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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                          to                        

 

Commission File Number: 000-53195

 

Behringer Harvard Multifamily REIT I, 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.)

 

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of Principal Executive Offices) (ZIP Code)

 

(866) 655-3600

(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 o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

As of April 30, 2011, the Registrant had 119,158,636 shares of common stock outstanding.

 

 

 



Table of Contents

 

BEHRINGER HARVARD MULTIFAMILY REIT I, INC.

Form 10-Q

Quarter Ended March 31, 2011

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010

3

 

 

 

 

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010

4

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2011 and the Year Ended December 31, 2010

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

 

Item 4.

 

Controls and Procedures

57

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

58

 

 

 

 

Item 1A.

 

Risk Factors

58

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

60

 

 

 

 

Item 4.

 

(Removed and Reserved)

60

 

 

 

 

Item 5.

 

Other Information

60

 

 

 

 

Item 6.

 

Exhibits

62

 

 

 

 

Signature

63

 

2



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

Assets

 

 

 

 

 

Real estate:

 

 

 

 

 

Land

 

$

96,470

 

$

96,470

 

Buildings and improvements

 

441,368

 

440,556

 

 

 

537,838

 

537,026

 

Less accumulated depreciation

 

(18,655

)

(13,941

)

Net operating real estate

 

519,183

 

523,085

 

Construction in progress, including land

 

988

 

905

 

Total real estate, net

 

520,171

 

523,990

 

 

 

 

 

 

 

Investments in unconsolidated real estate joint ventures

 

320,769

 

349,411

 

Cash and cash equivalents

 

157,370

 

52,606

 

Deferred financing costs, net

 

3,537

 

3,699

 

Receivables from affiliates

 

304

 

286

 

Intangibles, net

 

18,874

 

19,992

 

Other assets, net

 

13,847

 

8,817

 

Total assets

 

$

1,034,872

 

$

958,801

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgage loans payable

 

$

93,206

 

$

93,360

 

Credit facility payable

 

63,000

 

64,000

 

Payables to affiliates

 

2,914

 

2,863

 

Distributions payable

 

5,674

 

5,179

 

Deferred lease revenues and other related liabilities, net

 

15,562

 

15,909

 

Tenant security deposits

 

946

 

940

 

Accounts payable and other liabilities

 

6,179

 

5,781

 

Total liabilities

 

187,481

 

188,032

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, $.0001 par value per share; 124,999,000 shares authorized, none outstanding

 

 

 

Non-participating, non-voting convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and outstanding

 

 

 

Common stock, $.0001 par value per share; 875,000,000 shares authorized, 113,665,643 and 102,859,791 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

 

12

 

10

 

Additional paid-in capital

 

994,799

 

896,500

 

Cumulative distributions and net loss

 

(147,420

)

(125,741

)

Total stockholders’ equity

 

847,391

 

770,769

 

Total liabilities and stockholders’ equity

 

$

1,034,872

 

$

958,801

 

 

See Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Operations

(in thousands, except per share amounts)

(Unaudited)

 

 

 

For the Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Rental revenues

 

$

12,413

 

$

5,146

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Property operating expenses

 

3,816

 

1,396

 

Real estate taxes

 

1,916

 

588

 

Asset management and other fees

 

1,468

 

1,278

 

General and administrative expenses

 

1,037

 

1,016

 

Acquisition expenses

 

 

2,776

 

Interest expense

 

1,842

 

642

 

Depreciation and amortization

 

6,264

 

3,588

 

Total expenses

 

16,343

 

11,284

 

 

 

 

 

 

 

Interest income

 

288

 

326

 

Equity in loss of investments in unconsolidated real estate joint ventures

 

(2,115

)

(3,207

)

Net loss

 

$

(5,757

)

$

(9,019

)

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

107,486

 

64,222

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$

(0.05

)

$

(0.14

)

 

See Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Cumulative

 

Total

 

 

 

Number

 

Par

 

Number

 

Par

 

Paid-in

 

Distributions and

 

Stockholders’

 

 

 

of Shares

 

Value

 

of Shares

 

Value

 

Capital

 

Net  Loss

 

Equity

 

Balance at January 1, 2010

 

1

 

$

 

57,098

 

$

5

 

$

486,880

 

$

(35,868

)

$

451,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(34,570

)

(34,570

)

Sales of common stock, net

 

 

 

44,626

 

5

 

397,406

 

 

397,411

 

Redemptions of common stock

 

 

 

(1,837

)

 

(16,029

)

 

(16,029

)

Distributions declared on common stock

 

 

 

 

 

 

(55,303

)

(55,303

)

Stock issued pursuant to distribution reinvestment plan, net

 

 

 

2,973

 

 

28,243

 

 

28,243

 

Balance at December 31, 2010

 

1

 

 

102,860

 

10

 

896,500

 

(125,741

)

770,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

(5,757

)

(5,757

)

Sales of common stock, net

 

 

 

10,536

 

2

 

95,350

 

 

95,352

 

Redemptions of common stock

 

 

 

(601

)

 

(5,329

)

 

(5,329

)

Distributions declared on common stock

 

 

 

 

 

 

(15,922

)

(15,922

)

Stock issued pursuant to distribution reinvestment plan, net

 

 

 

871

 

 

8,278

 

 

8,278

 

Balance at March 31, 2011

 

1

 

$

 

113,666

 

$

12

 

$

994,799

 

$

(147,420

)

$

847,391

 

 

See Notes to Consolidated Financial Statements.

 

5



Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

For the Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(5,757

)

$

(9,019

)

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

 

 

 

 

 

Equity in loss of investments in unconsolidated real estate joint ventures

 

2,115

 

3,207

 

Distributions received from investments in unconsolidated real estate joint ventures

 

3,632

 

1,537

 

Depreciation and amortization

 

4,870

 

1,806

 

Amortization of intangibles

 

1,106

 

1,587

 

Amortization of deferred financing costs

 

287

 

197

 

Amortization of deferred lease revenues and other related liabilities

 

(346

)

(344

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts payable and other liabilities

 

554

 

891

 

Other assets

 

191

 

(331

)

Payables to affiliates

 

 

(4

)

Cash provided by (used in) operating activities

 

6,652

 

(473

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Acquisition of and additions to real estate

 

(1,052

)

(80,482

)

Investments in unconsolidated real estate joint ventures

 

(1,126

)

(30,885

)

Return of investments in unconsolidated real estate joint ventures

 

23,743

 

29,445

 

Advances to/from unconsolidated real estate joint ventures

 

(18

)

(3,521

)

Escrow deposits

 

(5,121

)

1,032

 

Other, net

 

(84

)

27

 

Cash provided by (used in) investing activities

 

16,342

 

(84,384

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from sales of common stock

 

105,168

 

139,453

 

Mortgage proceeds

 

 

15,922

 

Mortgage principal payments

 

(154

)

(102

)

Credit facility proceeds

 

100,000

 

10,000

 

Credit facility payments

 

(101,000

)

 

Finance costs paid

 

(3

)

(2,898

)

Offering costs paid

 

(9,764

)

(15,407

)

Distributions on common stock paid in cash

 

(7,148

)

(4,970

)

Redemptions of common stock

 

(5,329

)

(11

)

Cash provided by financing activities

 

81,770

 

141,987

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

104,764

 

57,130

 

Cash and cash equivalents at beginning of period

 

52,606

 

77,540

 

Cash and cash equivalents at end of period

 

$

157,370

 

$

134,670

 

 

See Notes to Consolidated Financial Statements.

 

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Table of Contents

 

Behringer Harvard Multifamily REIT I, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.             Organization and Business

 

Organization

 

Behringer Harvard Multifamily REIT I, 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 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes. As a REIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required, among other requirements, to distribute annually at least 90% of our “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate tax rates.  As of March 31, 2011, we believe we are in compliance with all applicable REIT requirements.

 

We invest in and operate high quality multifamily communities. These multifamily communities include conventional multifamily assets, such as mid-rise, high-rise, garden style properties, and age-restricted properties, typically requiring residents to be age 55 or older.  We may also invest in other types of multifamily communities, such as student housing.  Our targeted communities include existing “core” properties that are already stabilized and producing rental income as well as more opportunistic properties in various phases of development, redevelopment, in lease up or repositioning.  Further, we may invest in other types of commercial real estate, real estate-related securities, mortgage, bridge, mezzanine or other loans and Section 1031 tenant-in-common interests, or in entities that make investments similar to the foregoing.  We completed our first investment in April 2007 and, as of March 31, 2011, we have made wholly owned or joint venture investments in 33 multifamily communities, of which 30 are stabilized operating properties and three are in various stages of lease up.  We have made and intend to continue making investments both on our own, through wholly owned investments, and through co-investment arrangements with other participants (“Co-Investment Ventures”).

 

We have no employees and are supported by related party service agreements. We are externally managed by Behringer Harvard Multifamily Advisors I, LLC (“Behringer Harvard Multifamily Advisors I” or the “Advisor”), a Texas limited liability company. The Advisor is responsible for managing our affairs on a day-to-day basis and for identifying and making real estate investments on our behalf.  Substantially all our business is conducted through our indirectly wholly owned operating partnership, Behringer Harvard Multifamily OP I LP, a Delaware limited partnership (“Behringer Harvard Multifamily OP I”). Our wholly owned subsidiary, BHMF, Inc., a Delaware corporation (“BHMF Inc.”), owns less than 0.1% of Behringer Harvard Multifamily OP I as its sole general partner. The remaining ownership interest in Behringer Harvard Multifamily OP I is held as a limited partner’s interest by our wholly owned subsidiary, BHMF Business Trust, a Maryland business trust.

 

Offerings of our Common Stock

 

On November 22, 2006, we commenced a private offering pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), to sell a maximum of approximately $400 million of common stock to accredited investors (the “Private Offering”).  We terminated the Private Offering on December 28, 2007.  We sold a total of approximately 14.2 million shares of common stock and raised a total of approximately $127.3 million in gross offering proceeds in the Private Offering. Net proceeds after selling commissions, dealer manager fees, and other offering costs were approximately $114.3 million.

 

On September 5, 2008, we commenced our initial public offering (the “Initial Public Offering”) of up to 200 million shares of common stock offered at a price of $10.00 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act.   The Initial Public Offering also covered the registration of up to an additional 50 million shares of common stock at a price of $9.50 per share pursuant to our distribution reinvestment plan (“DRIP”).  We reserve the right to reallocate shares of our common stock between the primary offering and our DRIP.  As of March 31, 2011, we have sold a total of approximately 102.2 million shares of common stock and raised a total of approximately $1.02 billion in gross offering proceeds in the Initial Public Offering. Net proceeds, after selling commissions, dealer manager fees, and other offering costs were approximately $904.2 million.

 

Our board has determined to end offering activities in respect of the primary portion of our Initial Public Offering generally on the earlier of the sale of all 200 million primary shares being offered or July 31, 2011.

 

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Table of Contents

 

Our common stock is not currently listed on a national securities exchange. However, management anticipates within four to six years after the termination of our Initial Public Offering to begin the process of either listing the common stock on a national securities exchange or liquidating our assets, depending on then-prevailing market conditions.

 

Reclassification

 

Certain reclassifications have been made to the Consolidated Statement of Cash Flows for the three months ended March 31, 2010 to be consistent with the 2011 presentation.  Specifically, for the three months ended March 31, 2010, the $102,000 decrease in accounts receivable and $55,000 decrease in accrued interest on note receivable were combined and included in other assets.  Additionally, the individual components of net proceeds from financings of $15.2 million for mortgage loans payable and $7.7 million for credit facility payable for the three months ended March 31, 2010 were reclassified into the following captions:  mortgage proceeds, mortgage principal payments, credit facility proceeds, credit facility payments and financing costs paid.  We believe these changes in presentation simplify the cash flow by combining immaterial line items and providing additional detail regarding our financing activities.

 

2.             Interim Unaudited Financial Information

 

The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission (“SEC”) on March 25, 2011. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted from this report.

 

The results for the interim periods shown in this report are not necessarily indicative of future financial results. The accompanying consolidated balance sheet and consolidated statement of stockholders’ equity as of March 31, 2011 and consolidated statements of operations and cash flows for the periods ended March 31, 2011 and 2010 have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly our consolidated financial position as of March 31, 2011 and December 31, 2010 and our consolidated results of operations and cash flows for the periods ended March 31, 2011 and 2010. Such adjustments are of a normal recurring nature.

 

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

 

3.             Summary of Significant Accounting Policies

 

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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as: the purchase price allocations for real estate acquisitions; impairment of long-lived assets, notes receivable and equity-method real estate investments; fair value evaluations; revenue recognition of note receivable interest income and equity in earnings of investments in unconsolidated real estate joint ventures; depreciation and amortization; and allowance for doubtful accounts.  Actual results could differ from those estimates.

 

8



Table of Contents

 

Principles of Consolidation and Basis of Presentation

 

Our consolidated financial statements include our accounts, the accounts of variable interest entities in which we are the primary beneficiary and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances and profits have been eliminated in consolidation.  Interests in entities are evaluated based on applicable GAAP, which requires the consolidation of variable interest entities (“VIEs”) in which we are deemed to be the primary beneficiary.  If the interest in the entity is determined to not be a VIE, then the entities are evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participation rights under the respective ownership agreement.

 

There are judgments and estimates involved in determining if an entity in which we will make an investment or have made an investment will be a VIE and if so, if we will be the primary beneficiary. The entity will be evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity. There are some guidelines as to what the minimum equity at risk should be, but the percentage can vary depending upon factors such as the type of financing, status of operations and entity structure and it will be up to our Advisor to determine that minimum percentage as it relates to our business and the facts surrounding each of our acquisitions. In addition, even if the entity’s equity at risk is a large percentage, our Advisor will be required to evaluate the equity at risk compared to the entity’s expected future losses to determine if there could still in fact be sufficient equity in the entity. Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility using a discount rate to determine the net present value of those future losses and allocating those losses between the equity owners, subordinated lenders or other variable interests. The determination will also be based on an evaluation of the voting and other rights of owners and other parties to determine if the equity interests possess minimum governance powers.  The evaluation will also consider the relation of these parties’ rights to their economic participation in benefits or obligation to absorb losses.  As partnership and other governance agreements have various terms which may change over time or based on future results, these evaluations require complex analysis and weighting of different factors. A change in the judgments, assumptions, allocations and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment on the equity method that should in fact be consolidated, the effects of which could be material to our results of operations and financial condition.

 

For VIEs and other investments, we must evaluate whether we have control of an entity. Such evaluation involves judgments in determining if provisions in governing agreements provide control of activities that will impact the entity or are protective or participating rights for us, our Co-Investment Ventures or other equity owners.  This evaluation includes an assessment of multiple governance terms, including their economic effect to the operations of the entity, how relevant the terms are to the recurring operations of the entity and the weighing of each item to determine in the aggregate which owner, if any, has control. These assessments would affect whether an entity should be consolidated or reported on the equity method, the effects of which could be material to our results of operations and financial condition.

 

Real Estate and Other Related Intangibles

 

For real estate properties acquired by us or our Co-Investment Ventures classified as business combinations, we determine the purchase price, after adjusting for contingent consideration and settlement of any pre-existing relationships.  We record the tangible assets acquired, consisting of land, inclusive of associated rights, and buildings, any assumed debt, identified intangible assets and liabilities and asset retirement obligations based on their fair values.  Identified intangible assets and liabilities primarily consist of the fair value of in-place leases and contractual rights.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interest in the acquiree are less than the fair value of the identifiable net assets acquired.

 

The fair value of any tangible assets acquired, expected to consist of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets using discounted cash flow analyses or similar methods.  Buildings are depreciated over their estimated useful lives ranging from 25 to 35 years using the straight-line method.  Improvements are depreciated over their estimated useful lives ranging from 3 to 15 years using the straight-line method.  When we acquire rights to use land or improvements through contractual rights rather than fee simple interests, we determine the value of the use of these assets based on the relative fair value of the assets after considering the contractual rights and the fair value of similar assets. Assets acquired under these contractual rights are classified as

 

9



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intangibles and amortized on a straight-line basis over the shorter of the contractual term or the estimated useful life of the asset. Contractual rights related to land or air rights that are substantively separated from depreciating assets are amortized over the life of the contractual term or, if no term is provided, are classified as indefinite-lived intangibles.  Intangible assets are evaluated at each reporting period to determine whether the indefinite and finite useful lives are appropriate.

 

We determine the value of in-place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leases and tenant relationships are determined by applying a fair value model.  The estimates of fair value of in-place leases includes an estimate of carrying costs during the expected lease up periods for the respective units considering current market conditions.  In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, legal expenses, tenant improvements and other operating expenses to execute similar deals as well as projected rental revenue and carrying costs during the expected lease up period.  The estimate of the fair value of tenant relationships also includes our estimate of the likelihood of renewal.

 

We determine the value of above-market and below-market in-place leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (i) the remaining non-cancelable lease term for above-market leases, or (ii) the remaining non-cancelable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the above determined lease term.

 

We amortize the value of in-place leases acquired to expense over the remaining term of the leases. The value of tenant relationship intangibles will be amortized to expense over the initial term and any anticipated renewal periods, but in no event will the amortization period for intangible assets exceed the remaining depreciable life of the building.  Intangible lease assets are classified as intangibles and intangible lease liabilities are recorded within deferred lease revenues and other related liabilities.

 

We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.

 

Initial valuations are subject to change until our information is finalized, which is no later than 12 months from the acquisition date.  We have had no significant valuation changes for acquisitions prior to March 31, 2011.

 

Impairment of Real Estate-Related Assets and Investments in Unconsolidated Real Estate Joint Ventures

 

For properties wholly owned by us or our Co-Investment Ventures, including all related intangibles, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset including its eventual disposition, to the carrying amount of the asset.  In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  In addition, we evaluate indefinite-lived intangible assets for possible impairment at least annually by comparing the fair values with the carrying values.  Fair value is generally estimated by valuation of similar assets.

 

For real estate we own through an investment in an unconsolidated real estate joint venture or other similar real estate investment structure, at each reporting date we compare the estimated fair value of our real estate investment to the carrying value.  An impairment charge is recorded to the extent the fair value of our real estate investment is less than the carrying amount and the decline in value is determined to be other than a temporary decline.  We did not record any impairment losses for the three months  ended March 31, 2011 or 2010.

 

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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.

 

Notes Receivable

 

We and our Co-Investment Ventures report notes receivable at their outstanding principal balances net of any unearned income and unamortized deferred fees and costs. Loan origination fees and certain direct origination costs are generally deferred and recognized as adjustments to interest income over the lives of the related loans.  Included within other assets are notes receivable of $4.2 million as of March 31, 2011 and December 31, 2010.

 

In accounting for notes receivable by us or our Co-Investment Ventures, we evaluate whether the investments are loans, investments in joint ventures or acquisitions of real estate. In addition, we evaluate whether the loans contain any rights to participate in expected residual profits, provide sufficient collateral or qualifying guarantees or include other characteristics of a loan. As a result of our review, neither our wholly owned loan nor the loans made through our Co-Investment Ventures contain a right to participate in expected residual profits. In addition, the project borrowers remain obligated to pay principal and interest due on the loan with sufficient collateral, reserves or qualifying guarantees to account for the investments as loans.

 

Notes receivable are assessed for impairment in accordance with applicable GAAP.  Based on specific circumstances, we determine whether it is probable that there has been an adverse change in the estimated cash flows of the contractual payments for the notes receivable. We then assess the impairment based on the probability of collecting all contractual amounts. If the impairment is probable, we recognize an impairment loss equal to the difference between our or the Co-Investment Venture’s investment in the note receivable and the present value of the estimated cash flows discounted at the note receivable’s effective interest rate. Where we have the intent and the ability to foreclose on our security interest in the property, we will use the collateral’s fair value as a basis for the impairment.

 

In evaluating impairments, there are judgments involved in determining the probability of collecting contractual amounts. As these types of notes receivable are generally investment specific based on the particular loan terms and the underlying project characteristics, there is usually no secondary market to evaluate impairments. Accordingly, we must rely on our subjective judgments and individual weightings of the specific factors. If notes receivable are considered impaired, then judgments and estimates are required to determine the projected cash flows for the notes receivable, considering the borrower’s or, if applicable, the guarantor’s financial condition and the consideration and valuation of the secured property and any other collateral. Changes in these facts or in our judgments and assessments of these facts could result in impairment losses which could be material to our consolidated financial statements.

 

Investments in Unconsolidated Real Estate Joint Ventures

 

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

 

We capitalize interest expense to investments in unconsolidated real estate joint ventures for our share of qualified expenditures.

 

We amortize any excess of the carrying value of our investments in joint ventures over the book value of the underlying equity over the estimated useful lives of the underlying operating property, which represents the assets to which the excess is most clearly related.

 

When we or our Co-Investment Ventures acquire a controlling interest in a previously noncontrolled investment, a gain or loss is recognized for the differences between the investment’s carrying value and fair value.

 

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Deferred Financing Costs

 

Deferred financing costs are recorded at cost and are amortized to interest expense using a straight-line method that approximates the effective interest method over the life of the related debt.

 

Revenue Recognition

 

Rental income related to leases is recognized on an accrual basis when due from residents or commercial tenants, generally on a monthly basis.  Rental revenues for leases with uneven payments and terms greater than one year are recognized on a straight-line basis over the term of the lease.  Any deferred revenue is recorded as a liability within deferred lease revenues and other related liabilities.

 

Acquisition Costs

 

Acquisition costs for business combinations, which are expected to include most wholly owned properties, are expensed when it is probable that the transaction will be accounted for as a business combination and the purchase will be consummated. Our acquisition costs related to investments in unconsolidated real estate joint ventures are capitalized as a part of our basis in the investment. Pursuant to our Advisory Management Agreement (as defined below), our Advisor is obligated to reimburse us for all investment-related expenses the Company pursues but ultimately does not consummate. Prior to the determination of its status, amounts incurred are recorded in other assets.  Acquisition costs and expenses include amounts incurred with our Advisor and with third parties.

 

Organization and Offering Costs

 

Our Advisor is obligated to pay all of our Initial Public Offering and Private Offering organization and offering costs, and we are required to make reimbursements in accordance with the Advisory Management Agreement, as amended.  Organization expenses are expensed as incurred.  Offering costs are recognized based on estimated amounts probable of reimbursement and are offset against additional paid-in capital.

 

Redemptions of Common Stock

 

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

 

Income Taxes

 

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT since the year ended December 31, 2007.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to remain qualified as a REIT.

 

We have evaluated the current and deferred income tax related to state taxes, where we do not have a REIT exemption, and we have no significant tax liability or benefit as of March 31, 2011 and December 31, 2010.

 

We recognize the financial statement benefit of an uncertain tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. As of March 31, 2011 and December 31, 2010, we have no significant uncertain tax positions.

 

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Concentration of Credit Risk

 

We invest our cash and cash equivalents among several banking institutions and money market accounts in an attempt to minimize exposure to any one of these entities.  As of March 31, 2011 and December 31, 2010, we had cash and cash equivalents deposited in certain financial institutions in excess of federally-insured levels.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.

 

Income (Loss) per Share

 

Basic earnings per share is calculated by dividing net earnings available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share is calculated similarly, except that during periods of net income it includes the dilutive effect of the assumed exercise of securities, including the effect of shares issuable under our stock-based incentive plans.  During periods of net loss, the assumed exercise of securities is anti-dilutive and are not included in the calculation of earnings per share.

 

The Behringer Harvard Multifamily REIT I, Inc. Amended and Restated 2006 Incentive Award Plan (“Incentive Award Plan”) authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards.  A total of 10 million shares has been authorized and reserved for issuance under the Incentive Award Plan.  As of March 31, 2011, no options have been issued.  For the three months ended March 31, 2011 and 2010, 6,000 shares of the restricted stock have been included in the basic and dilutive earnings per share calculation.

 

As of March 31, 2011 and December 31, 2010, we had 1,000 shares of convertible stock issued and outstanding, no shares of preferred stock issued and outstanding, and had no options to purchase shares of common stock outstanding.  The convertible stock is not included in the dilutive earnings per share because the shares of convertible stock do not participate in earnings and would currently not be convertible into any common shares, if converted.

 

Reportable Segments

 

Our current business 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 we account 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.

 

Fair Value

 

In connection with our assessments and determinations of fair value for many real estate assets and financial instruments, there are generally not available observable market price inputs for substantially the same items.  Accordingly, we make assumptions and use various estimates and pricing models, including, but not limited to, the estimated cash flows, costs to lease properties, useful lives of the assets, the cost of replacing certain assets, discount and interest rates used to determine present values, market capitalization rates and rental rates. Many of these estimates are from the perspective of market participants and will also be obtained from independent third party appraisals. However, we are responsible for the source and use of these estimates. A change in these estimates and assumptions could be material to our results of operations and financial condition.

 

As of March 31, 2011, we believe the carrying values of cash and cash equivalents, receivables and payables from affiliates and credit facility payable approximate their fair values based on their highly-liquid nature and/or short-term maturities, including prepayment options.  As of March 31, 2011, we estimate the fair value of our mortgage loans payable at $95.0 million compared to its carrying value of $93.2 million.  As of December 31, 2010, we estimate the fair value of our mortgage loans payable at $94.7 million compared to its carrying value of $93.4 million.  As of March 31, 2011 and December 31, 2010, we had no significant assets or liabilities measured at fair value on a recurring or nonrecurring basis.  We estimate fair values for financial instruments based on interest rates with similar terms and remaining maturities that management believes we could obtain.

 

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4.             New Accounting Pronouncements

 

In April 2011, the Financial Accounting Standards Board issued further clarification on when a loan modification or restructuring is considered a troubled debt restructuring. In determining whether a loan modification represents a troubled debt restructuring, an entity should consider whether the debtor is experiencing financial difficulty and the lender has granted a concession to the borrower. This guidance is to be applied retrospectively, with early application permitted.   This guidance is effective for the first interim or annual period beginning on or after June 15, 2011. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements or disclosures.

 

5.             Real Estate Investments

 

We make real estate investments through entities wholly owned by us or through unconsolidated real estate joint ventures.  As of March 31, 2011 and December 31, 2010, we had ten wholly owned real estate investments and 23 investments in unconsolidated real estate joint ventures. All of our investments in unconsolidated real estate joint ventures are BHMP CO-JVs (as defined below). We are not limited to joint ventures through BHMP CO-JVs, as we may choose other joint venture partners or investment structures.

 

The following presents our wholly owned real estate investments and our investments in unconsolidated real estate joint ventures as of March 31, 2011 and December 31, 2010.  The investments are categorized as of March 31, 2011 based on the type of investment, on the stages in the development and operation of the investment and for investments in unconsolidated real estate joint ventures based on the type of underlying investment.  The definitions of each stage are as follows:

 

·      Stabilized / Comparable are communities that are stabilized (the earlier of 90% occupancy or one year after completion of construction or acquisition) for both the current and prior reporting period.

 

·      Stabilized / Non-comparable are communities that have been stabilized or acquired after January 1, 2010.

 

·      Lease ups are communities that have commenced leasing but have not yet reached stabilization.

 

·      Developments are communities currently under construction for which leasing activity has not commenced.  As of March 31, 2011, there were no communities classified as developments.

 

 

 

 

 

 

 

Total Net Operating Real Estate
(in millions)

 

Investments in Real Estate

 

Location

 

Units

 

As of March
31, 2011

 

As of December
31, 2010

 

Stabilized / Comparable:

 

 

 

 

 

 

 

 

 

The Gallery at NoHo Commons

 

Los Angeles, CA

 

438

 

$

102.0

 

$

102.9

 

Grand Reserve Orange

 

Orange, CT

 

168

 

24.1

 

24.3

 

Mariposa Loft Apartments

 

Atlanta, GA

 

253

 

26.8

 

27.1

 

 

 

 

 

 

 

 

 

 

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

Acacia on Santa Rosa Creek

 

Santa Rosa, CA

 

277

 

36.4

 

36.8

 

Allegro

 

Addison, TX

 

272

 

43.3

 

43.5

 

Burnham Pointe

 

Chicago, IL

 

298

 

84.7

 

85.1

 

The Lofts at Park Crest

 

McLean, VA

 

131

 

47.5

 

48.0

 

The Reserve at La Vista Walk

 

Atlanta, GA

 

283

 

38.3

 

38.5

 

Uptown Post Oak

 

Houston, TX

 

392

 

62.3

 

62.7

 

 

 

 

 

 

 

 

 

 

 

Lease ups:

 

 

 

 

 

 

 

 

 

Acappella

 

San Bruno, CA

 

163

 

53.8

 

54.2

 

 

 

 

 

2,675

 

$

519.2

 

$

523.1

 

 

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Our Investment in Unconsolidated Real
Estate Joint Ventures
(in millions)

 

Investments in Unconsolidated Real Estate Joint
Ventures (a)  

 

Location

 

Units

 

As of March
31, 2011

 

As of December
 31, 2010

 

Equity Investments

 

 

 

 

 

 

 

 

 

Stabilized / Comparable:

 

 

 

 

 

 

 

 

 

Burrough’s Mill (b)

 

Cherry Hill, NJ

 

308

 

$

6.9

 

$

7.1

 

Calypso Apartments and Lofts (b)

 

Irvine, CA

 

177

 

13.2

 

13.6

 

Halstead (b)

 

Houston, TX

 

301

 

6.2

 

6.5

 

The Reserve at Johns Creek Walk (c) (d)

 

Johns Creek, GA

 

210

 

3.3

 

3.4

 

Waterford Place (b)

 

Dublin, CA

 

390

 

9.5

 

9.8

 

 

 

 

 

 

 

 

 

 

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

4550 Cherry Creek (b)

 

Denver, CO

 

288

 

12.7

 

12.5

 

55 Hundred (c) (d) 

 

Arlington, VA

 

234

 

20.9

 

21.6

 

7166 at Belmar (b)

 

Lakewood, CO

 

308

 

12.0

 

12.4

 

Briar Forest Lofts (b)

 

Houston, TX

 

352

 

8.9

 

9.1

 

The Cameron (d) (e) 

 

Silver Spring, MD

 

325

 

11.5

 

11.2

 

Cyan/PDX (b) 

 

Portland, OR

 

352

 

21.7

 

45.4

 

The District Universal Boulevard (b) 

 

Orlando, FL

 

425

 

33.0

 

33.4

 

Eclipse (b) 

 

Houston, TX

 

330

 

6.4

 

6.8

 

Fitzhugh Urban Flats (b)

 

Dallas, TX

 

452

 

11.1

 

11.1

 

Forty55 Lofts (b)

 

Marina del Rey, CA

 

140

 

12.6

 

12.7

 

Grand Reserve (e) 

 

Dallas, TX

 

149

 

5.6

 

5.5

 

Satori (c) (d) 

 

Fort Lauderdale, FL

 

279

 

10.6

 

11.0

 

Skye 2905 (b) 

 

Denver, CO

 

400

 

27.1

 

27.8

 

Tupelo Alley (b)

 

Portland, OR

 

188

 

10.5

 

10.7

 

The Venue (b) 

 

Clark County, NV

 

168

 

14.2

 

14.4

 

Veritas (d) (f) 

 

Henderson, NV

 

430

 

14.1

 

14.2

 

 

 

 

 

 

 

 

 

 

 

Lease ups:

 

 

 

 

 

 

 

 

 

Bailey’s Crossing (c) (d) 

 

Alexandria, VA

 

414

 

29.1

 

29.3

 

San Sebastian (b)

 

Laguna Woods, CA

 

134

 

19.7

 

19.9

 

 

 

 

 

6,754

 

$

320.8

 

$

349.4

 

Total units — wholly owned and unconsolidated JVs

 

9,429

 

 

 

 

 

 


(a)   Our ownership interest in all our investments in unconsolidated real estate joint ventures is 55% except for The Reserve at Johns Creek Walk (64%), Cyan/PDX (70%) and 7166 at Belmar (70%).  Each of our investments in unconsolidated real estate joint ventures may become subject to buy-sell rights with the BHMP Co-Investment Partner.

 

(b)   Equity investment wholly owned by a BHMP CO-JV.

 

(c)   Equity investment of a BHMP CO-JV in a Property Entity with unaffiliated third parties.

 

(d)   Equity interests in the property owned by BHMP CO-JV and/or other owners may be subject to call rights, put rights and/or buy-sell rights and/or right of BHMP CO-JV to convert mezzanine loan investment to equity in the property.

 

(e)   Loan investment by a BHMP CO-JV.

 

(f)    Equity investment of a BHMP CO-JV in a Property Entity with unaffiliated third parties and a loan investment by a BHMP CO-JV.

 

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Investments in real estate

 

In the three months ended March 31, 2010, we acquired in separate transactions two wholly owned multifamily communities, Acacia on Santa Rosa Creek and The Lofts at Park Crest, totaling 408 units for an aggregate purchase price of approximately $106.8 million, including assumption of a mortgage loan payable of $26.7 million.  We had no acquisitions during the three months ended March 31, 2011.

 

The following tables present certain additional information regarding our 2010 acquisitions.  Certain of the tables provide information for our material first quarter 2010 acquisition, The Lofts at Park Crest.

 

The amounts recognized for major assets acquired and liabilities assumed as of the acquisition date individually presented for material acquisitions and summarized for the other 2010 non-material acquisition are as follows (in millions):

 

 

 

The Lofts at
Park Crest

 

Other Non-
Material
Acquisitions

 

Total 2010
Acquisitions

 

Land

 

$

 

$

8.1

 

$

8.1

 

Buildings and improvements

 

49.7

 

29.5

 

79.2

 

Intangible assets:

 

 

 

 

 

 

 

In place lease

 

2.7

 

1.0

 

3.7

 

Contractual rights (a)

 

16.2

 

 

16.2

 

Total intangible assets

 

18.9

 

1.0

 

19.9

 

Mortgage loan payable

 

 

(26.8

)

(26.8

)

Deferred lease revenues and other liabilities (b)

 

(0.4

)

 

(0.4

)

Total

 

$

68.2

 

$

11.8

 

$

80.0

 

 


(a)   Contractual rights include land and parking garage rights.

 

(b)   The deferred lease revenues and other liabilities relate to contingent consideration payable of $0.4 million.

 

The amounts recognized for revenues and net losses from the acquisition dates to March 31, 2010 related to the operations of The Lofts at Park Crest and summarized for the other 2010 non-material acquisitions are as follows (in millions):

 

 

 

The Lofts at
Park Crest

 

Other Non-
Material
Acquisitions

 

Total 2010
Acquisitions

 

Revenues

 

$

0.3

 

$

1.0

 

$

1.3

 

Acquisition expenses

 

1.8

 

1.0

 

2.8

 

Depreciation and amortization

 

0.2

 

0.8

 

1.0

 

Net loss

 

(0.4

)

(0.6

)

(1.0

)

 

The following unaudited consolidated pro forma information is presented as if we acquired each of the properties on January 1, 2010.  This information excludes activity that is non-recurring and not representative of our future activity, primarily acquisition expenses of $2.8 million for the three months ended March 31, 2010.  Expenses, including depreciation and amortization, do not include amounts for periods prior to the completed construction of the property.  As these 2010 acquisitions are already included in  consolidated operating results for the three months ended March 31, 2011, no proforma table for 2011 is presented, as proforma results mirror actual results.  This information is not necessarily indicative of what the actual results of operations would have been had we completed these transactions on January 1, 2010, nor does it purport to represent our future operations (amounts in millions, except per share):

 

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Pro Forma

 

 

 

For the Three Months
Ended
March 31, 2010

 

Revenue

 

$

6.2

 

Depreciation and amortization

 

$

4.1

 

Net loss

 

$

(6.7

)

Net loss per share

 

$

(0.10

)

 

Depreciation expense associated with all of our wholly owned buildings and improvements for the three months ended March 31, 2011 and 2010 was approximately $4.7 million and $1.8 million, respectively.

 

Cost of intangibles related to our wholly owned investments in real estate consisted of the value of in-place leases and other contractual intangibles.  These in-place leases are amortized over the remaining term of the in-place leases, approximately a six month term for multifamily in-place leases and terms ranging from three to 20 years for retail leases.  Amortization expense associated with our lease intangibles for the three months ended March 31, 2011 and 2010 was approximately $1.1 and $1.6 million, respectively.  Included in other contractual intangibles as of March 31, 2011 and December 31, 2010 is $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.  Anticipated amortization associated with lease and other contractual intangibles for each of the following five years is as follows (in millions):

 

April — December 2011

 

$

1.0

 

2012

 

$

0.4

 

2013

 

$

0.4

 

2014

 

$

0.4

 

2015

 

$

0.4

 

 

As of March 31, 2011 and December 31, 2010, accumulated depreciation and amortization related to our consolidated real estate properties and related intangibles were as follows (in millions):

 

 

 

As of March 31, 2011

 

As of December 31, 2010

 

 

 

 

 

Intangibles

 

 

 

Intangibles

 

 

 

Buildings
and
Improvements

 

In-Place
Lease
Intangibles

 

Other
Contractual

 

Buildings
and
Improvements

 

In-Place
Lease
Intangibles

 

Other
Contractual

 

Cost

 

$

441.4

 

$

12.1

 

$

16.3

 

$

440.6

 

$

12.1

 

$

16.3

 

Less: depreciation and amortization

 

(18.7

)

(9.3

)

(0.2

)

(13.9

)

(8.2

)

(0.2

)

Net

 

$

422.7

 

$

2.8

 

$

16.1

 

$

426.7

 

$

3.9

 

$

16.1

 

 

Investments in unconsolidated real estate joint ventures

 

We have entered into 23 separate joint ventures with Behringer Harvard Master Partnership I LP (the “BHMP Co-Investment Partner”) through entities in which we are the manager. The 1% general partner of the BHMP Co-Investment Partner is Behringer Harvard Institutional GP LP, which is an affiliate of our Advisor and is indirectly owned by our sponsor, Behringer Harvard Holdings, LLC. The 99% limited partner of the BHMP Co-Investment Partner is 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, an investment vehicle for Dutch pension funds (“PGGM”).  Substantially all of the capital provided to the BHMP Co-Investment Partner is from PGGM. We have no ownership or other direct financial interests in either of these entities.

 

PGGM has committed to invest up to $300 million in co-investments with affiliates or investment programs of our sponsor.  As of March 31, 2011, approximately $26.2 million of the $300 million commitment remains unfunded; however, in the event that certain investments are refinanced or new property debt is placed within two years from the date of the acquisition, the amount of the unfunded commitment may be increased.

 

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Generally, the BHMP Co-Investment Partner will co-invest with a 45% equity interest, and we will co-invest with a 55% equity interest, although the BHMP Co-Investment Partner may elect smaller allocations.  Capital contributions and cash distributions are allocated pro rata in accordance with ownership interests.

 

Each of our separate joint ventures with the BHMP Co-Investment Partner is made through a separate entity that owns 100% of the voting equity interests and approximately 99% of the economic interests in one subsidiary REIT, through which substantially all of the joint venture’s business is conducted.  Each separate joint venture entity, together with its respective subsidiary REIT, is referred to herein as a “BHMP CO-JV.”  Each BHMP CO-JV is a separate legal entity formed for the sole purpose of holding its respective investment and obtaining legally separated debt and equity financing.  In certain circumstances, the governing documents of the BHMP CO-JV may require the subsidiary REIT to be disposed of via a sale of its capital stock rather than as an asset sale by that subsidiary REIT.

 

Each BHMP CO-JV is managed by us or a subsidiary of ours, but the operation of the BHMP CO-JV’s investment must generally be conducted in accordance with operating plans approved by the BHMP Co-Investment Partner.  In addition, without the consent of all members of the BHMP CO-JV, the manager may not generally approve or disapprove on behalf of the BHMP CO-JV certain major decisions affecting the BHMP CO-JV, such as (1) selling or otherwise disposing of the BHMP CO-JV’s investment or any other property having a value in excess of $100,000, (2) selling any additional interests in the BHMP CO-JV, (3) approving initial and annual operating plans and capital expenditures or (4) incurring or materially modifying any indebtedness of the BHMP CO-JV in excess of $100,000 or causing the BHMP CO-JV to become liable for any debt, obligation or undertaking of any other individual or entity in excess of $100,000 other than in accordance with the operating plans.  The BHMP Co-Investment Partner may remove the manager for cause and appoint a successor.  Each BHMP CO-JV provides buy-sell rights between the members in the event of a “major dispute” as defined in each respective BHMP CO-JV operating agreement.

 

We have determined that our BHMP CO-JVs are not variable interest entities and that each member has equal substantive control and participating rights with no single party controlling each BHMP CO-JV. Accordingly, we account for our interest in each BHMP CO-JV using the equity method of accounting.

 

Certain BHMP CO-JVs have made equity investments with third party owners in, and/or have made loans to, entities that own one multifamily operating property or development community.  The collective group of these operating property entities or development entities are collectively referred to herein as “Property Entities.”  Each Property Entity is a separate legal entity for the sole purpose of holding its respective operating property or development project and obtaining legally separated debt and equity financing.

 

As of March 31, 2011, 21 of our BHMP CO-JVs include equity investments in Property Entities.  Each of these BHMP CO-JV equity investments in a Property Entity is evaluated for consolidation at the BHMP CO-JV level using our consolidation policy. Of these 21 Property Entities, 19 investments are reported on a consolidated basis by the BHMP CO-JV and the remaining investments are recorded as unconsolidated real estate joint ventures and reported with the equity method of accounting by the respective BHMP CO-JVs.

 

During the three months ended March 31, 2011, we did not invest in and/or form any new BHMP CO-JVs.  During the three months ended March 31, 2011, the Cyan BHMP CO-JV obtained mortgage financing totaling $33.0 million and distributed all of the net proceeds to us and the BHMP Co-Investment Partner. Our share of the distributions was approximately $23.1 million and is classified as a return of investment in unconsolidated real estate joint ventures on the consolidated statement of cash flows for the three months ended March 31, 2011.

 

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The summarized financial data shown below presents the combined accounts of each of the (i) BHMP CO-JVs and (ii) Property Entities where there is a corresponding BHMP CO-JV equity investment.  The Property Entities include 100% of their accounts, where the noncontrolling interest amounts represent the portion owned by unaffiliated third parties.  All inter-entity transactions, balances and profits have been eliminated in the combined financial data (amounts in millions):

 

Balance Sheet Data:

 

 

 

As of
March 31, 2011

 

As of
December 31, 2010

 

 

 

 

 

 

 

Land, buildings and improvements

 

$

1,182.2

 

$

1,181.8

 

Less: accumulated depreciation and amortization

 

(48.6

)

(37.6

)

Land, buildings and improvements, net

 

1,133.6

 

1,144.2

 

Notes receivable, net

 

26.3

 

26.3

 

Cash and cash equivalents

 

13.4

 

13.4

 

Intangible assets, net of accumulated amortization of $15.0 million and $12.9 million as of March 31, 2011 and December 31, 2010, respectively

 

2.9

 

5.0

 

Other assets, including restricted cash

 

20.1

 

18.3

 

Total assets

 

$

1,196.3

 

$

1,207.2

 

 

 

 

 

 

 

BHMP CO-JV level mortgage loans payable

 

$

370.3

 

$

337.7

 

Property Entity level construction and mortgage loans payable

 

255.4

 

253.2

 

Accounts payable, interest payable and other liabilities

 

17.4

 

18.5

 

Total liabilities

 

643.1

 

609.4

 

 

 

 

 

 

 

Redeemable, noncontrolling interests

 

7.3

 

7.8

 

 

 

 

 

 

 

Our members’ equity

 

303.1

 

333.9

 

BHMP Co-Investment Partner’s equity

 

235.8

 

250.3

 

Nonredeemable, noncontrolling interests

 

7.0

 

5.8

 

Total equity

 

545.9

 

590.0

 

Total liabilities and equity

 

$

1,196.3

 

$

1,207.2

 

 

Operating Data:

 

 

 

For the Three Months Ended
March 31,

 

 

 

2011

 

2010

 

Revenues

 

 

 

 

 

Rental revenues

 

$

24.5

 

$

10.9

 

Interest income

 

1.5

 

2.4

 

 

 

26.0

 

13.3

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Property operating expenses

 

7.4

 

5.2

 

Real estate taxes

 

3.5

 

1.7

 

Interest expense

 

6.3

 

3.7

 

Acquisition expenses

 

 

0.4

 

Depreciation and amortization

 

13.6

 

8.8

 

 

 

30.8

 

19.8

 

Net loss

 

(4.8

)

(6.5

)

Net loss attributable to noncontrolling interests

 

1.0

 

0.9

 

Net loss attributable to consolidated BHMP CO-JV

 

$

(3.8

)

$

(5.6

)

Our share of equity in loss of investments in unconsolidated real estate joint ventures

 

$

(2.1

)

$

(3.2

)

 

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The following presents the reconciliation between our member’s equity interest in the combined BHMP CO-JVs and our total investments in unconsolidated real estate joint ventures (amounts in millions):

 

 

 

March 31,
2011

 

December 31,
2010

 

Balance of our member’s equity in the BHMP CO-JVs

 

$

303.1

 

$

333.9

 

Other capitalized costs, net of amortization

 

17.7

 

15.5

 

Investments in unconsolidated real estate joint ventures

 

$

320.8

 

$

349.4

 

 

Included in the combined financial data are certain notes receivable to certain BHMP CO-JVs from Property Entities.  All note receivable advances have been fully funded.  Below are the BHMP CO-JVs’ notes receivable from the Property Entities that are included in the combined financial data (amounts in millions):

 

 

 

Carrying Amount as of

 

Fixed

 

 

 

Name of Underlying Property

 

March 31,
2011

 

December 31,
2010

 

Interest
Rate

 

Maturity Date

 

Grand Reserve

 

$

7.5

 

$

7.5

 

10.0

%

April 2012

 

The Cameron (a)

 

19.3

 

19.3

 

9.5

%

December 2012

 

Total BHMP CO-JV Notes receivable

 

26.8

 

26.8

 

 

 

 

 

Less: Deferred financing fees

 

(0.5

)

(0.5

)

 

 

 

 

Net BHMP CO-JV Notes receivable

 

$

26.3

 

$

26.3

 

 

 

 

 

 


(a)          Subsequent to March 31, 2011, this note receivable was converted by The Cameron BHMP CO-JV into an equity interest in The Cameron Property Entity.  See Note 13, “Subsequent Events” for further information.

 

In the combined financial data, the note receivable and note payable between the Veritas BHMP CO-JV and its Property Entity in which the BHMP CO-JV has an equity interest is eliminated.  All advances for this note have been fully funded.  Below is the eliminated BHMP CO-JV’s note receivable (amounts in millions):

 

 

 

Carrying Amount as of

 

Fixed

 

 

 

Name of Underlying Property

 

March 31,
2011

 

December 31,
2010

 

Interest
Rate

 

Maturity Date

 

Veritas

 

$

21.0

 

$

21.0

 

13.0

%

December 2013

 

Total BHMP CO-JV Note receivable eliminated in combination

 

$

21.0

 

$

21.0

 

 

 

 

 

 

As of March 31, 2011 and December 31, 2010, BHMP CO-JVs are also subject to senior construction and mortgage loans payable as described in the following table.  These loans are senior to the equity investments made by the BHMP CO-JVs.  The lenders for these loans payable have no recourse to us or the applicable BHMP CO-JV other than carve-out guarantees for certain matters such as environmental conditions, misuse of funds and material misrepresentations.  These loan payables are referred to as BHMP CO-JV level mortgage loans payable (amounts in millions and monthly LIBOR at March 31, 2011 was 0.25%):

 

 

 

Carrying Amount as of

 

 

 

 

 

BHMP CO-JV Level Mortgage Loans Payable

 

March 31,

2011

 

December 31,
2010

 

Interest Rate

 

Maturity Date

 

Skye 2905

 

$

47.0

 

$

47.0

 

Monthly LIBOR + 250 basis points

 

June 2011

 

Waterford Place

 

58.6

 

59.0

 

4.83% - Fixed

 

May 2013

 

4550 Cherry Creek

 

28.6

 

28.6

 

4.23% - Fixed

 

March 2015

 

Calypso Apartments and Lofts

 

24.0

 

24.0

 

4.21% - Fixed

 

March 2015

 

7166 at Belmar

 

22.8

 

22.8

 

4.11% - Fixed

 

June 2015

 

Cyan/PDX

 

33.0

 

 

4.25% - Fixed

 

April 2016

 

Burrough’s Mill

 

26.0

 

26.0

 

5.29% - Fixed

 

October 2016

 

Fitzhugh Urban Flats

 

28.0

 

28.0

 

4.35% - Fixed

 

August 2017

 

 

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Carrying Amount as of

 

 

 

 

 

BHMP CO-JV Level Mortgage Loans Payable

 

March 31,
2011

 

December 31, 
2010

 

Interest Rate

 

Maturity Date

 

Eclipse

 

20.8

 

20.8

 

4.46% - Fixed

 

September 2017

 

Briar Forest Lofts

 

21.0

 

21.0

 

4.46% - Fixed

 

September 2017

 

Tupelo Alley

 

19.3

 

19.3

 

3.58% - Fixed

 

October 2017

 

Halstead

 

15.7

 

15.7

 

3.79% - Fixed

 

November 2017

 

Forty55 Lofts

 

25.5

 

25.5

 

3.90% - Fixed

 

October 2020

 

Total

 

$

370.3

 

$

337.7

 

 

 

 

 

 

As of March 31, 2011 and December 31, 2010, Property Entities are subject to senior construction and mortgage loans payable as described in the following table. These loans are senior to any equity or debt investments made or held by the BHMP CO-JVs.  The lenders for these loans have no recourse to us or the BHMP CO-JVs with recourse only to the applicable Property Entities and with respect to Satori and Veritas to affiliates of the project developers that have provided completion and repayment guarantees.  These loans payable are referred to as Property Entity level construction and mortgage loans payable (amounts in millions and monthly LIBOR at March 31, 2011 was 0.25%):

 

 

 

Carrying Amount as of

 

 

 

 

 

Property Entity Level Construction and 
Mortgage Loans Payable 

 

March 31, 
2011

 

December 31,
2010

 

Interest Rate

 

Maturity Date

 

Satori (a)

 

$

71.1

 

$

71.3

 

Monthly LIBOR + 140 bps

 

October 2011

 

Bailey’s Crossing (a)

 

71.5

 

71.1

 

Monthly LIBOR + 275 bps

 

November 2011

 

Veritas (a)

 

37.1

 

35.1

 

Monthly LIBOR + 275 bps

 

December 2012

 

The Reserve at Johns Creek Walk

 

23.0

 

23.0

 

6.46% - Fixed

 

March 2013

 

55 Hundred (a)

 

52.7

 

52.7

 

Monthly LIBOR + 300 bps

 

November 2013

 

Total

 

$

255.4

 

$

253.2

 

 

 

 

 

 


(a)          Each of these Property Entity level construction loans are used to fund development projects and are drawn as construction costs are incurred.  The aggregate total commitment, if fully funded, is $239.9 million.  Each construction loan has provisions allowing for prepayment at par and extensions, generally two one-year options if certain operational performance levels have been achieved as of the maturity date.  An extension fee, generally 0.25% of the total loan balance, is required for each extension.

 

As of March 31, 2011, approximately $867.3 million of the net carrying value of land, buildings and improvements and construction in progress collateralized the combined BHMP CO-JV level and Property Entity level construction and mortgage loans payable.

 

6.                    Leasing Activity

 

In addition to multifamily resident units, certain of our wholly owned multifamily communities have retail areas, representing approximately 8% of total rentable area.  Future minimum base rental payments due to us under these non-cancelable retail leases in effect as of March 31, 2011 are as follows (in millions):

 

Year

 

Future Minimum
Lease Payments

 

April through December 2011

 

$

1.7

 

2012

 

2.4

 

2013

 

2.4

 

2014

 

2.3

 

2015

 

2.3

 

Thereafter

 

26.5

 

Total

 

$

37.6

 

 

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7.                                      Mortgage Loans Payable

 

The following presents the carrying amounts of the mortgage loans payable as of March 31, 2011 and December 31, 2010 (amounts in millions).

 

 

 

Loan Amount

 

 

 

 

 

 

 

Mortgage Loans Payable

 

March 31,
2011

 

December 31,
2010

 

Loan Type

 

Interest Rate

 

Maturity Date

 

Acacia on Santa Rosa Creek

 

$

26.1

 

$

26.3

 

Principal and interest

 

4.63% - fixed

 

May 2013

 

The Gallery at NoHo Commons

 

51.3

 

51.3

 

Interest-only

 

4.72% - fixed

 

November 2016

 

Mariposa Loft Apartments

 

15.8

 

15.8

 

Interest-only

 

5.21% - fixed

 

March 2017

 

Total

 

$

93.2

 

$

93.4

 

 

 

 

 

 

 

 

As of March 31, 2011, $165.3 million of the net carrying value of real estate collateralized the mortgage loans payable.

 

Contractual principal payments for the five subsequent years and thereafter are as follows (in millions):

 

Year

 

Contractual Principal 
Payments

 

April 1, 2011 — December 31, 2011

 

$

0.5

 

2012

 

0.6

 

2013

 

25.0

 

2014

 

 

2015

 

 

Thereafter

 

67.1

 

Total

 

$

93.2

 

 

8.                                      Credit Facility Payable

 

On March 26, 2010, we closed on a $150.0 million credit facility.  The credit facility matures on April 1, 2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facility bear interest at a “base rate” based on either the one-month or three-month LIBOR rate, selected at our option, plus an applicable margin which adjusts based on the facility’s debt service requirements. As of March 31, 2011, the applicable margin is 2.08% and the base rate is 0.25% based on one-month LIBOR.  The credit facility also provides for fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% per annum of the total commitment less the greater of 75% of the total commitment or the actual amount outstanding. The minimum usage fee is equal to 75% of the total credit facility times the lowest applicable margin less the margin portion of interest paid during the calculation period.  The loan requires monthly interest-only payments and monthly or annual payment of fees.  We may prepay borrowing tranches at the expiration of the LIBOR interest rate period without any penalty.  Prepayments during a LIBOR interest rate period are subject to a prepayment penalty generally equal to the interest due for the remaining term of the LIBOR interest rate period.

 

Draws under the credit facility are secured by a pool of certain multifamily communities owned by our wholly owned subsidiaries, where we may add and remove multifamily communities from the collateral pool in compliance with the requirements under the credit facility agreement.   As of March 31, 2011, $266.8 million of the net carrying value of real estate collateralized the credit facility.   The aggregate borrowings under the credit facility are limited to 70% of the value of the collateral pool, which may be different than the carrying value for financial statement reporting purposes.  As of March 31, 2011, available but undrawn amounts under the credit facility are approximately $87.0 million.

 

The credit facility agreement contains customary provisions with respect to events of default, covenants and borrowing conditions.  In particular, the credit facility agreement requires us to maintain consolidated net worth of at least $150.0 million, liquidity of at least $15.0 million and net operating income of the collateral pool to be no less than 155% of the facility debt service cost. Certain prepayments may be required upon a breach of covenants or borrowing conditions.  We believe we are in compliance with all provisions as of March 31, 2011.

 

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9.                                      Stockholders’ Equity

 

Capitalization

 

As of March 31, 2011 and December 31, 2010, we had 113,665,643 and 102,859,791 shares of common stock outstanding, respectively, including 6,000 shares of restricted stock issued to our independent directors for no cash, and 24,969 shares owned by Behringer Harvard Holdings, LLC, an affiliate of our Advisor, for cash of approximately $0.2 million.

 

As of March 31, 2011 and December 31, 2010, we had 1,000 shares of convertible stock owned by our Advisor issued for cash of $1,000.  The convertible stock has no voting rights, other than for certain limited exceptions, and prior to conversion, does not participate in any earnings or distributions.  The convertible stock generally is convertible into shares of common stock with a value equal to 15% of the amount by which (1) our enterprise value at the time of conversion, including the total amount of distributions paid to our stockholders, exceeds (2) the sum of the aggregate capital invested by our stockholders plus a 7% cumulative, non-compounded, annual return on such capital at the time of conversion, on a cash-on-cash basis.  The convertible stock can be converted when the excess value described above is achieved and distributed to stockholders or our common stock is listed on a national securities exchange.  The conversion may also be prorated in the event of a termination or non-renewal of the Advisory Management Agreement (defined below) other than for cause. Management has determined that the requirements for conversion have not been met as of March 31, 2011.  Management reviewed the terms of the underlying convertible stock and determined the fair value approximated the nominal value paid for the shares at issuance.

 

As of March 31, 2011 and December 31, 2010, we had no shares of preferred stock issued and outstanding. Our board of directors has no present plans to issue preferred stock but may do so with terms established at its discretion and at any time in the future without stockholder approval.

 

Share Redemption Program

 

Our board of directors has authorized a share redemption program for stockholders who have held their shares for more than one year, subject to the significant conditions and limitations of the program.  Under the share redemption program, the per share redemption price will generally equal 90% of the most recently disclosed estimated value per share as determined in accordance with our valuation policy. Redemptions are limited to no more than 5% of the weighted average of shares outstanding during the preceding twelve month period immediately prior to the date of redemption.  In addition, redemptions are generally limited to the proceeds from our DRIP during the period consisting of the preceding four fiscal quarters for which financial statements are available, less any cash already used for redemptions during the same period, plus, if we had positive cash flows from operating activities during such preceding four fiscal quarters, 1% of all such cash flows during such preceding four fiscal quarters.

 

As of March 31, 2011 and December 31, 2010, we did not have any unpaid redemptions.

 

Distributions

 

Distributions, including those paid by issuing shares under the DRIP, for the three months ended March 31, 2011 and for the year ended December 31, 2010 were as follows (amounts in millions):

 

 

 

Distributions

 

 

 

Declared

 

Paid

 

For the Three Months Ended March 31, 2011

 

 

 

 

 

First Quarter

 

$

15.9

 

$

15.4

 

 

 

 

 

 

 

For the Year Ended December 31, 2010

 

 

 

 

 

Fourth Quarter

 

$

15.0

 

$

14.4

 

Third Quarter

 

15.3

 

15.6

 

Second Quarter

 

13.9

 

13.1

 

First Quarter

 

11.1

 

10.2

 

Total

 

$

55.3

 

$

53.3

 

 

Our board of directors has declared distributions at a daily amount of $0.0016438 per share of common stock, an annualized

 

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rate of 6%, beginning in the month of September 2010 through the second quarter of 2011.  We calculate the annualized rate as if the shares were outstanding for a full year based on a $10 per share price.

 

10.                               Commitments and Contingencies

 

Each of the BHMP CO-JVs and each of the BHMP CO-JV equity investments that include unaffiliated third party owners include buy/sell provisions.  Under these provisions and during specific periods, an owner could make an offer to purchase the interest of the other owners, and the other owners would have the option to accept the offer or purchase the offering owner’s interest at that price.  As of March 31, 2011, no such offers are outstanding.

 

The Bailey’s Crossing BHMP CO-JV and The Cameron BHMP CO-JV may become separately obligated to purchase a limited partnership interest in the related Property Entity at a price set through an appraisal process if the limited partner were to exercise its rights to put its interests to the BHMP CO-JVs. The obligations are for defined periods ranging from less than one to three years.  As the prices would be based on future events and valuations, we are not able to estimate this amount if exercised; however, the limited partners’ combined invested capital as of March 31, 2011 is approximately $22.1 million.  Based on this value, our combined share of these BHMP CO-JV obligations would be approximately $12.2 million. See Note 13, “Subsequent Events” with respect to The Cameron.

 

In the ordinary course of business, the multifamily communities in which we have investments may have commitments to provide affordable housing. Under these arrangements, we generally receive from the resident a below market rent, which is determined by a local or national authority. In certain arrangements, a local or national housing authority makes payments covering some or substantially all of the difference between the restricted rent paid by residents and market rents. In connection with our acquisition of The Gallery at NoHo Commons, we assumed an obligation to provide affordable housing through 2048. As partial reimbursement for this obligation, the 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 housing authority if certain operating results are achieved on a cumulative basis during the term of the agreement. At the acquisition, we recorded a liability of $14.0 million based on the fair value of the terms over the life of the agreement.  In addition, we will record rental revenue from the housing authority on a straight line basis, deferring a portion of the collections as deferred lease revenues and other related liabilities. As of March 31, 2011 and December 31, 2010, we have approximately $15.6 million and $15.9 million, respectively, of carrying value for deferred lease revenues and other related liabilities.

 

11.                               Related Party Arrangements

 

We have no employees and are supported by related party service agreements.   We are dependent on our Advisor, Behringer Securities LP (“Behringer Securities”),  and Behringer Harvard Multifamily Management Services, LLC (“BHM Management”), and their affiliates for certain services that are essential to us, including the sale of shares of our common stock, asset acquisition and disposition decisions, property management and leasing services and other general administrative responsibilities. In the event that these companies become unable to provide us with the respective services, we would be required to obtain such services from other sources.

 

These services are provided through our advisory management agreement (the “Advisory Management Agreement”), as it has been amended and restated, and may be renewed for an unlimited number of successive one-year terms.  The current term of the Advisory Management Agreement expires on July 1, 2011.  The board of directors has a duty to evaluate the performance of our Advisor annually before the parties can agree to renew the Advisory Management Agreement.

 

Subject to the deferral described below, we are required to reimburse the Advisor for organization and offering expenses related to our Initial Public Offering of shares (other than pursuant to a distribution reinvestment plan) and any organization and offering expenses previously advanced by the Advisor related to a prior offering of shares to the extent not previously reimbursed by us out of proceeds from the prior offering (“O&O Reimbursement”). However, the Advisor is obligated to reimburse us after the completion of the public offering to the extent that O&O Reimbursement paid by us exceeds 1.5% of the gross proceeds of the completed Initial Public Offering. We did not incur any O&O Reimbursement during the three months ended March 31, 2011.  For the three months ended March 31, 2010, we incurred O&O Reimbursement of approximately $2.3 million.  As of March 31, 2011, the amount by which our O&O Reimbursement exceeded 1.5% of the gross proceeds of our Initial Public Offering was approximately $7.2 million.

 

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The Advisor agreed to defer payment of the O&O Reimbursement from June 2010 to September 2, 2011.  Based on our review of projected gross proceeds from our Initial Public Offering, considering that our board of directors has approved to end our Initial Public Offering generally by no later than July 31, 2011, we have limited the amount of O&O Reimbursement accruals to amounts we currently expect to have to disburse. As of March 31, 2011, $2.7 million of O&O Reimbursement was accrued and unpaid.  As of March 31, 2011, our Advisor has incurred expenses related to the offering totaling $26.2 million, of which approximately $3.7 million has not been recognized by us as offering costs.

 

Behringer Securities, an affiliate of our Advisor, serves as the dealer manager for the Initial Public Offering and receives selling commissions of up to 7% of gross offering proceeds before reallowance of commissions earned by participating broker-dealers.  In connection with the Initial Public Offering, up to 2.5% of gross proceeds before reallowance to participating broker-dealers are paid to Behringer Securities as a dealer manager fee. No selling commissions or dealer manager fees are paid on purchases made pursuant to our DRIP.  In the Initial Public Offering, Behringer Securities reallows all of its commissions to participating broker-dealers and reallows a portion of its dealer manager fee of up to 2.0% of the gross offering proceeds to be paid to such participating broker-dealers; provided, however, that Behringer Securities may reallow, in the aggregate, no more than 1.5% of gross offering proceeds for marketing fees and expenses, bona fide training and educational meetings and non-itemized, non-invoiced due diligence efforts, and no more than 0.5% of gross offering proceeds for bona fide, separately invoiced due diligence expenses incurred as fees, costs and other expenses from third parties.

 

The following presents the components of the sale of shares of our common stock related to our Initial Public Offering (amounts in millions):

 

 

 

For the Three Months Ended 
March 31,

 

Sale of common stock

 

2011

 

2010

 

Gross proceeds

 

$

105.2

 

$

139.5

 

Less offering costs:

 

 

 

 

 

O&O Reimbursement

 

 

(2.3

)

Dealer manager fees

 

(2.6

)

(3.5

)

Selling commissions

 

(7.2

)

(9.4

)

Total offering costs

 

(9.8

)

(15.2

)

Sale of common stock, net

 

$

95.4

 

$

124.3

 

 

Our Advisor and its affiliates receive acquisition and advisory fees of 1.75% of (1) the contract purchase price paid or allocated in respect of the development, construction or improvement of each asset acquired directly by us, including any debt attributable to these assets, or (2) when we make an investment indirectly through another entity, our pro rata share of the gross asset value of real estate investments held by that entity. Our Advisor and its affiliates also receive 1.75% of the funds advanced in respect of a loan or other investment.

 

Our Advisor receives a non-accountable acquisition expense reimbursement in the amount of 0.25% of (1) funds advanced in respect of a loan or other investment, and (2) the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction or improvement in the case of assets that we acquire and intend to develop, construct or improve. We will also pay third parties, or reimburse the Advisor, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third party brokerage or finder’s fees, title insurance, premium expenses and other closing costs.  In addition, to the extent our Advisor or its affiliates directly provide services formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the SEC, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to our Advisor of providing these services are acquisition expenses for which we reimburse our Advisor. In addition, acquisition expenses for which we reimburse our Advisor include any payments made to (1) a prospective seller of an asset, (2) an agent of a prospective seller of an asset, or (3) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset. Except as described above with respect to services customarily or previously provided by third parties, our Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent dedicated to making investments for us, such as wages and benefits of the investment personnel. Our Advisor is also responsible for paying all of the investment-related expenses that we or our Advisor incurs that are due to third parties or related to the additional services provided by our Advisor as described above with respect to investments we do not

 

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make, other than certain non-refundable payments made in connection with any acquisition.

 

No acquisition and advisory fees were incurred for the three months ended March 31, 2011.  For the three months ended March 31, 2010, our Advisor earned acquisition and advisory fees, including the 0.25% non-accountable acquisition expense reimbursement, of approximately $2.7 million, of which approximately $0.6 million were capitalized to investments in unconsolidated real estate joint ventures.

 

Our Advisor receives debt financing fees of 1% of the amount available to us under debt financing which was originated, assumed or refinanced by or for us. Our Advisor may pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for us. For the three months ended March 31, 2011 and 2010, our Advisor has earned debt financing fees of approximately $0.1 million and $1.9 million, respectively.

 

Our Advisor receives a monthly asset management fee for each real estate related asset held by us.  Since September 2008 through June 30, 2010, the asset management fee was equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset as of the last day of the preceding month.

 

Effective July 1, 2010, the asset management fee was modified so that the amount of the fee is dependent upon our performance with respect to reaching a modified funds from operations or MFFO coverage amount per quarter of fifteen cents per share of our common stock (equivalent to an annualized sixty cents per share).  As modified, the asset management fee will be a monthly fee equal to one-twelfth of the Applicable Asset Management Fee Percentage (“the AAMF Percentage”) of the sum of the higher of the cost or value of our assets.  Effective July 1, 2010, the AAMF Percentage was 0.50% (reduced from 0.75% prior to July 1, 2010). The percentage will increase to 0.75% following two consecutive fiscal quarters during which our MFFO for each such fiscal quarter equals or exceeds 80% of the MFFO coverage amount described above.  Once the AAMF Percentage has increased to 0.75%, it will not decrease during the term of the agreement, regardless of our MFFO in any subsequent period.  The percentage will increase further to 1.0% following two consecutive fiscal quarters during which our MFFO for each such fiscal quarter equals or exceeds 100% of such MFFO coverage amount.  Finally, the percentage will return to 0.75% upon the first day following the fiscal quarter during which our Advisor has, since July 1, 2010, earned asset management fees equal to the amount of asset management fees our Advisor would have earned if the AAMF Percentage had been 0.75% every day since July 1, 2010. In no event will our Advisor receive more than the asset management fee at the annual 0.75% rate originally contracted for, but will be at risk for up to one-third of those fees and incentivized to grow our MFFO.  For the three months ended March 31, 2011 and 2010, our Advisor earned asset management fees of approximately $1.5 million and $1.3 million, respectively.

 

We will pay a development fee to our Advisor in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project; provided, however, we will not pay a development fee to an affiliate of our Advisor if our Advisor or any of its affiliates elects to receive an acquisition and advisory fee based on the cost of such development. Our Advisor has earned no development fees since our inception.

 

Property management services are provided by BHM Management and its affiliates through a property management agreement (the “Property Management Agreement”).  The Property Management Agreement expires on November 21, 2012, but if neither us nor BHM Management do not give written notice of termination at least 30 days prior to the expiration date, then it will automatically continue for consecutive two-year periods. The Property Management Agreement also provides that, in the event we terminate the Advisory Management Agreement with our Advisor, BHM Management will have the right to terminate the agreement upon at least thirty days’ prior written notice.  Further, the Property Management Agreement applies where we have control over the selection of property management.  As of March 31, 2011, 29 multifamily communities, including BHMP CO-JVs, were subject to the Property Management Agreement.  For all other multifamily communities, an unaffiliated third party owner has selected the property manager.

 

Property management fees are equal to 3.75% of gross revenues.  In the event that we contract directly with a non-affiliated third party property manager in respect to a property, we will pay BHM Management or its affiliates an oversight fee equal to 0.5% of gross rental revenues of the property managed.  In no event will we pay both a property management fee and an oversight fee to BHM Management or its affiliates with respect to a particular property. We will reimburse the costs and expenses incurred by BHM Management on our behalf, including the wages and salaries and other employee-related expenses of all on-site employees of BHM Management and other out-of-pocket expenses that are directly related to the management of specific properties.

 

For the three months ended March 31, 2011, BHM Management or its affiliates earned property management fees, net of expenses to third parties, of $0.6 million and only earned minimal fees for the comparable period of 2010.

 

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As part of our reimbursement of operating expenses, we reimburse our Advisor for any direct expenses and costs of salaries and benefits of persons employed by our Advisor performing advisory services for us, provided, however, that we will not reimburse our Advisor for personnel employment costs incurred by our Advisor in performing services under the Advisory Management Agreement to the extent that the employees perform services for which the Advisor receives a separate fee other than with respect to acquisition services formerly provided or usually provided by third parties.  We also do not reimburse our Advisor for the salary or other compensation of our executive officers.

 

Included in general and administrative expenses are accounting and legal personnel costs incurred on our behalf by our Advisor for the both of the three months ended March 31, 2011 and 2010 of approximately $0.5 million.

 

12.                               Supplemental Disclosures of Cash Flow Information

 

Supplemental cash flow information is summarized below (amounts in millions):

 

 

 

For the Three Months Ended 
March 31,

 

 

 

2011

 

2010

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Interest paid, net of amounts capitalized of $-0- and $0.5 million in 2011 and 2010, respectively

 

$

2.7

 

$

0.3

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

Assumption of mortgage note payable

 

$

 

$

26.7

 

Stock issued pursuant to our DRIP

 

$

5.5

 

$

3.6

 

Distributions payable

 

$

5.7

 

$

4.1

 

Accrued offering costs and dealer manager fees

 

$

0.2

 

$

1.2

 

Redemptions payable

 

$

 

$

0.8

 

Contingent consideration liability

 

$

 

$

0.4

 

 

13.                               Subsequent Events

 

Status of the Offering

 

For the period April 1, 2011 through April 30, 2011, we sold approximately 5.5 million shares of common stock for gross proceeds of approximately $54.7 million including, issuances through our DRIP.

 

Distributions Paid

 

On April 1, 2011, we paid total distributions of approximately $5.7 million, of which $2.6 million was cash distributions and $3.1 million was funded by issuing shares pursuant to our DRIP, relating to distributions declared each day in the month of March 2011. On May 2, 2011, we paid total distributions of approximately $5.7 million, of which $2.6 million was cash distributions and $3.1 million was funded by issuing shares pursuant to our DRIP, relating to distributions declared each day in the month of April 2011.

 

Sale, Acquisition, and Potential Acquisitions of Real Estate

 

On May 11, 2011, the Waterford Place BHMP CO-JV sold the Waterford Place multifamily community for a sales price of $110 million, excluding closing costs.  The buyer assumed the multifamily community mortgage of $58.6 million.  The net proceeds, net of the mortgage assumption, to the Waterford Place BHMP CO-JV were approximately $50 million and are intended to be used to acquire other multifamily communities, including the multifamily community described in the next paragraph.  Due to the timing of the disposition, we have not completed the final accounting, but in connection with the sale and related transactions, we estimate our share of the GAAP gain, after closing costs, to be approximately $18 million.

 

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Subsequent to the quarter ended March 31, 2011, the Waterford Place BHMP CO-JV acquired a 179-unit multifamily community located in San Francisco, California.  The purchase price, excluding closing costs, was approximately $94.0 million.  We have initially contributed $98.0 million to the Waterford Place BHMP CO-JV in connection with the acquisition.  We anticipate having an ultimate effective ownership in the multifamily community of no less than 90%.

 

We are under contract to purchase two multifamily communities for a total purchase price of approximately $100.7 million, excluding closing costs.  As of May 13, 2011, we have made a total of $2.5 million in earnest money deposits on these multifamily communities.  If consummated, we expect that the acquisitions would be made through wholly owned subsidiaries of our operating partnership, the Waterford Place BHMP CO-JV or newly created BHMP CO-JVs. The consummation of each purchase remains subject to substantial conditions, including, but not limited to, (1) the satisfaction of the conditions to the acquisition contained in the relevant contracts; (2) no material adverse change occurring relating to the multifamily community or in the local economic conditions; (3) our receipt of sufficient net proceeds from the Initial Public Offering and financing proceeds to make the acquisition; and (4) our receipt of satisfactory due diligence information, including environmental reports and lease information.  Other investments may be identified in the future that we may acquire before or instead of these multifamily communities.

 

Recapitalization of The Cameron

 

Subsequent to the quarter ended March 31, 2011, The Cameron BHMP CO-JV and the other partners in The Cameron Property Entity recapitalized their respective investments in The Cameron Property Entity.  In connection with the recapitalization, The Cameron BHMP CO-JV converted its mezzanine loan, with outstanding principal and interest of approximately $20.8 million, to an equity ownership interest in The Cameron Property Entity.  The BHMP CO-JV also contributed approximately $3.8 million of additional capital. The BHMP CO-JV’s capital contribution along with the capital contribution from an unaffiliated third party partner was used by the Cameron Property Entity to pay the senior loan down by approximately $3.0 million, to redeem a partner’s equity ownership interest and to pay other closing costs. Our portion of the BHMP CO-JV capital contribution was approximately $2.1 million and was funded with proceeds from our Initial Public Offering.

 

As a result of this recapitalization, The Cameron BHMP CO-JV acquired an effective 64.1% ownership interest and became the managing member of the general partner of The Cameron Property Entity, with certain major decisions subject to the approval of an unaffiliated third party owner in The Cameron Property Entity.  In addition, the Cameron Property BHMP CO-JV’s obligation to purchase a limited partner interest was terminated.

 

The senior loan for The Cameron Property Entity was also modified in connection with the recapitalization.  As modified, the loan is divided into two tranches with a combined principal balance of approximately $72.7 million and a blended floating interest rate set and payable monthly based on monthly LIBOR plus 3.89%. The maturity date is April 26, 2013, with two one-year extension options that may extend the maturity date of the loan to April 26, 2014 and April 26, 2015, respectively.  The Cameron Property Entity may exercise these options upon payment of an extension fee for each option exercised in the amount of 0.25% of the total loan commitment.  The Cameron Property Entity also has the right to prepay the outstanding principal loan amount in whole or in part at any time without payment of a prepayment premium or penalty.  With the closings of the recapitalization, The Cameron Property Entity has cured all technical defaults related to its senior loan.

 

* * * * *

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and the notes thereto.

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Multifamily REIT I, Inc. and its subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including, but not limited to, our ability to make accretive investments, our ability to generate cash flow to support cash distributions to our stockholders, our ability to obtain favorable debt financing, our ability to secure leases at favorable rental rates, our assessment of market rental rate trends, capital markets and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

 

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2011 and the factors described below:

 

·                                          market and economic challenges experienced by the U.S. economy or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

 

·                                          our ability to make accretive investments in a diversified portfolio of assets;

 

·                                          the availability of cash flow from operating activities for distributions;

 

·                                          our level of debt and the terms and limitations imposed on us by our debt agreements;

 

·                                          the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

 

·                                          our ability to secure resident leases at favorable rental rates;

 

·                                          our ability to raise capital through our initial public offering of shares of common stock and through joint venture arrangements;

 

·                                          our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;

 

·                                          conflicts of interest arising out of our relationships with our advisor and its affiliates;

 

·                                          unfavorable changes in laws, taxation or regulations impacting our business, our assets or our key relationships; and

 

·                                          factors that could affect our ability to qualify as a real estate investment trust.

 

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect or false.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

 

Cautionary Note

 

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report  on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk

 

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among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

 

Overview

 

We were incorporated on August 4, 2006 as a Maryland corporation and operate as a REIT for federal income tax purposes. We make investments in and operate high quality multifamily communities. In particular, we were organized to invest in and operate high quality multifamily communities that we believe have desirable locations, personalized amenities, and high quality construction. We began making investments in multifamily communities in April 2007. As of March 31, 2011, all of our investments have been in high quality multifamily communities located in the top 50 Metropolitan Statistical Areas (“MSAs”) in the United States.  We have made and intend to continue making investments both on our own, through wholly owned investments, and through co-investment arrangements with other participants (“Co-Investment Ventures”).

 

As of March 31, 2011, we own ten wholly owned multifamily investments and 23 investments in Co-Investment Ventures.   We have funded these investments and intend to fund future investments with a combination of sources, including proceeds from our Initial Public Offering, mortgage debt and unsecured or secured debt facilities.  As discussed below, we have and will continue to utilize available Co-Investment Ventures when it is favorable for us; however, we anticipate Co-Investment Ventures will represent a smaller percentage and wholly owned investments will represent a larger percentage of our new investments in the future.

 

Our investment strategy is designed to provide our stockholders with a diversified portfolio, and our management and board of directors have extensive experience in investing in numerous types of real estate, loans and other investments to execute this strategy. We intend to focus on acquiring high quality multifamily communities that will produce rental income and will appreciate in value within our program’s targeted life. Our targeted communities include existing “core” properties that are already stabilized and producing rental income as well as more opportunistic properties in various phases of development, redevelopment, lease up or repositioning.  Further, we may invest in other types of commercial real estate, real estate-related securities, mortgage, bridge, mezzanine or other loans and Section 1031 tenant-in-common interests, or in entities that make investments similar to the foregoing.  Although we intend to primarily invest in real estate assets located in the United States, in the future, we may make investments in real estate assets located outside the United States.

 

Our multifamily community acquisition strategy concentrates on multifamily communities located in the top 50 MSAs across the United States. We believe these types of investments, particularly those in submarkets with significant barriers of entry, are in demand by institutional investors which can result in better exit pricing.  We also believe that economic conditions in the major U.S. metropolitan markets will continue to provide adequate demand for properly positioned multifamily communities; such conditions include job and salary growth, lifestyle trends, as well as single-family home pricing and availability of credit. The U.S. Census population estimates are used to determine the largest MSAs. Our top 50 MSA strategy will focus on acquiring communities and other real estate assets that provide us with broad geographic diversity.

 

Investments in multifamily communities have benefited from changing demographic and finance trends. These trends include continued growth in non-traditional households, the echo-boomer generation coming of age and entering the rental market, increased immigration and recently higher credit standards for home buyers. Changes in domestic financial markets can affect the stability and direction of these historical trends and can significantly affect our strategy, both favorably and unfavorably.  Due to higher capital and return requirements, the supply of new multifamily communities coming into the market has significantly slowed.  Even if these trends change, which we do expect, the period required to develop new multifamily communities would work in our favor (for the next two to four years).  Demand for multifamily communities is also affected by changes in financial markets where changes in underwriting have affected the cost, availability and affordability of financing for purchase of single family homes. In the near term, we believe these trends will be favorable for multifamily demand as the key demographic population increases and single family housing options become more restrictive.

 

Initial Public Offering

 

On September 5, 2008, we commenced our initial public offering (the “Initial Public Offering”) of up to 200 million shares of common stock offered at a price of $10.00 per share pursuant to a Registration Statement on Form S-11 filed under the Securities Act.   The Initial Public Offering also covered the registration of up to an additional 50 million shares of common stock at a price of $9.50 per share pursuant to our distribution reinvestment plan (“DRIP”).  We reserve the right to reallocate shares of our common stock between the primary offering and our DRIP.

 

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Our board has determined to end offering activities in respect of the primary portion of our Initial Public Offering on the earlier of the sale of all 200 million of primary shares being offered or July 31, 2011.  All subscription payments from non-custodial accounts (generally individual, joint and trust accounts), must be received in good order by our transfer agent no later than July 31, 2011 under subscription agreements dated no later than July 31, 2011.  Investments by custodial held accounts (such as IRA, Roth IRA, SEP, and 401(k) accounts) must be under subscription agreements dated no later than July 31, 2011 and the subscription agreements and funds must be received in good order by our transfer agent no later than August 31, 2011.  Notwithstanding the foregoing, we may, in our sole discretion, in order to accommodate the operational needs of any participating broker-dealer, allow for the receipt of payments or corrections of subscriptions not in good order in respect of any such subscription agreement dated no later than July 31, 2011 to a date no later than the last day we may legally accept subscription agreements under our Registration Statement for such shares.

 

In making the decision to end our primary Initial Public Offering and not commence a follow-on offering, our board considered a number of factors related to the capital needs and sources necessary to position us for the next phase in our life cycle.  These factors include the strength and size of our existing real estate portfolio, current conditions in the multifamily real estate market, the strength of our balance sheet, the amount of cash we have available for additional investments, as well as our access to favorable debt capital, including our existing credit facility and access to favorable financing options through Fannie Mae and Freddie Mac (each a government-sponsored enterprise, or “GSE”) and other financing providers, such as banks and insurance companies.

 

We plan to continue to offer shares under our distribution reinvestment plan beyond the above dates.  In addition, our board of directors has the discretion to extend the offering period for the shares being sold pursuant to our distribution reinvestment plan up to the sixth anniversary of the termination of the primary offering until we have sold all shares available pursuant to the distribution reinvestment plan, in which case we will notify participants in the plan of such extension.  In many states, we will need to renew the registration statement or file a new registration statement to continue the offering for these periods. We may terminate the distribution reinvestment plan offering at any time.

 

Co-Investment Ventures

 

As of March 31, 2011 all of our investments made through Co-Investment Ventures have been made through joint ventures with Behringer Harvard Master Partnership I LP (the “BHMP Co-Investment Partner”) through entities in which we are the manager. The 1% general partner of the BHMP Co-Investment Partner is Behringer Harvard Institutional GP LP, which is an affiliate of our Advisor and is indirectly owned by our sponsor, Behringer Harvard Holdings, LLC. The 99% limited partner of the BHMP Co-Investment Partner is 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, an investment vehicle for Dutch pension funds (“PGGM”).  Substantially all of the capital provided to the BHMP Co-Investment Partner is from PGGM. We have no ownership or other direct financial interests in either of these entities.

 

Each of our separate joint ventures with the BHMP Co-Investment Partner is made through a separate entity that owns 100% of the voting equity interests and approximately 99% of the economic interests in one subsidiary REIT, through which substantially all of the joint venture’s business is conducted. Each separate joint venture entity, together with its respective subsidiary REIT, is referred to herein as a “BHMP CO-JV.” Each BHMP CO-JV is a separate legal entity formed for the sole purpose of holding its respective investment and obtaining legally separated debt and equity financing.

 

Each BHMP CO-JV is managed by us or a subsidiary of ours, but the operation of the BHMP CO-JV’s investment must generally be conducted in accordance with operating plans approved by the BHMP Co-Investment Partner. In addition, without the consent of all members of the BHMP CO-JV, we as the manager may not generally approve or disapprove on behalf of the BHMP CO-JV certain major decisions affecting the BHMP CO-JV, such as (1) selling or otherwise disposing of the BHMP CO-JV’s investment or any other property having a value in excess of $100,000, (2) selling any additional interests in the BHMP CO-JV, (3) approving initial and annual operating plans and capital expenditures or (4) incurring or materially modifying any indebtedness of the BHMP CO-JV in excess of $100,000 or causing the BHMP CO-JV to become liable for any debt, obligation or undertaking of any other individual or entity in excess of $100,000 other than in accordance with the operating plans. Generally, if there are disagreements regarding these major decisions, then either member may exercise buy-sell rights. The BHMP Co-Investment Partner may remove the manager for cause and appoint a successor. Distributions of net cash flow from the BHMP CO-JV will be distributed to the members no less than quarterly in accordance with the members’ ownership interests. BHMP CO-JV capital contributions and distributions are made pro rata in accordance with ownership interests.

 

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Certain BHMP CO-JVs have made equity investments with third-party partners in, and/or have made loans to, entities that own a single multifamily operating or development community. The collective group of these operating property entities or development entities is collectively referred to herein as “Property Entities.” Each Property Entity is a separate legal entity for the sole purpose of holding its respective operating property or development project and obtaining legally separated debt and equity financing.

 

As of March 31, 2011, two of our 23 BHMP CO-JVs have only mezzanine or mortgage loan investments in Property Entities. The remaining 21 BHMP CO-JVs have made equity investments in operating properties.  Of these, 16 are indirectly wholly owned by the BHMP CO-JVs. The remaining five BHMP CO-JVs have made equity investments with third party partners in, and/or have made notes receivable to, Property Entities that own one real estate operating property.  The partners of these Property Entities are the applicable BHMP CO-JV and unaffiliated third parties, which were organized to own, construct, and finance only one particular real estate project. Each of these five BHMP CO-JV investments in a Property Entity is evaluated for consolidation at the BHMP CO-JV level using our principles of consolidation.  Based on this evaluation, three of the five investments are reported on a consolidated basis by the BHMP CO-JV.   The two remaining investments are recorded as unconsolidated real estate joint ventures and reported using the equity method of accounting by the respective BHMP CO-JVs.

 

We believe our strategy of investing through Co-Investment Ventures has allowed and will continue to allow us to increase the number of our investments, thereby increasing our diversification, and providing participation with greater economic interest in larger or more selective real estate investments with greater access to high quality investment opportunities. We also believe partnerships with high quality institutional entities, such as PGGM, enhance the valuation of our portfolio. We intend to continue to invest through BHMP CO-JVs in operating communities, to-be-developed multifamily communities or newly constructed multifamily communities that have not yet stabilized, excluding residential properties for assisted living, student housing or senior housing. However, we are not limited to co-investments with the BHMP Co-Investment Partner, and as the BHMP Co-Investment Partner’s funding commitment is utilized, we may pursue other Co-Investment Ventures if they provide greater diversification or investment opportunities. We also plan to pursue wholly owned, direct investments consistent with our investment policies.

 

Each current Property Entity arrangement with an unaffiliated third party developer is unique and heavily negotiated, but the governing agreement and the capital structure generally include certain basic provisions. The BHMP CO-JV will generally provide the greater proportion of the equity capital, which generally ranges from 60% to 90%, but in some instances could be 100% of the equity capital. If one of the owners has made a special contribution, usually defined as a contribution where the other owners do not participate, the owner making the special contribution will receive priority distributions until the capital is returned to the contributing owner plus a preference rate. To avoid dilution, we expect the BHMP CO-JV will always make such special contributions. Currently, two BHMP CO-JVs are the only owners in a Property Entity with such a capital account.  Other distributions from operating cash flow are generally distributed pro rata between those owners who contributed capital. Distributions after these capital accounts are returned to the owners are generally not distributed pro rata, where the unaffiliated developer owner will generally receive a higher proportion. This additional distribution, referred to as a developer promote, generally ranges from 20% to 50%. For future Co-Investment Ventures, particularly development projects, we may incorporate different forms or structures.

 

Management of the Property Entity is generally the responsibility of an unaffiliated third party; however, for two Property Entities, 55 Hundred and Bailey’s Crossing, the BHMP CO-JV is the managing owner. Regardless of which owner is officially designated as the managing owner, each owner of the respective Property Entity has certain approval rights over major decisions, which effectively require all owners to agree before these actions can be taken. These major decisions usually include actions pertaining to admittance or transfer of owners, sale of the property, financing, selection of third party property managers and approval of operating budgets.

 

For Property Entities that have not reached full stabilization or continue to be financed under the initial construction loan, the unaffiliated third party developer provides completion guarantees and cost overrun protections.  The unaffiliated third party developer also guarantees all principal and interest payments under the construction loan, usually through the term of the construction loan or in some cases until the property reaches certain operating milestones. As of March 31, 2011, these provisions generally apply to BHMP CO-JV investments in Satori and Veritas.

 

Market Outlook

 

During the first quarter of 2011, the U.S. economy weathered a potential shut down of the government, a catastrophic Japanese tsunami and nuclear crisis, political instability in the Middle East and oil surpassing $100 a barrel and yet continued to post steady improvements in most of the key fundamental benchmarks. Unemployment dropped below 9% with favorable growth trends

 

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related to declining unit labor costs, layoffs and jobless claims, lengthening work weeks and increased hiring, particularly in manufacturing and technology. Regions less affected by the housing bust are generally showing the most gains, but on a national basis, jobless claims are now less than those experienced pre-recession in September 2008. Bolstered by low interest rates and increased productivity, corporate profits continued to improve. All of these factors contributed to a respectable growth in GDP for the first quarter of 2011 of 1.8%.  The general consensus from analysts is that the economy has reached a fundamental level of recovery that should allow for continued steady growth, which we believe will continue in the near term and should positively impact our portfolio.

 

Increased renter demand and lack of supply of higher quality new multifamily communities continue to provide the basis for favorable multifamily fundamentals.  Analyst reports and surveys indicate improved traffic, occupancy gains and increased rental rates over expiring rents, both for new leases and renewals.  For our portfolio from December 31, 2010 to March 31, 2011, approximately 70% of our stabilized communities had monthly rental rate per unit increases and our total occupancy increased from approximately 88% to 90%.  Since high quality multifamily development can take 18 to 36 months to entitle, permit and construct, we believe there should be a window of limited supply that would keep these favorable fundamentals in place for the short term. We do see evidence of increased permitting for multifamily development, so depending on available financing, we would expect development activity to accelerate in the near term.

 

Multifamily financing has benefited from low market interest rates and increased lender competition.  Five year treasury rates were 2.24% as of March 31, 2011, an increase of less than 0.25% from December 31, 2010. Ten year treasury rates were 3.47% as of March 31, 2011, an increase of less than 0.15% from December 31, 2010. However, both rates are still lower than those at the beginning of 2010 and their average rates since 2000.  Shorter term rates, as measured by 30-day LIBOR, were essentially unchanged during the quarter and continue to be near historical lows. At the same time, insurance companies and commercial banks have been aggressive in the multifamily sector, competing with Fannie Mae and Freddie Mac for new business. Accordingly, market interest rates for stabilized, permanent financing remained within a relatively tight band.  However, with the Federal Reserve’s quantitative easing expected to expire in June 2011, we do expect interest rates to rise.  Accordingly, we continued our strategy of locking in longer term rates.  During the first quarter of 2011, we completed one seven-year financing at an interest rate of 4.25%.

 

In this investing environment, competition for new acquisitions is intense. Investors, such as institutions, public REITs and private owners, consider the multifamily sector to have good revenue growth prospects, particularly in light of alternative investments.  With their large capital positions, these investors have been bidding multifamily community prices up.   Similarly, more multifamily owners are deciding to hold properties rather than monetize their appreciation, with those electing to sell asking for higher pricing. Consequently, multifamily values are increasing and capitalization rates are compressing. Our approach is to continue to focus on high quality, core assets in institutional markets where there are barriers to entry for new multifamily communities. We generally will not participate in heavily bid acquisitions but will seek out properties and situations where our financial strength and experience allow us to differentiate our offers from other buyers. Previous situations where these strengths have provided us with acquisition opportunities include lender short sales, failed condominiums and debt restructurings.

 

We believe that the projected demand for new developments coupled with the tight capital markets for new developments may provide opportunities for mortgage, bridge or mezzanine investments, as well as development opportunities for our own account.  GSEs typically do not lend on development properties during construction until after 90 days or more of stabilized operations.  Banks and other debt providers tend to limit financing to approximately 60% of total costs.  These limitations may provide us with lending opportunities with creditworthy borrowers that would provide higher short-term returns (three to five years).  We would also evaluate developments for our own account or with development partners that meet our investment criteria.

 

We expect to use the proceeds from our Initial Public Offering as the primary funding source for the execution of our investment strategy and the expansion of our portfolio.  As of March 31, 2011, we have sold a total of approximately 102.2 million shares (including DRIP) of common stock and raised a total of $1.02 billion in gross proceeds from our Initial Public Offering.  Our board has determined to end offering activities in respect of the primary portion of our Initial Public Offering on the earlier of the sale of all 200 million of primary shares being offered or July 31, 2011 (although processing of subscriptions may continue through the last date we may legally accept subscriptions).  At the completion of our Initial Public Offering, we believe we will own sufficient assets that meet our investment objectives.

 

We intend to leverage the proceeds from these offerings with property debt and aim for a leverage ratio of approximately 50% to 60% following the investment of the proceeds raised from the Initial Public Offering and upon stabilization of our portfolio. However, market fundamentals related to capitalization rates, interest rates and financing terms could affect our eventual leverage

 

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ratio thus, we will maintain a flexible policy as to leverage. We may use various forms of debt financing, including property specific, cross collateralized pools and credit facilities.  We will generally seek non-recourse financing, particularly for stabilized communities.

 

We expect to meet our short-term liquidity requirements through the net cash raised from offerings, our credit facility and cash flow from operating activities of our current and future investments. For purposes of our long-term liquidity requirements, we expect that the net cash from our Initial Public Offering, our credit facility and our current and future investments will generate sufficient cash flow to cover operating expenses and our distributions to stockholders. Also to the extent we hold unencumbered or appreciated real estate investments, refinancing proceeds could be another source of capital.

 

Property Portfolio

 

The table below presents our wholly owned communities and investments in unconsolidated real estate joint ventures, the latter of which are currently all BHMP CO-JVs.  Each of these investments is categorized as of March 31, 2011 based on stages as defined below:

 

·                  Stabilized / Comparable are communities that are stabilized (the earlier of 90% occupancy or one year after completion of construction or acquisition) for both the current and prior reporting period.

 

·                  Stabilized / Non-comparable are communities that have been stabilized or acquired after January 1, 2010.

 

·                  Lease ups are communities that have commenced leasing but have not yet reached stabilization.

 

·                  Developments are communities currently under construction for which leasing activity has not commenced.  As of March 31, 2011, there are no communities classified as developments.

 

For each of the investments in unconsolidated real estate joint ventures in BHMP CO-JVs, we provide additional information describing the underlying investment.  All BHMP CO-JV information is presented gross and not proportionate to our ownership (amounts in millions):

 

 

 

 

 

Physical Occupancy Rates (a)

 

Monthly Rental Rate Per Unit (b)

 

Investments in Real Estate

 

Units

 

As of
March 31, 
2011

 

As of 
December 31,
2010

 

As of
March 31,
2011

 

As of
December 31,
2010

 

Stabilized / Comparable:

 

 

 

 

 

 

 

 

 

 

 

The Gallery at NoHo Commons / Los Angeles, California

 

438

 

88

%

85

%

$

1,866

 

$

1,877

 

Grand Reserve Orange / Orange, Connecticut

 

168

 

93

%

93

%

$

1,508

 

$

1,511

 

Mariposa Loft Apartments / Atlanta, Georgia

 

253

 

98

%

98

%

$

1,180

 

$

1,164

 

 

 

 

 

 

 

 

 

 

 

 

 

Stabilized / Non-comparable:

 

 

 

 

 

 

 

 

 

 

 

Acacia on Santa Rosa Creek / Santa Rosa, California

 

277

 

90

%

91

%

$

1,348

 

$

1,309

 

Allegro / Addison, Texas

 

272

 

88

%

85

%

$

1,343

 

N/A

 

Burnham Pointe / Chicago, Illinois

 

298

 

86

%

90

%

$

1,936

 

$

2,016

 

The Lofts at Park Crest / McLean, Virginia

 

131

 

90

%

95

%

$

2,993

 

$

3,046

 

The Reserve at La Vista Walk / Atlanta, Georgia

 

283

 

89

%

91

%

$

1,086

 

$

1,088

 

Uptown Post Oak / Houston, Texas

 

392

 

95

%

91

%

$

1,406

 

$

1,389

 

Lease ups:

 

 

 

 

 

 

 

 

 

 

 

Acappella / San Bruno, California

 

163

 

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