10-K 1 aec201310k.htm 10-K aec 2013 10K


 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
 
OR
 
[ ] 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 1-12486
 
Associated Estates Realty Corporation
(Exact name of registrant as specified in its charter)
 
OHIO
 
34-1747603
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
1 AEC Parkway, Richmond Heights, Ohio 44143-1550
(Address of principal executive offices)
 
Registrant's telephone number, including area code (216) 261-5000
 
Securities registered pursuant to Section 12(b) of the Act:
 
TITLE OF EACH CLASS
 
NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Shares, without par value
 
New York Stock Exchange, Inc.
 
 
Nasdaq Global Market
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x  No ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨   No x
 
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 ¨
 
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 (subsection 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £
 
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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x  Accelerated filer ¨ Non-accelerated filer ¨  (Do not check if a smaller reporting company) 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 ¨  No x
 
The aggregate market value of the voting stock held by non-affiliates of the Registrant was $769.3 million as of June 30, 2013.
 
The number of Common Shares outstanding as of February 10, 2014 was 57,566,851.
 
DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein).
 
Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Shareholders to be held on May 7, 2014 (in Part III).





ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2013

 
 
 
 
 
Item
 
PART I
 
Page
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1A.
 
 
1B.
 
 
2.
 
 
 
 
 
 
 
 
3.
 
 
4.
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
5.
 
 
 
 
 
and Issuer Purchases of Equity Securities
 
6.
 
 
7.
 
 
 
 
 
Condition and Results of Operations
 
7A.
 
 
8.
 
 
9.
 
 
 
 
 
on Accounting and Financial Disclosure
 
9A.
 
 
9B.
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
10.
 
 
11.
 
 
12.
 
 
 
 
 
and Related Shareholder Matters
 
13.
 
 
14.
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
15.
 
 

2



PART I
Except as the context otherwise requires, all references to "we," "our," "us" and the "Company" in this report collectively refer to Associated Estates Realty Corporation ("AERC") and its consolidated subsidiaries.
Item 1. Business
GENERAL
We are a fully integrated, self-administered and self-managed equity real estate investment trust ("REIT"). We are publicly traded on the New York Stock Exchange ("NYSE") and the Nasdaq Global Market ("NASDAQ") under the ticker symbol "AEC." Our headquarters, located at 1 AEC Parkway in Richmond Heights, Ohio, is composed of one office building of approximately 42,000 square feet and two adjacent parcels of land containing approximately 1.1 and 3.0 acres, respectively, all of which are suitable for further development or expansion and all of which we own under a long-term ground lease.
We specialize in multifamily ownership, operation, acquisition, development, construction, disposition and property management activities. We own a taxable REIT subsidiary that performs general contracting and construction services for our own account in connection with the development of multifamily properties that we own and operate. As of December 31, 2013, our operating property portfolio consisted of 53 owned apartment communities containing 13,676 units in ten states. See Item 2 for a state-by-state listing of our portfolio. Additionally, in May 2012, in conjunction with our acquisition of land for development of an apartment community, we acquired a commercial building in Los Angeles, California containing approximately 78,800 total square feet of office and commercial space. In January 2014, we assumed property management responsibilities for a fee for an apartment property that we expect to acquire, subject to construction completion, pursuant to an existing contract. Our consolidated financial statements include the accounts of all subsidiaries, including the taxable REIT subsidiary, which is separately taxed for federal income tax purposes as a Taxable REIT Subsidiary ("TRS") under the REIT Modernization Act ("RMA") implemented in 1999. Our consolidated financial statements also include a partnership in which we own a 97.0% equity interest.
BUSINESS SEGMENTS
Substantially all of our properties are multifamily communities and, while the economic climate of the markets in which they are located may vary from time to time, the communities offer similar products and services and have similar economic characteristics. Management evaluates the performance of our properties and makes acquisition/disposition decisions on a property-by-property basis. In the aggregate our multifamily properties provided approximately 99.2% of our consolidated revenue for 2013. We have determined that we have only one reportable segment, which is multifamily properties.
OPERATING STRATEGY AND BUSINESS OBJECTIVES
See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report on Form 10-K for additional discussion on our 2014 outlook and expectations.

3



Acquisition/Disposition. Our acquisition/disposition strategy in recent years has been to (i) buy properties located in high growth submarkets outside of the Midwest; (ii) sell properties where market conditions are such that the reinvestment of cash proceeds derived from a sale are expected to provide, over time, a significantly greater return on equity and increased cash flow; (iii) reduce the average age of our portfolio; and (iv) improve the operating margins of our portfolio. In 2013 we acquired the following five properties:
Acquisition Date
 
Property
 
Location
 
Units
 
Purchase Price
November 19, 2013
 
Lofts at Weston Lakeside
 
Cary, NC
 
215

 
$
38,300

November 18, 2013
 
St. Mary's Square
 
Raleigh, NC
 
134

 
27,325

October 10, 2013
 
The Apartments at Blakeney
 
Charlotte, NC
 
295

 
53,180

September 27, 2013
 
Rienzi at Turtle Creek
 
Dallas, TX
 
152

 
48,900

July 16, 2013
 
Doral West
 
Doral, FL
 
388

 
93,500

 
 
 
 
 
 
1,184

 
$
261,205

In 2013 we also disposed of the following four properties:
Disposition Date
 
Property
 
Location
 
Units
 
Sales Price
December 18, 2013
 
Courtney Chase
 
Orlando, FL
 
288

 
$
38,100

November 14, 2013
 
St. Andrews at Little Turtle
 
Columbus, OH
 
102

 
8,165

September 3, 2013
 
Bradford at Easton
 
Columbus, OH
 
324

 
29,500

March 22, 2013
 
Idlewylde
 
Duluth, GA
 
843

 
63,230

 
 
 
 
 
 
1,557

 
$
138,995

In addition, in 2013, we acquired land in San Francisco, California for development of an apartment community for a purchase price of $46.6 million.
We continue to monitor acquisition opportunities in our existing markets, in particular Southeast Florida, Charlotte, Atlanta and Dallas. We have also identified Southern and Northern California as targeted growth markets. We will also consider opportunistic acquisition and development opportunities in other markets.
We continually monitor the current and expected return on equity of all of our properties. We will consider opportunistic sales of properties in any market, including our targeted growth markets, if we determine that the proceeds from such sales would provide a greater return on equity and increased cash flow when redeployed, or when proceeds could be used to fund development or to reduce debt.
During the three years ended December 31, 2013, we acquired 12 multifamily properties containing a total of 3,036 units for an aggregate purchase price of approximately $560.2 million, and we sold 12 multifamily properties containing a total of 3,363 units for an aggregate sales price of approximately $236.8 million.
Development. We intend to contribute to our growth by developing new properties. During 2013, we substantially completed and placed in service a 99-unit expansion on a parcel of land adjacent to our existing San Raphael property in North Dallas. Additionally, during 2013, we acquired one parcel of land in San Francisco, California, where we are developing a project comprising 410 apartment units and 40,000 square feet of commercial space. We are also developing a 472-unit apartment community in the Design District of downtown Los Angeles, California and a 154-unit apartment community in Monrovia, California. The San Francisco and Design District projects are being developed in 50/50 joint ventures. The Monrovia land is held in a 50/50 joint venture and we anticipate developing it in a joint venture as well. During 2012, we acquired one parcel of land in Los Angeles, California, to develop a 175-unit apartment community and one parcel in Bethesda, Maryland to develop a project comprised of 140 apartment units and 7,000 square feet of commercial space. Construction has commenced on both of these projects. During 2011, we acquired a parcel of land located in the Turtle Creek neighborhood adjacent to downtown Dallas, where we have commenced construction of a 249-unit apartment community. See Note 3 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.

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Property Operations. We operate in a number of different markets and submarkets. The economic climate in these markets may vary from time to time and, as a result, occupancy and the degree to which we can maintain or increase rents varies between markets. However, our goal is to maximize property net operating income in all of our markets through a combination of increasing rents, maintaining occupancy levels and aggressively managing controllable operating expenses. Strategies to increase revenues include constant monitoring of our markets and submarkets, providing superior resident service and creating highly desirable communities in which to live. We use Property Solutions International to leverage the power of the Internet through enhanced property websites and resident portals that allow integrated resident communication, and by implementing resident billing programs for utilities and refuse collections. We use LROTM, a rental revenue software product that provides comprehensive submarket-based statistical data to assist in maximizing rental revenue while remaining market competitive. We combine this data with our proprietary market knowledge and experience to maximize rental revenues and try to maintain high occupancy levels. With LROTM, we try to generate long-term rent growth by adjusting rents to address market forces in real-time. Our AEC Academy for Career Development provides training and support for our employees, which help us provide better educated and skilled personnel at our communities while minimizing employee turnover. We aggressively manage controllable operating expenses through strategies such as utilizing centralized purchasing contracts benefiting multiple properties and through diligent upkeep and regular maintenance at all of our communities.
Financing and Capital. We use proceeds received from new debt, refinancings, property sales or equity issuances to maximize returns, while remaining keenly focused on strengthening our balance sheet. Increasing both our coverage ratios and the number of unencumbered assets have been two of our principal objectives. During the past three years, we continued to focus on lowering our cost of debt. The weighted average interest rate on our total debt declined 170 basis points from 5.5% per annum at December 31, 2010 to 3.8% per annum at December 31, 2013. Our interest coverage ratio and fixed charge coverage ratios were 2.98:1 and 2.98:1, respectively, at December 31, 2013, up from 1.97:1 and 1.85:1, respectively, at December 31, 2010.
2013 Activities. On October 23, 2013, we consummated a subsidiary merger transaction that had the effect of converting the remaining 74,083 operating partnership units related to the 1998 acquisition of an operating partnership into a right to receive cash merger consideration, pursuant to which $1.4 million was paid on November 6, 2013.
On October 21, 2013, we completed the issuance of $100.0 million of unsecured notes. The notes were offered in a private placement with two maturity tranches: $45.0 million with a 7-year maturity at 4.29% per annum, and $55.0 million with a 10.2-year maturity at 4.94% per annum. The $100.0 million total issuance had a weighted average term of 8.8 years and a weighted average interest rate of 4.65% per annum. Proceeds from the issuance were used to repay borrowings on our unsecured revolver.
On October 1, 2013, we settled Forward Share Agreements (FSAs) with forward purchasers entered into on May 29, 2013 by delivering 7,047,958 shares of our common stock at a price of $17.25 per share. We received net proceeds of approximately $115.1 million based on the adjusted net settlement price of $16.33 per share. Proceeds from the forward sale were applied toward the repayment of debt that matured on October 1, 2013.
On June 19, 2013, we amended the terms of our $350 million unsecured revolving credit facility. Among the modifications, we reduced the credit spread and extended the maturity from January 12, 2016 to June 15, 2017. Total costs associated with this amendment were $1.2 million. This facility provides improved flexibility and the ability to capitalize on strategic opportunities without the delays associated with financing contingencies. Our borrowing capacity under the revolver is a function of our unencumbered property pool.

5



On April 12, 2013, we filed a new shelf registration statement on Form S-3ASR to register the sale and issuance of equity and debt securities in public offerings which replaced our shelf registration statement that was to expire in June 2013. This current shelf registration expires in April 2016. Additionally, on April 12, 2013, we filed a prospectus supplement to register an at-the-market ("ATM") program, which allows us to sell up to $75.0 million of our common shares in open market transactions at the then-current market price per share. The ATM program was originally established in August 2012. Due to the filing of the new shelf registration statement on Form S-3ASR, it was necessary to file a new prospectus supplement to continue the ATM program. As of December 31, 2013, we have sold 107,498 shares under the ATM program for total net proceeds of $1.9 million, and have remaining availability of approximately $73.1 million.
On April 2, 2013, we entered into a forward starting interest rate swap on $125 million of our $150 million unsecured term loan, fixing the rate beginning June 2, 2016 at a rate of 1.55% per annum plus the credit spread, which was 1.70% per annum as of December 31, 2013, or an all-in rate of 3.25% per annum until the loan matures in January 2018. The credit spread is subject to change, from time to time, from a minimum of 1.25% per annum to a maximum of 2.20% per annum over LIBOR based upon our qualified ratings as defined in the swap agreement. See Note 11 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for additional information regarding this swap.

On February 15, 2013, we purchased our development partner's interest in Vista Germantown for $4.5 million. We now own a 100% interest in the Vista Germantown property, a 242-unit apartment community located in downtown Nashville, Tennessee. Prior to the purchase, we held a 90.0% equity interest. This property was included as a consolidated entity in our financial statements before and after the purchase.

On January 22, 2013, we completed the issuance of $150.0 million of unsecured notes. The notes were offered in a private placement with two maturity tranches: $63.0 million with an 8-year maturity at 4.02% per annum, and $87.0 million with a 10-year maturity at 4.45% per annum. The $150.0 million total issuance had a weighted average term of 9.2 years and a weighted average interest rate of 4.27% per annum. Proceeds from the issuance were used to repay borrowings on our unsecured revolver.

2012 Activities. On October 19, 2012, we completed modifications to our unsecured term loan, which included increasing the outstanding principal amount to $150 million from $125 million and extending the maturity date from June 2016 to January 2018. An investment grade pricing grid was also added to determine the interest rate on the loan upon our achieving investment grade credit ratings. Total costs associated with this modification were $600,000.
During 2012, we sold 681,178 shares under our $25.0 million ATM program for total gross proceeds of $11.3 million, or $11.1 million net of sales and commissions and other costs. The proceeds were used to reduce borrowings on our unsecured revolver and for general corporate purposes. At June 30, 2012, all $25.0 million of common shares available for issuance under the ATM had been sold and the program was completed. In August 2012, we entered into an ATM program that would allow us to sell up to $75.0 million of our common shares in open market transactions at-the-then market price per share. There were no shares sold during 2012 under this $75.0 million ATM program.
On June 27, 2012, we sold 6,325,000 of our common shares in an underwritten public offering at a price of $14.40 per share, which resulted in total net proceeds of approximately $87.2 million. The proceeds were used to fund property acquisitions and development and for general corporate purposes.
In January 2012, we increased our $250 million unsecured revolver to $350 million. This facility provided additional financial flexibility. Debt procurement costs related to this credit facility modification were $2.3 million. Our borrowing capacity under the revolver was a function of our unencumbered property pool.
2011 Activities. On June 3, 2011, we closed on a $125 million unsecured, five year term loan, subsequently modified in 2012. Proceeds from the term loan were used to pay down borrowings on our $250 million unsecured revolver and for general corporate purposes. Debt procurement costs related to this loan were $1.0 million. The Company entered into a forward starting interest rate swap in December 2011 fixing the rate at 1.26% per annum plus the credit spread (which is currently 1.7% per annum), or an all-in rate of 2.96% per annum beginning in June 2013 until June 2016. See Note 11 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for additional information regarding this swap.

6



During 2011, we sold 788,676 shares under our ATM program for total net proceeds of $13.3 million. The proceeds were used to reduce borrowings on our unsecured revolver and for general corporate purposes.
General Contractor/Construction. We perform general contractor and construction management services for our own account in connection with the development of multifamily properties we own and operate as well as unconsolidated joint ventures. We previously performed construction services for third parties. However, in 2011 we decided to exit the third party construction services business, and our work under all third party construction contracts was substantially completed as of December 31, 2011. Among other things, we believe we will realize significant cost savings and improved quality of our development properties as a result of our in-house development and general contracting capabilities.
INCOME TAXES
See Note 10 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.
COMPETITIVE CONDITIONS
See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report on Form 10-K.
CUSTOMERS
Our business, taken as a whole, is not dependent upon any single customer or a few customers.
EMPLOYEES
On February 10, 2014, we employed approximately 400 people.
ENVIRONMENTAL CONSIDERATIONS
See Item 1A. Risk Factors for information concerning the potential effects of environmental regulations on our operations.
AVAILABLE INFORMATION
Shareholders may obtain, free of charge from our Internet site at AssociatedEstates.com, a copy of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission ("SEC").
REPORTS TO SECURITY HOLDERS
We issue annual reports to our security holders that contain financial statements.
Item 1A. Risk Factors
We are subject to certain risks and uncertainties as described below. These risks and uncertainties are not the only ones we face and there may be additional risks that we do not presently know of or that we currently consider immaterial. All of these risks could adversely affect our business, financial condition, results of operations and cash flows. Our ability to pay dividends on, and the market price of, our equity securities may be adversely affected if any of such risks result in a material adverse effect upon our operations and/or financial condition.

7



We are subject to risks inherent in the real estate business and operation of a REIT. We own and manage multifamily apartment communities that are subject to varying degrees of risk generally incident to the ownership of real estate. Our financial condition, the value of our properties and our ability to make distributions to our shareholders will be dependent upon our continued access to the debt and equity markets and our ability to operate our properties in a manner sufficient to generate income in excess of operating expenses and debt service charges, which may be affected by the following risks, some of which are discussed in more detail below:
changes in the economic climate in the markets in which we own and manage properties, including interest rates, the overall level of economic activity, the availability of consumer credit and mortgage financing, unemployment rates and other factors;
elimination of, or limitations on, federal government support for Fannie Mae and/or Freddie Mac that might result in significantly reduced availability of mortgage financing sources, as well as increases in interest rates for mortgage financing;
our ability to refinance debt on favorable terms at maturity;
risks of a lessening of demand for the multifamily units that we own;
competition from other available multifamily units, single family units available for rental or purchase, and changes in market rental rates;
the failure of development projects or redevelopment activities to achieve expected results due to, among other causes, construction and contracting risks, unanticipated increases in materials and/or labor, delays in project completion and/or lease-up that result in increased costs and/or reduce the profitability of a completed project, and the absence of our right to control all activities and decisions of joint venture developments where the applicable agreement allocate decision making authority to, or require the consent of, our joint venture partner;
the failure to enter into development joint venture arrangements on acceptable terms;
increases in property and liability insurance costs;
unanticipated increases in real estate taxes and other operating expenses;
weather conditions that adversely affect operating expenses;
expenditures that cannot be anticipated such as utility rate and usage increases and unanticipated repairs;
our inability to control operating expenses or achieve increases in revenue;
shareholder ownership limitations that may discourage a takeover otherwise considered favorable by shareholders;
the results of litigation involving us;
changes in tax legislation;
risks of personal injury and property damage claims that are not covered by our insurance;
catastrophic property damage losses that are not covered by our insurance;
risks associated with property acquisitions, such as failure to achieve expected results or matters not discovered in due diligence; and
risks related to the perception of residents and prospective residents as to the attractiveness, convenience and safety of our properties or the neighborhoods in which they are located.

8



We are dependent on rental income from our multifamily apartment communities. If we are unable to attract and retain residents, or if our residents are unable to pay their rental obligations, our financial condition and funds available for distribution to our shareholders may be adversely affected.
Our multifamily apartment communities are subject to competition. Our apartment communities are located in developed areas that include other apartment communities and compete with other housing alternatives, such as condominiums, single family and multifamily rental homes and owner occupied single family and multifamily homes. Foreclosed single family homes that become rental properties could create additional competition in certain of our markets. Such competition may impact our rental rates, and affect our ability to attract and retain residents.
Our insurance may not be adequate to cover certain risks. There are certain types of risks, generally of a catastrophic nature, such as earthquakes, floods, windstorms, acts of war and terrorist attacks that may be uninsurable, are not economically insurable, or are not fully covered by insurance. Moreover, certain risks, such as mold and environmental exposures and certain employment related claims, generally are not covered by our insurance. Other risks are subject to various limits, sub-limits, deductibles and self insurance retentions, which help to control insurance costs, but which may result in increased exposures to uninsured losses. Significant uninsured losses could have a material adverse effect on our business, financial condition and results of operations.
Secured debt financing could adversely affect our performance. At December 31, 2013, 11 of our 53 operating properties were encumbered by project specific, non-recourse, and non-cross-collateralized mortgage debt. There is a risk that these properties may not have sufficient cash flow from operations to pay required principal and interest. We may not be able to refinance these loans at an amount equal to the loan balance, and the terms of any refinancing may not be as favorable as the terms of existing indebtedness. If we are unable to make required payments on indebtedness that is secured by a mortgage, the property securing the mortgage may be foreclosed with a consequent loss of income and value to us. Although Fannie Mae and Freddie Mac continue to provide needed financing to qualified borrowers, such as us, there is no assurance that those mortgage capital sources will remain available or available on competitively favorable terms. Additional sources of secured financing are provided by life insurance companies, commercial banks and commercial mortgage-backed securities ("CMBS"), which from time-to-time offer terms competitive with Fannie Mae and Freddie Mac. We believe that we currently have access to such financing at competitive terms; however, there can be no assurance that such financing will be available or that we will qualify for such financing in the future. In addition, there are currently numerous proposals before Congress that could curtail the lending ability of Fannie Mae and Freddie Mac.
Financial covenants could limit our ability to achieve our strategic objectives. The agreements governing our unsecured credit facilities contain certain restrictions, requirements and other limitations on our ability to incur additional secured and unsecured debt, commence project construction, acquire additional land or development projects and make other strategic investments or business acquisitions or dispositions. These agreements also contain certain financial and operating covenants including, among other things, maintenance of certain financial ratios. Additionally, our unsecured notes contain certain provisions that mirror the requirements of our unsecured credit facilities. Our unsecured credit facilities and unsecured notes are cross-defaulted and also contain cross default provisions with all of our other outstanding indebtedness of $25.0 million or more.
Real estate investments are generally illiquid, and we may not be able to sell our properties when it is economically or strategically advantageous to do so. Real estate investments generally cannot be sold quickly, and our ability to sell properties may be adversely affected by market conditions. We may not be able to further diversify or vary our portfolio in accordance with our strategies or in response to economic or other conditions. In addition, provisions of the Internal Revenue Code of 1986, as amended (the "Code"), limit the ability of a REIT to sell its properties in some situations when it may be economically advantageous to do so, thereby potentially adversely affecting our ability to make distributions to our shareholders.

9



Litigation may result in unfavorable outcomes. Like many real estate operators, we are frequently involved in lawsuits, including those pertaining to premises liability claims, housing discrimination claims and alleged violations of landlord-tenant laws, which may give rise to class action litigation or governmental investigations. Any material litigation not covered by insurance, such as a class action, could result in substantial costs being incurred.
The costs of complying with laws and regulations could adversely affect our cash flow. Our properties must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that they are "public accommodations" or "commercial facilities" as defined in the ADA. The ADA does not consider apartment communities to be public accommodations or commercial facilities, except for portions of such communities, such as leasing offices and commercial space, that are open to the public. In addition, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1990, to be accessible to disabled individuals. Other state and local laws also require apartment communities to be disability accessible. The FHAA also prohibits discrimination against protected classes of individuals. Noncompliance with these laws could result in the imposition of fines or an award of damages to private litigants. We have been subject to lawsuits alleging violations of accessible design laws in connection with certain of our properties.
Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in the property. This liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of the substances. Other laws impose on owners and operators certain requirements regarding conditions and activities that may affect human health or the environment. Failure to comply with applicable requirements could complicate our ability to lease or sell an affected property and could subject us to monetary penalties, costs required to achieve compliance and potential liability to third parties. All of our properties and development sites have been the subject of environmental assessments completed by qualified independent environmental consulting companies. While these environmental assessments have not revealed, nor are we aware of, any environmental liability that our management believes would have a material adverse effect, there can be no assurance that we will not incur such liabilities in the future. There have been an increasing number of lawsuits against owners and managers of multifamily properties alleging personal injury and property damage caused by the presence of mold in residential real estate. As some of these lawsuits have resulted in substantial monetary judgments or settlements, insurance carriers have reacted by excluding mold-related claims from standard policies and pricing mold endorsements at prohibitively high rates. While we have adopted programs designed to minimize the existence of mold in any of our properties as well as guidelines for promptly addressing and resolving reports of mold to minimize any impact mold might have on our residents and our properties, should mold become an issue in the future, our financial condition or results of operations may be adversely affected. Further, it is possible that material environmental contamination or conditions exist, or could arise in the future in our apartment communities or on the land upon which they are located or be present in land or improvements which we may acquire in the future.
Changes in applicable laws could adversely affect our operations or expose us to liability. In addition to the costs of compliance with applicable laws currently in effect, applicable laws are subject to change and new legislation may be enacted, all of which may have the effect of increasing our costs of compliance and/or exposing us to increased potential liabilities. Compliance with changes in: (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions; (ii) rent control or rent stabilization laws; (iii) increased construction costs for additional accommodations for disabled residents; (iv) required employee benefits, such as health care coverage, or additional employer obligations; or (v) other governmental rules and regulations or enforcement policies affecting the use and operation of our communities, including changes to building codes and fire and life-safety codes, may result in lower revenue growth or significant unanticipated expenditures.

10



We are subject to risks associated with development, acquisition, disposition and expansion of multifamily apartment communities. Development projects, acquisitions, dispositions and expansions of apartment communities are subject to a number of risks, including:
availability of acceptable financing;
competition with other entities for investment opportunities, dispositions, development or construction services or tenants;
failure by our properties to achieve anticipated operating results;
failure to avoid retained liabilities with respect to property dispositions or assumed liabilities with respect to property acquisitions;
development costs of a property exceeding estimates;
delays in construction of developments or expansions due to weather, required governmental approvals and/or unavailability of labor and materials;
expenditure of funds on, and the devotion of management time to, transactions that may not come to fruition;
construction and construction business risks, including, without limitation, rapid and unanticipated increases in prices of building materials and commodities; and
additional costs due to environmental contamination.
Failure to succeed in new markets or in activities ancillary to the development, ownership and operation of multifamily apartment communities may adversely effect our operations. We may, from time to time, commence development activity or make acquisitions outside of our existing market areas when appropriate opportunities arise. Our experience in our existing markets in acquiring, developing, owning and operating multifamily apartment communities does not ensure that we will be able to operate successfully in new markets when we choose to enter them.  Entering new markets may expose us to a variety of risks, including an inability to accurately evaluate local apartment market conditions; an inability to identify appropriate acquisition opportunities; an inability to hire and retain key personnel; and lack of familiarity with local governmental requirements.  Although we are primarily in the multifamily business, we may also own and lease ancillary commercial space when such ancillary rental activities are a component of our multifamily rental activities.  We may be unsuccessful in owning and leasing ancillary commercial space at or adjacent to our apartment communities, which could have an adverse effect on our results of operations.
We impose stock ownership limitations that may discourage a takeover otherwise considered favorable by shareholders. With certain limited exceptions, our Second Amended and Restated Articles of Incorporation, as amended, prohibit the ownership of more than 4.0% of our outstanding common shares and more than 9.8% of the shares of any series of any class of our preferred shares by any person, (the "Ownership Limit"), unless we grant a waiver. Absent such a waiver, any shares owned in excess of such Ownership Limit are subject to repurchase by us and to other consequences as set forth in our Second Amended and Restated Articles of Incorporation, as amended. A transfer of shares may be void if it causes a person to violate the Ownership Limit. The Ownership Limit could delay or prevent a change in control and, therefore, could adversely affect our security holders' ability to realize a premium over the then prevailing market price for their shares.
We have a shareholders rights plan which would delay or prevent a change in control. We also have a shareholders rights plan, which may be triggered if any person or group becomes the beneficial owner of, or announces an offer to acquire, 15.0% or more of our common shares. While our Board of Directors believes that our shareholders rights plan could assist in maximizing value for our shareholders in a change in control transaction, our shareholders rights plan is likely to have the effect of precluding acquisition of control of us without our consent.

11



We may fail to qualify as a REIT. Commencing with our taxable year ending December 31, 1993, we have operated in a manner so as to permit us to qualify as a REIT under the Code, and we intend to continue to operate in such a manner. Many of the REIT requirements, however, are highly technical and complex. We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT. The determination that we are a REIT requires an analysis of various factual matters that may not be totally within our control. For example, to qualify as a REIT, our gross income must generally come from rental and other real estate or passive related sources that are itemized in the REIT tax laws. We are also required to distribute to security holders at least 90.0% of our REIT taxable income excluding capital gains. If we were to fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for distributions to our shareholders in computing our taxable income and would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under certain Code provisions, we also would be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost. As a result, the cash available for distribution to our shareholders could be reduced or eliminated for each of the years involved.
Changes in tax laws could adversely affect the value of our common stock. If Congress enacts legislation that eliminates the REIT provisions from the Code or otherwise decreases the advantages of qualified REIT status under the Code, such as imposing a direct tax on some or all of our real estate related income, such legislation would likely have an adverse impact upon the market value of our common stock and might also result in a reduction of the dividends payable on our common stock.
We depend on our key personnel. Our success depends to a significant degree upon the continued contribution of key members of our management team, who may be difficult to replace. The loss of services of these executives could have a material adverse effect on us. There can be no assurance that the services of such personnel will continue to be available to us. Our Chairman of the Board, President and Chief Executive Officer, Mr. Jeffrey I. Friedman, is a party to an employment agreement with us. Other than Mr. Friedman, we do not have employment agreements with key personnel. We do not hold key-man life insurance on any of our key personnel.
Item 1B. Unresolved Staff Comments
None.

12



Item 2. Properties
Our Portfolio. The following table represents our portfolio as of December 31, 2013, which consists of properties we owned, directly or indirectly, or joint ventures in which we have an ownership interest.
 
 
Total Number
 
 Total Number
 
 
of Properties
 
of Units
State
 
 
 
 
Florida
 
5

 
1,594

Georgia
 
2

 
354

Indiana
 
3

 
836

Maryland
 
3

 
667

Michigan
 
7

 
2,216

North Carolina
 
6

 
1,404

Ohio
 
15

 
2,884

Tennessee
 
1

 
242

Texas
 
4

 
1,093

Virginia
 
7

 
2,386

 
 
53

 
13,676

Development Projects
 
 
 
 
7001 Arlington Road (1)
 

 

Cantabria (2)
 

 

The Desmond on Wilshire (3)
 

 

350 Eighth (4)
 

 

 
 
 
 
 
Total wholly owned properties
 
53

 
13,676

 
 
 
 
 
Joint Venture Development Projects
 
 
 
 
Monrovia (5)
 

 

950 Third (6)
 

 

 
 
 
 
 
Total Portfolio
 
53

 
13,676

 
 
 
 
 
 
 
Location
 
Acres
Undeveloped Land Parcels
 
 
 
 
Westlake
 
Westlake, OH
 
39.0

Wyndemere
 
Franklin, OH
 
10.0

 
 
 
 
 
Total undeveloped acres
 
 
 
49.0

(1)
Development in process in Bethesda, Maryland of 140 units with 7,000 square feet of ground floor commercial space.
(2)
Development in process in Dallas, Texas of 249 units.
(3)
Development in process in Los Angeles, California of 175 units.
(4)
Planned development in San Francisco, California of an estimated 410 units. On February 3, 2014 we entered into a joint venture and admitted a 50.0% partner in this development. Refer to Note 19 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for further detail.
(5)
Planned joint venture development in Monrovia, California of 154 units.
(6)
Planned joint venture development in Los Angeles, California of 472 units.


13



 
 
 Total Number
 
 
 
 
of Units
 
Age (1)
State
 
 
 
 
Florida
 
 
 
 
Cypress Shores
 
300

 
22

Doral West
 
388

 
15

Vista Lago
 
316

 
10

Waterstone at Wellington
 
222

 
15

Windsor Pines
 
368

 
15

 
 
1,594

 
 
Georgia
 
 
 
 
Cambridge at Buckhead
 
168

 
18

Morgan Place
 
186

 
24

 
 
354

 
 
Indiana
 
 
 
 
Center Point
 
344

 
16

Residence at White River
 
228

 
22

Steeplechase at Shiloh
 
264

 
15

 
 
836

 
 
Maryland
 
 
 
 
Annen Woods
 
131

 
26

Hampton Point
 
352

 
27

Reflections
 
184

 
28

 
 
667

 
 
Michigan
 
 
 
 
Arbor Landings
 
328

 
14

Clinton Place
 
202

 
25

Georgetown Park
 
480

 
14

Landings at the Preserve
 
190

 
22

Oaks at Hampton
 
544

 
25

Spring Valley
 
224

 
26

Summer Ridge
 
248

 
22

 
 
2,216

 
 
North Carolina
 
 
 
 
St. Mary's Square (2)
 
134

 

Southpoint Village
 
211

 
5

The Apartments at Blakeney
 
295

 
5

The Apartments at the Arboretum
 
205

 
4

The Lofts at Weston Lakeside (2)
 
215

 

The Park at Crossroads
 
344

 
7

 
 
1,404

 
 
(1)
Age of property is determined by the number of years since construction of the property was completed.
(2)
Construction completed during 2013.





14



 
 
Total Number
 
 
 
 
 
 
of Units
 
Age (1)
 
 
State
 
 
 
 
 
 
Ohio
 
 
 
 
 
 
Bedford Commons
 
112

 
26

 
 
Heathermoor
 
280

 
24

 
 
Kensington Grove
 
76

 
18

 
 
Lake Forest
 
192

 
19

 
 
Mallard's Crossing
 
192

 
23

 
 
Perimeter Lakes
 
189

 
21

 
 
Residence at Barrington
 
288

 
14

 
 
Saw Mill Village
 
340

 
26

 
 
Sterling Park
 
128

 
19

 
 
The Residence at Christopher Wren
 
264

 
20

 
 
Village at Avon
 
312

 
12

 
 
Village of Western Reserve
 
108

 
15

 
 
Westchester Townhomes
 
136

 
24

 
 
Westlake Seven
 
7

 
28

 
 
Williamsburg Townhomes
 
260

 
23

 
 
 
 
2,884

 
 
 
 
Tennessee
 
 
 
 
 
 
Vista Germantown
 
242

 
1

 
 
 
 
242

 
 
 
 
Texas
 
 
 
 
 
 
Rienzi at Turtle Creek
 
152

 
11

 
 
San Raphael
 
222

 
14

 
 
San Raphael Phase II (3)
 
99

 

 
 
The Brixton
 
224

 
16

 
 
21 Forty Medical District
 
396

 
4

 
 
 
 
1,093

 
 
 
 
Virginia
 
 
 
 
 
 
Ashborough
 
504

 
9

 
 
Dwell Vienna Metro
 
250

 
5

 
 
River Forest
 
300

 
7

 
 
Riverside Station
 
304

 
8

 
 
The Alexander at Ghent
 
268

 
7

 
 
The Belvedere
 
296

 
8

 
 
Westwind Farms
 
464

 
7

 
 
 
 
2,386

 
 
 
 
Total properties
 
13,676

 
15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anticipated
 
 
Location
 
Acres
 
Completion
Development Projects
 
 
 
 
 
 
7001 Arlington Road
 
Bethesda, MD
 
2.5

 
2015
Cantabria
 
Dallas, TX
 
2.4

 
2015
Monrovia (2)
 
Monrovia, CA
 
2.9

 
The Desmond on Wilshire
 
Los Angeles, CA
 
2.2

 
2015
350 Eighth (4)
 
San Francisco, CA
 
3.4

 
2016
950 Third (2)
 
Los Angeles, CA
 
5.9

 
2016
(1)
Age of property is determined by the number of years since construction of the property was completed.
(2)
Joint venture 50.0% owned.
(3)
Construction substantially completed in Q4 2013. Stabilized operations anticipated in Q1 2014.
(4)
On February 3, 2014, we admitted a 50.0% joint venture partner in this development.

15




Indebtedness Encumbering the Properties. We have financed the acquisition, development and rehabilitation of our properties with a variety of sources of mortgage indebtedness. At December 31, 2013, 42 of the 53 wholly owned operating properties were unencumbered. The remaining 11 properties were encumbered by project-specific mortgages.
Item 3. Legal Proceedings
In conjunction with our May 2012 acquisition of land for development of an apartment community, we acquired a commercial building in Los Angeles, California (the “Property”), and entered into a triple net master lease (the "Lease") of the Property as landlord with Art and Architecture Books of the 21st Century as tenant (“Tenant”).
When Tenant failed to pay December 2012 rent when due under the Lease, we served Tenant with a notice to pay rent or vacate the premises pursuant to the California Code of Civil Procedure. On December 20, 2012, we filed an unlawful detainer action in the Superior Court for the State of California (the “Bankruptcy Court”). Tenant did not pay rent for January or February 2013.
On February 19, 2013 (the scheduled trial date for our unlawful detainer suit), Tenant filed its Chapter 11 petition with the U.S. Bankruptcy Court for the Central District of California (the "California Bankruptcy Case").
On March 29, 2013, Tenant filed a motion to assume the Lease.  We opposed Tenant’s lease assumption motion. On September 12, 2013, the Bankruptcy Court granted Tenant’s motion to assume the Lease. We appealed the Bankruptcy Court’s order granting Tenant’s motion to assume the Lease to the U.S. District Court for the Central District of California (the “District Court”). On December 2, 2013, the District Court ruled in our favor and held the Bankruptcy Court had erred when it concluded the Lease had not been terminated prior to the date Tenant filed its Chapter 11 petition. The District Court remanded the case back to the Bankruptcy Court for further proceedings consistent with the District Court’s determination. Tenant has filed a notice of appeal of the District Court's decision to the U.S. Court of Appeals for the Ninth Circuit.
If we conclude, based on the outcome of this litigation, that it is unlikely Tenant will remain the master lease tenant at the Property, we will write off the remaining intangible asset associated with the Lease at that time. The intangible asset is being amortized over the initial five-year term of the Lease, beginning May 2012, and had a balance of $1.3 million at December 31, 2013. In addition, we may be required to refund to Tenant the $630,000 cure payment Tenant paid to us in connection with its assumption of the lease.
In addition to the California Bankruptcy Case, we are subject to other legal proceedings, lawsuits and other claims in the ordinary course of our business (collectively, "Litigation"). Litigation is subject to uncertainties and outcomes are difficult to predict. Many of the claims in Litigation are covered by insurance, subject to deductible amounts. We believe any current Litigation will not have a material adverse impact on us after final disposition. However, because of the uncertainties of Litigation, one or more of the Litigation proceedings could ultimately result in a material loss or obligation.
Item 4. Mine Safety Disclosures
N/A.

16



PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common shares are traded on the NYSE and NASDAQ under the trading symbol "AEC." The following table sets forth for the periods indicated the high and low sale prices per common share as reported on the NYSE (composite tape) and the dividends declared per common share.
 
 
 
 
 
 
 
 
 
 
Dividends Declared
 
 
Price Range
 
Per Share
 
 
2013
 
2012
 
2013
 
2012
 
 
High
 
Low
 
High
 
Low
 
 
 
 
First Quarter
 
$
18.67

 
$
15.79

 
$
17.09

 
$
14.80

 
$
0.19

 
$
0.17

Second Quarter
 
$
19.09

 
$
14.98

 
$
17.51

 
$
14.30

 
$
0.19

 
$
0.18

Third Quarter
 
$
16.79

 
$
13.10

 
$
15.60

 
$
14.24

 
$
0.19

 
$
0.18

Fourth Quarter
 
$
16.62

 
$
14.28

 
$
16.13

 
$
14.25

 
$
0.19

 
$
0.18

 
 
 
 
 
 
 
 
 
 
$
0.76

 
$
0.71


On February 10, 2014, there were approximately 720 holders of record and approximately 17,000 beneficial owners of our common shares.
We maintain a dividend reinvestment plan under which shareholders may elect to reinvest their dividends automatically in our common shares and may also acquire additional common shares which the plan administrator purchases in the open market.
There is a total of $26.3 million remaining on our Board of Director authorizations to repurchase our common shares. We did not repurchase any shares using this authority during 2013, and we have no present intention to use this authority to repurchase shares. Additionally, we have a policy which allows employees to pay their portion of the income taxes related to restricted shares vesting by surrendering a number of shares to us equal in value on the day of vesting to the amount of taxes due up to the statutory withholding amount.

17



Performance Graph. The following graph compares the cumulative return on our common shares during the five year period ended December 31, 2013, to the cumulative return of the Russell 2000 and the MSCI US REIT Index for the same period. The comparisons assume an initial investment of $100 and the reinvestment of all dividends during the comparison period. Performance during this comparison period is not necessarily indicative of future performance.
 
Period Ending
Index
 
12/31/08
 
12/31/09
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
 
 
 
 
 
 
 
 
 
 
 
 
Associated Estates Realty Corporation
 
$
100.00

 
$
136.74

 
$
195.41

 
$
212.79

 
$
225.26

 
$
234.92

Russell 2000
 
$
100.00

 
$
127.17

 
$
161.32

 
$
154.59

 
$
179.86

 
$
249.69

MSCI US REIT Index
 
$
100.00

 
$
128.61

 
$
165.23

 
$
179.60

 
$
211.5

 
$
216.73

Source: SNL Financial LC, Charlottesville, VA
© 2014
www.snl.com



18



Item 6. Selected Financial Data
The following tables set forth selected financial and other data for us on a consolidated basis. The historical financial information contained in the tables has been derived from and should be read in conjunction with (i) our Consolidated Financial Statements and Notes thereto, and (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations both included elsewhere herein.
(Dollars in thousands, except per share and monthly rent amounts)
 
Year Ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
Property revenue
 
$
179,982

 
$
157,507

 
$
132,754

 
$
105,852

 
$
98,654

Office revenue
 
1,497

 
1,046

 

 

 

Management and service operations:
 
 
 
 
 
 
 
 
 
 
Fees, reimbursements and other
 

 

 

 
817

 
1,287

Construction and other services
 

 

 
16,869

 
17,051

 
1,160

Total revenue
 
181,479

 
158,553

 
149,623

 
123,720

 
101,101

 
 
 
 
 
 
 
 
 
 
 
Total expenses
 
(146,849
)
 
(129,399
)
 
(133,751
)
 
(108,264
)
 
(84,655
)
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(29,342
)
 
(29,273
)
 
(28,743
)
 
(26,251
)
 
(26,843
)
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
5,288

 
(119
)
 
(12,871
)
 
(10,795
)
 
(10,397
)
Income from discontinued operations:
 
 
 
 
 
 
 
 
 
 
Operating income, net of interest expense
 
3,179

 
3,881

 
3,642

 
1,965

 
1,126

Gain on disposition of properties
 
52,828

 
26,849

 
14,597

 
245

 
15,534

Income from discontinued operations
 
56,007

 
30,730

 
18,239

 
2,210

 
16,660

Net income (loss)
 
61,295

 
30,611

 
5,368

 
(8,585
)
 
6,263

Net income attributable to noncontrolling interests
 
(45
)
 
(19
)
 
(40
)
 
(51
)
 
(53
)
Net income (loss) attributable to AERC
 
61,250

 
30,592

 
5,328

 
(8,636
)
 
6,210

Preferred share dividends
 

 

 

 
(2,030
)
 
(4,199
)
Preferred share redemption/repurchase costs
 

 

 

 
(993
)
 

Allocation to participating securities
 
(228
)
 

 

 

 
(423
)
Net income (loss) applicable to common shares
 
$
61,022

 
$
30,592

 
$
5,328

 
$
(11,659
)
 
$
1,588

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share - Basic:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
 
 
 
 
applicable to common shares
 
$
0.10

 
$

 
$
(0.31
)
 
$
(0.46
)
 
$
(0.89
)
Income from discontinued operations
 
1.08

 
0.66

 
0.44

 
0.08

 
0.99

Net income (loss) applicable to common shares
 
$
1.18

 
$
0.66

 
$
0.13

 
$
(0.38
)
 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
Earnings per common share - Diluted:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
 
 
 
 
applicable to common shares
 
$
0.10

 
$

 
$
(0.31
)
 
$
(0.46
)
 
$
(0.89
)
Income from discontinued operations
 
1.07

 
0.66

 
0.44

 
0.08

 
0.99

Net income (loss) applicable to common shares
 
$
1.17

 
$
0.66

 
$
0.13

 
$
(0.38
)
 
$
0.10

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
51,622

 
46,063

 
41,657

 
30,421

 
16,516

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
 
52,184

 
46,063

 
41,657

 
30,421

 
16,516

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.76

 
$
0.71

 
$
0.68

 
$
0.68

 
$
0.68


19



 
 
2013
 
2012
 
2011
 
2010
 
2009
Cash flow data:
 
 
 
 
 
 
 
 
 
 
Cash flow provided by operations
 
$
73,563

 
$
70,606

 
$
53,317

 
$
33,511

 
$
31,300

Cash flow (used for) provided by investing activity
 
$
(211,176
)
 
$
(157,319
)
 
$
(146,333
)
 
$
(283,432
)
 
$
16,450

Cash flow provided by (used for) financing activity
 
$
137,459

 
$
87,125

 
$
92,974

 
$
250,691

 
$
(47,701
)
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data at December 31:
 
 
 
 
 
 
 
 
 
 
Total net real estate
 
$
1,373,999

 
$
1,139,917

 
$
986,834

 
$
875,000

 
$
638,535

Total assets
 
$
1,422,497

 
$
1,172,477

 
$
1,018,493

 
$
918,235

 
$
662,505

Total debt
 
$
812,974

 
$
716,778

 
$
664,788

 
$
555,666

 
$
525,836

Total shareholders' equity attributable to AERC
 
$
544,450

 
$
403,398

 
$
308,793

 
$
316,184

 
$
99,440

 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
Property net operating income (1) (6)
 
$
112,103

 
$
96,879

 
$
80,986

 
$
62,618

 
$
57,843

Funds from operations (2) (7)
 
$
66,078

 
$
57,179

 
$
42,707

 
$
26,153

 
$
20,501

Funds from operations as adjusted (3) (7)
 
$
66,078

 
$
59,330

 
$
42,707

 
$
27,075

 
$
19,273

Funds available for distribution (4) (7)
 
$
58,311

 
$
52,820

 
$
36,417

 
$
22,291

 
$
14,213

Total properties (at end of period)
 
53

 
52

 
53

 
52

 
48

Total apartment units (at end of period)
 
13,676

 
13,950

 
13,908

 
13,662

 
12,108

Monthly property revenue per occupied unit
 
$
1,255

 
$
1,326

 
$
1,055

 
$
968

 
$
945

Average occupancy (5)
 
95.4
%
 
92.5
%
 
94.3
%
 
94.5
%
 
93.2
%
(1)
We consider property net operating income ("property NOI") to be an important indicator of the overall performance of our multifamily property portfolio because it reflects the operating performance of our property portfolio and is used to assess regional property level performance. Property NOI is determined by deducting property operating and maintenance expenses from property revenue. Property NOI should not be considered (i) as an alternative to net income determined in accordance with accounting principles generally accepted in the United States ("GAAP"), (ii) as an indicator of financial performance, (iii) as cash flow from operating activities (determined in accordance with GAAP), or (iv) as a measure of liquidity; nor is it necessarily indicative of sufficient cash flow to fund all of our needs. Other real estate companies may define property NOI in a different manner. Property NOI has been recast for discontinued operations for periods shown.
 
 
(2)
We calculate funds from operations ("FFO") in accordance with the definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT"). This definition includes all operating results, both recurring and non-recurring, except those results defined as "extraordinary items" under GAAP, adjusted for depreciation on real estate assets and amortization of intangible assets, excludes impairment write-downs of depreciable real estate and gains and losses from the disposition of properties and land. We calculate FFO per share using the weighted average shares outstanding amounts used in the calculation of basic and diluted earnings per share in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. FFO is used in the real estate industry as a supplemental measure of the operating performance of real estate companies because it excludes charges such as real estate depreciation that are generally considered not to be reflective of the actual value of real estate assets over time. See Footnote 7 below for those items that are used to compute FFO. Other real estate companies may define FFO in a different manner.
 
 
(3)
Funds from operations as adjusted is FFO, as defined above, adjusted for certain corporate transactions to provide an amount that is more representative of the operations of our real estate portfolio. We consider FFO as adjusted to be a more appropriate measure of comparing the operating performance of our real estate portfolio between periods as well as to that of other real estate companies. See Footnote 7 below for those items that are used to compute FFO as adjusted. Other real estate companies may define FFO as adjusted in a different manner.
 
 
(4)
We define funds available for distribution ("FAD") as FFO as adjusted, as defined above, plus depreciation other and amortization of deferred financing fees less recurring fixed asset additions.  Fixed asset additions exclude development, investment, revenue enhancing and non-recurring capital additions.  We consider FAD to be an appropriate supplemental measure of the performance of an equity REIT because, like FFO and FFO as adjusted, it captures real estate performance by excluding gains or losses from the disposition of properties and land and depreciation on real estate assets and amortization of intangible assets.  Unlike FFO and FFO as adjusted, FAD also reflects the recurring capital expenditures that are necessary to maintain the associated real estate. See Note 7 below for a reconciliation of FFO as adjusted to FAD.
 
 
(5)
Average occupancy is defined as the average number of units occupied during the period divided by total number of units.


20



(6)
Reconciliation of property NOI to net income (loss) attributable to AERC:
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Property net operating income
 
$
112,103

 
$
96,879

 
$
80,986

 
$
62,618

 
$
57,843

Office revenue
 
1,497

 
1,046

 

 

 

Fees, reimbursements and other revenue
 

 

 
16,869

 
817

 
1,287

Construction and other services revenue
 

 

 

 
17,051

 
1,160

Direct property management and service company expense
 

 

 

 
(745
)
 
(1,107
)
Construction and other services expenses
 

 
(176
)
 
(19,297
)
 
(16,415
)
 
(1,745
)
Depreciation and amortization
 
(58,053
)
 
(49,938
)
 
(45,768
)
 
(31,379
)
 
(26,968
)
General and administrative expense
 
(19,481
)
 
(16,995
)
 
(15,944
)
 
(15,684
)
 
(14,024
)
Development costs
 
(912
)
 
(864
)
 
(435
)
 
(208
)
 

Costs associated with acquisitions
 
(524
)
 
(798
)
 
(539
)
 
(599
)
 

Interest expense
 
(29,342
)
 
(29,273
)
 
(28,743
)
 
(26,251
)
 
(26,843
)
Income from discontinued operations:
 
 
 
 
 
 
 
 
 
 
Operating income, net of interest expense
 
3,179

 
3,881

 
3,642

 
1,965

 
1,126

Gain on disposition of properties
 
52,828

 
26,849

 
14,597

 
245

 
15,534

Income from discontinued operations
 
56,007

 
30,730

 
18,239

 
2,210

 
16,660

Net income (loss)
 
61,295

 
30,611

 
5,368

 
(8,585
)
 
6,263

Net income attributable to noncontrolling redeemable interest
 
(45
)
 
(19
)
 
(40
)
 
(51
)
 
(53
)
Net income (loss) attributable to AERC
 
$
61,250

 
$
30,592

 
$
5,328

 
$
(8,636
)
 
$
6,210




21



(7)
Reconciliation of net income (loss) attributable to AERC to FFO, FFO as adjusted and FAD:
 
 
Year Ended December 31,
(In thousands, except per share amounts)
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to AERC
 
$
61,250

 
$
30,592

 
$
5,328

 
$
(8,636
)
 
$
6,210

Depreciation - real estate assets
 
53,779

 
48,547

 
44,006

 
35,593

 
32,822

Amortization of intangible assets
 
3,877

 
4,889

 
7,970

 
2,219

 
1,068

Preferred share dividends
 

 

 

 
(2,030
)
 
(4,199
)
Preferred share redemption/repurchase costs
 

 

 

 
(993
)
 

Gain on disposition of properties
 
(52,828
)
 
(26,849
)
 
(14,597
)
 

 
(15,400
)
Funds from operations
 
66,078

 
57,179

 
42,707

 
26,153

 
20,501

 
 
 
 
 
 
 
 
 
 
 
Gain on insurance recoveries
 

 

 

 
(245
)
 
(665
)
Defeasance/prepayment and other costs
 
 
 
 
 
 
 
 
 
 
associated with debt repayments
 

 
2,430

 

 

 

Preferred share repurchase costs
 

 

 

 
993

 

Trust preferred redemption costs
 

 

 

 
727

 

Refund of defeasance costs for previously defeased loans
 

 
(279
)
 

 
(553
)
 
(563
)
Funds from operations as adjusted
 
66,078

 
59,330

 
42,707

 
27,075

 
19,273

 
 
 
 
 
 
 
 
 
 
 
Depreciation - other assets
 
2,176

 
2,108

 
1,954

 
1,827

 
1,522

Amortization of deferred financing fees
 
2,002

 
2,128

 
1,970

 
1,415

 
1,225

Recurring fixed asset additions
 
(11,945
)
 
(10,746
)
 
(10,214
)
 
(8,026
)
 
(7,807
)
Funds available for distribution
 
$
58,311

 
$
52,820

 
$
36,417

 
$
22,291

 
$
14,213

 
 
 
 
 
 
 
 
 
 
 
Funds from operations per common share - basic
 
$
1.28

 
$
1.24

 
$
1.03

 
$
0.85

 
$
1.20

Funds from operations as adjusted per common share - basic
 
$
1.28

 
$
1.29

 
$
1.03

 
$
0.89

 
$
1.17

 
 
 
 
 
 
 
 
 
 
 
Funds from operations per common share - diluted
 
$
1.27

 
$
1.23

 
$
1.03

 
$
0.85

 
$
1.20

Funds from operations as adjusted per common share - diluted
 
$
1.27

 
$
1.27

 
$
1.03

 
$
0.89

 
$
1.17

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
51,622

 
46,063

 
41,657

 
30,421

 
16,516

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
 
52,184

 
46,553

 
41,657

 
30,421

 
16,516


22



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of this report on Form 10-K. This discussion may contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected, including but not limited to, expectations regarding our 2014 performance that are based on certain assumptions. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. These forward-looking statements are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The words "expects," "projects," "believes," "plans," "anticipates" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that these forward-looking statements involve risks and uncertainty that could cause actual results to differ from estimates or projections contained in these forward-looking statements. For a discussion of these risks and uncertainties, see "Risk Factors" in Item 1A of this report on Form 10-K.
Overview. We are engaged primarily in the ownership and operation of multifamily apartment units. Our subsidiary, Merit, is a general contractor and construction manager that acts as our in-house construction division. Our primary source of cash and revenue from operations is rental payments from the leasing of apartment units, which represented 99.2% of our consolidated revenue for the year ended December 31, 2013.
The operating performance of our properties is affected by general economic trends including, but not limited to, household formation, job and wage growth, unemployment rates, population growth, immigration, the supply of new multifamily rental units and, in certain markets, the supply of other housing alternatives, such as condominiums, single family and multifamily rental homes and owner occupied single family and multifamily homes. Additionally, our performance may be affected by our ability to access the capital markets and the prices we can obtain for our debt and equity securities.
Rental revenue collections are impacted by rental rates and occupancy levels. We use LROTM, a rental revenue software product that provides comprehensive submarket-based statistical data to assist in maximizing rental revenue while remaining market competitive. We combine this data with our proprietary market knowledge and experience to maximize rental revenues and maintain high occupancy levels. With LROTM, we generate long-term rent growth by adjusting rents to address market forces in real-time. We adjust our rental rates in our continuing effort to adapt to changing market conditions, and we continuously monitor physical occupancy and revenue per occupied unit to track our success in maximizing property revenue. These indicators are more fully described in the Results of Operations comparison. Additionally, we consider property net operating income ("NOI"), Funds from Operations ("FFO") and FFO as adjusted to be important indicators of our overall performance. Property NOI (property revenue less property operating and maintenance expenses) is a measure of the profitability of our properties and has the largest impact on our financial condition and operating results. FFO is used by real estate investment trusts as a supplemental measure of the operating performance of real estate companies because it excludes charges such as real estate depreciation and amortization of intangible assets that are generally considered not to be reflective of the actual value of real estate assets over time. Additionally, gains and losses from the sale of most real estate assets and certain other items are also excluded from FFO. See Selected Financial Data presented in Part II, Item 6 of this report on Form 10-K for reconciliations of property NOI, FFO and FFO as adjusted to consolidated net income (loss) in accordance with accounting principles generally accepted in the United States ("GAAP").
Our Same Community portfolio includes properties we have owned and operated for the entire two-year period ending December 31, 2013, and consists of 43 properties containing 10,995 units. Our Same Community portfolio accounted for 84.3% of total revenue and 85.1% of our property NOI in 2013. Acquired/Development properties represent five properties acquired in 2013, a 242-unit development in Nashville, Tennessee completed and stabilized in 2012, a 99-unit expansion located in Dallas, Texas, and four properties acquired in 2012. See Results of Operations for an additional discussion of our Same Community properties.

23



Same Community property NOI increased 5.0% in 2013 compared to 2012 as a result of a $2.7 million or 6.7% increase in property NOI from our Midwest (Ohio, Michigan and Indianapolis) portfolio. Our Mid-Atlantic (Maryland, Metro DC and Virginia) portfolio property NOI increased $958,000 or 2.7%, our Southeast (Atlanta and Florida) portfolio property NOI increased $621,000 or 4.8%, and our Southwest (Dallas) portfolio property NOI increased $319,000 or 11.7% in 2013.
The following table presents property NOI results for 2013 and 2012:
 
 
Year Ended December 31,
 
 
 
 
2013
 
2012
 
 
(In thousands)
 
Property NOI
 
Property NOI
 
Variance
Same Community Properties:
 
 
 
 
 
 
Midwest
 
$
42,215

 
$
39,555

 
$
2,660

Mid-Atlantic
 
36,488

 
35,530

 
958

Southeast
 
13,681

 
13,060

 
621

Southwest
 
3,049

 
2,730

 
319

Total Same Community
 
95,433

 
90,875

 
4,558

Acquired Properties
 
13,796

 
4,383

 
9,413

Development
 
2,874

 
1,621

 
1,253

Total Property NOI
 
$
112,103

 
$
96,879

 
$
15,224

We intend to continue to evaluate potential property acquisitions and development opportunities within our investment criteria. We also may sell properties where market conditions are such that the reinvestment of cash proceeds derived from a sale are expected to provide, over time, a greater return on equity, an increase in cash flow or further enhance our strategic objectives. We will continue to focus on three important metrics: (i) the ratio of our net debt to the undepreciated book value of our real estate assets, which was 45.9% at December 31, 2013 compared with 47.1% at December 31, 2012, (ii) the level of secured debt to gross real estate assets, which was 15.9% at December 31, 2013 compared to 24.9% at December 31, 2012, and (iii) our fixed charge coverage ratio, which remained stable at 2.98 times as of December 31, 2013 and December 31, 2012.
Federal Income Taxes. We have elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ending December 31, 1993. REITs are subject to a number of organizational and operational requirements including a requirement that 90.0% of the income that would otherwise be considered as taxable income be distributed to shareholders. Providing we continue to qualify as a REIT, we will generally not be subject to federal income tax on net income.
A REIT is precluded from owning more than 10.0% of the outstanding voting securities of any one issuer, other than a wholly owned subsidiary or another REIT, and more than 10.0% of the value of all securities of any one issuer. As an exception to this prohibition, a REIT is allowed to own up to 100% of the securities of a taxable REIT subsidiary (“TRS”) that can provide non-customary services to REIT tenants and others without disqualifying the rents that a REIT receives from its tenants. However, no more than 25.0% of the value of a REIT's total assets can be represented by securities of one or more TRS's. The amount of intercompany interest and other expenses charged in transactions between a TRS and a REIT are subject to arms length allocation requirements contained in the Code and Treasury regulations. We believe we have qualified and plan to, and believe we will, continue to qualify as a REIT. However, qualification as a REIT is subject to the satisfaction of numerous highly technical and complex requirements. We cannot, therefore, guarantee that we have qualified or will qualify in the future as a REIT. See "Risk Factors" in Item 1A of this report on Form 10-K.

24



LIQUIDITY AND CAPITAL RESOURCES
Cash Flows and Liquidity. Significant sources and uses of cash in the past three years are summarized as follows:
Significant Cash Sources (Uses):
 
Year Ended December 31,
(In thousands)
2013
 
2012
 
2011
 
 
 
 
 
 
Net cash provided by operations
$
73,563

 
$
70,606

 
$
53,317

Fixed assets:
 
 
 
 
 
Acquisitions and development expenditures
(311,746
)
 
(207,207
)
 
(165,271
)
Net property disposition proceeds
135,580

 
64,422

 
28,961

Recurring, revenue enhancing and non-recurring capital expenditures
(13,626
)
 
(12,314
)
 
(11,561
)
Deposits on potential future acquisitions
(13,192
)
 
(4,500
)
 
(200
)
Investment in joint ventures
(9,271
)
 

 

Debt:
 
 
 
 
 
(Decrease) increase in mortgage notes payable, net
(124,004
)
 
(132,784
)
 
18,623

(Decrease) increase in revolving credit facility borrowings, net
(57,000
)
 
132,500

 
(34,500
)
Increase in term loan borrowings

 
25,000

 
125,000

Unsecured note issuances
250,000

 

 

Purchase of operating partnership units
(1,393
)
 

 

Exercise of stock options
2,470

 
312

 
810

Issuance of common shares
116,751

 
98,149

 
13,300

Purchase of treasury shares
(2,618
)
 
(959
)
 
(857
)
Purchase of noncontrolling interest
(4,544
)
 

 

Cash dividends and operating partnership distributions paid
(40,368
)
 
(32,460
)
 
(28,139
)
Our primary sources of liquidity are cash flow provided by operations, short-term borrowings on the unsecured revolver, project-specific loans and the sale of debt or equity securities. Our scheduled debt maturities for 2014 consist of three mortgage loans totaling approximately $44.5 million. We intend to repay these loans from one or more of the following sources: borrowings on our unsecured revolver, unsecured debt financings, or proceeds from property sales.
    

25



On January 22, 2013, we completed the issuance of $150.0 million of unsecured notes. The notes were offered in a private placement with two maturity tranches: $63.0 million with an 8-year maturity at 4.02% per annum, and $87.0 million with a 10-year maturity at 4.45% per annum. The $150.0 million total issuance had a weighted average term of 9.2 years and a weighted average interest rate of 4.27% per annum. Proceeds from the issuance were used to repay borrowings on the unsecured revolver.

On February 15, 2013, we funded the purchase of our partner's interest in Vista Germantown for $4.5 million. Consequently, we own a 100% interest in the property, a 242-unit apartment community located in downtown Nashville, Tennessee. Prior to the purchase, we held a 90.0% equity interest. This property was included as a consolidated entity in our financial statements both prior to as well as subsequent to the purchase.

On April 12, 2013, we filed a new shelf registration statement on Form S-3ASR to register the sale and issuance of equity and debt securities in public offerings which replaced our shelf registration statement that was to expire in June 2013. This current shelf registration expires in April 2016. Additionally, on April 12, 2013, we filed a prospectus supplement to register an at-the-market ("ATM") program, which allows us to sell up to $75.0 million of our common shares in open market transactions at the then-current market price per share. This ATM program was originally established in August 2012. However, due to the filing of the new shelf registration statement on Form S-3ASR, it was necessary to file a new prospectus supplement to continue our existing ATM program. As of December 31, 2013, we have sold 107,498 shares under this ATM program for total net proceeds of $1.9 million.

On June 19, 2013, among other modifications, we reduced the credit spread and extended the maturity of our $350 million unsecured revolving credit facility from January 12, 2016 to June 15, 2017. This facility provides additional flexibility and the ability to capitalize on strategic opportunities without the delays associated with financing contingencies.

On October 1, 2013, we settled Forward Share Agreements (FSAs) with forward purchasers entered into on May 29, 2013 by delivering 7,047,958 shares of our common stock at a price of $17.25 per share. We received net proceeds of approximately $115.1 million based on the adjusted net settlement price of $16.33 per share. Proceeds from the forward sale were applied toward the repayment of debt that matured on October 1, 2013.

On October 21, 2013, we completed the issuance of $100.0 million of unsecured notes. The notes were offered in a private placement with two maturity tranches: $45.0 million with a 7-year maturity at 4.29% per annum, and $55.0 million with a 10.2-year maturity at 4.94% per annum. The $100.0 million total issuance had a weighted average term of 8.8 years and a weighted average interest rate of 4.65% per annum. Proceeds from the issuance were used to repay borrowings on the unsecured revolver.

On October 23, 2013, we consummated a subsidiary merger transaction that had the effect of converting the remaining 74,083 operating partnership units related to the 1998 acquisition of an operating partnership into a right to receive cash merger consideration, pursuant to which $1.4 million was paid on November 6, 2013.

Cash flow provided by operations increased $3.0 million when comparing 2013 to 2012. The increase was primarily due to a 5.0% increase in Same Community property NOI and the contribution from the five properties acquired during 2013. In 2013, we also had the full year of contribution from the four properties acquired in 2012 and the completion and lease up of our Vista Germantown development in 2012. This was offset by the disposition of four properties during 2013 and six properties during 2012.
Cash flow provided by operations increased $17.3 million when comparing 2012 to 2011. The increase was primarily due to an increase in property NOI as a result of the acquisition of four properties during 2012. In 2012, we also had the full year of contribution from the three properties acquired in 2011 and the completion and lease up of our Vista Germantown development in 2012. This was offset by the disposition of six properties during 2012 and two properties during 2011.

26



Shelf Availability. We have an unlimited shelf registration statement that relates to the offering, from time to time, of debt securities (including convertible debt), preferred shares, depositary shares, common shares and common share warrants. This registration statement expires in April 2016.
Liquidity: Normal Business Operations. We anticipate that we will meet our normal business operations and liquidity requirements for the upcoming year generally through net cash provided by operations. We believe that if net cash provided by operations is below projections, other sources such as the unsecured revolver and secured and unsecured borrowings are or can be made available and should be sufficient to meet our normal business operations and liquidity requirements.
Liquidity: Non-Operational Activities. Sources of cash available for repayment of debt, any property acquisitions, development spend and funding other capital expenditures are expected to be provided primarily by proceeds from the refinancing of borrowings, construction loans, our unsecured revolver, the sale of properties and possibly the sale of common shares. The development of the 140-unit apartment community in Bethesda, Maryland and the 249-unit apartment community in Dallas, Texas will be funded through construction financings. We anticipate that the development of our Desmond project in Los Angeles will be funded from some combination of property sale proceeds, or borrowings on our unsecured revolver. Additionally, we expect the required funding for our development joint ventures in California will be funded from some combination of property sale proceeds, construction financings, or borrowings on our unsecured revolver. For detailed information about these joint ventures see Note 6 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.
Long-Term Contractual Obligations. The following table summarizes our long-term contractual obligations at December 31, 2013, as defined by Item 303(a)(5) of Regulation S-K of the Securities Exchange Act of 1934.
 
 
Payments Due In
(In thousands)
 
 
 
 
 
 
 
 
 
2019 and
Contractual Obligations
 
Total
 
2014
 
2015-2016
 
2017-2018
 
Later Years
 
 
 
 
 
 
 
 
 
 
 
Debt payable - principal
 
$
810,816

 
$
46,672

 
$
70,416

 
$
333,978

 
$
359,750

Debt payable - interest
 
174,876

 
29,739

 
51,888

 
41,200

 
52,049

Operating leases
 
298

 
75

 
149

 
74

 

Purchase obligations
 
377,324

 
204,386

 
172,938

 

 

Total
 
$
1,363,314

 
$
280,872

 
$
295,391

 
$
375,252

 
$
411,799

Debt Payable - Principal. Debt payable - principal includes principal payments on all property-specific mortgages, the unsecured term loan, the unsecured revolver and the unsecured notes based on amounts and terms of debt in existence at December 31, 2013. For detailed information about our debt, see Note 7 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.
Debt Payable - Interest. Debt payable - interest includes accrued interest at December 31, 2013, and interest payments as required based upon the terms of the debt in existence at December 31, 2013. Interest related to floating rate debt included in the above table was calculated based on applicable rates as of December 31, 2013.
Operating Leases. We lease certain equipment and facilities under operating leases. For detailed information about our lease obligations, see Note 9 of the Notes to Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K.
Purchase Obligations. Purchase obligations represent agreements to purchase goods or services and contracts for the acquisition of properties that are legally binding and enforceable and that specify all significant terms of the agreement. Our purchase obligations include, but are not limited to, obligations under construction contracts for labor and materials as well as vendor contracts for property operations entered into in the normal course of operations, such as for landscaping, snow removal, elevator maintenance, security, trash removal and electronically generated services.

27



During the third quarter of 2013, we entered into a purchase agreement to acquire a portfolio of seven properties for a total purchase price of $323.9 million, which includes the assumption of $28.0 million of existing mortgage financing. Payments will be made of $117.4 million related to the properties expected to close in 2014 and $74.5 million related to the property expected to close in 2015 under this purchase agreement. Our remaining purchase obligation is conditioned upon the successful construction of three of the remaining properties, as well as certain closing conditions specified in the agreement. Although we intend to acquire the remaining properties, and regard our acquisition of each property in the portfolio as probable, there can be no assurance that we will acquire such properties. See Note 3 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for further information on the acquisition portfolio. In addition, 2016 includes a purchase agreement to acquire a property to be developed in Florida for a purchase price of $80.2 million, net of a $4.0 million earnest money deposit. Our purchase obligation is conditioned upon the successful completion of the property in accordance with agreed upon plans and specifications and up to a 18-month period to allow for lease up of the property. Closing will not occur unless the closing conditions are satisfied, which is not expected to occur until 2016. If we choose not to purchase the property despite the closing conditions having been satisfied within the time period contemplated by the purchase agreement, we would forfeit our $4.0 million earnest money deposit. Obligations included in the above table represent agreements dated December 31, 2013 or earlier.

Dividends. On December 4, 2013, we declared a dividend of $0.19 per common share, which was paid in cash on February 3, 2014, to shareholders of record on January 15, 2014. We anticipate that we will continue paying regular quarterly dividends in cash. In 2013, we increased the quarterly dividend to $0.19 per share from $0.18 per share effective with the dividend paid in February, 2013. In conjunction with revising the Company's dividend policy, the Board of Directors evaluated the Company's past performance and future prospects for earnings growth. Additional factors considered in determining the increase included current dividend distributions, the relationship of dividend distributions to taxable income, distribution requirements under rules governing REITs, and expected growth in taxable income.
Capital Expenditures. We anticipate incurring approximately $14.8 million in capital expenditures for 2014. This includes replacement of worn carpet and appliances, refurbishing parking lots and similar items in accordance with our current property expenditure plan, as well as commitments for investment/revenue enhancing and non-recurring expenditures. We expect to use cash provided by operating activities to pay for these expenditures.
The following table identifies our capital expenditures as of December 31:
(In thousands)
 
2013
 
2012
 
Variance
Recurring fixed asset additions
 
$
11,710

 
$
10,659

 
$
1,051

Revenue enhancing/non-recurring