
As of September 30, 2016 and December 31, 2015, the PGGM CO-JVs include Developer Partners in 18 multifamily communities.  

We have elected to be taxed, and currently qualify, as a REIT for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.  As of September 30, 2016, we believe we are in compliance with all applicable REIT requirements.


2.                                      Summary of Significant Accounting Policies

Interim Unaudited Financial Information
 
The accompanying condensed 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, 2015, which was filed with the Securities and Exchange Commission (“SEC”) on February 26, 2016. 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 condensed consolidated balance sheet as of September 30, 2016 and condensed consolidated statements of operations, equity and cash flows for the periods ended September 30, 2016 and 2015 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of September 30, 2016 and December 31, 2015, and our consolidated results of operations and cash flows for the periods ended September 30, 2016 and 2015. Such adjustments are of a normal recurring nature.

Basis of Presentation
 
The accompanying condensed consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries and any consolidated variable interest entities (“VIEs”).  All inter-company balances and transactions have been eliminated in consolidation.
 
Developments

We capitalize project costs related to the development and construction of real estate (including interest, real estate taxes, insurance, and other 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 thereof, 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.

Impairment of Real Estate Related Assets
 
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 aggregate undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition.  If the carrying amount exceeds the aggregate undiscounted future operating cash flows, we recognize an impairment loss to the extent the carrying amount exceeds the estimated fair value of the property.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  The fair value of intangibles is generally estimated by valuation of similar assets.


8


We did not record any impairment loss for the nine months ended September 30, 2016. We recorded an impairment loss for the nine months ended September 30, 2015 related to one of our developments. See Note 4, “Real Estate Investments — Sales of Real Estate Reported in Continuing Operations” for more information.
 
Assets Held for Sale and Discontinued Operations
 
For sales of real estate or assets classified as held for sale, 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 September 30, 2016 and December 31, 2015, cash and cash equivalents include $28.2 million and $32.5 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 the Master Partnership and individual Co-Investment Ventures is not restricted to specific uses within those entities. However, the terms of the joint venture agreements define the timing and magnitude of the distribution of those funds to us or limit our use of them for our general corporate purposes.  Cash held by the Master Partnership and 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 Master Partnership and individual Co-Investment Ventures are then available for our general corporate purposes.
 
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. For the nine months ended September 30, 2016, any common stock equivalents were anti-dilutive For the three months ended September 30, 2016 and the three and nine months ended September 30, 2015, the dilutive impact was less than $0.01.

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.
 
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.
 

9


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; construction payables; impairment of long-lived assets; notes receivable; fair value evaluations; earning recognition of noncontrolling interests; depreciation and amortization; and share-based compensation measurements.  Actual results could differ from those estimates.

Reclassifications

Certain amounts previously reflected on the prior year condensed consolidated statements of operations have been revised to conform to our 2016 presentation. The condensed consolidated statement of operations reflects the single line item “acquisition, investment and development expenses” that was previously presented on two lines “acquisition expenses” (approximately $0.5 million and $0.6 million) and “investment and other development expenses” (approximately $0.2 million and $3.9 million) for the three and nine months ended September 30, 2015, respectively. These reclassifications had no effect on the Company’s results of operations or financial position.

Recently Adopted Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-02 , "Amendments to the Consolidation Analysis." The guidance was effective January 1, 2016 and requires companies to evaluate the consolidation of certain legal entities under a revised consolidation model, which modified the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. Reporting entities which consolidate or hold a variable interest in a VIE as a result of this standard are subject to additional disclosure requirements. We adopted ASU 2015-02 effective January 1, 2016 applying the modified retrospective method. The adoption of this standard did not result in any changes in our previous consolidation conclusions. However, upon adoption, all previously consolidated CO-JVs, as discussed in Note 5, "Variable Interest Entities," were classified as VIEs. As we are considered the primary beneficiary, we will continue to consolidate these CO-JVs.

In April 2015, the FASB issued ASU 2015-03, “Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.” The guidance requires costs incurred to issue debt to be presented in the balance sheet as a direct deduction from the carrying value of the debt rather than being recorded as a deferred charge and presented as an asset. The standard also requires amortization of debt issuance costs to be reported as interest expense. We are currently presenting the amortization of debt issuance costs as a separate line in the statement of operations. The standard does not address presentation of debt issuance costs related to credit facilities allowing the Company to adopt an accounting policy regarding classification of debt issuance costs related to credit facilities. Accordingly, we have elected to report debt issuance costs related to credit facilities as a deduction to the credit facilities payable in the liability section of the consolidated balance sheet. We adopted the standard effective January 1, 2016. The retrospective application required upon adoption of this standard resulted in a reclassification of approximately $15.2 million of unamortized debt issuance costs from other assets, net to a deduction from mortgages and notes payable of $11.7 million and credit facilities payable of $3.5 million, respectively, in our consolidated balance sheets as of December 31, 2015.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement to retrospectively account for adjustments to provisional amounts recognized in a business combination. The acquirer in a business combination is required to recognize any adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. A company must present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. We adopted the standard effective January 1, 2016. The adoption of this pronouncement did not have any effect on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which affects the presentation of how share-based payments are accounted for and presented in the financial statements. We adopted the standard during the second quarter of 2016 effective as of January 1, 2016 on a modified retrospective basis. The adoption of this pronouncement did not have any effect on our condensed consolidated financial statements.
 

10



3.                                      New Accounting Pronouncements

In May 2014, the FASB issued updated guidance with respect to revenue recognition. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance.  The revised guidance will replace most existing revenue and real estate sale recognition guidance in GAAP when it becomes effective. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however, the sale of real estate will be required to follow the revised guidance. The revised guidance allows for the use of either the full or modified retrospective transition method. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. We have not yet selected a transition method and are currently evaluating each of our revenue streams for the effect that the adoption of the revised guidance will have on our consolidated financial statements and related disclosures. We plan to adopt the guidance effective January 1, 2018.

In February 2016, the FASB issued a new standard, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This guidance is effective for fiscal years and interim periods within those years beginning after December 31, 2018, and early adoption is permitted. This standard must be applied as of the beginning of the earliest comparative period presented in the year of adoption. We are currently evaluating our leases to determine the impact this standard may have on our consolidated financial statements and related disclosures. As a lessee, we have a limited number of agreements, mostly related to our office space and office equipment. As lessors, substantially all of our agreements have a term of 12 months or less.

In August 2016, the FASB issued guidance, which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating the full impact of the new standard.

For other new accounting standards issued by the FASB or other standards setting bodies, we believe the impact of other recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.


4.                                      Real Estate Investments
 
Real Estate Investments and Intangibles and Related Depreciation and Amortization
 
As of September 30, 2016 and December 31, 2015, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):
 
 
September 30, 2016
 
December 31, 2015
 
 
Buildings
 
Intangibles
 
Buildings
 
Intangibles
 
 
and
 
In-Place
 
Other
 
and
 
In-Place
 
Other
 
 
Improvements
 
Leases
 
Contractual
 
Improvements
 
Leases
 
Contractual
Cost
 
$
2,767.9

 
$
35.6

 
$
24.2

 
$
2,627.7

 
$
37.1

 
$
24.2

Less: accumulated depreciation and amortization
 
(440.9
)
 
(33.6
)
 
(9.0
)
 
(357.0
)
 
(34.9
)
 
(8.3
)
Net
 
$
2,327.0

 
$
2.0

 
$
15.2

 
$
2,270.7

 
$
2.2

 
$
15.9

 

11


Depreciation expense for the three months ended September 30, 2016 and 2015 was approximately $30.8 million and $24.5 million, respectively. Depreciation expense for the nine months ended September 30, 2016 and 2015 was approximately $91.0 million and $71.1 million, respectively.
 
Cost of intangibles relates to the value of in-place leases and other contractual intangibles.  Cost of other contractual intangibles as of both September 30, 2016 and December 31, 2015, includes $7.9 million of intangibles, primarily asset management and related fee revenue services. Cost of other contractual intangibles as of both September 30, 2016 and December 31, 2015, also includes $6.8 million related to the use rights of a parking garage and site improvements and $9.5 million of indefinite-lived contractual rights related to land air rights.
 
Amortization expense associated with our lease and other contractual intangibles for the three months ended September 30, 2016 and 2015 was approximately $0.3 million and $0.2 million, respectively. Amortization expense associated with our lease and other contractual intangibles for the nine months ended September 30, 2016 and 2015 was approximately $0.8 million and $3.1 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
October through December 2016
 
$
0.3

2017
 
1.1

2018
 
0.5

2019
 
0.5

2020
 
0.5


Developments 

For the three and nine months ended September 30, 2016 and 2015, we capitalized the following amounts of interest, real estate taxes and overhead related to our developments (in millions):
 
 
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest
 
$
1.8

 
$
4.1

 
$
6.1

 
$
13.5

Real estate taxes
 
0.6

 
0.7

 
1.9

 
3.4

Overhead
 
0.1

 
0.1

 
0.4

 
0.5


Sales of Real Estate Reported in Continuing Operations

The following table presents our sales of real estate for the nine months ended September 30, 2016 and September 30, 2015 (in millions):

Date of Sale
 
Multifamily Community
 
Sales Contract Price
 
Net Cash Proceeds
 
Gains on Sales of Real Estate
For the Nine Months Ended September 30, 2016
 
 
 
 
 
 
August 2016
 
Renaissance, including land held for future development (a)
 
$
65.4

 
$
65.0

 
$
17.5

 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30, 2015
 
 
 
 
 
 
July 2015
 
Uptown Post Oak
 
$
90.1

 
$
88.3

 
$
34.4

June 2015
 
Burnham Pointe
 
126.0

 
123.6

 
48.6

June 2015
 
Shady Grove (b)
 
38.5

 
38.4

 

 
 
Total
 
$
254.6

 
$
250.3

 
$
83.0

 
 
 
 
 
 
 
 
 

12


 

(a)
All cash proceeds from the sale have been collected as of the date of sale. A portion of the reported gain on sale of real estate has been deferred, reducing the gain by $2.0 million, pending assignment of related development and construction agreements to the buyer and our release from these agreements.

(b)
In May 2015, we recorded an impairment of $3.1 million based on the Company’s decision to sell the development at an amount below the carrying value. The impairment, which was primarily due to certain costs capitalized for GAAP not expected to be recovered in a sale, is included in “acquisition, investment and development expenses” on the condensed consolidated statement of operations. In June 2015, we closed on the sale of the development to a group led by the applicable Developer Partner for net proceeds of $38.4 million, the development’s net carrying value at the date of sale.

The following table presents net income related to the multifamily communities sold in 2016 and 2015 for the three and nine months ended September 30, 2016 and 2015, respectively, and includes the gains on sales of real estate (in millions):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income from multifamily communities sold
 
$
17.6

 
$
34.6

 
$
18.0

 
$
84.0

Less: net income attributable to noncontrolling interest
 
(7.9
)
 
(0.1
)
 
(8.1
)
 
(0.2
)
Net income attributable to common stockholders
 
$
9.7

 
$
34.5

 
$
9.9

 
$
83.8

 
 
 
 
 
 
 
 
 


5.                                      Variable Interest Entities
 
Effective January 1, 2016, we adopted the revised guidance on consolidation accounting as further discussed in Note 2, “Summary of Significant Account Policies — Recently Adopted Accounting Pronouncements.” Under the new guidance we have concluded that all of our CO-JVs, including the Master Partnership, are VIEs, and we are the primary beneficiary of each CO-JV. All of these VIEs were created for the purpose of operating and developing multifamily communities.  Because these CO-JVs 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-JVs is based upon contributed capital and ranges from 50% to 100%. Each of the VIEs are businesses, and assets of each VIE are available for purposes other than the settlement of the VIE’s obligations.

The following table presents the significant balances related to our VIEs as of September 30, 2016 and December 31, 2015 (in millions):

 
 
September 30, 2016
 
December 31, 2015
Total assets
 
$
2,333.7

 
$
2,378.1

Net operating real estate
 
2,104.1

 
2,033.3

Construction in progress
 
177.1

 
287.9

 
 
 
 
 
Mortgages and notes payable outstanding (a)
 
$
1,234.1

 
$
1,173.2

Plus: unamortized adjustments from business combinations
 
0.3

 
1.0

Less: deferred financing costs, net
 
(7.7
)
 
(9.5
)
Total mortgages and notes payable, net
 
$
1,226.7

 
$
1,164.7

 
 
 
 
 
 

(a)
Except as noted below, the lenders on the outstanding mortgages and notes payable have no recourse to us. 


13


Of the $1,234.1 million of mortgages and notes payable outstanding as of September 30, 2016, $673.2 million represents fully funded, non recourse mortgages and the remaining $560.9 million relates to amounts outstanding for construction financing with total commitments of $612.1 million. We have provided partial payment guarantees ranging from 5% to 25% on $380.3 million of the $560.9 million outstanding as of September 30, 2016. The outstanding amount of these guarantees is $74.8 million as of September 30, 2016. Each guarantee may terminate or be reduced upon completion of the development or if the development achieves certain operating results. The construction loans are secured by a first mortgage in each multifamily community. See Note 7, “Mortgages and Notes Payable” for further information on our construction loans.  
 

6.                                      Other Assets
 
The components of other assets as of September 30, 2016 and December 31, 2015 are as follows (in millions):
 
 
September 30, 2016
 
December 31, 2015
Notes receivable, net (a)
 
$
39.0

 
$
36.5

Resident, tenant and other receivables
 
8.3

 
12.2

Escrows and restricted cash
 
9.1

 
8.7

Prepaid assets, deposits and other assets
 
7.7

 
7.6

Total other assets, net
 
$
64.1

 
$
65.0

 
 

(a)
Notes receivable include mezzanine loans, primarily related to multifamily development projects.  As of September 30, 2016, the weighted average interest rate is 15.6% and the weighted average remaining years to scheduled maturity is 1.2 years. The borrowers generally have options to prepay prior to maturity or to extend the maturity for one to two years.

7.                                      Mortgages and Notes Payable

The following table summarizes the carrying amounts of the mortgages and notes payable classified by whether the obligation is ours or that of the applicable consolidated Co-Investment Venture as of September 30, 2016 and December 31, 2015 (dollar amounts in millions and monthly LIBOR at September 30, 2016 is 0.53%):
 
 
 
 
 
 
As of September 30, 2016
 
 
September 30,
 
December 31,
 
Weighted Average
 
Maturity
 
 
2016
 
2015
 
Interest Rates
 
Dates
Company level (a)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
$
293.8

 
$
297.3

 
3.88%
 
2018 to 2020
Total Company level
 
293.8

 
297.3

 
 
 
 
Co-Investment Venture level - consolidated (b)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
637.6

 
631.6

 
3.27%
 
2017 to 2023
Variable rate mortgage payable
 
35.6

 
11.6

 
Monthly LIBOR + 1.94%
 
2017
Fixed rate construction loans payable:
 
 
 
 
 
 
 
 
   Operating
 

 
29.2

 
 
 
 
   In construction (c)
 
49.7

 
44.5

 
4.00%
 
2018
Variable rate construction loans payable (d):
 
 
 
 
 
 
 
 
   Operating
 
497.7

 
355.3

 
Monthly LIBOR + 2.09%
 
2017 to 2018
   In construction
 
13.5

 
101.0

 
Monthly LIBOR + 2.15%
 
2019
Total Co-Investment Venture level - consolidated
 
1,234.1

 
1,173.2

 
 
 
 
Total Company and Co-Investment Venture level
 
1,527.9

 
1,470.5

 
 
 
 
Plus: unamortized adjustments from business combinations
 
1.3

 
2.5

 
 
 
 
Less: deferred financing costs, net
 
(9.2
)
 
(11.7
)
 
 
 
 
Total consolidated mortgages and notes payable, net
 
$
1,520.0

 
$
1,461.3

 
 
 
 
 

14



(a)
Company level debt is defined as debt that is a direct obligation of the Company or one of the Company’s wholly owned subsidiaries.
 
(b)
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.

(c)
As of September 30, 2016, includes one loan with a total commitment of $53.5 million. The construction loan includes a two year extension option. As of September 30, 2016, there is $3.8 million remaining to draw under the construction loan. We may elect not to fully draw down any unfunded commitment.

(d)
As of September 30, 2016, includes twelve loans with total commitments of $558.6 million. As of September 30, 2016, the Company has partially guaranteed seven of these loans with total commitments of $427.6 million, of which $74.8 million is recourse to the Company. Our percentage guarantee on each of these loans ranges from 5% to 25%. These loans include one to two year extension options. As of September 30, 2016, there is $47.4 million remaining to draw under the construction loans. We may elect not to fully draw down any unfunded commitment.

As of September 30, 2016, $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 September 30, 2016.
 
As of September 30, 2016, contractual principal payments for our mortgages and notes payable (excluding any extension options) for the five subsequent years and thereafter are as follows (in millions):
 
 
 
 
Co-Investment
 
Total
Year
 
Company Level
 
Venture Level
 
Consolidated
October through December 2016
 
$
1.2

 
$
1.5

 
$
2.7

2017
 
5.8

 
349.2

 
355.0

2018
 
153.4

 
422.6

 
576.0

2019
 
79.5

 
155.0

 
234.5

2020
 
53.9

 
172.0

 
225.9

Thereafter
 

 
133.8

 
133.8

Total
 
$
293.8

 
$
1,234.1

 
1,527.9

Add: unamortized adjustments from business combinations
 
 

 
 

 
1.3

Less: deferred financing costs, net
 
 
 
 
 
(9.2
)
Total mortgages and notes payable, net
 
 

 
 

 
$
1,520.0



8.                               Credit Facilities Payable
 
We have two credit facilities as of September 30, 2016, 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 September 30, 2016 and December 31, 2015 (dollar amounts in millions and monthly LIBOR at September 30, 2016 was 0.53%):
 
 
 
Balance Outstanding
 
 
 
 
 
 
 
September 30,
2016
 
December 31,
2015
 
Interest Rate as of September 30, 2016
 
Maturity Date
$150 Million Facility
 
$
10.0

 
$
49.0

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

 

 
Monthly LIBOR + 2.50%
 
January 14, 2019
Total credit facilities outstanding
10.0

 
49.0

 
 
 
 
Less: deferred financing costs, net
(2.4
)
 
(3.5
)
 
 
 
 
 
Total credit facilities payable, net
$
7.6

 
$
45.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 


15


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. The $150 Million Facility also provides for fees based on unutilized amounts and minimum usage.  The loan requires minimum borrowings 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 at our discretion in order to increase amounts available for borrowing.  As of September 30, 2016, $115.0 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 September 30, 2016, our availability to draw under the $150 Million Facility was limited to approximately $116.2 million based upon the value of the collateral pool.
 
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 of the $150 Million Facility agreement as of September 30, 2016.

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 September 30, 2016 is LIBOR + 2.5%. 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 a first priority perfected assignment of a portion of certain of our notes receivable. In addition, we may provide additional security related to future property acquisitions.

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 (as defined in the agreement) a tangible consolidated net worth of at least $1.16 billion, consolidated total indebtedness to total gross asset value of less than 65%, and adjusted rolling 12-month consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to consolidated fixed charges of not less than 1.50 to 1, and, beginning December 31, 2015, a limit on distributions and share repurchases in excess of 95% of our rolling 12-month 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 (“NAREIT”). We believe we are in compliance with all provisions of the $200 Million Facility agreement as of September 30, 2016.


9.                               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.   


16


As of September 30, 2016 and December 31, 2015, non-redeemable noncontrolling interests (“NCI”) consisted of the following, including the direct and non-direct noncontrolling interests ownership ranges where applicable (dollar amounts in millions):
 
 
September 30, 2016
 
December 31, 2015
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
PGGM Co-Investment Partner
 
$
293.8

 
30% to 45%
 
$
332.0

 
30% to 45%
MW Co-Investment Partner
 
112.7

 
45%
 
123.7

 
45%
Developer Partners
 
4.3

 
0% to 10%
 
4.0

 
0% to 10%
Subsidiary preferred units
 
2.1

 
(b)
 
2.1

 
(b)
Total non-redeemable NCI
 
$
412.9

 
 
 
$
461.8

 
 
 

(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 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 or participation 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, its noncontrolling interest includes an interest in the Master Partnership and the PGGM CO-JVs. For PGGM CO-JVs and MW CO-JVs, capital contributions and distributions are generally made pro rata in accordance with these ownership interests; however, the Master Partnership’s and the PGGM CO-JV’s pro rata interests are subject to a promoted interest to us if certain performance returns are achieved. Developer CO-JVs generally have limited participation in contributions and generally only participate in distributions after certain preferred returns are collected by us or the PGGM CO-JVs, as applicable, which in some cases may not be until we have received all of our investment capital. None of these Co-Investment Venture partners have any rights to put or redeem their ownership interest; however, they generally provide for buy/sell rights after certain periods. In certain circumstances the governing documents of the PGGM CO-JV or MW CO-JV may require a sale of the Co-Investment Venture or its subsidiary REIT rather than 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 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 their redemption price, generally $500 per unit (par value).  The subsidiary preferred units are not redeemable by the unit holders and, as of September 30, 2016, we have no current intent to exercise our redemption option.  Accordingly, these noncontrolling interests are reported as equity.

For the nine months ended September 30, 2016 and 2015, we paid the following distributions to noncontrolling interests (in millions):
 
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
Distributions paid to noncontrolling interests:
 
 
 
 
Operating activities
 
$
19.7

 
$
11.8

Investing and financing activities
 
34.8

 
30.1

Total
 
$
54.5

 
$
41.9

 
 
 
 
 

On May 7, 2015, we acquired six noncontrolling interests in PGGM CO-JVs, which related to equity investments in six multifamily communities, and one controlling interest in a PGGM CO-JV, which related to a debt investment in a multifamily community. The net purchase price was $119.8 million, exclusive of closing costs. After the acquisition, we owned 100% in all but one of the PGGM CO-JVs in which we owned a post acquisition 93.5% interest based upon contributed capital. Because these equity investments were previously accounted for on the consolidated method of accounting, the

17


acquisition of the investment interests did 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 debt investment resulted in a change from equity method accounting to the consolidated method of accounting.

  
Redeemable Noncontrolling Interests
 
As of September 30, 2016 and December 31, 2015, redeemable noncontrolling interests consisted of the following (dollar amounts in millions):
 
 
September 30, 2016
 
December 31, 2015
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
Developer Partners
 
$
29.1

 
0% to 10%
 
$
29.1

 
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 (particularly in the event of a sale of the underlying multifamily community), 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 national or regional multifamily developers, which may require or previously required that we pay or reimburse our Developer Partners upon certain events.  They also generally have put options, generally 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. As of September 30, 2016, we have recorded in redeemable noncontrolling interests $28.8 million of put options, of which $7.7 million are exercisable by certain of our Developer Partners but have not been exercised. These Developer CO-JVs also generally include buy/sell provisions, generally available after the tenth year after completion of the development and mark to market elections which if elected, are generally available after the seventh year after formation of the Developer CO-JV. The mark to market provisions provide us the option to acquire the Developer Partner’s ownership interest or sell the multifamily community. None of these buy/sell or mark to market rights are currently available.  Each of these Developer CO-JVs is managed by a subsidiary of ours. As manager, we have substantial operational control rights.  These Developer CO-JVs generally provide that we have a preferred cash flow distribution until we receive certain returns on our investment.  If the individual put options are not exercised, these Developer Partners 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.


10.                               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 an affiliate of our former external advisor, Behringer Harvard Multifamily Advisors I, LLC (collectively with its affiliates, “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 earlier election by the holders of a majority of the then outstanding shares of Series A Preferred Stock, in each case based on the trading prices of our shares of common stock over a subsequent measurement period (the “Measurement Period”). 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 trading price of our common stock at the time of conversion, as determined pursuant to the Articles Supplementary establishing the Series A Preferred Stock over the

18


Measurement Period, multiplied by 168,537,343 shares of our common stock, plus (b) the aggregate value of distributions (including distributions constituting a return of capital) paid through such time on the 168,537,343 shares of our common stock 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 Value Per Share”). As of September 30, 2016, based on the per share trading price on that date, no shares of common stock would be issued in connection with the conversion. If the Conversion Value Per Share of Series A Preferred Stock is zero at the end of the Measurement Period, the Series A Preferred Stock will be deemed automatically canceled and cease to be outstanding as of such date.

On December 14, 2015, our board of directors formed a special determination committee (the “Determination Committee”) to determine the timing of the start and end of the Measurement Period in order to establish the appropriate conversion terms, including the conversion rate, of the Series A Preferred Stock in the event that Behringer does not elect conversion prior to December 31, 2016. The Determination Committee made and our board of directors approved the determination that the Measurement Period for the conversion of Series A Preferred Stock into shares of our common stock in connection with a Listing (as defined in the our charter) begins on January 2, 2017 and ends on February 13, 2017 and that on February 13, 2017, the Series A Preferred Stock will cease to be outstanding. See Note 11, “Commitments and Contingencies” for additional information regarding the status of the determinations made by the Determination Committee.

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 of common stock has been authorized for issuance under the Incentive Award Plan and 18.7 million shares of common stock are available for issuance as of September 30, 2016. For the nine months ended September 30, 2016 and 2015, we had approximately $2.7 million and $1.8 million, respectively, in compensation costs related to share-based payments including dividend equivalent payments.
 
Restricted Stock Units

Restricted stock units are granted to our directors and certain executive employees and generally vest in equal increments over a three year period. Dividends on restricted stock units that have vested but not been exercised are reflected in other distributions in the condensed consolidated statement of equity. The following table includes the number of restricted stock units granted, exercised (including units used to satisfy employee income tax withholding), forfeited and outstanding as of September 30, 2016 and 2015:
 
 
2016
 
2015
 
 
Units
 
Weighted Average Grant Date Fair Value
 
Units
 
Weighted Average Grant Date Fair Value
Outstanding January 1,
549,496

 
$
9.64

 
248,691

 
$
10.03

Granted
 
424,128

 
9.30

 
467,951

 
9.45

Exercised
 
(146,560
)
 
9.50

 
(40,690
)
 
10.03

Forfeited
 
(20,496
)
 
9.66

 

 

Outstanding September 30,
 
806,568

 
$
9.49

 
675,952

 
$
9.63

 
 
 
 
 
 
 
 
 

Restricted Stock

Restricted stock is granted to certain employees and generally vests in equal increments over a three-year period following the grant date. The following is a summary of the restricted stock granted, exercised (including shares used to satisfy employee income tax withholding), forfeited and outstanding as of September 30, 2016 and 2015:

19


 
 
2016
 
2015
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding January 1,
 
20,868

 
$
9.21

 

 
$

Granted
 
145,845

 
9.69

 
25,746

 
9.21

Exercised
 
(6,414
)
 
9.21

 

 

Forfeited
 
(30,123
)
 
9.20

 
(4,878
)
 
9.21

Outstanding September 30,
 
130,176

 
$
9.75

 
20,868

 
$
9.21

 
 
 
 
 
 
 
 
 


Distributions 

The following table presents the regular distributions declared for the nine months ended September 30, 2016 and 2015 (in millions, except per share amounts):
 
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
 
Declared
 
Declared per Share
 
Declared
 
Declared per Share
Third quarter
 
$
12.5

 
$
0.075

 
$
12.5

 
$
0.075

Second quarter
 
12.5

 
0.075

 
12.5

 
0.075

First quarter
 
12.5

 
0.075

 
12.5

 
0.075

Total
 
$
37.5

 
$
0.225

 
$
37.5

 
$
0.225

 
 
 


11.                               Commitments and Contingencies
 
Substantially all of our Co-Investment Ventures include buy/sell provisions and substantially all of our Developer CO-JVs include mark to market 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 or in the case of a mark to market provision, we have the option to purchase the Developer Partner’s ownership interest at the established market price or sell the multifamily community.  As of September 30, 2016, no such buy/sell offers are outstanding or mark to market provisions are available.
 
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 markets, a local or national housing authority may make 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 time of 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 September 30, 2016 and December 31, 2015, we have approximately $19.8 million and $18.9 million, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.

As of September 30, 2016, we have entered into construction and development contracts with $110.7 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.


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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):
Year
 
Future Minimum Lease Payments
October 2016 through December 2016
 
$
0.1

2017
 
0.8

2018
 
0.8

2019
 
0.8

2020
 
0.8

Thereafter
 
3.2

Total
 
$
6.5


On November 10, 2015, a complaint was filed in the District Court of Dallas County, Texas against the Company by Behringer, the Company’s former external advisor. The complaint alleges the Company breached certain terms of the self-management transition agreements between the Company and Behringer. In the complaint, Behringer makes claims for damages to recover approximately $2.3 million in debt financing fees purportedly owed to Behringer relating to the Company’s $200 Million Facility as well as certain property-level debt financing arrangements.   On January 13, 2016, the Company filed an answer and counterclaim in the Behringer lawsuit.  The Company’s counterclaim seeks approximately $1.5 million in refunds of development fees previously paid by the Company in connection with the Shady Grove acquisition. On June 24, 2016, Behringer filed a motion for summary judgment amending its original claims of approximately $2.3 million to approximately $4.3 million in debt financing fees plus attorney’s fees and prejudgment interest. Because the litigation related to Behringer’s claims and our claims is in the beginning stages of discovery, management cannot estimate the ultimate resolution of the matters. As of September 30, 2016, no liabilities for the matter have been recorded. We do not believe the ultimate outcome will have a material effect on our consolidated financial statements.

On September 30, 2016, the Company filed a complaint and a motion for summary judgment with the Circuit Court for Baltimore City, Maryland, seeking a judicial declaration that, among other things, the Company’s determination regarding the Measurement Period for the Series A Preferred Stock (See Note 10, “Stockholders’ Equity”) is valid, final, conclusive and binding upon the Company and every stockholder, including Behringer as the sole holder of the Series A Preferred Stock. At this time, the Company is unable to predict the outcome or timing of the court’s ruling on the Company’s judicial declaration request. As of September 30, 2016, any uncertainty over the terms and timing of the Measurement Period has not resulted in any contingencies related to any reported financial statement amounts, including but not limited to calculations of basic and diluted earnings per share.

We are also subject to various legal proceedings and claims which arise in the ordinary course of business, operations and developments. 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.


12.                              Fair Value of Derivatives and Financial Instruments

Financial Instruments Carried at Fair Value on a Recurring Basis

We currently use interest rate cap arrangements with financial institutions to manage our exposure to interest rate changes for our loans that utilize floating interest rates. The fair value of the interest rate caps are determined using Level 2 inputs under the fair value hierarchy. These inputs include quoted prices for similar interest rate cap arrangements, including consideration of the remaining term, the current yield curve, and interest rate volatility. Because our interest rate caps are on standard, commercial terms with national financial institutions, credit issues are not considered significant. As of September 30, 2016, we have $0.1 million of interest rate caps that are carried at fair value on a recurring basis.

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2016 (in millions):

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For the Three and Nine Months Ended September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
 
Loss
Other assets
 
 
 
 
 
 
 
 
 
 
 
Interest rate caps
 
$

 
$
0.1

 
$

 
$
0.1

 
$

 
 
 
 
 
 
 
 
 
 
 
 

We had no fair value adjustments on a recurring basis for the three and nine months ended September 30, 2015.

Non-recurring Basis - Fair Value Adjustments

As discussed in Note 4, “Real Estate Investments — Sales of Real Estate Reported in Continuing Operations,” we recorded an impairment charge related to one of our developments in May 2015. Prior to the impairment, the development had a net carrying value of $44.4 million. The $3.1 million impairment is included in the line item “acquisition, investment and development expenses” on the consolidated statement of operations. The fair value for the development was determined based upon the terms of the purchase and sale agreement which closed in June 2015. We consider this a Level 2 input under the fair value hierarchy.

As discussed in Note 9, “Noncontrolling Interests — Non-Redeemable Noncontrolling Interests,” we acquired a controlling interest in an unconsolidated investment in real estate joint venture in May 2015. We consolidated the PGGM CO-JV and recognized a loss related to the revaluation of our equity interest for the difference between our carrying value and the value of the investment. The fair value was determined based upon the pay-off value of the note receivable and its related accrued interest both which were repaid shortly after the acquisition of the controlling interest. We consider this a Level 2 input under the fair value hierarchy.

The following fair value hierarchy table presents information about our assets measured at fair value on a nonrecurring basis for the nine months ended September 30, 2015 (in millions):
For the Nine Months Ended September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
 
Gain (Loss)
Assets
 
 
 
 
 
 
 
 
 
 
 
Construction in progress
 
$

 
$
41.2

 
$

 
$
41.2

 
$
(3.1
)
 
Other assets
 

 
16.6

 

 
16.6

 

 
 
 
$

 
$
57.8

 
$

 
$
57.8

 
$
(3.1
)
 
 
 
 
 
 
 
 
 
 
 
 

We had no fair value adjustments on a nonrecurring basis for the three and nine months ended September 30, 2016. We had no fair value adjustments on a nonrecurring basis for the three months ended September 30, 2015.

Financial Instruments Not Carried at Fair Value
 
Financial instruments held as of September 30, 2016 and December 31, 2015 and not measured at fair value on a recurring basis include cash and cash equivalents, notes receivable, credit facilities 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 facilities 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 September 30, 2016 and December 31, 2015 are as follows (in millions):  
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
Mortgages and notes payable
 
$
1,529.2

 
$
1,534.5

 
$
1,473.0

 
$
1,473.1

Less: deferred financing costs, net
 
(9.2
)
 
 
 
(11.7
)
 
 
Mortgages and notes payable, net
 
$
1,520.0

 
 
 
$
1,461.3

 
 

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13.                               Supplemental Disclosures of Cash Flow Information
 
Supplemental cash flow information for the nine months ended September 30, 2016 and 2015 is summarized below (in millions):
 
 
For the Nine Months Ended 
 September 30,
 
 
2016
 
2015
Supplemental disclosure of cash flow information:
 
 

 
 

Interest paid, net of amounts capitalized of $6.1 million and $13.5 million in 2016 and 2015, respectively
 
$
33.1

 
$
21.4

 
 
 
 
 
Non-cash investing and financing activities:
 
 

 
 

Transfer of real estate from construction in progress to operating real estate
 
181.4

 
387.9

Conversion of investment in unconsolidated real estate joint venture into notes receivable
 

 
5.0

Distributions payable - regular<