10-K 1 aec201410k.htm 10-K aec 2014 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, 2014
 
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
 
 
NASDAQ Stock Market LLC
 
 
 
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. x
 
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 $997.0 million as of June 30, 2014.
 
The number of Common Shares outstanding as of February 3, 2015 was 57,715,771.
 
DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein).
 
Notice of Annual Meeting and Proxy Statement for the 2015 Annual Meeting of Shareholders (in Part III).





ASSOCIATED ESTATES REALTY CORPORATION
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2014
 
 
 
 
 
Item
 
PART I
 
Page
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1A.
 
 
1B.
 
 
2.
 
 
 
 
 
 
 
 
3.
 
 
4.
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
5.
 
 
 
 
 
 
6.
 
 
7.
 
 
 
 
 
 
7A.
 
 
8.
 
 
9.
 
 
 
 
 
 
9A.
 
 
9B.
 
 
 
 
 
 
 
 
 
PART III
 
 
 
 
 
 
 
10.
 
 
11.
 
 
12.
 
 
 
 
 
 
13.
 
 
14.
 
 
 
 
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
15.
 
 

2



PART I
Except as the context otherwise requires, all references to "we," "our," "us," "AERC," "AEC" and the "Company" in this report collectively refer to Associated Estates Realty Corporation and its consolidated subsidiaries.
Item 1. Business
GENERAL
We are a fully-integrated, self-administered and self-managed equity real estate investment trust ("REIT"). Our common shares are publicly traded on the New York Stock Exchange ("NYSE") and the Nasdaq Global Select 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 are subject to a long-term ground lease.
We specialize in multifamily ownership, operation, acquisition, development, disposition and property management activities. We own a taxable REIT subsidiary ("TRS") that performs construction management services for our own account in connection with the development of multifamily properties that we own and operate, including consolidated and unconsolidated joint ventures. As of December 31, 2014, our operating portfolio consisted of 49 apartment communities containing 12,734 units in eight states that are owned, either directly or indirectly, through subsidiaries. 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. During 2014, we assumed property management responsibilities for a fee for apartment properties we expect to acquire pursuant to existing contracts. Our consolidated financial statements include the accounts of all subsidiaries, including the TRS, which is separately taxed for federal income tax purposes under the REIT Modernization Act implemented in 1999. Our consolidated financial statements also include the results of a partnership in which we own a 98.1% 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 an individual basis. In the aggregate, our multifamily properties provided approximately 98.6% of our consolidated revenue for 2014. We have determined that, as of December 31, 2014, we have one reportable segment, which is multifamily properties.
OPERATING STRATEGY AND BUSINESS OBJECTIVES
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 2014, we acquired the following property:
(Dollar amounts in thousands)
 
 
 
 
 
 
Acquisition Date
 
Property
 
Location
 
Units
 
Purchase Price
June 10, 2014
 
Alpha Mill Phase I and Phase II
 
Charlotte, NC
 
267
 
$
45,075



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In 2014, we also disposed of the following five properties:
(Dollar amounts in thousands)
 
 
 
 
 
 
Disposition Date
 
Property
 
Location
 
Units
 
Sales Price
December 12, 2014
 
Cypress Shores
 
Coconut Creek, FL
 
300

 
$
44,250

June 16, 2014
 
Annen Woods
 
Pikesville, MD
 
131

 
20,500

April 28, 2014
 
Reflections
 
Columbia, MD
 
184

 
38,400

April 2, 2014
 
Vista Germantown
 
Nashville, TN
 
242

 
53,250

February 24, 2014
 
Hampton Point
 
Silver Springs, MD
 
352

 
60,000

 
 
 
 
 
 
1,209

 
$
216,400

In addition, in 2014, we acquired a land parcel in Woodland Hills, California for $15.8 million that is entitled for a 379-unit apartment community.
We continue to monitor acquisition opportunities in our existing markets, in particular Central and 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 investment 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 investment 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, 2014, we acquired 10 multifamily properties containing a total of 2,607 units for an aggregate purchase price of approximately $469 million, and we sold 15 multifamily properties containing a total of 4,122 units for an aggregate sales price of approximately $423 million.
Development. We intend to contribute to our growth by developing new properties. During 2014, we acquired a parcel of land in Woodland Hills, California that is entitled for a 379-unit apartment community. Additionally, during 2014, we continued development on our 175-unit apartment community in the Mid-Wilshire submarket of Los Angeles, California, our 140-unit apartment community with 6,898 square feet of commercial space in Bethesda, Maryland and our 249-unit apartment community in the Turtle Creek neighborhood of the Uptown submarket of Dallas, Texas. We are also developing a 472-unit apartment community with 19,700 square feet of commercial space in the Arts District of downtown Los Angeles, California, and a 410-unit apartment community with 40,000 square feet of commercial space in the South of Market ("SoMa") submarket San Francisco, California. These two projects, known respectively as 950 East Third and 350 8th, are being developed in 50/50 joint venture partnerships. Construction has commenced on the 950 East Third and 350 8th projects. Additionally, the Company was a 50/50 joint venture partner in a property in Monrovia, California known as 5th and Huntington. See Note 3 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K. On February 3, 2015, we acquired our partner's 50.0% interest in 5th and Huntington for $8.4 million, increasing our ownership percentage in the development to 100%.

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Property Operations. We operate in a number of different markets and submarkets. The economic climate in these markets will vary from time to time and, as a result, occupancy and the degree to which we can maintain or increase rents varies. 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 and 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 110 basis points from 4.8% per annum at December 31, 2011 to 3.7% per annum at December 31, 2014. Our interest coverage ratio and fixed charge coverage ratios were 3.29:1 and 3.29:1, respectively, at December 31, 2014, up from 2.34:1 and 2.34:1, respectively, at December 31, 2011.
2014 Activities. On July 25, 2014, we amended and restated our $150 million unsecured term loan. Among other modifications, the amendment extended the maturity date from January 3, 2018 to January 3, 2020, and reduced the interest rate spread across the pricing grid. We also amended our unsecured revolving credit facility to implement corresponding financial covenant modifications.
On February 3, 2014, we entered into a partnership agreement with AIG Global Real Estate (AIG) for the development and operation of 350 8th, a 410-unit apartment community with 40,000 square feet commercial space and underground parking located in the SoMa neighborhood of San Francisco, California. We are a 50.01% partner with AIG, which has contributed $33.9 million to the partnership. The land upon which the project is being developed was purchased by us for $46.6 million on May 28, 2013. As of December 31, 2013, this land was included in our consolidated financial statements. Upon the formation of our partnership with AIG, the land and improvements to date, with a carrying value of $50.3 million, were deconsolidated. On April 25, 2014, the partnership entered into a construction loan agreement for $143.6 million with a five-year term. We have guaranteed the payment of all future borrowings from this loan and the completion of construction in connection with the partnership's development.
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 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 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 revolving credit facility.

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On October 1, 2013, we settled Forward Share Agreements with forward purchasers entered into on May 29, 2013 by delivering 7,047,958 common shares 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 unsecured revolving credit facility is a function of our unencumbered property pool.
On April 12, 2013, we filed a new shelf registration statement on Form S-3 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 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-3, 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 gross proceeds of $2.0 million, and have remaining availability of approximately $73.0 million. There were no shares sold during 2014 under this $75 million ATM program.
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 1.40% per annum as of December 31, 2014, or an all-in rate of 2.95% per annum until the loan matures in January 2018. The credit spread is subject to change, from time to time, from a minimum of 0.90% per annum to a maximum of 1.90% per annum over LIBOR based upon our qualified ratings as defined in the term loan 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. See also Note 19 of the Notes to the Consolidated Financial Statements presented in Part II, Item 8 of this report on Form 10-K for additional information.
On February 15, 2013, we purchased our development partner's interest in Vista Germantown, a 242-unit apartment community located in downtown Nashville, Tennessee, for $4.5 million. Prior to the purchase, we held a 90.0% equity interest in Vista Germantown. This property was included as a consolidated entity in our financial statements before and after the purchase. On April 2, 2014, we disposed of Vista Germantown for a sales price of $53.3 million.
On January 22, 2013, we completed the issuance of $150 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 million total issuance had a weighted average term of 9.2 years and a weighted average interest rate of 4.27% per annum. Net proceeds from the issuance were used to repay borrowings on our unsecured revolving credit facility.
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 million ATM program for total gross proceeds of $11.3 million, or $11.1 million net of sales commissions and other costs. The net proceeds were used to reduce borrowings on our unsecured revolving credit facility and for general corporate purposes. At June 30, 2012, all $25 million of common shares available for issuance under the ATM program 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 million of our common shares in open market transactions at the then market price per share.

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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 net proceeds were used to fund property acquisitions and development and for general corporate purposes.
In January 2012, we increased our $250 million unsecured revolving credit facility to $350 million. This facility provided additional financial flexibility. Debt procurement costs associated with this modification were $2.3 million. Our borrowing capacity under the unsecured revolving credit facility was a function of our unencumbered property pool.
General Contractor/Construction. We perform 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. 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 construction management 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 3, 2015, we employed approximately 410 people.
EXECUTIVE OFFICERS
The following information regarding our executive officers is provided pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Name
 
Age
 
Position with the Company
Jeffrey I. Friedman
 
63
 
Chairman of the Board, President and Chief Executive Officer
 
 
 
 
 
Lou Fatica
 
48
 
Senior Vice President, Treasurer and Chief Financial Officer
 
 
 
 
 
Jason A. Friedman
 
40
 
Senior Vice President, Acquisitions and Development
 
 
 
 
 
Scott D. Irwin
 
48
 
Senior Vice President, General Counsel and Secretary
 
 
 
 
 
John T. Shannon
 
53
 
Senior Vice President, Operations
Jeffrey I. Friedman is Chairman of the Board, President and Chief Executive Officer of Associated Estates. Mr. Friedman was named President in 2000 and has served as Chairman and CEO since 1993. He originally joined the Company in 1974.
Mr. Friedman also currently serves on the Board of Directors of the Greater Cleveland Sports Commission and the Board of Trustees of the Cleveland Clinic.



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With more than 40 years of real estate experience, Mr. Friedman has been an instrumental part of building a team of apartment experts who deliver on the highest of standards in apartment living, professional fulfillment and shareholder value. In 1993, Mr. Friedman took the Company public. Since then, he has led the growth of the company from assets valued at approximately $160 million, to assets valued in excess of $2 billion. Under Mr. Friedman's guidance, Associated Estates has a diversified portfolio of high-quality properties in high growth submarkets with a national footprint. The Company has increased average property revenue per occupied unit from below $900 in 2007 to nearly $1,300 in 2014; increased the quarterly cash dividend by 18% over the last three years, while maintaining one of the lowest payout ratios in the multifamily sector; and achieved investment grade ratings from Moody's, Fitch and S&P.
As the Chairman and CEO of one of 10 publicly traded multifamily REITs in the country, Mr. Friedman is active in several professional organizations, which include the National Association of Real Estate Investment Trusts, Chief Executives Organization and the National Multi-Housing Council.
Mr. Friedman's past Board positions include United Way, Boy Scouts of America, Cleveland Center for Contemporary Art and the Jewish Community Center of Cleveland. He was honored by Ernst & Young as an "Entrepreneur of the Year" in 2011. He holds a Bachelor of Science degree from The Ohio State University. He is also a graduate of Leadership Cleveland which is designed to enhance and leverage leadership resources within the Cleveland Community. Mr. Friedman is the father of Jason A. Friedman.
Lou Fatica, Senior Vice President, Chief Financial Officer and Treasurer, joined Associated Estates in 1999 as Controller and was promoted to Vice President, Controller in 2000. He assumed his current role in 2001. Mr. Fatica is responsible for financial operations including capital markets, reporting, internal audit and Sarbanes-Oxley compliance as well as tax, treasury and finance functions for the Company. He has more than 25 years of finance and accounting experience and is a Certified Public Accountant ("CPA"). He earned his bachelor's degree in Accounting from Cleveland State University. Mr. Fatica is a member of the American Institute of Certified Public Accountants, the Ohio Society of CPAs, and serves as a member of the Board of Directors of the Hillcrest Family YMCA.
Jason A. Friedman, Senior Vice President, Acquisition and Development, joined Associated Estates in 2009. Mr. Jason A. Friedman is responsible for overseeing the Company's acquisition efforts including the purchase of new assets. Additionally, Mr. Jason A. Friedman is responsible for all new development and construction activities including the purchasing of new land, design and entitlement. He has more than 16 years of real estate experience, including acquisitions, development, construction and financing. He earned his bachelor's degree in Communications and Business from Auburn University. Mr. Jason A. Friedman is a member of the Urban Land Institute, National Multi-Housing Council, National Association of Home Builders, Young Presidents Organization, and National Association of Real Estate Investment Trusts (NAREIT). He also serves as a board member for the American Red Cross and the Domestic Violence and Child Advocacy Center.
Scott D. Irwin, Senior Vice President, General Counsel and Secretary, joined Associated Estates in 2013. Mr. Irwin is responsible for all aspects of the Company's legal matters, providing advice and counsel in the negotiation, structuring and implementation of the Company's property acquisition, development, disposition, financing and capital markets activities, as well as risk management, corporate governance, public company reporting and litigation. From 2010 to 2013, Mr. Irwin served as Executive Vice President, General Counsel and Secretary of Buffets, Inc., one of the largest family dining restaurant companies in the United States. He has more than 22 years of overall experience in law, specializing in finance, corporate governance and compliance, acquisitions and divestitures, labor and employment, and litigation. Mr. Irwin earned his bachelor's degree, summa cum laude, from Kent State University, where he was inducted into Phi Beta Kappa. His Juris Doctorate was awarded, summa cum laude, by The Ohio State University College of Law, where he was elected to the Order of the Coif.

8



John T. Shannon, Senior Vice President of Operations, joined Associated Estates in 2004. Mr. Shannon is responsible for the overall direction and guidance of property operations with the objective of maximizing growth and profitability, while fostering a culture committed to providing excellence in service. He also has oversight responsibilities for dispositions, marketing, ancillary services; and he provides day-to-day support of the Company's strategic goals. He has 25 years of property management experience. Mr. Shannon earned his bachelor's degree in Business Administration with a concentration in real estate finance and construction management from the University of Denver.
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.
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 may 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 we own;
competition from other available multifamily units, single family units available for rental or purchase, and changes in market rental rates;




9



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 cost, disruption and diversion of management's attention associated with campaigns commenced by activist investors seeking to influence the Company to take particular actions favored by the activist or gain representation on our Board of Directors;
information security breaches and other disruptions that could comprise our information or expose us to business interruption;
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;
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; and
those risks factors and special considerations set forth in the documents the Company files from time to time with the SEC.

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.

10



Secured debt financing could adversely affect our performance. At December 31, 2014, eight of our 49 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. Additionally, at December 31, 2014, we had two construction loans with balances that are collateralized by the respective development properties, as well as an additional unconsolidated construction loan for which we are the guarantor which has no borrowings. 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 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, which from time-to-time offer terms competitive with Fannie Mae and Freddie Mac. We believe 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 facility and term loan 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 facility and term loan. Our unsecured credit facility, term loan 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.
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 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.

11



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.
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, among other causes, 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 and compliance.

12



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 (the "Ownership Limit"), and more than 9.8% of the shares of any series of any class of our preferred shares by any person 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 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. At our 2015 Annual Meeting, we will ask shareholders to approve our Third Amended and Restated Articles of Incorporation, which eliminates the Ownership Limit.
We have a shareholders rights plan which would delay or prevent a change in control. We have a shareholders rights plan that 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 our shareholders rights plan could assist in maximizing value for our shareholders in a change in control transaction, our shareholders rights plan would likely have the effect of precluding an acquisition of control of us without our consent.  In December 2014, our Board of Directors approved the elimination of our shareholder rights plan, which is expected to be completed during the first quarter of 2015.
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 shares and may also result in a reduction of the dividends payable on our common shares.

13



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.
Any material weaknesses identified in our internal control over financial reporting could have an adverse effect on our share price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our share price.
A currently pending proxy contest, and any other actions of activist stockholders, could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect on our business. On November 17, 2014, Land & Buildings Investment Management, LLC, a shareholder that, together with its affiliates, held 2.9% of our outstanding common shares, issued by press release a public letter to our shareholders announcing its intent to nominate a slate of seven individual candidates for election to our Board of Directors at our 2015 Annual Meeting of Shareholders.
As a result of this pending proxy contest, or if other activist shareholder activities ensue, our business could be adversely affected because responding to proxy contests and reacting to other actions by activist shareholders can be costly and time-consuming, disrupt our operations and divert the attention of management and our employees. We have retained the services of various professionals to advise us on this matter, including legal, financial and communications advisors, the costs of which may negatively impact our future financial results. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a consequence of these and any similar activist shareholder initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors and joint venture partners, and cause our common share price to experience periods of volatility or stagnation. Moreover, if individuals are elected to our Board of Directors with a specific agenda, it may adversely affect our ability to effectively and timely implement our current initiatives, retain and attract experienced executives and employees, and execute on our long-term strategy.
Item 1B. Unresolved Staff Comments
None.

14



Item 2. Properties
Our Portfolio. The following table represents our portfolio as of December 31, 2014, 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
 
4

 
1,294

Georgia
 
2

 
354

Indiana
 
3

 
836

Michigan
 
7

 
2,216

North Carolina
 
7

 
1,671

Ohio
 
15

 
2,884

Texas
 
4

 
1,093

Virginia
 
7

 
2,386

 
 
49

 
12,734

Development Projects
 
 
 
 
7001 Arlington at Bethesda (1)
 

 

Cantabria at Turtle Creek (2)
 

 

The Desmond on Wilshire (3)
 

 

 
 
49

 
12,734

 
 
 
 
 
Joint Venture Development Projects
 
 
 
 
950 East Third (4)
 

 

350 8th (5)
 

 

 
 
 
 
 
Total Portfolio
 
49

 
12,734

 
 
 
 
 
 
 
Location
 
Acres
Land Parcels
 
 
 
 
Westlake
 
Westlake, OH
 
39.0

Wyndemere
 
Franklin, OH
 
10.0

5th and Huntington (6)
 
Monrovia, CA
 
2.9

Warner Center (7)
 
Woodland Hills, CA
 
4.6

 
 
 
 
 
Total undeveloped acres
 
 
 
56.5

(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)
Joint venture development in process in Los Angeles, California of 472 units.
(5)
Joint venture development in process in San Francisco, California of 410 units.
(6)
Planned joint venture development in Monrovia, California of 154 units. On February 3, 2015, we purchased our partner's 50.0% interest in 5th and Huntington for $8.4 million, increasing our ownership percentage in the development to 100%. See 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 information related to this subsequent event.
(7)
Planned development in Woodland Hills, California of 379 units.

15



 
 
Total Number
 
 
 
 
of Units
 
Age (1)
State
 
 
 
 
Florida
 
 
 
 
Doral West
 
388

 
16

Vista Lago
 
316

 
11

Waterstone at Wellington
 
222

 
16

Windsor Pines
 
368

 
16

 
 
1,294

 
 
Georgia
 
 
 
 
Cambridge at Buckhead
 
168

 
19

Morgan Place
 
186

 
25

 
 
354

 
 
Indiana
 
 
 
 
Center Point
 
344

 
17

Residence at White River
 
228

 
23

Steeplechase at Shiloh
 
264

 
16

 
 
836

 
 
Michigan
 
 
 
 
Arbor Landings
 
328

 
15

Clinton Place
 
202

 
26

Georgetown Park
 
480

 
15

Landings at the Preserve
 
190

 
23

Oaks at Hampton
 
544

 
26

Spring Valley
 
224

 
27

Summer Ridge
 
248

 
23

 
 
2,216

 
 
North Carolina
 
 
 
 
Alpha Mill Phase 1
 
167

 
4

Alpha Mill Phase 2 (2)
 
100

 

St. Mary's Square
 
134

 
1

Southpoint Village
 
211

 
6

The Apartments at Blakeney
 
295

 
6

The Apartments at the Arboretum
 
205

 
5

The Lofts at Weston Lakeside
 
215

 
1

The Park at Crossroads
 
344

 
8

 
 
1,671

 
 
(1)
Age of property is determined by the number of years since construction of the property was completed.
(2)
Construction completed during 2014.

16



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

 
27

 
 
Heathermoor
 
280

 
25

 
 
Kensington Grove
 
76

 
19

 
 
Lake Forest
 
192

 
20

 
 
Mallard's Crossing
 
192

 
24

 
 
Perimeter Lakes
 
189

 
22

 
 
Residence at Barrington
 
288

 
15

 
 
Saw Mill Village
 
340

 
27

 
 
Sterling Park
 
128

 
20

 
 
The Residence at Christopher Wren
 
264

 
21

 
 
Village at Avon
 
312

 
13

 
 
Village of Western Reserve
 
108

 
16

 
 
Westchester Townhomes
 
136

 
25

 
 
Westlake Seven
 
7

 
29

 
 
Williamsburg Townhomes
 
260

 
24

 
 
 
 
2,884

 
 
 
 
Texas
 
 
 
 
 
 
Rienzi at Turtle Creek
 
152

 
12

 
 
San Raphael
 
222

 
15

 
 
San Raphael Phase II
 
99

 
1

 
 
The Brixton
 
224

 
17

 
 
21 Forty Medical District
 
396

 
5

 
 
 
 
1,093

 
 
 
 
Virginia
 
 
 
 
 
 
Ashborough
 
504

 
10

 
 
Dwell Vienna Metro
 
250

 
6

 
 
River Forest
 
300

 
8

 
 
Riverside Station
 
304

 
9

 
 
The Alexander at Ghent
 
268

 
8

 
 
The Belvedere
 
296

 
9

 
 
Westwind Farms
 
464

 
8

 
 
 
 
2,386

 
 
 
 
Total properties
 
12,734

 
15

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

 
2015
Cantabria at Turtle Creek
 
Dallas, TX
 
2.4

 
2015
The Desmond on Wilshire
 
Los Angeles, CA
 
2.2

 
2015
350 8th (2)
 
San Francisco, CA
 
3.4

 
2016
950 East Third (3)
 
Los Angeles, CA
 
5.9

 
2017
Future Development Land Parcels
 
 
 
 
 
 
5th and Huntington (4) 
 
Monrovia, CA
 
2.9

 
Warner Center
 
Woodland Hills, CA
 
4.6

 
(1)
Age of property is determined by the number of years since construction of the property was completed.
(2)
Joint venture 50.01% owned.
(3)
Joint venture 50.0% owned.
(4)
Joint venture 50.0% owned. On February 3, 2015, we purchased our partner's 50.0% interest in 5th and Huntington for $8.4 million, increasing our ownership percentage in the development to 100%. See 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 information related to this subsequent event.

17



Indebtedness Encumbering the Properties. We have financed the acquisition, development and rehabilitation of certain of our properties with a variety of sources of mortgage indebtedness. At December 31, 2014, 41 of the 49 wholly-owned operating properties were unencumbered. The remaining eight properties were encumbered by property-specific mortgages. Additionally, at December 31, 2014, we had two construction loans with balances that are collateralized by the respective development properties, as well as an additional unconsolidated construction loan for which we are the guarantor which has no borrowings.
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. 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 (the "Bankruptcy Court") for the Central District of California (the "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. Tenant appealed the District Court's decision to the U.S. Court of Appeals for the Ninth Circuit. The District Court remanded the case back to the Bankruptcy Court for further proceedings consistent with the District Court’s determination. On October 27, 2014, the Bankruptcy Court, on the matter remanded by the District Court, denied Tenant's lease assumption motion. Tenant has appealed the Bankruptcy Court's decision, and petitioned the Bankruptcy Court for a stay pending the outcome of Tenant's appeals. On December 29, 2014, the Bankruptcy Court granted Tenant's motion for stay pending appeal, which stayed the effect of the Bankruptcy Court's denial of Tenant's lease assumption motion, including the requirement that Tenant surrender the Property.
If we conclude, based on the outcome of this litigation, that it is unlikely Tenant will remain at the Property, we will accelerate the amortization of 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 $887,000 at December 31, 2014. 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.
On December 26, 2014, the United States District Court for the Northern District of Ohio (the "Court") entered an order approving a settlement and dismissing a shareholder derivative and class action captioned Monson v. Friedman, et al. (the "Action"). Pursuant to the settlement, and in exchange for releases and a dismissal of the Action with prejudice, Mr. Jeffrey I. Friedman voluntarily relinquished, and the Company rescinded, 63,714 of the 125,000 options awarded to him in 2012, and for the twelve-month period following final settlement, the Company will not award any stock options to Mr. Friedman. Also, the Company will implement additional processes relating to the future granting of equity awards and pay for plaintiffs' counsel fees and expenses approved by the Court with respect to the Action. We maintain insurance that will help defray the cost of the settlement, and the settlement did not have a material impact on our financial results.

18



In addition to the above, 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. With respect to current Litigation, we have determined either that a loss is not reasonably possible or that the estimated loss or range of loss, if any, will not have a material adverse impact on our financial statements.
Item 4. Mine Safety Disclosures
Not applicable.

19



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
 
 
2014
 
2013
 
2014
 
2013
 
 
High
 
Low
 
High
 
Low
 
 
 
 
First Quarter
 
$
17.70

 
$
15.49

 
$
18.67

 
$
15.79

 
$
0.19

 
$
0.19

Second Quarter
 
$
18.81

 
$
16.37

 
$
19.09

 
$
14.98

 
$
0.19

 
$
0.19

Third Quarter
 
$
18.87

 
$
17.27

 
$
16.79

 
$
13.10

 
$
0.20

 
$
0.19

Fourth Quarter
 
$
23.95

 
$
17.26

 
$
16.62

 
$
14.28

 
$
0.21

 
$
0.19

 
 
 
 
 
 
 
 
 
 
$
0.79

 
$
0.76

On February 3, 2015, there were approximately 680 holders of record and approximately 14,000 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 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 common shares using this authority during 2014. Additionally, we have a policy that 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.
Issuer Purchases of Equity Securities for the Three Months Ended December 31, 2014
 
 
 
 
 
 
 
 
Approximate Dollar
 
 
 
 
 
 
 
 
Value of Shares
 
 
 
 
 
 
Total Number of
 
That May Yet Be
 
 
 
 
 
 
Shares Purchased
 
Purchased Under
 
 
 
 
Average
 
As Part of Publicly
 
the Plans or
 
 
Total Number of
 
Price Paid
 
Announced Plans
 
Programs
Period
 
Shares Purchased
 
Per Share
 
or Programs
 
(in thousands)
October 1 through
 
 
 
 
 
 
 
 
October 31
 

 
$

 

 
$
26,288

November 1 through
 
 
 
 
 
 
 
 
November 30
 

 

 

 
26,288

December 1 through
 
 
 
 
 
 
 
 
December 31
 
65

 
22.94

 

 
26,288

Total
 
65

 
$
22.94

 

 
 


20



Performance Graph. The following graph compares the cumulative return on our common shares during the five-year period ended December 31, 2014 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
 
12/31/09
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
12/31/14
 
 
 
 
 
 
 
 
 
 
 
 
 
Associated Estates Realty Corporation
 
$
100.00

 
$
142.90

 
$
155.61

 
$
164.73

 
$
171.79

 
$
262.19

Russell 2000
 
$
100.00

 
$
126.86

 
$
121.56

 
$
141.43

 
$
196.34

 
$
205.95

MSCI US REIT Index
 
$
100.00

 
$
128.48

 
$
139.65

 
$
164.46

 
$
168.52

 
$
219.72

Source: SNL Financial LC, Charlottesville, VA
© 2015
www.snl.com


21



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.
 
 
Year Ended December 31,
(In thousands, except per share amounts)

 
2014
 
2013
 
2012
 
2011
 
2010
Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
Property revenue
 
$
191,306

 
$
179,982

 
$
157,507

 
$
132,754

 
$
105,852

Office revenue
 
1,883

 
1,497

 
1,046

 

 

Property management and construction services revenue
 
891

 

 

 
16,869

 
17,868

Total revenue
 
194,080

 
181,479

 
158,553

 
149,623

 
123,720

 
 
 
 
 
 
 
 
 
 
 
Total expenses
 
(156,647
)
 
(146,849
)
 
(129,399
)
 
(133,751
)
 
(108,264
)
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(25,976
)
 
(29,342
)
 
(29,273
)
 
(28,743
)
 
(26,251
)
Gain on disposition of properties
 
133,254

 

 

 

 

Income (loss) from continuing operations
 
144,711

 
5,288

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

 
3,179

 
3,881

 
3,642

 
1,965

Gain on disposition of properties
 

 
52,828

 
26,849

 
14,597

 
245

Income from discontinued operations
 

 
56,007

 
30,730

 
18,239

 
2,210

Net income (loss)
 
144,711

 
61,295

 
30,611

 
5,368

 
(8,585
)
Net income attributable to noncontrolling interests
 

 
(45
)
 
(19
)
 
(40
)
 
(51
)
Net income (loss) attributable to AERC
 
144,711

 
61,250

 
30,592

 
5,328

 
(8,636
)
Preferred share dividends
 

 

 

 

 
(2,030
)
Preferred share redemption/repurchase costs
 

 

 

 

 
(993
)
Allocation to participating securities
 
(473
)
 
(228
)
 

 

 

Net income (loss) applicable to common shares
 
$
144,238

 
$
61,022

 
$
30,592

 
$
5,328

 
$
(11,659
)
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share - Basic:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
 
 
 
 
applicable to common shares
 
$
2.51

 
$
0.10

 
$

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

 
1.08

 
0.66

 
0.44

 
0.08

Net income (loss) applicable to common shares
 
$
2.51

 
$
1.18

 
$
0.66

 
$
0.13

 
$
(0.38
)
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share - Diluted:
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
 
 
 
 
applicable to common shares
 
$
2.49

 
$
0.10

 
$

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

 
1.07

 
0.66

 
0.44

 
0.08

Net income (loss) applicable to common shares
 
$
2.49

 
$
1.17

 
$
0.66

 
$
0.13

 
$
(0.38
)
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
57,478

 
51,622

 
46,063

 
41,657

 
30,421

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
 
57,975

 
52,184

 
46,063

 
41,657

 
30,421

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.79

 
$
0.76

 
$
0.71

 
$
0.68

 
$
0.68



22



(Dollar amounts in thousands)

 
2014
 
2013
 
2012
 
2011
 
2010
Cash flow data:
 
 
 
 
 
 
 
 
 
 
Cash flow provided by operations
 
$
76,232

 
$
81,825

 
$
70,606

 
$
53,317

 
$
33,511

Cash flow provided by (used for) investing activity
 
$
32,815

 
$
(219,438
)
 
$
(157,319
)
 
$
(146,333
)
 
$
(283,432
)
Cash flow (used for) provided by financing activity
 
$
(108,941
)
 
$
137,459

 
$
87,125

 
$
92,974

 
$
250,691

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data at December 31:
 
 
 
 
 
 
 
 
 
 
Total net real estate
 
$
1,381,427

 
$
1,373,999

 
$
1,139,917

 
$
986,834

 
$
875,000

Total assets
 
$
1,465,697

 
$
1,422,497

 
$
1,172,477

 
$
1,018,493

 
$
918,235

Total debt
 
$
749,113

 
$
812,974

 
$
716,778

 
$
664,788

 
$
555,666

Total shareholders' equity attributable to AERC
 
$
647,226

 
$
544,450

 
$
403,398

 
$
308,793

 
$
316,184

 
 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
 
Property net operating income (1) (6)
 
$
118,305

 
$
112,103

 
$
96,879

 
$
80,986

 
$
62,618

Funds from operations (2) (7)
 
$
72,780

 
$
66,078

 
$
57,179

 
$
42,707

 
$
26,153

Operating FFO (3) (7)
 
$
73,089

 
$
66,078

 
$
59,330

 
$
42,707

 
$
27,075

Funds available for distribution (4) (7)
 
$
66,281

 
$
58,311

 
$
52,820

 
$
36,417

 
$
22,291

Total properties (at end of period)
 
49

 
53

 
52

 
53

 
52

Total apartment units (at end of period)
 
12,734

 
13,676

 
13,950

 
13,908

 
13,662

Monthly property revenue per occupied unit
 
$
1,266

 
$
1,255

 
$
1,326

 
$
1,055

 
$
968

Average occupancy (5)
 
95.2
%
 
95.4
%
 
92.5
%
 
94.3
%
 
94.5
%
(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. See footnote 6 for those items that are used to compute property NOI. 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. 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, amortization of intangible asset and lease up costs for development properties, and excludes impairment write-downs of depreciable real estate and gains and losses from the disposition of previously depreciated real estate. 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, 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 for those items that are used to compute FFO. Other real estate companies may define FFO in a different manner.
(3)
Operating FFO 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 Operating FFO 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 for those items that are used to compute Operating FFO. Other real estate companies may define Operating FFO in a different manner.
(4)
We define funds available for distribution ("FAD") as Operating FFO, 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 Operating FFO, it captures real estate performance by excluding gains or losses from the disposition of previously depreciated real estate and depreciation on real estate assets and amortization of intangible asset and lease up costs for development properties.  Unlike FFO and Operating FFO, FAD also reflects the recurring capital expenditures that are necessary to maintain the associated real estate. See Note 7 for a reconciliation of Operating FFO to FAD.
(5)
Average occupancy is defined as the average number of units occupied during the period divided by total number of units.
    

23



(6)
Reconciliation of property NOI to net income (loss) attributable to AEC.
 
 
Year Ended December 31,
(In thousands)
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
Property net operating income
 
$
118,305

 
$
112,103

 
$
96,879

 
$
80,986

 
$
62,618

Office revenue
 
1,883

 
1,497

 
1,046

 

 

Property management and construction services revenue
 
891

 

 

 
16,869

 
17,868

Construction and other services expenses
 
(396
)
 

 
(176
)
 
(19,297
)
 
(17,160
)
Depreciation and amortization
 
(63,557
)
 
(58,053
)
 
(49,938
)
 
(45,768
)
 
(31,379
)
General and administrative expense
 
(18,729
)
 
(19,481
)
 
(16,995
)
 
(15,944
)
 
(15,684
)
Development costs
 
(779
)
 
(912
)
 
(864
)
 
(435
)
 
(208
)
Costs associated with acquisitions
 
(185
)
 
(524
)
 
(798
)
 
(539
)
 
(599
)
Interest expense
 
(25,976
)
 
(29,342
)
 
(29,273
)
 
(28,743
)
 
(26,251
)
Gain on disposition of properties
 
133,254

 

 

 

 

Income (loss) from continuing operations
 
144,711

 
5,288

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

 
3,179

 
3,881

 
3,642

 
1,965

Gain on disposition of properties
 

 
52,828

 
26,849

 
14,597

 
245

Income from discontinued operations
 

 
56,007

 
30,730

 
18,239

 
2,210

Net income (loss)
 
144,711

 
61,295

 
30,611

 
5,368

 
(8,585
)
Net income attributable to noncontrolling redeemable interest
 

 
(45
)
 
(19
)
 
(40
)
 
(51
)
Net income (loss) attributable to AERC
 
$
144,711

 
$
61,250

 
$
30,592

 
$
5,328

 
$
(8,636
)


24



(7)
Reconciliation of net income (loss) attributable to AERC to FFO, Operating FFO and FAD:
 
 
Year Ended December 31,
(In thousands, except per share amounts)
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) attributable to AERC
 
$
144,711

 
$
61,250

 
$
30,592

 
$
5,328

 
$
(8,636
)
Depreciation - real estate assets
 
58,039

 
53,779

 
48,547

 
44,006

 
35,593

Amortization of intangible assets
 
3,284

 
3,877

 
4,889

 
7,970

 
2,219

Preferred share dividends
 

 

 

 

 
(2,030
)
Preferred share redemption/repurchase costs
 

 

 

 

 
(993
)
Gain on disposition of properties
 
(133,254
)
 
(52,828
)
 
(26,849
)
 
(14,597
)
 

Funds from operations
 
72,780

 
66,078

 
57,179

 
42,707

 
26,153

 
 
 
 
 
 
 
 
 
 
 
Gain on insurance recoveries
 

 

 

 

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

 

 
2,430

 

 

Preferred share repurchase costs
 

 

 

 

 
993

Shareholder activism costs
 
309

 

 

 

 

Trust preferred redemption costs
 

 

 

 

 
727

Refund of defeasance costs for previously defeased loans
 

 

 
(279
)
 

 
(553
)
Operating FFO
 
73,089

 
66,078

 
59,330

 
42,707

 
27,075

 
 
 
 
 
 
 
 
 
 
 
Depreciation - other assets
 
2,234

 
2,176

 
2,108

 
1,954

 
1,827

Amortization of deferred financing fees
 
1,879

 
2,002

 
2,128

 
1,970

 
1,415

Recurring fixed asset additions
 
(10,921
)
 
(11,945
)
 
(10,746
)
 
(10,214
)
 
(8,026
)
Funds available for distribution
 
$
66,281

 
$
58,311

 
$
52,820

 
$
36,417

 
$
22,291

 
 
 
 
 
 
 
 
 
 
 
Funds from operations per common share - basic
 
$
1.27

 
$
1.28

 
$
1.24

 
$
1.03

 
$
0.85

Operating FFO per common share - basic
 
$
1.27

 
$
1.28

 
$
1.29

 
$
1.03

 
$
0.89

 
 
 
 
 
 
 
 
 
 
 
Funds from operations per common share - diluted
 
$
1.26

 
$
1.27

 
$
1.23

 
$
1.03

 
$
0.85

Operating FFO per common share - diluted
 
$
1.26

 
$
1.27

 
$
1.27

 
$
1.03

 
$
0.89

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
57,478

 
51,622

 
46,063

 
41,657

 
30,421

 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
 
57,975

 
52,184

 
46,553

 
41,657

 
30,421




25



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 2015 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 construction manager that acts as our in-house construction management division. Our primary source of cash and revenue from operations is rental payments from the leasing of apartment units, which represented 98.6% of our consolidated revenue for the year ended December 31, 2014.
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 program 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 Operating FFO 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 on 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 Operating FFO 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, 2014, and consists of 43 properties containing 11,184 units. Our Same Community portfolio accounted for 80.8% of total revenue and 82.8% of our property NOI in 2014. Acquired/Development properties represent one property acquired in 2014, a 99-unit expansion located in Dallas, Texas completed in 2013 and stabilized in 2014, and five properties acquired in 2013. See Results of Operations for an additional discussion of our Same Community properties.

26



Same Community property NOI increased 3.3% in 2014 compared to 2013 as a result of a $1.8 million or 4.2% increase in property NOI from our Midwest (Indianapolis, Michigan and Ohio) portfolio. Our Mid-Atlantic (Metro DC, Raleigh-Durham and Virginia) portfolio property NOI increased $493,000 or 1.4%, our Southeast (Florida and Atlanta) portfolio property NOI increased $684,000 or 6.2%, and our Southwest (Dallas) portfolio property NOI increased $167,000 or 2.8% in 2014.
The following table presents property NOI results for 2014 and 2013:
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
 
(In thousands)
 
Property NOI
 
Property NOI
 
Variance
Same Community Properties:
 
 
 
 
 
 
Midwest
 
$
43,996

 
$
42,216

 
$
1,780

Mid-Atlantic
 
36,138

 
35,645

 
493

Southeast
 
11,797

 
11,113

 
684

Southwest
 
6,076

 
5,909

 
167

Total Same Community
 
98,007

 
94,883

 
3,124

Acquired Properties
 
14,716

 
3,966

 
10,750

Development
 
542

 
58

 
484

Dispositions
 
5,040

 
13,196

 
(8,156
)
Total Property NOI
 
$
118,305

 
$
112,103

 
$
6,202

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 39.4% at December 31, 2014 compared with 45.9% at December 31, 2013, (ii) the level of secured debt to gross real estate assets, which was 15.3% at December 31, 2014 compared to 15.9% at December 31, 2013, and (iii) our fixed charge coverage ratio, which improved to 3.29 times at December 31, 2014 from 2.98 times at of December 31, 2013.
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 at least 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.

27



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)
2014
 
2013
 
2012
 
 
 
 
 
 
Net cash provided by operations
$
76,232

 
$
81,825

 
$
70,606

Fixed assets:
 
 
 
 
 
Acquisitions and development expenditures
(129,174
)
 
(320,008
)
 
(207,207
)
Net property disposition proceeds
212,053

 
135,580

 
64,422

Recurring, revenue enhancing and non-recurring capital expenditures
(13,794
)
 
(13,626
)
 
(12,314
)
Cash proceeds from sale of equity interest in development property
24,075

 

 

Deposits on potential future acquisitions
3,192

 
(13,192
)
 
(4,500
)
Contributions to joint ventures
(20,811
)
 
(9,271
)
 

Escrow deposits related to property sales
(115,587
)
 

 

Escrow disbursements related to property acquisition
72,292

 

 

Debt:
 
 
 
 
 
Decrease in mortgage and construction notes payable, net
(6,094
)
 
(124,004
)
 
(132,784
)
(Decrease) increase in unsecured revolving credit facility borrowings, net
(57,000
)
 
(57,000
)
 
132,500

Increase in term loan borrowings

 

 
25,000

Unsecured note issuances

 
250,000

 

Purchase of operating partnership units

 
(1,393
)
 

Exercise of stock options
733

 
2,470

 
312

Issuance of common shares

 
116,751