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EX-32.1 - EXHIBIT 32.1 - Monogram Residential Trust, Inc.exhibit321063017.htm
EX-31.2 - EXHIBIT 31.2 - Monogram Residential Trust, Inc.exhibit312063017.htm
EX-31.1 - EXHIBIT 31.1 - Monogram Residential Trust, Inc.exhibit311063017.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 June 30, 2017
 
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 July 31, 2017, the Registrant had 167,026,690 shares of common stock outstanding.
 



MONOGRAM RESIDENTIAL TRUST, INC.
Form 10-Q
Quarter Ended June 30, 2017
 
 
 
Page
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



Monogram Residential Trust, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)(Unaudited) 
 
 
June 30,
2017
 
December 31,
2016
Assets
 
 

 
 

Real estate
 
 

 
 

Land
 
$
544,617

 
$
527,944

Buildings and improvements
 
2,750,618

 
2,814,221

Gross operating real estate
 
3,295,235

 
3,342,165

Less accumulated depreciation
 
(460,038
)
 
(461,869
)
Net operating real estate
 
2,835,197

 
2,880,296

Construction in progress, including land
 
108,052

 
120,423

Total real estate, net
 
2,943,249

 
3,000,719

 
 
 
 
 
Assets associated with real estate held for sale
 
47,843

 

Cash and cash equivalents
 
56,274

 
74,396

Tax like-kind exchange escrows
 
148,313

 
56,762

Intangibles, net
 
16,034

 
16,977

Other assets, net
 
59,001

 
51,248

Total assets
 
$
3,270,714

 
$
3,200,102

 
 
 
 
 
Liabilities and equity
 
 

 
 

 
 
 
 
 
Liabilities
 
 

 
 

Mortgages and notes payable, net
 
$
1,131,901

 
$
1,522,207

Credit facilities payable, net
 
386,695

 
8,023

Construction costs payable
 
18,390

 
26,859

Accounts payable and other liabilities
 
30,922

 
32,707

Deferred revenues and other gains
 
21,999

 
22,077

Distributions payable
 
12,527

 
12,512

Tenant security deposits
 
6,268

 
6,205

Obligations associated with real estate held for sale
 
33,589

 

Total liabilities
 
1,642,291

 
1,630,590

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Redeemable noncontrolling interests
 
23,516

 
29,073

 
 
 
 
 
Equity
 
 

 
 

Common stock, $0.0001 par value per share; 875,000,000 shares authorized, 167,031,843 and 166,832,722 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively
 
17

 
17

Additional paid-in capital
 
1,440,303

 
1,439,199

Cumulative distributions and net income (loss)
 
(252,374
)
 
(310,124
)
Total equity attributable to common stockholders
 
1,187,946

 
1,129,092

Non-redeemable noncontrolling interests
 
416,961

 
411,347

Total equity
 
1,604,907

 
1,540,439

Total liabilities and equity
 
$
3,270,714

 
$
3,200,102

 
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 
 June 30,
 
For the Six Months Ended 
 June 30,
 
 
2017
 
2016
 
2017
 
2016
Rental revenues
 
$
71,835

 
$
68,551

 
$
145,173

 
$
134,098

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Property operating expenses
 
18,869

 
20,401

 
38,007

 
39,207

Real estate taxes
 
11,690

 
10,617

 
23,654

 
21,239

General and administrative expenses
 
4,686

 
7,353

 
11,556

 
13,863

Merger-related expenses
 
2,801

 

 
2,801

 

Acquisition, investment and development expenses
 
69

 
100

 
133

 
378

Interest expense
 
11,850

 
11,063

 
23,554

 
21,429

Amortization of deferred financing costs
 
1,327

 
1,554

 
2,876

 
3,090

Depreciation and amortization
 
31,662

 
30,998

 
63,521

 
61,054

Total expenses
 
82,954

 
82,086

 
166,102

 
160,260

 
 
 
 
 
 
 
 
 
Interest income
 
1,246

 
1,776

 
2,427

 
3,458

Loss on early extinguishment of debt
 
(940
)
 

 
(4,841
)
 

Other expense, net
 
(232
)
 
(168
)
 
(320
)
 
(283
)
Loss from continuing operations before gains on sales of real estate
 
(11,045
)
 
(11,927
)
 
(23,663
)
 
(22,987
)
Gains on sales of real estate
 
28,559

 

 
115,282

 

 
 
 
 
 
 
 
 
 
Net income (loss)
 
17,514

 
(11,927
)
 
91,619

 
(22,987
)
 
 
 
 
 
 
 
 
 
Net (income) loss attributable to non-redeemable noncontrolling interests
 
(10,683
)
 
2,710

 
(8,803
)
 
5,465

Net income (loss) available to the Company
 
6,831

 
(9,217
)
 
82,816

 
(17,522
)
Dividends to preferred stockholders
 

 
(1
)
 

 
(3
)
Net income (loss) attributable to common stockholders
 
$
6,831

 
$
(9,218
)
 
$
82,816

 
$
(17,525
)
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
 
167,135

 
166,800

 
167,068

 
166,772

Weighted average number of common shares outstanding - diluted
 
168,241

 
166,800

 
168,016

 
166,772

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

 
$
(0.06
)
 
$
0.49

 
$
(0.11
)
 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.075

 
$
0.075

 
$
0.150

 
$
0.150

 
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, 2016
 
10

 
$

 
166,612

 
$
17

 
$
1,436,254

 
$
461,833

 
$
(269,523
)
 
$
1,628,581

Net loss
 

 

 

 

 

 
(5,465
)
 
(17,522
)
 
(22,987
)
Contributions by noncontrolling interests
 

 

 

 

 

 
2,967

 

 
2,967

Issuance of common and restricted shares, net
 

 

 
173

 

 
(341
)
 

 

 
(341
)
Amortization of stock-based compensation
 

 

 

 

 
1,771

 

 

 
1,771

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Common stock - regular
 

 

 

 

 

 

 
(25,017
)
 
(25,017
)
Noncontrolling interests
 

 

 

 

 

 
(15,769
)
 

 
(15,769
)
Preferred stock
 

 

 

 

 

 

 
(3
)
 
(3
)
Balance at June 30, 2016
 
10

 
$

 
166,785

 
$
17

 
$
1,437,684

 
$
443,566

 
$
(312,065
)
 
$
1,569,202

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
 
10

 
$

 
166,833

 
$
17

 
$
1,439,199

 
$
411,347

 
$
(310,124
)
 
$
1,540,439

Net income
 

 

 

 

 

 
8,803

 
82,816

 
91,619

Acquisitions of noncontrolling interests
 

 

 

 

 
(674
)
 
(541
)
 

 
(1,215
)
Contributions by noncontrolling interests
 

 

 

 

 

 
12,652

 

 
12,652

Issuance of common and restricted shares, net
 

 

 
199

 

 
(602
)
 

 

 
(602
)
Cancellation of preferred stock
 
(10
)
 

 

 

 

 

 

 

Amortization of stock-based compensation
 

 

 

 

 
2,380

 

 

 
2,380

Distributions:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Common stock - regular
 

 

 

 

 

 

 
(25,050
)
 
(25,050
)
Other related to stock-based compensation
 

 

 

 

 

 

 
(16
)
 
(16
)
Noncontrolling interests
 

 

 

 

 

 
(15,300
)
 

 
(15,300
)
Balance at June 30, 2017
 

 
$

 
167,032

 
$
17

 
$
1,440,303

 
$
416,961

 
$
(252,374
)
 
$
1,604,907

 
See Notes to Condensed Consolidated Financial Statements.





5


Monogram Residential Trust, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited) 
 
 
For the Six Months Ended 
 June 30,
 
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

Net income (loss)
 
$
91,619

 
$
(22,987
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 

 
 

Gains on sales of real estate
 
(115,282
)
 

Loss on early extinguishment of debt
 
4,841

 

Depreciation
 
62,960

 
60,479

Amortization of deferred financing costs and debt premium/discount
 
2,376

 
2,089

Amortization of intangibles
 
516

 
551

Amortization of deferred revenues
 
(819
)
 
(728
)
Amortization of stock-based compensation
 
2,380

 
1,771

Other, net
 
(248
)
 
(96
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts payable and other liabilities
 
300

 
728

Other assets
 
(4,553
)
 
1,291

Cash provided by operating activities
 
44,090

 
43,098

 
 
 
 
 
Cash flows from investing activities
 
 

 
 

Additions to real estate:
 
 

 
 

Acquisitions of real estate
 
(248,065
)
 

Additions to existing real estate
 
(5,039
)
 
(4,295
)
Construction in progress, including land
 
(47,155
)
 
(55,332
)
Proceeds from sales of real estate, net
 
349,379

 

Acquisitions of noncontrolling interests
 
(6,572
)
 

Advances on notes receivable
 

 
(17,203
)
Collection on notes receivable
 

 
14,989

Tax like-kind exchange escrow deposits
 
(219,184
)
 
624

Tax like-kind exchange escrow disbursements
 
127,633

 

Other escrow deposits
 
1,301

 
(567
)
Other, net
 
268

 
86

Cash used in investing activities
 
(47,434
)
 
(61,698
)
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

Mortgage and notes payable proceeds
 
174,554

 
39,862

Mortgage and notes payable principal payments
 
(539,120
)
 
(6,601
)
Proceeds from credit facilities
 
440,000

 
26,000

Credit facilities payments
 
(61,909
)
 
(28,000
)
Contributions from noncontrolling interests
 
12,652

 
2,967

Distributions paid on common stock - regular
 
(25,051
)
 
(25,002
)
Distributions paid to noncontrolling interests
 
(15,300
)
 
(15,768
)
Other, net
 
(604
)
 
(341
)
Cash used in financing activities
 
(14,778
)
 
(6,883
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(18,122
)
 
(25,483
)
Cash and cash equivalents at beginning of period
 
74,396

 
83,727

Cash and cash equivalents at end of period
 
$
56,274

 
$
58,244

 
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.  Subsequent to June 30, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with newly formed affiliates of Greystar Real Estate Partners, LLC. Under the terms of the Merger Agreement, which was unanimously approved by the Company’s board of directors, the Company’s stockholders will receive $12.00 per share in cash. The Company expects to close the Merger (as defined below) in the second half of 2017. See Note 15, “Subsequent Events — Merger Agreement” for further information.

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 primarily 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 June 30, 2017, we have equity and debt investments in 48 multifamily communities, of which 41 are stabilized operating multifamily communities and seven are in various stages of lease up or construction. Of the 48 multifamily communities, we wholly own 11 multifamily communities and two debt investments for a total of 13 wholly owned investments. One of the wholly owned multifamily communities was held for sale as of June 30, 2017 and sold in July 2017. See Note 4, “Real Estate Investments.” The remaining 35 investments are held through Co-Investment Ventures, all of which are consolidated. 
 
As of June 30, 2017, 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 June 30, 2017 and December 31, 2016. 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.

7


 
 
June 30, 2017
 
December 31, 2016
Co-Investment Structure
 
Number of Multifamily Communities
 
Our Effective
Ownership
 
Number of Multifamily Communities
 
Our Effective
Ownership
PGGM CO-JVs (a)
 
19

 
50% to 70%
 
21

 
50% to 70%
MW CO-JVs
 
14

 
55%
 
14

 
55%
Developer CO-JVs
 
2

 
100%
 
2

 
100%
Total
 
35

 
 
 
37

 
 
 
 
 
 
 
 
 
 
 
 

(a)
As of June 30, 2017 and December 31, 2016, the PGGM CO-JVs include Developer Partners in 15 and 18 multifamily communities, respectively. During the three months ended June 30, 2017, we sold two multifamily communities held by PGGM CO-JVs, both of which included Developer Partners. Additionally during the three months ended June 30, 2017, one of the Developer Partners exercised its put option. See further discussion in Note 9, “Noncontrolling Interests.”  

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 June 30, 2017, 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, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on February 28, 2017. 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 June 30, 2017 and condensed consolidated statements of operations, equity and cash flows for the periods ended June 30, 2017 and 2016 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 June 30, 2017 and December 31, 2016, and our consolidated results of operations and cash flows for the periods ended June 30, 2017 and 2016. 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 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 thereof, are completed and ready for

8


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.

We did not record any impairment loss for the six months ended June 30, 2017 and 2016, respectively.
 
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.

As of June 30, 2017, we had one multifamily community held for sale. See Note 4, “Real Estate Investments.” We had no assets held for sale as of December 31, 2016.
   
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 June 30, 2017 and December 31, 2016, cash and cash equivalents include $29.6 million and $28.8 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 three and six months ended June 30, 2016, any common stock equivalents were anti-dilutive. For the three and six months ended June 30, 2017, the dilutive impact was less than $0.01.


9


Reportable Segments
 
Our current business primarily consists of investing in and operating multifamily communities. Substantially all of our consolidated net income (loss) is from investments in real estate properties that we wholly own or own through Co-Investment Ventures, the latter of which may be accounted for under the equity method of accounting. Our management evaluates operating performance on an individual investment level. However, as each of our investments has similar economic characteristics in our consolidated financial statements, the Company is managed on an enterprise-wide basis with one reportable segment.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts included in the financial statements and accompanying notes to consolidated financial statements.  These estimates include such items as: the purchase price allocations for real estate and other acquisitions; 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.



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, our accounting for 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 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 do not expect the new guidance to have a significant effect on the recognition of our real estate sales; however, such final determination can only be made based on the specific terms of such sale. 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, which are our primary lease term, 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 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 lease agreements, mostly related to our office space and office equipment. As a lessor, our primary multifamily community leases are less than one year, and we expect that only our long-term leases, primarily retail leases, are in scope.

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. In November 2016, the FASB issued additional guidance requiring that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for annual

10


periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period using a retrospective transition method to each period presented. 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
 
Acquisitions of Real Estate

In January 2017, we acquired Desmond at Wilshire, a 175-unit multifamily community located in Los Angeles, California, from an unaffiliated seller, for a gross contract purchase price of $105.0 million, excluding closing costs. The purchase was substantially funded from the proceeds of multifamily community sales and the tax like-kind exchange escrow. The Desmond at Wilshire was a recently completed development in lease up at the date of acquisition and as of June 30, 2017 is 54% occupied.

In April 2017, we acquired Latitude, a 265-unit multifamily community in Arlington, Virginia, from an unaffiliated seller, for a gross contract purchase price of $142.5 million, excluding closing costs. The purchase was funded from proceeds of the tax like-kind exchange escrow of approximately $70.9 million, related to the sale of a multifamily community in March 2017, and the remainder primarily funded from our credit facilities. Latitude was a recently completed development in lease up at the date of acquisition and as of June 30, 2017 is 35% occupied.

Real Estate Investments and Intangibles and Related Depreciation and Amortization
 
As of June 30, 2017 and December 31, 2016, major components of our real estate investments and intangibles and related accumulated depreciation and amortization were as follows (in millions):
 
 
June 30, 2017
 
December 31, 2016
 
 
Buildings
 
Intangibles
 
Buildings
 
Intangibles
 
 
and
 
In-Place
 
Other
 
and
 
In-Place
 
Other
 
 
Improvements
 
Leases
 
Contractual
 
Improvements
 
Leases
 
Contractual
Cost
 
$
2,750.6

 
$
29.6

 
$
18.9

 
$
2,814.2

 
$
34.1

 
$
18.9

Less: accumulated depreciation and amortization
 
(460.0
)
 
(28.2
)
 
(4.3
)
 
(461.9
)
 
(32.1
)
 
(3.9
)
Net
 
$
2,290.6

 
$
1.4

 
$
14.6

 
$
2,352.3

 
$
2.0

 
$
15.0

 

Depreciation expense for the three months ended June 30, 2017 and 2016 was approximately $31.3 million and $30.6 million, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was approximately $62.7 million and $60.2 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 June 30, 2017 and December 31, 2016, includes $2.6 million of intangibles, primarily asset management and related fee revenue services. Cost of other contractual intangibles as of both June 30, 2017 and December 31, 2016, 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 both the three months ended June 30, 2017 and 2016 was approximately $0.3 million. Amortization expense associated with our lease and other contractual intangibles for the six months ended June 30, 2017 and 2016 was approximately $0.5 million and $0.6 million, respectively.
   

11


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
July through December 2017
 
$
0.5

2018
 
0.4

2019
 
0.4

2020
 
0.4

2021
 
0.4


Sales of Real Estate Reported in Continuing Operations

The following table presents our sales of real estate for the six months ended June 30, 2017 (in millions):
Date of Sale
 
Multifamily Community
 
Sales Contract Price
 
Net Cash Proceeds
 
Gains on Sales of Real Estate
For the Six Months Ended June 30, 2017
 
 
 
 
 
 
June 2017
 
Allusion West University - Houston, TX (a)
 
$
49.0

 
$
48.1

 
$
12.4

June 2017
 
Muse Museum District - Houston, TX (a)
 
60.0

 
58.8

 
16.1

March 2017
 
The District Universal Boulevard - Orlando, FL (a)
 
78.5

 
77.0

 
27.1

March 2017
 
Skye 2905 - Denver, CO
 
126.0

 
124.2

 
43.7

February 2017
 
Grand Reserve - Dallas, TX
 
42.0

 
41.3

 
16.0

 
 
Total
 
$
355.5

 
$
349.4

 
$
115.3

 
 
 
 
 
 
 
 
 
 

(a)
The cash proceeds from the sale, net of related mortgage debt as applicable, are reflected in “Tax like-kind exchange escrow” on the consolidated balance sheet as of June 30, 2017. The proceeds are being held in escrow in connection with a tax like-kind exchange for replacement properties. See Note 15, “Subsequent Events” for acquisitions closing subsequent to June 30, 2017.

The following table presents net income for the periods presented below related to the multifamily communities sold during the three and six months ended June 30, 2017, including gains on sales of real estate (in millions)
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Net income from multifamily communities sold
 
$
27.8

 
$
0.2

 
$
111.9

 
$
1.2

Less: net income attributable to noncontrolling interest
 
(12.5
)
 
(0.1
)
 
(12.5
)
 
(0.2
)
Net income attributable to common stockholders
 
$
15.3

 
$
0.1

 
$
99.4

 
$
1.0

 
 
 
 
 
 
 
 
 

There were no sales of multifamily communities for the six months ended June 30, 2016.

Real Estate Held for Sale

As of June 30, 2017, we had a 430-unit multifamily community, Veritas, located in Henderson, Nevada, which was classified as real estate held for sale. The multifamily community was sold in July 2017 for a gross sales price of $76.5 million. We had no real estate held for sale as of December 31, 2016. The major classes of assets and obligations associated with real estate held for sale are as follows (in millions):

12


 
 
June 30, 2017
Land
 
$
4.9

Buildings and improvements, net of approximately $13.6 million in accumulated depreciation
 
42.8

Other assets, net
 
0.1

Assets associated with real estate held for sale
 
$
47.8

 
 
 
Mortgages and notes payable, net
 
$
33.3

Accounts payable and other liabilities
 
0.3

Obligations associated with real estate held for sale
 
$
33.6

 
 
 

  

5.                                      Variable Interest Entities
 
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.   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 June 30, 2017 and December 31, 2016 (in millions):
 
 
June 30, 2017
 
December 31, 2016
Total assets
 
$
2,354.2

 
$
2,335.1

Net operating real estate
 
2,079.6

 
2,154.6

Construction in progress
 
108.1

 
120.8

 
 
 
 
 
Mortgages and notes payable outstanding (a)
 
$
991.3

 
$
1,237.9

Unsecured credit facility
 
270.2

 

Plus: unamortized adjustments from business combinations
 
(0.1
)
 
0.1

Less: deferred financing costs, net
 
(8.3
)
 
(7.9
)
Total mortgages and notes payable, net
 
$
1,253.1

 
$
1,230.1

 
 
 
 
 
 

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

Of the $991.3 million of mortgages and notes payable outstanding as of June 30, 2017, $748.3 million represents fully funded, non recourse mortgages and the remaining $243.0 million relates to amounts outstanding for construction financing with total commitments of $328.8 million. We have provided partial payment guarantees ranging from 5% to 25% on $190.5 million of the $243.0 million outstanding as of June 30, 2017. The outstanding amount of these guarantees is $39.1 million as of June 30, 2017. 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” and Note 8, “Credit Facilities Payable” for further information on our VIE debt.  
 

13



6.                                      Other Assets
 
The components of other assets as of June 30, 2017 and December 31, 2016 are as follows (in millions):
 
 
June 30, 2017
 
December 31, 2016
Notes receivable, net (a)
 
$
26.9

 
$
26.7

Resident, tenant and other receivables
 
9.4

 
5.2

Escrows and restricted cash
 
5.4

 
13.7

Prepaid assets, deposits and other assets
 
17.3

 
5.6

Total other assets, net
 
$
59.0

 
$
51.2

 
 

(a)
Notes receivable include mezzanine loans, primarily related to multifamily development projects.  As of June 30, 2017, the weighted average interest rate is 15.0% and the weighted average remaining years to scheduled maturity is 1.0 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 June 30, 2017 and December 31, 2016 (dollar amounts in millions and monthly LIBOR at June 30, 2017 is 1.22%):
 
 
 
 
 
 
As of June 30, 2017
 
 
June 30,
 
December 31,
 
Weighted Average
 
Maturity
 
 
2017
 
2016
 
Interest Rates
 
Dates
Company level (a)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
$
180.2

 
$
292.6

 
3.71%
 
2018 to 2021
 
 
 
 
 
 
 
 
 
Co-Investment Venture level - consolidated (b)
 
 

 
 

 
 
 
 
Fixed rate mortgages payable
 
712.6

 
636.6

 
3.33%
 
2017 to 2027
Variable rate mortgage payable
 
35.7

 
35.5

 
Monthly LIBOR + 1.81%
 
2017 to 2018
Fixed rate construction loans payable:
 
 
 
 
 
 
 
 
   Operating (c)
 
52.5

 

 
4.00%
 
2018
   In construction
 

 
50.9

 
N/A
 
N/A
Variable rate construction loans payable (d):
 
 
 
 
 
 
 
 
   Operating
 
190.5

 
498.5

 
Monthly LIBOR + 2.10%
 
2018 to 2019
   In construction
 

 
16.4

 
Monthly LIBOR + 2.65%
 
2020
Total Co-Investment Venture level - consolidated
 
991.3

 
1,237.9

 
 
 
 
Total Company and Co-Investment Venture level
 
1,171.5

 
1,530.5

 
 
 
 
Less: mortgage payable, net on multifamily community held for sale as of June 30, 2017 (e)
 
(33.3
)
 

 
 
 
 
Less: unamortized adjustments from business combinations
 
(0.1
)
 
1.0

 
 
 
 
Less: deferred financing costs, net
 
(6.2
)
 
(9.3
)
 
 
 
 
Total consolidated mortgages and notes payable, net
 
$
1,131.9

 
$
1,522.2

 
 
 
 
 

(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.


14


(c)
As of June 30, 2017, includes one loan with a total commitment of $53.5 million. The construction loan includes a two year extension option. As of June 30, 2017, there is $1.0 million remaining to draw under the construction loan. We may elect not to fully draw down any unfunded commitment.

(d)
As of June 30, 2017, includes five loans with total commitments of $275.3 million. As of June 30, 2017, the Company has partially guaranteed four of these loans with total commitments of $195.3 million, of which $39.1 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 June 30, 2017, there is $84.8 million remaining to draw under the construction loans. We may elect not to fully draw down any unfunded commitment.

(e)
The debt is included in the line item “Obligations associated with real estate held for sale” on the consolidated balance sheet as of June 30, 2017.

In connection with our sales of real estate during the six months ended June 30, 2017, we retired $110.1 million of mortgages and notes payable prior to their maturity date, incurring $3.0 million of loss on early extinguishment of debt. We included payments related to early extinguishment of debt in cash flows from financing activities in the condensed consolidated statement of cash flows.

As of June 30, 2017, $2.0 billion of the net consolidated carrying value of real estate collateralized the mortgages and notes payable.  We believe we are in compliance with all financial covenants as of June 30, 2017.
 
As of June 30, 2017, 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
July through December 2017
 
$
1.9

 
$
91.7

 
$
93.6

2018
 
63.9

 
236.8

 
300.7

2019
 
60.4

 
164.3

 
224.7

2020
 
1.2

 
172.9

 
174.1

2021
 
52.8

 
108.5

 
161.3

Thereafter
 

 
217.1

 
217.1

Total
 
$
180.2

 
$
991.3

 
1,171.5

Less: mortgage payable, net on multifamily community held for sale as of June 30, 2017
 
 
 
 
 
(33.3
)
Add: unamortized adjustments from business combinations
 
 

 
 

 
(0.1
)
Less: deferred financing costs, net
 
 
 
 
 
(6.2
)
Total mortgages and notes payable, net
 
 

 
 

 
$
1,131.9


We believe these mortgages and notes payable can be refinanced or retired from available capital resources at or prior to their maturity dates, which may include extension options.


8.                               Credit Facilities Payable
 
The following table presents the terms and amounts outstanding under our credit facilities as of June 30, 2017 and December 31, 2016 (dollar amounts in millions and monthly LIBOR at June 30, 2017 was 1.22%):

15


 
 
 
Balance Outstanding
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
 
Interest Rate as of June 30, 2017
 
Maturity Date
Company level
 
 
 
 
 
 
 
 
$150 million credit facility (a)
 
$

 
$
10.0

 
N/A
 
N/A
$200 million revolving credit facility
 
121.0

 

 
Monthly LIBOR + 2.50%
 
January 14, 2019 (b)
Total Company level
121.0

 
10.0

 
 
 
 
 
 
 
 
 
 
 
 
Co-Investment Venture level - consolidated
 
 
 
 
 
 
 
 
Unsecured Credit Facility:
 
 
 
 
 
 
 
 
 
Revolver
 
170.2

 

 
Monthly LIBOR + 2.25%
 
March 30, 2021 (b)
 
Term loan
 
100.0

 

 
Monthly LIBOR + 2.25%
 
March 30, 2022
Total Co-Investment Venture level- consolidated
270.2

 

 
 
 
 
 
 
 
 
 
 
 
 
Total credit facilities outstanding
 
391.2

 
10.0

 
 
 
 
Less: deferred financing costs, net
(4.5
)
 
(2.0
)
 
 
 
 
 
Total credit facilities payable, net
$
386.7

 
$
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 

(a)    We retired the facility on February 28, 2017.

(b)    Includes a one year extension option, subject to the satisfaction of certain conditions.

Unsecured Credit Facility

On March 30, 2017, we and the PGGM Co-Investment Partner entered into a $300 million unsecured credit facility (the “Unsecured Credit Facility”), consisting of a $200 million revolving credit facility (the “Revolver”) and a $100 million term loan. The Unsecured Credit Facility provides us with the ability from time to time to increase the facility up to $500 million, subject to certain conditions, and to allocate the increase between the Revolver and the term loan.

The aggregate borrowing availability under the Unsecured Credit Facility will generally be equal to 50% of the value of the unencumbered properties, as defined in the agreement governing the Unsecured Credit Facility. Properties may be removed from or added to the unencumbered properties pool, subject to the satisfaction of certain conditions contained in the agreement governing the Unsecured Credit Facility. As of June 30, 2017, additional aggregate borrowing availability is approximately $22.0 million.

The agreement governing the Unsecured Credit Facility contains customary provisions with respect to events of default, covenants and borrowing conditions. The most significant of these are that the ratio of net operating income attributable to the unencumbered properties and tax like-kind exchange escrows to debt interest expense of borrowings under the Unsecured Credit Facility must not be less than 1.4 to 1.0 and that borrowing under the Unsecured Credit Facility must not exceed 50% of the adjusted value of the unencumbered properties.

$200 Million Revolving Credit Facility

Borrowing tranches under the $200 million revolving credit facility (the “$200 Million Facility”) bear interest at rates based on defined leverage ratios, which as of June 30, 2017 is LIBOR + 2.5%. 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 agreement governing the $200 Million Facility contains customary provisions with respect to events of default, covenants and borrowing conditions. In particular, the agreement governing the $200 Million Facility requires us to maintain (as defined in such 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

16


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 our credit facilities as of June 30, 2017.


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.   

As of June 30, 2017 and December 31, 2016, 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):
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
PGGM Co-Investment Partner
 
$
306.4

 
30% to 45%
 
$
295.6

 
30% to 45%
MW Co-Investment Partner
 
104.5

 
45%
 
109.6

 
45%
Developer Partners
 
4.1

 
0% to 10%
 
4.1

 
0% to 10%
Subsidiary preferred units
 
2.0

 
(b)
 
2.0

 
(b)
Total non-redeemable NCI
 
$
417.0

 
 
 
$
411.3

 
 
 

(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 June 30, 2017, we have no current intent to exercise our redemption option.  Accordingly, these noncontrolling interests are reported as equity.


17


For the six months ended June 30, 2017 and 2016, we paid the following distributions to noncontrolling interests (in millions):
 
 
For the Six Months Ended 
 June 30,
 
 
2017
 
2016
Distributions paid to noncontrolling interests:
 
 
 
 
Operating activities
 
$
13.5

 
$
12.8

Investing and financing activities
 
1.8

 
3.0

Total
 
$
15.3

 
$
15.8

 
 
 
 
 

Redeemable Noncontrolling Interests
 
As of June 30, 2017 and December 31, 2016, redeemable noncontrolling interests consisted of the following (dollar amounts in millions) :
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Effective
 
 
 
Effective
 
 
Amount
 
NCI % (a)
 
Amount
 
NCI % (a)
Developer Partners
 
$
23.5

 
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 that we pay or reimburse our Developer Partners upon certain events.  They also generally have put options, which are 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 June 30, 2017, we have recorded in redeemable noncontrolling interests $23.3 million of put options, of which $7.6 million are exercisable by certain of our Developer Partners but have not been exercised. During the three months ended June 30, 2017, one of the Developer Partners exercised their put for $2.8 million.

Prior to the sale of two multifamily communities in June 2017, we bought out the Developer Partner interest in each of the related Developer CO-JVs at a negotiated combined price of $3.7 million. The acquisitions of the noncontrolling interests did not result in a change in control, and accordingly, no gain or loss was recognized on the transactions. The acquisitions resulted in a $0.7 million charge to additional paid-in capital.
 
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.  If the noncontrolling interest relates to a PGGM Co-JV, then the PGGM Co-Investment Partner would be responsible for its share of such payments. See Note 11, “Commitments and Contingencies” for additional information regarding a currently outstanding buy/sell provision.

Each of these Developer CO-JVs is managed by a subsidiary of ours. As manager, we have substantial operational control rights.  These Developer CO-JVs generally provide that we have a preferred cash flow distribution until we receive certain returns on and of our investment.  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. For the six months ended June 30, 2017 and 2016, no promoted interest payments were made by us related to redeemable noncontrolling interests.


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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”). On February 13, 2017, all outstanding shares of the Series A Preferred Stock were canceled without any conversion or other consideration.

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 (“RSUs”), 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 18.2 million shares of common stock are available for issuance as of June 30, 2017. As of June 30, 2017, we have outstanding time-based RSUs (RSUs where the award vests ratably over time and is not subject to future performance targets, and accordingly, which are initially recorded at the current market price at the time of grant), performance-based RSUs (RSUs which at the time of grant are recorded at fair value and the final award, if any, is based on achieving certain performance targets) and restricted stock. For the six months ended June 30, 2017 and 2016, we had approximately $2.4 million and $1.9 million, respectively, in compensation costs related to share-based payments including dividend equivalent payments.
 
Restricted Stock Units

We have outstanding RSUs held by our executive officers and independent directors. RSUs generally vest in equal increments over the vesting period (generally two to three years with acceleration in the event of certain defined events). Dividends on RSUs that have vested but have not been exercised are reflected in other distributions in the condensed consolidated statement of equity.

The following table includes the number of RSUs granted, exercised (including RSUs used to satisfy employee income tax withholding) and outstanding as of June 30, 2017 and 2016:
 
 
2017
 
2016
 
 
Units
 
Weighted Average Grant Date Fair Value
 
Units
 
Weighted Average Grant Date Fair Value
Outstanding January 1,
801,603

 
$
9.48

 
549,496

 
$
9.64

Granted
 
634,456

 
8.64

 
424,128

 
9.30

Exercised
 
(202,165
)
 
9.34

 
(130,022
)
 
9.46

Forfeited
 
(9,955
)
 
10.02

 
(20,496
)
 
9.66

Outstanding June 30,
 
1,223,939

 
$
9.07

 
823,106

 
$
9.49

 
 
 
 
 
 
 
 
 
Time-based RSUs outstanding
 
918,275

 
$
9.74

 
823,106

 
$
9.49

Performance-based RSUs outstanding
 
305,664

 
$
6.99

 

 
$

 
 
 
 
 
 
 
 
 

Final awards of our performance-based RSUs outstanding as of June 30, 2017 will be based on our total shareholder return, as defined, compared to absolute targets and to the weighted average of a defined peer group. We believe it is probable that the total shareholder return will achieve the targets and that the performance-based RSUs will be awarded.

Restricted Stock

Restricted stock is granted to non-executive 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 June 30, 2017 and 2016:

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2017
 
2016
 
 
Shares
 
Weighted Average Grant Date Fair Value
 
Shares
 
Weighted Average Grant Date Fair Value
Outstanding January 1,
 
123,661

 
$
9.77

 
20,868

 
$
9.21

Granted
 
75,708

 
10.36

 
95,847

 
9.20

Exercised
 
(24,928
)
 
9.20

 
(6,414
)
 
9.21

Forfeited
 
(19,729
)
 
9.72

 
(14,195
)
 
9.20

Outstanding June 30,
 
154,712

 
$
10.16

 
96,106

 
$
9.20

 
 
 
 
 
 
 
 
 

Distributions 

The following table presents the regular distributions declared for the six months ended June 30, 2017 and 2016 (in millions, except per share amounts):
 
 
For the Six Months Ended 
 June 30,
 
 
2017
 
2016
 
 
Declared
 
Declared per Share
 
Declared
 
Declared per Share
Second quarter
 
$
12.5

 
$
0.075

 
$
12.5

 
$
0.075

First quarter
 
12.5

 
0.075

 
12.5

 
0.075

Total
 
$
25.0

 
$
0.150

 
$
25.0

 
$
0.150

 
 
 

In accordance with the Merger Agreement, as further discussed in Note 15, “Subsequent Events,” no future distributions are expected to be declared or paid through the closing of the Merger. The regular distribution for the second quarter of 2017 was paid on July 7, 2017.


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.  In June 2017, we issued buy/sell notices related to two MW CO-JVs for a combined purchase price of $24.3 million in CO-JV equity. The MW Co-Investment Partner gave notice which effectively elected to our purchase of the MW CO-JV’s equity interest. In response, we gave notice deferring the purchase of MW CO-JV’s interest until November 2017. During this period or the end of the deferral period, we have certain rights, including the right to acquire the MW CO-JV interests, jointly sell the multifamily community or to issue a new buy/sell notice. As of June 30, 2017, no other 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 June 30, 2017 and December 31, 2016, we have

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approximately $18.8 million and $19.5 million, respectively, of carrying value for deferred lease revenues related to The Gallery at NoHo Commons.

As of June 30, 2017, we have entered into construction and development contracts with approximately $70.0 million remaining to be paid.  These construction costs are expected to be paid during the completion of the development and construction period, generally within 18 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):
Year
 
Future Minimum Lease Payments
July through December 2017
 
$
0.3

2018
 
0.8

2019
 
0.8

2020
 
0.8

2021
 
0.8

Thereafter
 
2.4

Total
 
$
5.9


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

We had no fair value adjustments on a recurring or nonrecurring basis for the three and six months ended June 30, 2017 and 2016.

Financial Instruments Not Carried at Fair Value
 
Financial instruments held as of June 30, 2017 and December 31, 2016 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 June 30, 2017 and December 31, 2016 are as follows (in millions) :  
 
 
June 30, 2017
 
December 31, 2016
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
 
Amount
 
Value
 
Amount
 
Value
Mortgages and notes payable
 
$
1,171.4

 
$
1,166.0

 
$
1,531.5

 
$
1,533.8

Less: mortgage payable, net on multifamily community held for sale as of June, 30 2017
 
(33.3
)
 
 
 

 
 
Less: deferred financing costs, net
 
(6.2
)
 
 
 
(9.3
)
 
 
Mortgages and notes payable, net
 
$
1,131.9

 
 
 
$
1,522.2

 
 
 
 
 
 
 
 
 
 
 

13.                               Related Party Arrangements

On February 13, 2017, we made a payment of $1.6 million to Behringer in full settlement of disputed fees related to Behringer’s prior advisory services. The related expense was recorded in 2016.


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On February 13, 2017, all outstanding shares of the Series A Preferred Stock (See Note 10, “Stockholders’ Equity — Capitalization”) issued to Behringer, which represented all of the Series A Preferred Stock shares issued and outstanding, were canceled without any conversion or other consideration.


14.                               Supplemental Disclosures of Cash Flow Information
 
Supplemental cash flow information for the six months ended June 30, 2017 and 2016 is summarized below (in millions)
 
 
For the Six Months Ended 
 June 30,
 
 
2017
 
2016
Supplemental disclosure of cash flow information:
 
 

 
 

Interest paid, net of amounts capitalized of $2.1 million and $4.3 million in 2017 and 2016, respectively
 
$
25.4

 
$
22.1

 
 
 
 
 
Non-cash investing and financing activities:
 
 

 
 

Transfer of real estate from construction in progress to operating real estate
 
48.4

 
155.3

Transfer of assets to assets associated with real estate held for sale
 
47.8

 

Transfer of liabilities to obligations associated with real estate held for sale
 
33.6

 

Distributions payable - regular
 
12.5

 
12.5

Construction costs and other related payables
 
13.6

 
26.7



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

Merger Agreement
On July 4, 2017, the Company entered into the Merger Agreement with GS Monarch Parent, LLC (“GS Monarch Parent”) and GS Monarch Acquisition, LLC, which are affiliates of Greystar Real Estate Partners, LLC. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, the Company will merge with and into GS Monarch Acquisition, LLC (the “Merger”). Upon completion of the Merger, GS Monarch Acquisition, LLC will survive and the separate corporate existence of the Company will cease. The Merger Agreement, the Merger and the other transactions contemplated thereby were unanimously approved by the Company’s board of directors.
Pursuant to the terms and conditions in the Merger Agreement, at the closing of the Merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive an amount in cash equal to $12.00 per share, without interest (the “Merger Consideration”). The Company paid a common stock distribution of $0.075 per share in July 2017 for the quarter ended June 30, 2017, but, under the terms of the Merger Agreement, any additional distribution paid during the term of the Merger Agreement will result in a dollar for dollar reduction in the Merger Consideration.
The Merger Agreement also contains customary representations, warranties and covenants, including, among others, covenants by the Company to conduct its business in all material respects in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Merger. The obligations of the parties to consummate the Merger are not subject to any financing condition or the receipt of any financing by GS Monarch Parent.
The consummation of the Merger is subject to certain customary closing conditions, including, among others, approval of the Merger by the affirmative vote of a majority of the outstanding shares of the Company’s common stock as of the record date for the special meeting of the Company’s common stockholders (the “Company Stockholder Approval”) and that all required approvals, authorizations and consents of any governmental authority have been obtained.
The Merger Agreement requires the Company to convene a stockholders’ meeting for purposes of obtaining the Company Stockholder Approval. On July 28, 2017, we filed a preliminary proxy statement with the SEC with respect to such

22


meeting which contains, subject to certain exceptions, the Company’s board of directors’ recommendation that the Company’s stockholders vote in favor of the Merger.
The Company has agreed not to solicit or enter into an agreement regarding an Acquisition Proposal (as defined in the Merger Agreement). However, prior to receipt of the Company Stockholder Approval, the Company may participate in discussions or negotiations with, and provide certain nonpublic information to, third parties related to any unsolicited Acquisition Proposal if the Company’s board of directors concludes after consultation with advisors that failure to do so would be inconsistent with its legal duties and that such Acquisition Proposal constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the Merger Agreement).
Prior to the Company Stockholder Approval, the Company’s board of directors may in certain circumstances effect a Change in Recommendation (as defined in the Merger Agreement), subject to complying with specified notice and other conditions set forth in the Merger Agreement.
The Merger Agreement may be terminated under certain circumstances by the Company, including prior to receipt of the Company Stockholder Approval, if, after following certain procedures and adhering to certain restrictions, the Company’s board of directors has approved, and concurrently with the termination of the Merger Agreement, the Company enters into, a definitive agreement providing for the implementation of a Superior Proposal. In addition, GS Monarch Parent may terminate the Merger Agreement under certain circumstances and subject to certain restrictions, including if the Company’s board of directors effects a Change in Recommendation. Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termination fee to GS Monarch Parent of either $25,261,292 or $65,679,359 depending on the timing and circumstances of the termination. In certain other circumstances, GS Monarch Parent will be required to pay the Company a termination fee of $202,090,337 upon termination of the Merger Agreement.
During the quarter ended June 30, 2017, the Company recognized $2.8 million of Merger-related expenses. Subsequent to June 30, 2017, we incurred additional Merger-related expenses of approximately $3.0 million. We expect that additional expenses will be incurred in connection with the closing of the Merger. However, all such Merger-related expenses incurred by the Company will not reduce the Merger Consideration.
Acquisitions of Multifamily Communities and Tax Like-Kind Exchange Escrows

In July 2017, we acquired a 229-unit multifamily community in Boca Raton, Florida for a gross contract purchase price of $80.5 million, before any closing costs. The purchase was funded from the proceeds of the tax like-kind exchange escrow of $40.1 million from the sale of a multifamily community in March 2017 with the remainder primarily funded from our credit facilities.

In July 2017, $108.4 million of tax like-kind exchange escrows established in connection with our sales of the Allusion West University and Muse Museum District community sales were released in cash. The proceeds were primarily used to pay down our credit facilities.

In August 2017, we acquired a 182-unit multifamily community in Melrose, Massachusetts for a gross contract purchase price of $75.0 million, before any closing costs. The purchase was funded from the proceeds of the tax like-kind exchange escrow of $42.2 million from the sale of a multifamily community in July 2017 with the remainder primarily funded from our credit facilities.




* * * * *

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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 condensed 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” and Part II, Item 1A, “Risk Factors” included in this Quarterly Report on Form 10-Q 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 February 28, 2017.