Item 1. Business
General Development of Business
Formed on May 25, 1993, Camden Property Trust, a Texas real estate investment trust (“REIT”), is engaged in the ownership, development, construction, and management of multifamily apartment communities. Unless the context requires otherwise, “we,” “our,” “us,” and the “Company” refer to Camden Property Trust and its consolidated subsidiaries. Our multifamily apartment communities are referred to as “communities,” “multifamily communities,” “properties,” or “multifamily properties” in the following discussion.
Our executive offices are located at 3 Greenway Plaza, Suite 1300, Houston, Texas 77046 and our telephone number is (713) 354-2500. Our website is located at www.camdenliving.com. On our website, we make available free of charge our annual, quarterly, and current reports, and amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). We also make available, free of charge on our website, our Guidelines on Governance, Code of Business Conduct and Ethics, Code of Ethical Conduct for Senior Financial Officers, and the charters of each of our Audit, Compensation, Nominating, and Corporate Governance Committees.
Our annual, quarterly, and current reports, proxy statements, and other information are electronically filed with the SEC. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please contact the SEC at 1-800-SEC-0330 for further information about the operation of the SEC’s Public Reference Room. The SEC also maintains a website at www.sec.gov which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Financial Information about Segments
We are engaged in the ownership, development, construction, and management of multifamily apartment communities. As each of our communities has similar economic characteristics, residents, amenities, and services, our operations have been aggregated into one reportable segment. See our consolidated financial statements and notes included thereto in Item 15 of this Annual Report on Form 10-K for certain information required by Item 1.
Narrative Description of Business
As of December 31, 2009, we owned interests in, operated, or were developing 185 multifamily properties comprising 63,658 apartment homes across the United States. We had 372 apartment homes under development at two of our multifamily properties, including 119 apartment homes at one multifamily property owned through a nonconsolidated joint venture and 253 apartment homes at one multifamily property owned through a consolidated joint venture, in which we own an interest. In addition, we own other land parcels we may develop into multifamily apartment communities.
Operating Strategy
We believe producing consistent earnings growth through property operations, development and acquisitions, achieving market balance, and recycling capital are crucial factors to our success. We rely heavily on our sophisticated property management capabilities and innovative operating strategies to help us maximize the earnings potential of our communities.
Real Estate Investments and Market Balance. We believe we are well positioned in our current markets and have the expertise to take advantage of new opportunities as they arise. These capabilities, combined with what we believe is a conservative financial structure, should allow us to concentrate our growth efforts toward selective opportunities to enhance our strategy of having a geographically diverse portfolio of assets which meet the requirements of our residents.
We have historically focused our operating strategy on capturing greater market share, selectively disposing of properties, and redeploying capital in new multifamily communities while also maintaining a strong balance sheet. We have also historically evaluated acquisition opportunities as they arose, some of which were consummated and contributed to our growth and profitability.
We continue to operate in our core markets which we believe provides an advantage due to economies of scale. We believe, where possible, it is best to operate with a strong base of properties in order to benefit from the personnel allocation and the market strength associated with managing several properties in the same market. However, consistent with our goal of generating sustained earnings growth, we intend to selectively dispose of properties and redeploy capital for various strategic reasons, including if we determine a property cannot meet long-term earnings growth expectations.
During 2008 and 2009, a number of factors adversely affecting demand for and rents received by our multifamily communities were intense and pervasive across the United States, and the conditions within the multifamily industry have become progressively more challenging. A prolonged recession, high inventory levels of single-family homes and condominiums in the markets in which we operate, overall weak consumer confidence, and high unemployment, among other factors, have persisted and, in some cases, accelerated in 2009. We believe the effects of these factors on the multifamily industry have been further magnified by high levels of home foreclosures, liquidity disruptions in the financial markets, continued job losses, and a lack of job growth. Our average apartment lease term is approximately twelve months. The impact of an economic downturn affects us quickly due to the short-term nature of our leases because our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Based on these market conditions and our belief these conditions will continue in the near future, we are cautious regarding expected performance and expect a decline in property revenues during 2010 as compared to 2009. However, positive impacts on our performance may result from reductions in the U.S. home ownership rate, more stringent lending criteria for prospective home-buyers, and long-term growth prospects for population, employment, and household formations in our markets. However, there can be no assurance any of these factors will develop, continue or positively impact our operating results. We have noted a recent increase in issuances of debt and equity by REITs at more attractive rates. While this may be a positive sign, we are uncertain if this level of activity will increase or continue.
During the near term, we plan to continue to focus primarily on strengthening our capital and liquidity position by generating positive cash flows from operations, reducing outstanding debt and leverage ratios, and controlling and reducing overhead costs.
Subject to market conditions, we intend to continue to look for opportunities to acquire existing communities through our investment in and management of our discretionary investment funds, the Camden Multifamily Value Add Fund, L.P. and a related co-investment partnership (the “Funds”). Until the earlier of (i) December 31, 2011 or (ii) such time as 90% of their committed capital is invested, subject to two one-year extensions, the Funds will be our exclusive investment vehicles for acquiring fully developed multifamily properties, subject to certain exceptions.
Sophisticated Property Management. We believe the depth of our organization enables us to deliver quality services, promote resident satisfaction, and retain residents, thereby reducing operating expenses. We manage our properties utilizing a staff of professionals and support personnel, including certified property managers, experienced apartment managers and leasing agents, and trained apartment maintenance technicians. Our on-site personnel are trained to deliver high quality services to our residents. We strive to motivate our on-site employees through incentive compensation arrangements based upon property operational results, rental rate increases, and level of lease renewals achieved.
Operations. We believe an intense focus on operations is necessary to realize consistent, sustained earnings growth. Ensuring resident satisfaction, increasing rents as market conditions allow, maximizing rent collections, maintaining property occupancy at optimal levels, and controlling operating costs comprise our principal strategies to maximize property financial results. We believe our web-based property management and revenue management systems strengthen on-site operations and allow us to quickly adjust rental rates as local market conditions change. Lease terms are generally staggered based on vacancy exposure by apartment type so lease expirations are matched to each property’s seasonal rental patterns. We generally offer leases ranging from six to fifteen months, with an average lease of twelve months, and with individual property marketing plans structured to respond to local market conditions. In addition, we conduct ongoing customer service surveys to ensure timely response to residents’ changing needs and a high level of satisfaction.
Investments in Joint Ventures. We have entered into, and may continue in the future to enter into, joint ventures through which we own an indirect economic interest of less than 100% of the community or communities owned directly by the joint venture. See Note 7, “Investments in Joint Ventures,” and Note 14, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements for further discussion of our investments in joint ventures.
Competition
There are numerous housing alternatives which compete with our communities in attracting residents. Our properties compete directly with other multifamily properties as well as with condominiums and single-family homes which are available for rent or purchase in the markets in which our communities are located. This competitive environment could have a material adverse effect on our ability to lease apartment homes at our present communities or any newly developed or acquired community, as well as on the rents charged.
Employees
At December 31, 2009, we had approximately 1,750 employees, including executive, administrative, and community personnel.
Qualification as a Real Estate Investment Trust
As of December 31, 2009, we met the qualification of a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”). As a result, we, with the exception of our taxable REIT subsidiaries, will not be subject to federal income tax to the extent we continue to meet certain requirements of the Code.
Item 1A.
Item 1A. Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note additional risks not presently known to us or which we currently consider immaterial may also impair our business and operations.
Risks Associated with Real Estate, Real Estate Capital, and Credit Markets
Volatility in capital and credit markets could adversely impact us.
The capital and credit markets have been experiencing volatility and disruption, which has caused the spreads on prospective debt financings to fluctuate and potentially make it more difficult to borrow money. If current levels of market disruption and volatility continue or worsen, we may not be able to obtain new debt financing or refinance our existing debt on favorable terms or at all, which would adversely affect our liquidity and our ability to make distributions to shareholders. This market turmoil and tightening of credit have led to an increased lack of consumer confidence and widespread reduction of business activity generally, which have adversely impacted and may continue to adversely impact us, including our ability to acquire and dispose of assets and continue our development pipeline.
We could be negatively impacted by the condition of Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac are a major source of financing for secured multifamily rental real estate. We and other multifamily companies depend heavily on Fannie Mae and Freddie Mac to finance growth by purchasing or guaranteeing apartment loans. In September 2008, the U.S. government assumed control of Fannie Mae and Freddie Mac and placed both companies into a government conservatorship under the Federal Housing Finance Agency. In December 2009, the Obama administration pledged to cover unlimited losses through 2012 for both companies, lifting an earlier cap of $400 billion. Since that time, the chairman of the House Financial Services Committee has called for a new system for providing money for mortgages and the elimination of Fannie Mae and Freddie Mac. A decision by the government to eliminate Fannie Mae or Freddie Mac or reduce their acquisitions or guarantees of apartment loans may adversely affect interest rates, capital availability, and the development of multifamily communities. Governmental actions could also make it easier for individuals to finance loans for single-family homes, which would make renting a less attractive option and adversely affect our occupancy or rental rates.
Unfavorable changes in economic conditions could adversely impact occupancy or rental rates.
Weakened economic conditions, including decreased job growth and job losses, have affected and continue to significantly affect apartment home occupancy and rental rates. Significant decreases in occupancy or rental rates in the markets in which we operate, in turn, may have a material adverse impact on our cash flows and operating results. The risks which may affect conditions in these markets include the following:
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changes in the national, regional, and local economic climates;
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local conditions, such as an oversupply of apartments or other housing available for rent, or a reduction in demand for apartments in the area;
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declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
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changes in market rental rates;
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declines in mortgage interest rates, making alternative housing more affordable;
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government or builder incentives which enable first time have buyers to put little or no money down, making alternative housing options more attractive;
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a continued economic downturn which simultaneously affects one or more of our geographical markets; and
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increased operating costs, if these costs cannot be passed through to residents.
We may experience a decrease in rental revenues, an increase in operating expenses, or a combination of both, which may adversely affect our results of operations and our ability to satisfy our financial obligations and pay distributions to shareholders.
Short-term leases expose us to the effects of declining market rents.
Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
We face risks associated with land holdings and related activities.
We hold land for future development and may in the future acquire additional land holdings. The risks inherent in purchasing, owning, and developing land increase as demand for apartments, or rental rates, decrease. Real estate markets are highly uncertain and, as a result, the value of undeveloped land has fluctuated significantly and may continue to fluctuate as a result of changing market conditions. In addition, carrying costs can be significant and can result in losses or reduced margins in a poorly performing project. As a result, we hold certain land and may in the future acquire additional land in our development pipeline at a cost we may not be able to recover fully or upon which we cannot build and develop a profitable multifamily community. Under current market conditions, in 2009 we recorded impairment charges on land holdings for eight developments, and a land development joint venture we have put on hold for the foreseeable future. We may have future impairments of our land and related activities. These impairment charges are based on estimates of fair value. Given the current environment, the amount of market information available to estimate fair value is less than usual; if additional market information becomes available in future periods we may take additional impairment charges in the future.
Difficulties of selling real estate could limit our flexibility.
We intend to evaluate the potential disposition of assets that may no longer help us meet our objectives. When we decide to sell an asset, we may encounter difficulty in finding buyers in a timely manner as real estate investments generally cannot be disposed of quickly, especially when market conditions are poor. These difficulties have been exacerbated in the current credit environment because buyers have experienced difficulty in obtaining the necessary financing. These factors may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and may also limit our ability to utilize sales proceeds as a source of liquidity, which would adversely affect our ability to make distributions to shareholders or repay debt. In addition, in order to maintain our status as a REIT, the Code imposes restrictions on our ability to sell properties held fewer than two years, which may cause us to incur losses thereby reducing our cash flows and adversely impacting our ability to make distributions to shareholders or repay debt.
Compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial cost.
The Americans with Disabilities Act (“ADA”), the Fair Housing Amendments Act of 1988 (“FHAA”), and other federal, state, and local laws generally require public accommodations and apartment homes be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the government or the award of damages to private litigants. These laws may require us to modify our existing properties. These laws may also restrict renovations by requiring improved access to such buildings by disabled persons or may require us to add other structural features which increase our construction costs. Legislation or regulations adopted in the future may impose further burdens or restrictions on us with respect to improved access by disabled persons. We may incur unanticipated expenses which may be material to our financial condition or results of operations to comply with ADA, FHAA, and other federal, state, and local laws, or in connection with lawsuits brought by the government or private litigants.
Competition could limit our ability to lease apartments or increase or maintain rental income.
There are numerous housing alternatives which compete with our properties in attracting residents. Our properties compete directly with other multifamily properties as well as condominiums and single family homes which are available for rent or purchase in the markets in which our properties are located. This competitive environment could have a material adverse effect on our ability to lease apartment homes at our present properties or any newly developed or acquired property, as well as on the rents charged.
Risks Associated with Our Operations
Development and construction risks could impact our profitability.
Although we expect lower levels of development activity in 2010, as compared to prior years, in the long term we intend to continue to develop and construct multifamily apartment communities for our portfolio. Our development and construction activities may be exposed to a number of risks which may increase our construction costs including the following:
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inability to obtain, or delays in obtaining, necessary zoning, land-use, building, occupancy, and other required permits and authorizations;
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increased materials, labor, problems with subcontractors, or other costs due to errors and omissions which occur in the design or construction process;
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inability to obtain financing with favorable terms for the development of a community;
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inability to complete construction and lease-up of a community on schedule;
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incurring costs related to the abandonment of development opportunities which we have pursued and subsequently deemed unfeasible; and
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inability to successfully implement our development and construction strategy could adversely affect our results of operations and our ability to satisfy our financial obligations and pay distributions to shareholders.
We also serve as the general contractor on a limited number of development and construction projects for properties owned by unrelated third parties pursuant to guaranteed maximum price contracts. The terms of these contracts require us to estimate the time and costs to complete a project, and we assume the risk that the time and costs associated with our performance may be greater than was anticipated. As a result, our profitability on guaranteed maximum price contracts is dependent on our ability to accurately predict these factors. The time and costs may be affected by a variety of factors, including those listed above, many of which are beyond our control. In addition, the terms of these contracts generally require a warranty period, which may have durations of up to ten years, during which we may be required to repair, replace, or rebuild a project in the event of a material defect.
Our acquisition strategy may not produce the cash flows expected.
Subject to the requirements of the Funds, we may acquire additional operating properties on a select basis. Our acquisition activities are subject to a number of risks, including the following:
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we may not be able to successfully integrate acquired properties into our existing operations;
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our estimates of the costs of repositioning or redeveloping the acquired property may prove inaccurate;
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the expected occupancy and rental rates may differ from the actual results; and
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we may not be able to obtain adequate financing.
With respect to acquisitions of operating companies, we may not be able to identify suitable candidates on terms acceptable to us or may not achieve expected returns and other benefits as a result of integration challenges, such as personnel and technology.
Competition could adversely affect our ability to acquire properties.
We expect other real estate investors, including insurance companies, pension and investment funds, private investors, and other apartment REITs, will compete with us to acquire additional operating properties. This competition could increase prices for the type of properties we would likely pursue and adversely affect our ability to acquire these properties or the profitability of such properties upon acquisition.
Losses from catastrophes may exceed our insurance coverage.
We carry comprehensive property and liability insurance on our properties, which we believe is of the type and amount customarily obtained on similar real property assets. We intend to obtain similar coverage for properties we acquire or develop in the future. However, some losses, generally of a catastrophic nature such as losses from floods, hurricanes, or earthquakes, may be subject to coverage limitations. We exercise our discretion in determining amounts, coverage limits, and deductible provisions of insurance to maintain appropriate insurance on our investments at a reasonable cost and on suitable terms. If we suffer a substantial loss, our insurance coverage may not be sufficient to pay the full current market value or current replacement value of our lost investment, as well as the anticipated future revenues from the property. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also may reduce the feasibility of using insurance proceeds to replace a property after it has been damaged or destroyed.
Investments through joint ventures involve risks not present in investments in which we are the sole investor.
We have invested and may continue to invest as a joint venture partner in joint ventures. These investments involve risks, including the possibility the other joint venture partner may have business goals which are inconsistent with ours, be in a position to take action or withhold consent contrary to our requests, or become insolvent and require us to assume and fulfill the joint venture’s financial obligations. We and our joint venture partner may each have the right to initiate a buy-sell arrangement, which could cause us to sell our interest, or acquire our joint venture partner’s interest, at a time when we otherwise would not have entered into such a transaction. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
We face risks associated with investments in and management of discretionary funds.
We have formed the Funds which, through wholly-owned subsidiaries, we manage as the general partner and advisor. We have committed to invest 20% of the total equity interest in each of the Funds, up to $75 million in the aggregate. As of December 31, 2009, each of the Funds had total capital commitments of $187.5 million or $375 million in the aggregate. There are risks associated with the investment in and management of the Funds, including the following:
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investors in the Funds may fail to make their capital contributions when due and, as a result, the Funds may be unable to execute their investment objectives;
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the general partner of the Funds, our wholly-owned subsidiary, has unlimited liability for the third-party debts, obligations, and liabilities of the Funds pursuant to partnership law;
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investors in the Funds (other than us), by majority vote, may remove our subsidiary as the general partner of the Funds with or without cause and the Funds’ advisory boards, by a majority vote of their members, may remove our subsidiary as the general partner of the Funds at any time for cause;
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while we have broad discretion to manage the Funds and make investment decisions on behalf of the Funds, the investors or the advisory boards must approve certain matters, and as a result we may be unable to cause the Funds to make certain investments or implement certain decisions we consider beneficial;
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we are permitted to acquire land and develop communities outside of the Funds, but are generally prohibited from acquiring fully developed multifamily properties outside of the Funds until the earlier of (i) December 31, 2011 or (ii) such time as 90% of the Funds’ committed capital is invested, subject to certain exceptions;
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our ability to redeem all or a portion of our investments in the Funds is subject to significant restrictions; and
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we may be liable if the Funds fail to comply with various tax or other regulatory matters.
We depend on our key personnel.
Our success depends in part on our ability to attract and retain the services of executive officers and other personnel. There is substantial competition for qualified personnel in the real estate industry, and the loss of several of our key personnel could have an adverse effect on us.
Changes in laws and litigation risks could affect our business.
As a large publicly-traded owner of multifamily properties, we may become involved in legal proceedings, including consumer, employment, tort, or commercial litigation, which if decided adversely to or settled by us, could result in liability which is material to our financial condition or results of operations.
Tax matters, including failure to qualify as a REIT, could have adverse consequences.
We may not continue to qualify as a REIT in the future. The Internal Revenue Service may challenge our qualification as a REIT for prior years and new legislation, regulations, administrative interpretations, or court decisions may change the tax laws or the application of the tax laws with respect to qualification as a REIT or the federal tax consequences of such qualification.
For any taxable year we fail to qualify as a REIT and do not qualify under statutory relief provisions:
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we would be subject to federal income tax on our taxable income at regular corporate rates, including any applicable alternative minimum tax;
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we would be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify, thereby reducing our net earnings available for operations, including any distributions to shareholders, as we would be required to pay significant income taxes for the year or years involved; and
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our ability to expand our business and raise capital would be impaired, which may adversely affect the value of our common shares.
We may face other tax liabilities in the future which may impact our cash flow. These potential tax liabilities may be calculated on our income or property values at either the corporate or individual property levels. Any additional tax expense incurred would decrease the cash available for distribution to our shareholders.
Risks Associated with Our Indebtedness and Financing
Insufficient cash flows could limit our ability to make required payments for debt obligations or pay distributions to shareholders.
Substantially all of our income is derived from rental and other income from our multifamily communities. As a result, our performance depends in large part on our ability to collect rent from residents which could be negatively affected by a number of factors, including the following:
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delay in resident lease commencements;
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failure of residents to make rental payments when due;
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the attractiveness of our properties to residents and potential residents;
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our ability to adequately manage and maintain our communities;
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competition from other available apartments and housing alternatives; and
Cash flow could be insufficient to meet required payments of principal and interest with respect to debt financing. In order for us to continue to qualify as a REIT we must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to our shareholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. This requirement limits the cash flow available to meet required principal payments on our debt.
We have significant debt, which could have important adverse consequences.
As of December 31, 2009, we had outstanding debt of approximately $2.6 billion. This indebtedness could have important consequences, including:
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if a property is mortgaged to secure payment of indebtedness, and if we are unable to meet our mortgage obligations, we could sustain a loss as a result of foreclosure on the mortgaged property;
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our vulnerability to general adverse economic and industry conditions is increased; and
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our flexibility in planning for, or reacting to, changes in business and industry is limited.
The mortgages on our properties subject to secured debt, our unsecured credit facility, and the indentures under which our unsecured debt was issued contain customary restrictions, requirements, and other limitations, as well as certain financial and operating covenants including maintenance of certain financial ratios. Maintaining compliance with these provisions could limit our financial flexibility. A default in these provisions, if uncured, could require us to repay the indebtedness, which could severely affect our liquidity and increase our financing costs.
We may be unable to renew, repay, or refinance our outstanding debt.
We are subject to the risk that indebtedness on our properties or our unsecured indebtedness will not be renewed, repaid, or refinanced when due or the terms of any renewal or refinancing will not be as favorable as the existing terms of such indebtedness. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of the properties on disadvantageous terms, which might result in losses to us. Such losses could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt. Furthermore, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose on the property, appoint a receiver and exercise rights under an assignment of rents and leases, or pursue other remedies, all with a consequent loss of our revenues and asset value. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code.
Variable rate debt is subject to interest rate risk.
We have mortgage debt with varying interest rates dependent upon various market indexes. In addition, we have a revolving credit facility bearing interest at a variable rate on all amounts drawn on the facility. We may incur additional variable rate debt in the future. Increases in interest rates on variable rate debt would increase our interest expense, unless we make arrangements which hedge the risk of rising interest rates, which would adversely affect net income and cash available for payment of our debt obligations and distributions to shareholders.
We may incur losses on interest rate hedging arrangements.
Historically, we have entered into agreements to reduce the risks associated with changes in interest rates, and we may continue to do so in the future. Although these agreements may partially protect against rising interest rates, they may also reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness which is hedged, we may be exposed to losses to the extent which the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other. Additionally, nonperformance by the other party to the hedging arrangement may subject us to increased credit risks.
Issuances of additional debt may adversely impact our financial condition.
Our capital requirements depend on numerous factors, including the occupancy rates of our apartment properties, dividend payment rates to our shareholders, development and capital expenditures, costs of operations, and potential acquisitions. If our capital requirements vary materially from our plans, we may require additional financing earlier than anticipated. If we issue more debt, we could become more leveraged, resulting in increased risk of default on our obligations and an increase in our debt service requirements, both of which could adversely affect our financial condition and ability to access debt and equity capital markets in the future.
Failure to maintain our current credit ratings could adversely affect our cost of funds, related margins, liquidity, and access to capital markets.
Moody’s and Standard & Poor’s, the major debt rating agencies, routinely evaluate our debt and have given us ratings of Baa1 and BBB, respectively, with stable outlooks, on our senior unsecured debt. These ratings are based on a number of factors, which include their assessment of our financial strength, liquidity, capital structure, asset quality, and sustainability of cash flow and earnings. In light of the difficulties in the real estate industry and the volatile financial markets, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity, and access to capital markets.
Risks Associated with Our Shares
Share ownership limits and our ability to issue additional equity securities may prevent takeovers beneficial to shareholders.
For us to maintain our qualification as a REIT, we must have 100 or more shareholders during the year and not more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals. As defined for federal income tax purposes, the term “individuals” includes a number of specified entities. To minimize the possibility of us failing to qualify as a REIT under this test, our declaration of trust includes restrictions on transfers of our shares and ownership limits. The ownership limits, as well as our ability to issue other classes of equity securities, may delay, defer, or prevent a change in control. These provisions may also deter tender offers for our common shares which may be attractive to you or limit your opportunity to receive a premium for your shares which might otherwise exist if a third party were attempting to effect a change in control transaction.
Our share price will fluctuate.
Stock markets in general and our common shares have experienced continued price volatility over the past year. The market price and volume of our common shares may continue to be subject to significant fluctuations due not only to general stock market conditions but also to the risk factors discussed in this report and the following:
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operating results which vary from the expectations of securities analysts and investors;
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investor interest in our property portfolio;
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the reputation and performance of REITs;
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the attractiveness of REITs as compared to other investment vehicles;
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the results of our financial condition and operations;
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the perception of our growth and earnings potential;
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dividend payment rates;
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increases in market interest rates, which may lead purchasers of our common shares to demand a higher yield; and
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changes in financial markets and national economic and general market conditions.
We may reduce dividends on our equity securities.
On December 7, 2009, we announced our Board of Trust Managers had declared a fourth quarter dividend of $0.45 per common share, totaling $2.05 per share for the year ended December 31, 2009. In order for us to continue to qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to our shareholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. However, in the event of, among other factors, continued material future deterioration in business conditions, or continuing tightening in the credit markets, our Board of Trust Managers may decide to reduce our dividend while ensuring compliance with the requirements of the Code related to REIT qualification.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
The Properties
Our properties typically consist of mid-rise buildings or two and three story buildings in a landscaped setting and provide residents with a variety of amenities. Most of the properties have one or more swimming pools and a clubhouse and many have whirlpool spas, weight room facilities, and controlled-access gates. Many of the apartment homes offer additional features such as fireplaces, vaulted ceilings, microwave ovens, covered parking, icemakers, washers and dryers, and ceiling fans.
Operating Properties (including properties held through joint ventures)
The 183 operating properties in which we owned interests and operated at December 31, 2009 averaged 918 square feet of living area per apartment home. For the year ended December 31, 2009, no single operating property accounted for greater than 1.7% of our total revenues. Our operating properties had a weighted average occupancy rate of 93.3% and 93.9% for 2009 and 2008, respectively. Resident lease terms generally range from six to fifteen months with an average lease term of twelve months. One hundred and fifty-nine of our operating properties have over 200 apartment homes, with the largest having 904 apartment homes. Our operating properties have an average age of 10.4 years (calculated on the basis of investment dollars). Our operating properties were constructed and placed in service as follows:
Property Table
The following table sets forth information with respect to our operating properties at December 31, 2009:
(1)
Represents average physical occupancy for the year except as noted below.
(2)
Properties under lease-up at December 31, 2009.
(3)
Development property stabilized during 2009 - average occupancy calculated from date at which occupancy exceeded 90% through year-end.
(4)
Redevelopment completed during 2009 - average occupancy calculated from date at which occupancy exceeded 90% through year-end.
(5)
Properties under redevelopment at December 31, 2009.
(6)
Miramar is a student housing project for Texas A&M at Corpus Christi. Average occupancy includes summer which is normally subject to high vacancies.
(7)
Properties owned through a joint venture in which we own a 20% interest. The remaining interest is owned by an unaffiliated private pension fund.
(8)
Properties owned through a joint venture in which we own a 20% interest. The remaining interest is owned by an unaffiliated private investor.
(9)
Property owned through a joint venture in which we own a 50% interest. The remaining interest is owned by an unaffiliated private investor.
(10)
Properties owned through a joint venture in which we own a 15% interest. The remaining interest is owned by an unaffiliated private investor.
(11)
Properties owned through a joint venture in which we own a 20% interest. The remaining interest is owned by an unaffiliated private pension fund.
(12)
Properties owned through a joint venture in which we own a 30% interest. The remaining interest is owned by an unaffiliated private investor.
(13)
Property owned through a joint venture in which we own a 72% interest. The remaining interest is owned by an unaffiliated private investor.
Item 3.
Item 3. Legal Proceedings
For discussion regarding legal proceedings, see Note 14, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements.
Item 4.
Item 4. Reserved
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The high and low closing prices per share of our common shares, as reported on the New York Stock Exchange composite tape under the symbol “CPT,” and distributions per share declared for the quarters indicated are as follows:
As of February 19, 2010, there were 723 shareholders of record and approximately 18,835 beneficial owners of our common shares.
In April 2007, our Board of Trust Managers approved a program to repurchase up to $500 million of our common equity securities through open market purchases, block purchases, and privately negotiated transactions. Under this program, we repurchased 4.3 million shares for a total of approximately $230.2 million through December 31, 2009. The remaining dollar value of our common equity securities authorized to be repurchased under the program was approximately $269.8 million as of December 31, 2009. There were no repurchases of our equity securities during the quarter ended December 31, 2009.
See Part III, Item 12, for a description of securities authorized for issuance under equity compensation plans.
Item 6.
Item 6. Selected Financial Data
The following table provides selected financial data relating to our historical financial condition and results of operations as of and for each of the years ended December 31, 2005 through 2009. This data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes. Prior year amounts have been reclassified for discontinued operations and adoption of new accounting standards.
COMPARATIVE SUMMARY OF SELECTED FINANCIAL AND PROPERTY DATA
(a)
Excludes discontinued operations.
(b)
Management considers Funds from Operations (“FFO”) to be an appropriate measure of the financial performance of an equity REIT. The National Association of Real Estate Investment Trusts (“NAREIT”) currently defines FFO as net income (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”)), excluding gains (or losses) associated with the sale of previously depreciated operating properties, real estate depreciation and amortization, and adjustments for unconsolidated joint ventures. Our calculation of diluted FFO also assumes conversion of all potentially dilutive securities, including certain noncontrolling interests, which are convertible into common shares. We consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions of operating properties and excluding depreciation, FFO can assist in the comparison of the operating performance of a company’s real estate between periods or as compared to different companies.
(c)
Includes discontinued operations.
(d)
Excludes apartment homes owned in joint ventures.
(e)
The 2005 results include the operations of Summit Properties Inc. subsequent to February 28, 2005.
Item 7.
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 appearing elsewhere in this report. Historical results and trends which might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.
We consider portions of this report to be “forward-looking” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions, or other items relating to the future; forward-looking statements are not guarantees of future performances, results, or events. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance our expectations will be achieved. Any statements contained herein which are not statements of historical fact should be deemed forward-looking statements. Reliance should not be placed on these forward-looking statements as they are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from our actual results and performance.
Factors that may cause our actual results or performance to differ materially from those contemplated by forward-looking statements include, but are not limited to, the following:
•
volatility in capital and credit markets could adversely impact us;
•
we could be negatively impacted by the condition of Fannie Mae or Freddie Mac;
•
unfavorable changes in economic conditions could adversely impact occupancy or rental rates;
•
short-term leases expose us to the effects of declining market rents;
•
we face risks associated with land holdings and related activities;
•
difficulties of selling real estate could limit our flexibility;
•
compliance or failure to comply with laws requiring access to our properties by disabled persons could result in substantial cost;
•
competition could limit our ability to lease apartments or increase or maintain rental income;
•
development and construction risks could impact our profitability;
•
our acquisition strategy may not produce the cash flows expected;
•
competition could adversely affect our ability to acquire properties;
•
losses from catastrophes may exceed our insurance coverage;
•
investments through joint ventures involve risks not present in investments in which we are the sole investor;
•
we face risks associated with investments in and management of discretionary funds;
•
we depend on our key personnel;
•
changes in laws and litigation risks could affect our business;
•
tax matters, including failure to qualify as a REIT, could have adverse consequences;
•
insufficient cash flows could limit our ability to make required payments for debt obligations or pay distributions to shareholders;
•
we have significant debt, which could have important adverse consequences;
•
we may be unable to renew, repay, or refinance our outstanding debt;
•
variable rate debt is subject to interest rate risk;
•
we may incur losses on interest rate hedging arrangements;
•
issuances of additional debt may adversely impact our financial condition;
•
failure to maintain our current credit ratings could adversely affect our cost of funds, related margins, liquidity, and access to capital markets;
•
share ownership limits and our ability to issue additional equity securities may prevent takeovers beneficial to shareholders;
•
our share price will fluctuate; and
•
we may reduce dividends on our equity securities.
These forward-looking statements represent our estimates and assumptions as of the date of this report, and we assume no obligation to update or supplement forward-looking statements because of subsequent events.
Executive Summary
During 2008 and 2009, a number of factors adversely affecting the demand for and rents received by our multifamily communities were intense and pervasive across the United States, and the conditions within the multifamily industry have become progressively more challenging. A prolonged recession, high inventory levels of single-family homes and condominiums in the markets in which we operate, overall weak consumer confidence, and high unemployment, among other factors, have persisted and, in some cases, accelerated in 2009. We believe the effects of these factors on the multifamily industry have been further magnified by high levels of home foreclosures, liquidity disruptions in the financial markets, continued job losses, and lack of job growth. Our average apartment lease term is approximately twelve months. The impact of an economic downturn affects us quickly due to the short-term nature of our leases because our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Based on these market conditions and our belief these conditions will continue in the near future, we are cautious regarding expected performance and expect a decline in property revenues during 2010 as compared to 2009. However, positive impacts on our performance may result from reductions in the U.S. home ownership rate, more stringent lending criteria for prospective home-buyers, and long-term growth prospects for population, employment, and household formations in our markets, although there can be no assurance any of these factors will develop, continue or positively impact our operating results. We have noted a recent increase in issuances of debt and equity by REITs at more attractive rates. While this may be a positive sign, we are uncertain if this level of activity will increase or continue.
During the near term, we plan to continue to primarily focus on strengthening our capital and liquidity position by generating positive cash flows from operations, reducing outstanding debt and leverage ratios, and controlling and reducing overhead costs.
We review our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Our impairment evaluations take into consideration the current and anticipated economic climate. Based on our evaluations, we recorded significant impairment charges in the fourth quarter of 2009 for land holdings for eight future projects and a land development joint venture we have put on hold for the foreseeable future.
We currently have five wholly-owned land parcels held for future development we plan to develop. However, the commencement of future developments may continue to be impacted by macroeconomic issues, multifamily market conditions, and other factors. We will continue to evaluate future development starts based on market, economic and capital market conditions. However, if current conditions persist, there can be no assurance we will not have further impairments in the future.
Subject to market conditions, we intend to continue to look for opportunities to acquire existing communities through our investment in and management of our Funds. Until the earlier of (i) December 31, 2011 or (ii) such time as 90% of their committed capital is invested, subject to two one-year extensions, the Funds will be our exclusive investment vehicles for acquiring fully developed multifamily properties, subject to certain exceptions.
Property Portfolio
Our multifamily property portfolio, excluding land and joint venture properties which we do not manage, is summarized as follows:
(1)
Refer to Note 7, “Investments in Joint Ventures,” of the Notes to Consolidated Financial Statements for further discussion of our joint venture investments.
(2)
Includes Camden Travis Street, a fully-consolidated joint venture, of which we retain a 25% ownership.
Stabilized Communities
We generally consider a property stabilized when 90% occupancy is achieved at the beginning of a period. During the year ended December 31, 2009, stabilization was achieved at seven recently completed development properties as follows:
Partial Sales and Dispositions to Joint Ventures Included in Continuing Operations
There were no partial sales or dispositions to joint ventures for the years ended December 31, 2009 or 2007.
In March 2008, we sold Camden Amber Oaks, a development community in Austin, Texas, to one of the Funds for approximately $8.9 million. No gain or loss was recognized on the sale. Concurrent with the transaction, we invested approximately $1.9 million in the Fund. In August 2008, we sold Camden South Congress to the same Fund for approximately $44.2 million and recognized a gain of approximately $1.8 million on the sale. In conjunction with the transaction, we invested approximately $2.8 million in the Fund.
Discontinued Operations and Assets Held for Sale
We intend to maintain a long-term strategy of managing our invested capital through the selective sale of properties and to utilize the proceeds to reduce our outstanding debt and leverage ratios and fund investments with higher anticipated growth prospects in our markets. Income from discontinued operations includes the operations of properties, including land, sold during the period or classified as held for sale as of December 31, 2009. The components of earnings classified as discontinued operations include separately identifiable property-specific revenues, expenses, depreciation, and interest expense, if any. Any gain or loss on the disposal of the properties held for sale is also classified as discontinued operations.
During the year ended December 31, 2009, we received net proceeds of approximately $28.0 million and recognized a gain of approximately $16.9 million from the sale to an unaffiliated third party of one operating property with a net book value of approximately $11.3 million, containing 671 apartment homes. During the year ended December 31, 2008, we received net proceeds of approximately $121.7 million and recognized gains of approximately $80.2 million from the sales of eight operating properties, containing 2,392 apartment homes, to unaffiliated third parties. During the year ended December 31, 2007, we received net proceeds of approximately $166.4 million and recognized gains of approximately $106.3 million from the sales of ten operating properties, containing 3,054 apartment homes, to unaffiliated third parties.
During the year ended December 31, 2008, we recognized a gain of approximately $1.1 million from the sale of land adjacent to our regional office in Las Vegas, Nevada. The gain on this sale was not included in discontinued operations as the operations and cash flows of this asset were not clearly distinguished, operationally or for reporting purposes, from the adjacent assets.
There were no sales of undeveloped land during the years ended December 31, 2009 or 2008. During the year ended December 31, 2007, we sold undeveloped land totaling approximately 0.9 acres to unrelated third parties. In connection with these sales, we received net proceeds totaling approximately $6.0 million and recognized gains totaling approximately $0.7 million.
We reclassified the undeveloped land parcels previously included in discontinued operations to continuing operations during December 31, 2009 as management made the decision not to sell these assets after an existing sales contract was terminated. As a result, we adjusted the current and prior period consolidated financial statements to reflect the necessary reclassifications.
Development and Lease-Up Properties
At December 31, 2009, we had one completed consolidated property in lease-up as follows:
At December 31, 2009, we had one consolidated property under construction as follows:
(a)
Camden Travis Street is owned by a consolidated joint venture, of which we retain a 25% ownership
Our consolidated balance sheet at December 31, 2009 included approximately $201.6 million related to properties under development and land. Of this amount, approximately $8.6 million related to Camden Travis Street. Approximately $89.6 million was invested in land for projects we plan to develop, and approximately $103.4 million was invested primarily in land tracts for which future development activities have been put on hold for the foreseeable future.
At December 31, 2009, we had investments in non-consolidated joint ventures which were developing the following multifamily communities:
Refer to Note 7, “Investments in Joint Ventures” of the Notes to Consolidated Financial Statements for further discussion of our joint venture investments.
Geographic Diversification
At December 31, 2009 and 2008, our investments in various geographic areas, excluding depreciation, investments in joint ventures, and properties held for sale, were as follows:
Results of Operations
Changes in revenues and expenses related to our operating properties from period to period are due primarily to the performance of stabilized properties in the portfolio, the lease-up of newly constructed properties, acquisitions, and dispositions. Where appropriate, comparisons of income and expense on communities included in continuing operations are made on a dollars-per-weighted average apartment home basis in order to adjust for such changes in the number of apartment homes owned during each period. Selected weighted averages for the years ended December 31 are as follows:
Property-level operating results
The following tables present the property-level revenues and property-level expenses, excluding discontinued operations, for the year ended December 31, 2009 as compared to 2008 and for the year ended December 31, 2008 as compared to 2007:
Same store communities are communities we owned and which were stabilized as of January 1, 2008. Non-same store communities are stabilized communities we have acquired, developed, or re-developed after January 1, 2008. Development and lease-up communities are non-stabilized communities we have acquired or developed after January 1, 2008.
Same store communities are communities we owned and which were stabilized as of January 1, 2007. Non-same store communities are stabilized communities we have acquired, developed, or re-developed after January 1, 2007. Development and lease-up communities are non-stabilized communities we have developed or acquired after January 1, 2007.
Same store analysis:
Same store property revenues for the year ended December 31, 2009 decreased approximately $16.5 million, or 3.1%, from 2008. Same store rental revenues decreased approximately $23.9 million, or 5.1%, due to a slight decline in average occupancy and a 4.9% decline in average rental rates for our same store portfolio due to, among other factors, the challenges within the multifamily industry as discussed in the Executive Summary. This decrease was partially offset by an approximate $7.4 million increase in other property revenue primarily due to the continued rollout of Perfect Connection, which provides cable services to our residents, and other utility rebilling programs.
Same store property revenues for the year ended December 31, 2008 increased approximately $7.1 million, or 1.5%, from 2007. Same store property revenues were positively impacted by an approximate $9.0 million in other property revenue primarily due to the continued rollout of Perfect Connection, and other utility rebilling programs. This increase was partially offset by approximately $1.9 million, or 0.4%, due to slight declines in average occupancy and average rental rates for our same store portfolio due to, among other factors, the challenges within the multifamily industry.
Property expenses from our same store communities increased approximately $3.6 million, or 1.8%, for the year ended December 31, 2009, as compared to 2008. This increase in same store property expenses of approximately $83 per apartment home was primarily due to expenses related to our utility rebilling programs discussed above and increases in property insurance costs. These increases were partially offset by lower property taxes resulting from declining rates and valuations at a number of our communities, and lower repairs and maintenance, and marketing and leasing expenses. Excluding the expenses associated with our utility rebilling programs, same store property expenses declined approximately $0.2 million, or 0.1% from 2008.
Property expenses from our same store communities increased approximately $8.4 million, or 4.6%, for the year ended December 31, 2008, as compared to 2007. The increases in same store property expenses were primarily due to real estate taxes and expenses related to our utility rebilling programs discussed above. Real estate taxes increased primarily due to increases in appraisals and taxation rates. Excluding the expenses associated with our utility rebilling programs, same store property expenses for this period increased approximately $2.4 million, or 1.3%.
Non-same store and development and lease-up analysis:
Property revenues from non-same store and development and lease-up communities increased approximately $19.1 million for the year ended December 31, 2009 as compared to 2008 and increased approximately $28.6 million for the year ended December 31, 2008 as compared to 2007. The increases in both periods were primarily due to the completion and lease-up of certain properties in our development pipeline as well as property acquisitions in 2007. See “Development and Lease-Up Properties” for additional detail of occupancy at properties in our development pipeline.
Property expenses from non-same store and development and lease-up communities increased approximately $5.3 million for the year ended December 31, 2009 as compared to 2008 and approximately $12.5 million for 2008 as compared to 2007. The increases in both periods were due to the completion and lease-up of properties in our development pipeline as well as acquisitions completed in 2007.
Dispositions/other property analysis:
Property revenues from dispositions/other decreased approximately $2.7 million and $0.1 million for the year ended December 31, 2009 as compared to 2008 and for the year ended December 31, 2008 as compared to 2007, respectively. The decrease for 2009 as compared to 2008 primarily related to not having any dispositions in 2009 as compared to the sale of one of our communities to one of the Funds in 2008.
Property expenses from dispositions/other decreased approximately $1.3 million and increased approximately $0.7 million for the year ended December 31, 2009 as compared to 2008 and for the year ended December 31, 2008 as compared to 2007, respectively. The decrease in 2009 as compared to 2008 and the increase in 2008 as compared to 2007 were primarily due to insurance costs related to Hurricane Ike in September 2008.
Non-property income
Fee and asset management income, which represents income related to third-party construction and development projects and property management, for the year ended December 31, 2009 decreased approximately $1.2 million as compared to 2008 and increased approximately $0.9 million for the year ended December 31, 2008 as compared to 2007. The decrease for 2009 was primarily related to overall declines in development and construction fees earned on our development joint ventures in 2009 as compared to 2008 due to the completion of the associated construction activities at several joint venture communities in 2008 and 2009. The decrease in 2009 was partially offset by an increase in third-party construction activities in 2009. The increase in 2008 as compared to 2007 was due to increases in management fees earned from one of the Funds partially offset by decreased third-party construction activities in 2008.
Interest and other income decreased approximately $1.9 million for 2009 as compared to 2008 and decreased approximately $4.7 million for 2008 as compared to 2007. Interest income, which primarily relates to interest earned on notes receivable outstanding under our mezzanine financing program, decreased approximately $1.9 million for 2009 as compared to 2008 and decreased approximately $0.8 million for 2008 as compared to 2007. The decreases were primarily due to declines in interest income on our mezzanine loan portfolio related to contractual reductions in interest rates on mezzanine loans for development communities which have reached stabilization, reductions in interest earned on certain variable rate mezzanine notes due to declines in LIBOR, and lower balances of outstanding mezzanine loans. Other income decreased approximately $3.9 million for 2008 as compared to 2007. Other income primarily represents income recognized upon the settlement of legal, insurance and warranty claims, and contract disputes. In 2007, other income included approximately $3.3 million related to settlement of a contract dispute and a gain on sale of technology investments of $0.6 million.
Our deferred compensation plans earned income of approximately $14.6 million in 2009, incurred losses of approximately $33.4 million in 2008, and earned income of approximately $7.3 million in 2007. The changes were related to the performance of the investments held in the deferred compensation plans for plan participants and were directly offset by the expense (benefit) related to these plans, as set forth in the table below.
Other expenses
Property management expense, which represents regional supervision and accounting costs related to property operations, decreased approximately $1.0 million for the year ended December 31, 2009 as compared to 2008 and increased approximately $1.5 million for 2008 as compared to 2007. Property management expenses were 3.0%, 3.2%, and 3.1% of total property revenues for the years ended December 31, 2009, 2008, and 2007, respectively.
Fee and asset management expense, which represents expenses related to third-party construction and development projects and property management, decreased approximately $1.2 million for 2009 as compared to 2008 and increased approximately $1.5 million for 2008 as compared to 2007. The decrease for 2009 as compared to 2008 was primarily due to overall declines in development and construction activities related to our development joint ventures in 2009 as compared to 2008 due to the completion of the associated construction activities at several joint venture communities in 2008 and 2009. The increase for 2008 as compared to 2007 was primarily attributable to increased costs associated with one of the Funds partially offset by decreases in our third-party construction activities.
General and administrative expenses decreased approximately $0.3 million during the year ended December 31, 2009 as compared to 2008 and decreased approximately $1.0 million during the year ended December 31, 2008 as compared to 2007, and were 4.9%, 5.0%, and 5.4% of total revenues, excluding income or loss on deferred compensation plans, for the years ended December 31, 2009, 2008, and 2007, respectively. The decrease for 2009 as compared to 2008 was primarily due to various cost-saving initiatives implemented in 2009, and increased expenses in 2008 which did not recur in 2009 associated with the abandonment of potential acquisitions. The decrease was partially offset by $1.6 million in severance payments made in connection with the reduction in force of certain construction and development staff in 2009, and separation costs relating to the retirement of one executive officer during the fourth quarter of 2009. The decrease in general and administrative expenses for the year ended December 31, 2008 as compared to 2007 was primarily due to decreases in salaries, incentive compensation, and legal expenses.
Interest expense decreased approximately $4.1 million during the year ended December 31, 2009 as compared to 2008 and increased approximately $16.6 million during the year ended December 31, 2008 as compared to 2007. The decrease for 2009 as compared to 2008 was primarily due to decreases in indebtedness as a result of early retirement of outstanding debt of approximately $325.0 million during the first six months of 2009. Refer to Note 9, “Notes Payable,” in the Notes to Consolidated Financial Statements for further discussion of our early retirements of outstanding debt. This decrease in interest expense was partially offset by a decrease in capitalized interest of approximately $7.4 million during the year ended December 31, 2009 as compared to 2008 as a result of the completion of units in our development pipeline and our decision in fiscal year 2008 not to continue with five future development projects. The decrease was further offset by higher interest rates on existing indebtedness resulting from paying down amounts outstanding under our unsecured line of credit with proceeds from our $420 million credit facility entered into in April 2009 and our $380 million credit facility entered into in September 2008. The increase for 2008 as compared to 2007 was primarily due to the higher interest rates relating to the $380 million credit facility entered into in September 2008, decreased capitalized interest of approximately $4.9 million, and increased amounts outstanding on our line of credit, partially offset by our repurchases and early retirement of outstanding debt, and a decline in interest rates on our floating rate debt.
Depreciation and amortization expense increased approximately $2.9 million during the year ended December 31, 2009 as compared to 2008 and increased approximately $14.5 million during the year ended December 31, 2008 as compared to 2007. The increases were primarily due to completion of new development and capital improvements placed in service each year as compared to the previous year.
Amortization of deferred financing costs increased approximately $1.0 million during the year ended December 31, 2009 as compared to 2008 and decreased approximately $0.7 million during the year ended December 31, 2008 as compared to 2007. The increase for 2009 was primarily due to the amortization of our financing costs incurred upon the extension of our unsecured credit facility in October 2009, and financing costs related to our $380 million credit facility completed in September 2008 and our $420 million credit facility completed in April 2009. This increase was partially offset by the repurchase and retirement of certain series of notes during 2009. The decrease for 2008 was primarily due to certain deferred financing costs becoming fully amortized partially offset by the financing costs incurred on entering into our $380 million credit facility in September 2008.
Our deferred compensation plans incurred expenses of approximately $14.6 million in 2009, earned a benefit of approximately $33.4 million in 2008, and incurred expenses of approximately $7.3 million in 2007. The changes were related to the performance of the investments held in the deferred compensation plans for plan participants and were directly offset by the income (loss) related to these plans, as discussed above.
Other
Gain on sale of properties, including land, totaled approximately $2.9 million for the year ended December 31, 2008 due to gains on the partial sale of properties to one of the Funds and a gain on the sale of a land parcel in Las Vegas, Nevada to an unaffiliated third party. There was no gain on sale of properties, including land, for the years ended December 31, 2009 or 2007.
Loss on early retirement of debt was approximately $2.6 million for the year ended December 31, 2009 due to the repurchase and retirement of approximately $325.0 million of various unsecured and secured notes from unrelated third parties for approximately $327.5 million during the first two quarters of 2009. Gain on early retirement of debt was approximately $13.6 million for the year ended December 31, 2008 due to the repurchases and retirements of debt, including a tender offer for certain series of outstanding debt which resulted in the repurchase and retirement of approximately $108.3 million of debt from unrelated third parties for approximately $100.6 million, and the repurchases and retirements of approximately $82.7 million of various series of other outstanding debt from unrelated third parties for approximately $75.7 million. The gain (loss) on early retirement of debt for these transactions also includes reductions for the write-off of applicable loan costs. There was no gain (loss) on early retirement of debt for the year ended December 31, 2007.
The impairment associated with land development activities for the year ended December 31, 2009 of approximately $85.6 million includes approximately $72.2 million related to land holdings for eight projects, and approximately $13.4 million related to a land development joint venture we have put on hold for the foreseeable future. The impairment associated with land development activities for the year ended December 31, 2008 of approximately $51.3 million reflects impairments in the value of land holdings for several potential development projects we no longer plan to pursue, including approximately $48.6 million related to land holdings for five projects we no longer plan to develop, approximately $1.6 million in the value of a land parcel held for future development, and approximately $1.1 million for costs capitalized for a potential joint venture development we no longer plan to pursue. The impairment associated with land development activities for the year ended December 31, 2007 of approximately $1.4 million reflects impairment in the value of one potential development project we no longer plan to pursue. These impairment charges for land are the difference between each parcel’s estimated fair value and the carrying value, which includes pursuit and other costs.
Equity in income (loss) of joint ventures increased approximately $2.0 million for the year ended December 31, 2009 as compared to 2008, and decreased approximately $2.8 million for the year ended December 31, 2008 as compared to 2007. The increase for 2009 as compared to 2008 was primarily the result of certain properties owned by development joint ventures reaching or nearing stabilization in 2009 partially offset by declining earnings at our stabilized operating joint ventures due to declines in rental income. The decrease in 2008 as compared to 2007 was primarily due to the increase in joint ventures under development in 2008 as compared to the prior period. Additionally, in 2008 we incurred expenses of approximately $0.4 million associated with the abandonment of potential joint venture acquisitions, which were not incurred in 2009 or 2007.
We had current income tax expense of approximately $1.0 million, $0.8 million, and $3.1 million for the tax years ended December 31, 2009, 2008, and 2007, respectively. The increase in taxes in 2009 as compared to 2008 primarily relate to an increase in state income taxes. Income tax expense decreased $2.2 million for the year ended December 31, 2008 as compared to 2007, primarily attributable to lower gains on property dispositions in states with high income tax rates and changes in state tax laws affecting one of our operating partnerships.
Funds from Operations (“FFO”)
Management considers FFO to be an appropriate measure of the financial performance of an equity REIT. The National Association of Real Estate Investment Trusts (“NAREIT”) currently defines FFO as net income (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”)), excluding gains (or losses) associated with the sale of previously depreciated operating properties, real estate depreciation and amortization, and adjustments for unconsolidated joint ventures. Our calculation of diluted FFO also assumes conversion of all potentially dilutive securities, including certain noncontrolling interests, which are convertible into common shares. We consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions of operating properties and depreciation, FFO can help one compare the operating performance of a company’s real estate between periods or as compared to different companies.
To facilitate a clear understanding of our consolidated historical operating results, we believe FFO should be examined in conjunction with net income attributable to common shareholders as presented in the consolidated statements of income and comprehensive income and data included elsewhere in this report. FFO is not defined by GAAP and should not be considered as an alternative to net income attributable to common shareholders as an indication of our operating performance. Additionally, FFO as disclosed by other REITs may not be comparable to our calculation.
Reconciliations of net income attributable to common shareholders to diluted FFO for the years ended December 31 are as follows:
Liquidity and Capital Resources
Financial Condition and Sources of Liquidity
We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability to identify and capitalize on investment opportunities as they become available. We intend to maintain what management believes is a conservative capital structure by:
•
extending and sequencing the maturity dates of our debt where practicable;
•
managing interest rate exposure using what management believes to be prudent levels of fixed and floating rate debt;
•
maintaining what management believes to be conservative coverage ratios; and
•
using what management believes to be a prudent combination of debt and common and preferred equity.
Our interest expense coverage ratio, net of capitalized interest, was approximately 2.6, 2.6, and 3.0 times for the years ended December 31, 2009, 2008, and 2007, respectively. Our interest expense coverage ratio is calculated by dividing interest expense for the period into the sum of property revenues and expenses, non-property income, other expenses, income from discontinued operations, depreciation, amortization, and interest expense. At December 31, 2009, 2008, and 2007, approximately 72.8%, 78.3%, and 81.6%, respectively, of our properties (based on invested capital) were unencumbered. Our weighted average maturity of debt, including our line of credit, was 5.6 years at December 31, 2009.
Due to the instability experienced during the current economic downturn, we believe the timing and strength of an economic recovery is unclear and these conditions may not improve quickly. We plan to continue to primarily focus on strengthening our capital and liquidity position by generating positive cash flows from operations, reducing outstanding debt and leverage ratios, selectively disposing of properties when feasible, and controlling and reducing construction and overhead costs.
Our primary source of liquidity is cash flow generated from operations. Other sources include the availability under our unsecured credit facility and other short-term borrowings, secured mortgage debt, proceeds from dispositions of properties and other investments, and access to the capital markets. We believe our liquidity and financial condition are sufficient to meet all of our reasonably anticipated cash needs during 2010 including:
•
normal recurring operating expenses;
•
current debt service requirements;
•
recurring capital expenditures;
•
initial funding of property developments, acquisitions, joint venture investments, and notes receivable; and
•
the minimum dividend payments required to maintain our REIT qualification under the Code.
Factors which could increase or decrease our future liquidity include but are not limited to current volatility in capital and credit markets, sources of financing, our ability to complete asset sales, the effect our debt level and decreases in credit ratings could have on our costs of funds and our ability to access capital markets, and changes in operating costs resulting from a weakened economy, all of which could adversely impact occupancy and rental rates and our liquidity.
Cash Flows
Certain sources and uses of cash, such as the level of discretionary capital expenditures, and repurchases of debt and common shares are within our control and are adjusted as necessary based upon, among other factors, market conditions. The following is a discussion of our cash flows for the years ended December 31, 2009 and 2008.
Net cash provided by operating activities was approximately $217.7 million during the year ended December 31, 2009 as compared to approximately $217.0 during the year ended December 31, 2008. The slight increase was primarily due to lower interest expense offset by lower net operating income in 2009 as compared to 2008, and the timing of payments relating to accounts payable and accrued expenses.
Net cash used in investing activities during the year ended December 31, 2009 totaled approximately $69.5 million as compared to approximately $37.4 million during the year ended December 31, 2008. Cash outflows for property development, acquisition, and capital improvements were approximately $72.8 million during 2009 as compared to approximately $199.3 million during 2008. This decrease was due to the timing of completions of communities in our development pipeline and a reduction in construction and development activity in 2009 as compared to 2008. Cash inflows from sales of properties and partial sales of assets to joint ventures were approximately $28.1 million for the year ended December 31, 2009 as compared to approximately $176.0 million for the year ended December 31, 2008. Additionally, cash outflows for investments in joint ventures were $23.2 million for the year ended December 31, 2009 as compared to $10.4 million in 2008; this increase in cash outflows was primarily a result of our $22.2 million equity investment in one of our joint ventures during the third quarter 2009.
Net cash used in financing activities totaled approximately $91.4 million during the year ended December 31, 2009 as compared to approximately $173.1 million during 2008. During the year ended December 31, 2009, we used a total of approximately $648.7 million of cash to repay outstanding notes payable consisting of approximately $169.9 million of outstanding notes payable stemming from our April 2009 tender offer, the early retirement of outstanding debt consisting of approximately $139.1 million of secured notes, and approximately $18.2 million of senior unsecured notes. The remaining outstanding notes payable payments were primarily for maturing secured and unsecured notes payable of approximately $176.5 million, and payments of all remaining amounts outstanding on our unsecured line of credit. Also in 2009, $152.7 million was used for distributions paid to common shareholders, perpetual preferred unit holders, and noncontrolling interest holders. The cash outflows were offset by cash receipts of $420 million from a secured credit facility entered into during the second quarter, approximately $20.8 million from secured notes payable relating to a construction loan for a consolidated joint venture and net proceeds of approximately $272.1 million from the completion of our equity offering in May 2009. In 2008, we used $173.1 million of cash in financing activities primarily to repay approximately $379.2 million of outstanding notes payable consisting of approximately $100.6 million of outstanding notes payable in our December 2008 tender offer, approximately $75.7 million of various series of other outstanding debt, and approximately $201.9 million of maturing secured notes payable. Net cash used in financing activities for 2008 was also attributable to distributions paid to common shareholders, perpetual preferred unit holders, and noncontrolling interest holders of approximately $172.3 million and approximately $33.1 million of common share repurchases, offset by proceeds from notes payable and increases in our unsecured line of credit of approximately $385.9 million and $30.0 million, respectively.
Financial Flexibility
We have a $600 million unsecured credit facility which matures in January 2011. The scheduled interest rate is based on spreads over the London Interbank Offered Rate (“LIBOR”) or the prime rate. The scheduled interest rate spreads are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $300 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations, all of which we are in compliance.
Our line of credit provides us with the ability to issue up to $100 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under our line, it does reduce the amount available. At December 31, 2009, we had outstanding letters of credit totaling approximately $9.2 million, and had approximately $590.8 million available under our unsecured line of credit.
As an alternative to our unsecured line of credit, from time to time we may borrow using competitively bid unsecured short-term notes with lenders who may or may not be a part of the unsecured line of credit bank group. We expect such borrowings, if any, will vary in term and pricing and will typically be priced at interest rates below those available from the unsecured line of credit.
During the quarter ended June 30, 2009, we filed a shelf registration statement with the SEC which became automatically effective upon filing and allows us to offer, from time to time, an unlimited amount of common shares, preferred shares, debt securities, or warrants. Our declaration of trust provides we may issue up to 110 million shares of beneficial interest, consisting of 100 million common shares and 10 million preferred shares. During the quarter ended June 30, 2009, we issued approximately 10.4 million common shares at $27.50 per share in a public equity offering, resulting in net proceeds of approximately $272.1 million. As of December 31, 2009, we had approximately 77.0 million common shares and no preferred shares outstanding.
We believe our ability to access capital markets is enhanced by our senior unsecured debt ratings by Moody’s and Standard and Poor’s, which are currently Baa1 and BBB, respectively, with stable outlooks, as well as by our ability to borrow on a secured basis from Fannie Mae or Freddie Mac. However, we may not be able to maintain our current credit ratings and may not be able to borrow on a secured or unsecured basis in the future. The capital and credit markets have been experiencing continued volatility and disruption. We have noted a recent increase in issuances of debt and equity by REITs at more attractive rates. While this may be a positive sign, we are uncertain if this level of activity will increase or continue. If current levels of market disruption and volatility continue or worsen, we may not be able to obtain new debt financing or refinance our existing debt on favorable terms or at all.
On April 17, 2009, we, as guarantor, and five separate subsidiaries as borrowers entered into a $420 million secured credit facility agreement. The facility has a ten-year term with a fixed annual interest rate of 5.12% and monthly payments of interest only and matures on May 1, 2019. We have entered into standard nonrecourse carveout guarantees. The obligations of the Borrowers under the credit agreement are secured by cross-collateralized first priority mortgages on 11 of our multifamily communities. We used the proceeds from this credit facility to repurchase outstanding debt, repay maturing debt, prepay mortgage debt, pay down amounts outstanding under our revolving line of credit, and general corporate purposes.
Future Cash Requirements and Contractual Obligations
One of our principal long-term liquidity requirements includes the repayment of maturing debt, including any future borrowings under our unsecured line of credit. During 2010, approximately $141.6 million of unsecured debt, including scheduled principal amortizations, are scheduled to mature. See Note 9, “Notes Payable,” of the Notes to Consolidated Financial Statements for further discussion of scheduled maturities. Additionally, approximately $9.5 million remains to be funded for one development project owned by a consolidated joint venture and we expect substantially all of the remaining expenditures to be funded from an existing construction loan. We intend to meet our long-term liquidity requirements through cash flows generated from operations, draws on our unsecured credit facility, proceeds from property dispositions and secured mortgage notes, and the use of debt and equity offerings under our automatic shelf registration statement.
In order for us to continue to qualify as a REIT, we are required to distribute annual dividends to our shareholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. In December 2009, we announced our Board of Trust Managers had declared a dividend distribution of $0.45 per share to our common shareholders of record as of December 21, 2009. The dividend was subsequently paid on January 18, 2010. We paid equivalent amounts per unit to holders of the common operating partnership units. When aggregated with previous 2009 dividends, this distribution to common shareholders and holders of common operating partnership units equates to an annual dividend rate of $2.05 per share or unit for the year ended December 31, 2009.
The following table summarizes our known contractual cash obligations as of December 31, 2009:
(1)
Includes our line of credit and scheduled principal amortizations.
(2)
Includes contractual interest payments for our line of credit, senior unsecured notes, medium-term notes, and secured notes. Interest payments on hedged loans were calculated based on the interest rates effectively fixed by the interest rate swap agreements. The interest payments on certain secured notes with floating interest rates and our line of credit were calculated based on the interest rates in effect as of December 31, 2009 or the most recent practicable date.
Off-Balance Sheet Arrangements
The joint ventures in which we have an interest have been funded in part with secured, third-party debt. We are also committed to additional funding under mezzanine loans provided to joint ventures. We have guaranteed no more than our proportionate interest, totaling approximately $57.0 million, of five loans utilized for construction and development activities for our joint ventures and our commitment to fund additional amounts under the mezzanine loans was an aggregate of approximately $7.3 million at December 31, 2009.
Inflation
Substantially all of our apartment leases are for a term generally ranging from six to fifteen months. In an inflationary environment, we may realize increased rents at the commencement of new leases or upon the renewal of existing leases. We believe the short-term nature of our leases generally minimizes our risk from the adverse effects of inflation.
Critical Accounting Policies
The preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date, and the amounts of revenues and expenses recognized during the reporting period. These estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances. The following is a discussion of our critical accounting estimates. For a discussion of all of our significant accounting policies, see Note 2 to the accompanying consolidated financial statements.
Use of Estimates. In the application of GAAP, management is required to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, results of operations during the reporting periods, and related disclosures. Our more significant estimates include estimates supporting our impairment analysis related to the carrying values of our real estate assets, estimates of the useful lives of our assets, estimates related to the valuation of our investments in joint ventures and mezzanine financing, and estimates of expected losses of variable interest entities. These estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances. Future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Principles of Consolidation. We may enter into various joint venture agreements with unrelated third parties to hold or develop real estate assets. We must determine for each of these joint ventures whether to consolidate the entity or account for our investment under the equity or cost basis of accounting. Investments acquired or created are evaluated based on the accounting guidance relating to variable interest entities (“VIEs”), which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be a VIE, then the investment is evaluated for consolidation (primarily using a voting interest model) under the remaining consolidation guidance relating to real estate. If we are the general partner in a limited partnership, or manager of a limited liability company, we also consider the consolidation guidance relating to the rights of limited partners or non-managing members, as the case may be, to assess whether any rights held by the limited partners, or non-managing members, as the case may be, overcome the presumption of control by us. We evaluate our accounting for investments on a quarterly basis or when a reconsideration event (as defined in GAAP) with respect to our investments occurs. The analysis required to identify VIEs and primary beneficiaries is complex and requires substantial management judgment. Accordingly, we believe the decisions made to choose an appropriate accounting framework are critical.
Asset Impairment. Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if estimated future undiscounted cash flows associated with long-lived assets are not sufficient to recover the carrying value of such assets. We consider projected future discounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. When impairment exists, the long-lived asset is adjusted to its fair value. While we believe our estimates of future cash flows are reasonable, different assumptions regarding a number of factors, including market rents, economic conditions, and occupancies could significantly affect these estimates. In estimating fair value, management uses appraisals, management estimates, and discounted cash flow calculations that maximize inputs from a marketplace participant’s perspective. During the quarter ended December 31, 2009, we recognized a $72.2 million impairment charge to the previous carrying value of $109.9 million for land holdings for eight future projects we have put on hold for the foreseeable future. Additionally, we recognized a $13.4 million impairment charge relating to a land development joint venture we have put on hold for the foreseeable future. This development joint venture had a previous carrying value of approximately $8.9 million. The impairment also included exit costs associated with this joint venture. The estimates of fair value are based on what we believe to be marketplace participant expectations, and consider, among other things, the highest and best use of the land (for example, as a multifamily development, or single-family townhome construction), estimated timeframe and current estimates of construction and development costs, estimates of expected market rents and expenses upon completion of development, expected lease-up periods, and expected net operating income (or yield) that a marketplace participant would expect to receive from the developed project. We utilized opinions of value from third-parties to supplement our estimates. There were no significant market-based transactions that have occurred during the previous twelve months for the land parcels that were analyzed.
In addition, we evaluate our investments in joint ventures and mezzanine construction financing and if, with respect to investments, we believe there is an other than temporary decline in market value, or if, with respect to mezzanine loans, it is probable we will not collect all scheduled amounts due in accordance with the terms, we will record an impairment charge based on these evaluations. In general, we provide mezzanine loans to affiliated joint ventures constructing or operating multifamily assets. While we believe it is currently probable we will collect all scheduled amounts due with respect to these mezzanine loans, current market conditions with respect to credit markets and real estate market fundamentals inject a significant amount of uncertainty into the environment and any further adverse economic or market development may cause us to re-evaluate our conclusions, and could result in material impairment charges with respect to our mezzanine loans.
The value of our properties under development depends on market conditions, including estimates of the project start date as well as estimates of demand for multifamily communities. We have reviewed market trends and other marketplace information and have incorporated this information as well as our current outlook into the assumptions we use in our impairment analyses. Due to, among other factors, the judgment and assumptions applied in the impairment analyses and the fact limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.
We believe the carrying value of our operating real estate assets, properties under development, and land is currently recoverable. However, if market conditions deteriorate beyond our current expectations or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take material charges in future periods for impairments related to existing assets. Any such material non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Cost Capitalization. Real estate assets are carried at cost plus capitalized carrying charges. Carrying charges are primarily interest and real estate taxes which are capitalized as part of properties under development. Capitalized interest is generally based on our weighted average unsecured interest rate. Most transaction and restructuring costs associated with the acquisition of real estate assets are expensed. Expenditures directly related to the development and improvement of real estate assets are capitalized at cost as land and buildings and improvements. Indirect development costs, including salaries and benefits and other related costs directly attributable to the development of properties are also capitalized. All construction and carrying costs are capitalized and reported in the balance sheet as properties under development until the apartment homes are substantially completed. Upon substantial completion of the apartment homes, the total cost for the apartment homes and the associated land is transferred to buildings and improvements and land, respectively. Included in capitalized costs are management’s estimates of indirect costs associated with our development and redevelopment activities. The estimates used by management require judgment, and accordingly we believe cost capitalization to be a critical accounting estimate.
Recent Accounting Pronouncements
Recent Accounting Pronouncements. In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Codification. Effective July 1, 2009, the Codification is the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. We adopted the Codification during the third quarter of 2009 and the adoption did not materially impact our financial statements, however our references to accounting literature within our notes to the consolidated financial statements have been revised to conform to the Codification classification.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which provides alternatives to measuring the fair value of liabilities when a quoted price for an identical liability traded in an active market does not exist. The alternatives include using the quoted price for the identical liability when traded as an asset or the quoted price of a similar liability or of a similar liability when traded as an asset, in addition to valuation techniques based on the amount an entity would pay to transfer the identical liability (or receive to enter into an identical liability). We adopted ASU 2009-05 effective October 1, 2009 and the adoption did not have a material impact on our financial statements.
In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets,” which codified the previously issued Statement of Financial Accounting Standards (“SFAS”) 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” ASU 2009-16 modifies the financial components approach, removes the concept of a qualifying special purpose entity, and clarifies and amends the derecognition criteria for determining whether a transfer of a financial asset or portion of a financial asset qualifies for sale accounting. The ASU also requires expanded disclosures regarding transferred assets and how they affect the reporting entity. ASU 2009-16 is effective for us beginning January 1, 2010. Our adoption of ASU 2009-16 will not have a material effect on our financial statements.
In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codified the previously issued SFAS 167, “Amendments to FASB Interpretation No. 46R.” ASU 2009-17 changes the consolidation analysis for VIEs and requires a qualitative analysis to determine the primary beneficiary of the VIE. The determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or the right to receive benefits, of the VIE which could potentially be significant to the VIE. The ASU requires an ongoing reconsideration of the primary beneficiary and also amends the events triggering a reassessment of whether an entity is a VIE. ASU 2009-17 requires additional disclosures for VIEs, including disclosures about a reporting entity’s involvement with VIEs, how a reporting entity’s involvement with a VIE affects the reporting entity’s financial statements, and significant judgments and assumptions made by the reporting entity to determine whether it must consolidate the VIE. ASU 2009-17 is effective for us beginning January 1, 2010. Our adoption of ASU 2009-17 will not have a material effect on our financial statements.
In January 2010, the FASB issued ASU 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash.” The ASU clarifies when the stock portion of a distribution allows shareholders to elect to receive cash or stock, with a potential limitation on the total amount of cash which all shareholders could elect to receive in the aggregate, the distribution would be considered a share issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share prospectively. We adopted ASU 2010-01 effective October 1, 2009 and the adoption did not have an impact on our financial statements.
In January 2010, the FASB issued ASU 2010-02, “Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification.” The ASU clarifies the scope of Subtopic 810-10 applies to a subsidiary or group of assets considered to be a business or nonprofit activity, a subsidiary considered to be a business or nonprofit activity which is transferred to an equity method investee or joint venture, and an exchange of a group of assets considered to be a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture). ASU 2010-02 further clarifies the scope of Subtopic 810-10 does not apply to sales of in substance real estate or conveyances of oil and gas mineral rights, even if these transfers involve businesses. The ASU also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets. For entities who have previously adopted the noncontrolling interests guidance included in Subtopic 810-10, ASU 2010 is effective for interim or annual periods ending on or after December 15, 2009 and should be applied retrospectively to the first period in which the noncontrolling interests guidance was adopted. As we adopted the noncontrolling interests guidance on January 1, 2009, we also adopted ASU 2010-02 effective January 1, 2009 and the adoption did not have an impact on our financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks inherent in our operations. These risks generally arise from transactions entered into in the normal course of business. We believe our primary market risk exposure relates to interest rate risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
The table below provides information about our assets and our liabilities sensitive to changes in interest rates as of December 31, 2009 and 2008:
We have historically used variable rate indebtedness available under our revolving credit facility to initially fund acquisitions and our development pipeline. To the extent we utilize our revolving credit facility thereby increasing our variable rate indebtedness, our exposure to increases in interest rates will also increase.
For fixed rate debt, interest rate changes affect the fair market value but do not impact net income attributable to common shareholders or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact net income attributable to common shareholders and cash flows, assuming other factors are held constant. Holding other variables constant, a one percentage point variance in interest rates would change the unrealized fair market value of the fixed rate debt by approximately $100.7 million. The net income attributable to common shareholders and cash flows impact on the next year resulting from a one percentage point variance in interest rates on floating rate debt, excluding debt effectively fixed by interest rate swap agreements described below, would be approximately $2.2 million, holding all other variables constant. We currently use interest rate hedges to reduce the impact of interest rate fluctuations on certain variable indebtedness, not for trading or speculative purposes. Under the hedge agreements:
•
we agree to pay a counterparty the interest that would have been incurred on a fixed principal amount at a fixed interest rate; and
•
the counterparty agrees to pay us the interest rate that would have been incurred on the same principal amount at an assumed floating interest rate tied to a particular market index.
As of December 31, 2009, the effect of our hedge agreements was to fix the interest rate on approximately $514.9 million of our variable rate debt. Had the hedge agreements not been in place during 2009, our annual interest costs would have been approximately $22.6 million lower, based on balances and reported interest rates through the year as the variable interest rates were less than the effective interest rates on the associated hedge agreements. Additionally, if the variable interest rates on this debt had been 100 basis points higher through 2009 and the hedge agreements not been in place, our annual interest cost would have been approximately $5.4 million higher. Derivative financial instruments expose us to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. We believe we minimize our credit risk on these transactions by dealing with major, creditworthy financial institutions. As part of our on-going control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, thus minimizing credit risk concentration. We believe the likelihood of realized losses from counterparty non-performance is remote.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our response to this item is included in a separate section at the end of this report beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Securities Exchange Act (“Exchange Act”) Rules 13a-15(e) and 15d-15(e). Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded the disclosure controls and procedures as of the end of the period covered by this report are effective to ensure information required to be disclosed by us in our Exchange Act filings is recorded, processed, summarized, and reported within the periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in internal controls. There were no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) in Rules 13a-15 and 15d-15 under the Exchange Act) during our most recent fiscal quarter which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as follows:
A process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded our internal control over financial reporting is effective as of December 31, 2009.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report regarding the effectiveness of our internal controls over financial reporting, which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trust Managers and Shareholders of
Camden Property Trust
Houston, Texas
We have audited the internal control over financial reporting of Camden Property Trust and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of trust managers, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the board of trust managers of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules of the Company as of and for the year ended December 31, 2009 and our report dated February 25, 2010 expressed an unqualified opinion on those financial statements and financial statement schedules and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2010
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
Information with respect to this Item 10 is incorporated by reference from our Proxy Statement, which we expect to file on or before March 23, 2010 in connection with the Annual Meeting of Shareholders to be held May 3, 2010.
Item 11.
Item 11. Executive Compensation
Information with respect to this Item 11 is incorporated by reference from our Proxy Statement, which we expect to file on or before March 23, 2010 in connection with the Annual Meeting of Shareholders to be held May 3, 2010.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information with respect to this Item 12 is incorporated by reference from our Proxy Statement, which we expect to file on or before March 23, 2010 in connection with the Annual Meeting of Shareholders to be held May 3, 2010.
Equity Compensation Plan Information
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information with respect to this Item 13 is incorporated herein by reference from our Proxy Statement, which we expect to file on or before March 23, 2010 in connection with the Annual Meeting of Shareholders to be held May 3, 2010.
Item 14.
Item 14. Principal Accounting Fees and Services
Information with respect to this Item 14 is incorporated herein by reference from our Proxy Statement, which we expect to file on or before March 23, 2010 in connection with the Annual Meeting of Shareholders to be held May 3, 2010.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable.
(3) Index to Exhibits:
The following exhibits are filed as part of or incorporated by reference into this report:
(1)
Unless otherwise indicated, all references to reports or registration statements are to reports or registration statements filed by Camden Property Trust (File No. 1-12110).
(2)
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Camden Property Trust has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Camden Property Trust and in the capacities and on the dates indicated.
*By:
/s/ Dennis M. Steen
Dennis M. Steen
Attorney-in-fact
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trust Managers and Shareholders of
Camden Property Trust
Houston, Texas
We have audited the accompanying consolidated balance sheets of Camden Property Trust and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income and comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Camden Property Trust and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, on January 1, 2009, the Company changed its method of accounting for noncontrolling interests and retrospectively adjusted all periods presented in the consolidated financial statements.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2010
CAMDEN PROPERTY TRUST
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF EQUITY
See Notes to Consolidated Financial Statements
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF EQUITY
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
CAMDEN PROPERTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Formed on May 25, 1993, Camden Property Trust, a Texas real estate investment trust (“REIT”), is engaged in the ownership, development, construction, and management of multifamily apartment communities. Our multifamily apartment communities are referred to as “communities,” “multifamily communities,” “properties,” or “multifamily properties” in the following discussion. As of December 31, 2009, we owned interests in, operated, or were developing 185 multifamily properties comprising 63,658 apartment homes across the United States. We had 372 apartment homes under development at two of our multifamily properties, including 119 apartment homes at one multifamily property owned through a nonconsolidated joint venture and 253 apartment homes at one multifamily property owned through a consolidated joint venture, in which we own an interest. In addition, we own other land parcels we may develop into multifamily apartment communities.
2. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Principles of Consolidation. Our consolidated financial statements include our accounts and the accounts of other subsidiaries and joint ventures (including partnerships and limited liability companies) over which we have control. All intercompany transactions, balances, and profits have been eliminated in consolidation. Investments acquired or created are evaluated based on the accounting guidance relating to variable interest entities (“VIEs”), which requires the consolidation of VIEs in which we are considered to be the primary beneficiary. If the investment is determined not to be a VIE, then the investment is evaluated for consolidation (primarily using a voting interest model) under the remaining consolidation guidance relating to real estate. If we are the general partner in a limited partnership, or manager of a limited liability company, we also consider the consolidation guidance relating to the rights of limited partners or non-managing members, as the case may be, to assess whether any rights held by the limited partners, or non-managing members, as the case may be, overcome the presumption of control by us.
Upon the January 1, 2009 adoption of revised provisions regarding classification of noncontrolling interests within the Consolidation Topic of the Accounting Standards Codification (the “Codification”), we reclassified minority interest balances relating to (i) the common units in Camden Operating, L.P., Oasis Martinique, LLC, and Camden Summit Partnership, L.P. and (ii) other minority interests in a consolidated real estate joint venture into our consolidated equity accounts and these are now classified as noncontrolling interests. The noncontrolling interests totaled approximately $78.6 million and $89.9 million at December 31, 2009 and 2008, respectively. Additionally, income allocated to noncontrolling interests and perpetual preferred units are now reflected below the caption “net income (loss)” in the consolidated statements of income and comprehensive income. The balance relating to cumulative redeemable perpetual preferred units in Camden Operating, L.P. of approximately $97.9 million remains classified between liability and equity pursuant to guidance in the Distinguishing Liabilities from Equity Topic of the Codification. See Note 16, “Noncontrolling Interests,” for further disclosure requirements of noncontrolling interests.
Allocations of Purchase Price. Upon the acquisition of real estate, we allocate the purchase price between tangible and intangible assets, which includes land, buildings, furniture and fixtures, the value of in-place leases, including above and below market leases, and acquired liabilities. When allocating the purchase price to acquired properties, we allocate costs to the estimated intangible value of in-place leases and above or below market leases and to the estimated fair value of furniture and fixtures, land, and buildings on a value determined by assuming the property was vacant by applying methods similar to those used by independent appraisers of income-producing property. Depreciation and amortization is computed on a straight-line basis over the remaining useful lives of the related assets. The value of in-place leases and above or below market leases is amortized over the estimated average remaining life of leases in place at the time of acquisition. Estimates of fair value of acquired debt are based upon interest rates available for the issuance of debt with similar terms and remaining maturities.
Asset Impairment. Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Impairment exists if estimated future undiscounted cash flows associated with long-lived assets are not sufficient to recover the carrying value of such assets. We consider projected future discounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. When impairment exists, the long-lived asset is adjusted to its fair value. While we believe our estimates of future cash flows are reasonable, different assumptions regarding a number of factors, including market rents, economic conditions, and occupancies could significantly affect these estimates. In estimating fair value, management uses appraisals, management estimates, and discounted cash flow calculations that maximize inputs from a marketplace participant’s perspective. In addition, we evaluate our investments in joint ventures and mezzanine construction financing and if, with respect to investments, we believe there is an other than temporary decline in market value, or if, with respect to mezzanine loans, it is probable we will not collect all scheduled amounts due in accordance with the terms, we will record an impairment charge based on these evaluations. In general, we provide mezzanine loans to affiliated joint ventures constructing or operating multifamily assets. While we believe it is currently probable we will collect all scheduled amounts due with respect to these mezzanine loans, current market conditions with respect to credit markets and real estate market fundamentals inject a significant amount of uncertainty into the environment and any further adverse economic or market development may cause us to re-evaluate our conclusions, and could result in material impairment charges with respect to our mezzanine loans.
The value of our properties under development depends on market conditions, including estimates of the project start date as well as estimates of demand for multifamily communities. We have reviewed market trends and other marketplace information and have incorporated this information as well as our current outlook into the assumptions we use in our impairment analyses. Due to, among other factors, the judgment and assumptions applied in the impairment analyses and the fact limited market information regarding the value of comparable land exists at this time, it is possible actual results could differ substantially from those estimated.
We believe the carrying value of our operating real estate assets, properties under development, and land is currently recoverable. However, if market conditions deteriorate beyond our current expectations or if changes in our development strategy significantly affect any key assumptions used in our fair value calculations, we may need to take material charges in future periods for impairments related to existing assets. Any such material non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Cash and Cash Equivalents. All cash and investments in money market accounts and other highly liquid securities with a maturity of three months or less at the date of purchase are considered to be cash and cash equivalents. The majority of cash and cash equivalents are maintained with several major financial institutions in the United States. Deposits with these financial institutions may exceed the amount of insurance provided on such deposits; however, the Company regularly monitors the financial stability of these financial institutions and believes that we are not exposed to any significant default risk.
Cost Capitalization. Real estate assets are carried at cost plus capitalized carrying charges. Carrying charges are primarily interest and real estate taxes which are capitalized as part of properties under development. Capitalized interest is generally based on our weighted average unsecured interest rate. Most transaction and restructuring costs associated with the acquisition of real estate assets are expensed. Expenditures directly related to the development and improvement of real estate assets are capitalized at cost as land and buildings and improvements. Indirect development costs, including salaries and benefits and other related costs directly attributable to the development of properties are also capitalized. All construction and carrying costs are capitalized and reported in the balance sheet as properties under development until the apartment homes are substantially completed. Upon substantial completion of the apartment homes, the total cost for the apartment homes and the associated land is transferred to buildings and improvements and land, respectively.
As discussed above, carrying charges are principally interest and real estate taxes capitalized as part of properties under development and buildings and improvements. Capitalized interest was approximately $10.3 million, $17.7 million, and $22.6 million for the years ended December 31, 2009, 2008, and 2007, respectively. Capitalized real estate taxes were approximately $1.9 million, $3.4 million, and $3.5 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Where possible, we stage our construction to allow leasing and occupancy during the construction period, which we believe minimizes the duration of the lease-up period following completion of construction. Our accounting policy related to properties in the development and leasing phase is to expense all operating expenses associated with completed apartment homes. We capitalize renovation and improvement costs we believe extend the economic lives of depreciable property. Capital expenditures subsequent to initial construction are capitalized and depreciated over their estimated useful lives, which range from three to twenty years.
Depreciation and amortization is computed over the expected useful lives of depreciable property on a straight-line basis with lives generally as follows:
Derivative Financial Instruments. Derivative financial instruments are recorded in the balance sheet at fair value and we do not apply master netting; as such all derivatives are reflected at gross value in the balance sheet. Accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting, and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes attributable to the earnings effect of the hedged transactions. We may enter into derivative contracts which are intended to economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting.
Discontinued Operations. A property is classified as a discontinued operation when (i) the operations and cash flows of the property can be clearly distinguished and have been or will be eliminated from our ongoing operations; (ii) the property has either been disposed of or is classified as held for sale; and (iii) we will not have any significant continuing involvement in the operations of the property after the disposal transactions. Significant judgments are involved in determining whether a property meets the criteria for discontinued operations reporting and the period in which these criteria are met. A property is classified as held for sale when (i) management commits to a plan to sell and it is actively marketed; (ii) it is available for immediate sale and the sale is expected to be completed within one year; and (iii) it is unlikely significant changes to the plan will be made or the plan will be withdrawn. In isolated instances, assets held for sale may exceed one year due to events or circumstances beyond our control. Upon being classified as held for sale, the recoverability of the carrying value is assessed.
The results of operations for properties sold during the period or classified as held for sale at the end of the current period are required to be classified as discontinued operations in the current and prior periods. The property-specific components of earnings classified as discontinued operations include separately identifiable property-specific revenues, expenses, depreciation, and interest expense, if any. The gain or loss resulting from the eventual disposal of the held for sale properties is also classified as discontinued operations. Real estate assets held for sale are measured at the lower of carrying amount or fair value less costs to sell and are presented separately in the accompanying consolidated balance sheets. Subsequent to classification of a property as held for sale, no further depreciation is recorded. Properties sold by our unconsolidated entities are not included in discontinued operations and related gains or losses are reported as a component of equity in income (loss) of joint ventures.
Gains on sale of real estate are recognized using the full accrual or partial sale methods, as applicable, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), provided various criteria relating to the terms of sale and any subsequent involvement with the real estate sold are met.
Income Recognition. Our rental and other property revenue is recorded when due from residents and is recognized monthly as it is earned. Other property revenue consists primarily of utility rebillings and administrative, application, and other transactional fees charged to our residents. Our apartment homes are rented to residents on lease terms generally ranging from six to fifteen months, with monthly payments due in advance. All sources of income, including from interest and fee and asset management, are recognized as earned. Seven of our properties are subject to rent control. Operations of multifamily properties acquired are recorded from the date of acquisition in accordance with the acquisition method of accounting. In management’s opinion, due to the number of residents, the types and diversity of submarkets in which the properties operate, and the collection terms, there is no significant concentration of credit risk.
Insurance. Our primary lines of insurance coverage are property, general liability, and health and workers’ compensation. We believe our insurance coverage adequately insures our properties against the risk of loss attributable to fire, earthquake, hurricane, tornado, flood, and other perils and adequately insures us against other risks. Losses are accrued based upon our estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry and based on our experience.
Other Assets, Net. Other assets in our consolidated financial statements include investments under deferred compensation plans, deferred financing costs, non-real estate leasehold improvements and equipment, prepaid expenses, the value of in-place leases net of related accumulated amortization, and other miscellaneous receivables. Investments under deferred compensation plans are classified as trading securities and are adjusted to fair market value at period end. See further discussion of our investments under deferred compensation plans in Note 11, “Share-Based Compensation and Benefit Plans.” Deferred financing costs are amortized over the terms of the related debt on the straight-line method, which approximates the effective interest method. Corporate leasehold improvements and equipment are depreciated using the straight-line method over the shorter of the expected useful lives or the lease terms which range from three to ten years.
Reportable Segments. Our multifamily communities are geographically diversified throughout the United States, and management evaluates operating performance on an individual property level. As each of our multifamily communities has similar economic characteristics, residents, amenities, and services, our multifamily communities have been aggregated into one reportable segment. Our multifamily communities generate rental revenue and other income through the leasing of apartment homes, which comprised approximately 98%, 98%, and 97% of our total property revenues and total non-property income, excluding income (loss) on deferred compensation plans, for the years ended December 31, 2009, 2008, and 2007, respectively.
Restricted Cash. Restricted cash consists of escrow deposits held by lenders for property taxes, insurance and replacement reserves, cash required to be segregated for the repayment of residents’ security deposits, and escrowed amounts related to our development activities. Substantially all restricted cash is invested in demand and short-term instruments.
Share-Based Compensation. Compensation expense associated with share-based awards is recognized in our consolidated statements of income and comprehensive income using the grant-date fair values. Compensation cost for all share-based awards, including options, requires measurement at estimated fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants is estimated using the Black-Scholes valuation model. Valuation models require the input of assumptions, including judgments to estimate the expected stock price volatility, expected life, and forfeiture rate. The compensation cost for share-based awards is based on the market value of the shares on the date of grant.
Use of Estimates. In the application of GAAP, management is required to make estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, results of operations during the reporting periods, and related disclosures. Our more significant estimates include estimates supporting our impairment analysis related to the carrying values of our real estate assets, estimates of the useful lives of our assets, estimates related to the valuation of our investments in joint ventures and mezzanine financing, and estimates of expected losses of variable interest entities. These estimates are based on historical experience and other assumptions believed to be reasonable under the circumstances. Future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment.
Recent Accounting Pronouncements. In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Codification. Effective July 1, 2009, the Codification is the single source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. We adopted the Codification during the third quarter of 2009 and the adoption did not materially impact our financial statements, however our references to accounting literature within our notes to the consolidated financial statements have been revised to conform to the Codification classification.
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which provides alternatives to measuring the fair value of liabilities when a quoted price for an identical liability traded in an active market does not exist. The alternatives include using the quoted price for the identical liability when traded as an asset or the quoted price of a similar liability or of a similar liability when traded as an asset, in addition to valuation techniques based on the amount an entity would pay to transfer the identical liability (or receive to enter into an identical liability). We adopted ASU 2009-05 effective October 1, 2009 and the adoption did not have a material impact on our financial statements.
In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets,” which codified the previously issued Statement of Financial Accounting Standards (“SFAS”) 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140.” ASU 2009-16 modifies the financial components approach, removes the concept of a qualifying special purpose entity, and clarifies and amends the derecognition criteria for determining whether a transfer of a financial asset or portion of a financial asset qualifies for sale accounting. The ASU also requires expanded disclosures regarding transferred assets and how they affect the reporting entity. ASU 2009-16 is effective for us beginning January 1, 2010. Our adoption of ASU 2009-16 will not have a material effect on our financial statements.
In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810) - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” which codified the previously issued SFAS 167, “Amendments to FASB Interpretation No. 46R.” ASU 2009-17 changes the consolidation analysis for VIEs and requires a qualitative analysis to determine the primary beneficiary of the VIE. The determination of the primary beneficiary of a VIE is based on whether the entity has the power to direct matters which most significantly impact the activities of the VIE and has the obligation to absorb losses, or the right to receive benefits, of the VIE which could potentially be significant to the VIE. The ASU requires an ongoing reconsideration of the primary beneficiary and also amends the events triggering a reassessment of whether an entity is a VIE. ASU 2009-17 requires additional disclosures for VIEs, including disclosures about a reporting entity’s involvement with VIEs, how a reporting entity’s involvement with a VIE affects the reporting entity’s financial statements, and significant judgments and assumptions made by the reporting entity to determine whether it must consolidate the VIE. ASU 2009-17 is effective for us beginning January 1, 2010. Our adoption of ASU 2009-17 will not have a material effect on our financial statements.
In January 2010, the FASB issued ASU 2010-01, “Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash.” The ASU clarifies when the stock portion of a distribution allows shareholders to elect to receive cash or stock, with a potential limitation on the total amount of cash which all shareholders could elect to receive in the aggregate, the distribution would be considered a share issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per share prospectively. We adopted ASU 2010-01 effective October 1, 2009 and the adoption did not have an impact on our financial statements.
In January 2010, the FASB issued ASU 2010-02, “Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification.” The ASU clarifies the scope of Subtopic 810-10 applies to a subsidiary or group of assets considered to be a business or nonprofit activity, a subsidiary considered to be a business or nonprofit activity which is transferred to an equity method investee or joint venture, and an exchange of a group of assets considered to be a business or nonprofit activity for a noncontrolling interest in an entity (including an equity method investee or joint venture). ASU 2010-02 further clarifies the scope of Subtopic 810-10 does not apply to sales of in substance real estate or conveyances of oil and gas mineral rights, even if these transfers involve businesses. The ASU also expands the disclosure requirements about deconsolidation of a subsidiary or derecognition of a group of assets. For entities who have previously adopted the noncontrolling interests guidance included in Subtopic 810-10, ASU 2010 is effective for interim or annual periods ending on or after December 15, 2009 and should be applied retrospectively to the first period in which the noncontrolling interests guidance was adopted. As we adopted the noncontrolling interests guidance on January 1, 2009, we also adopted ASU 2010-02 effective January 1, 2009 and the adoption did not have an impact on our financial statements.
3. Share Data
Basic earnings per share are computed using net income (loss) attributable to common shareholders and the weighted average number of common shares outstanding. Diluted earnings per share reflect common shares issuable from the assumed conversion of common share options and share awards granted and units convertible into common shares. Only those items having a dilutive impact on our basic earnings per share are included in diluted earnings per share. On January 1, 2009, we adopted newly issued guidance in the Earnings Per Share Topic of the Codification relating to share-based payment transactions and participating securities and, as a result, our unvested share-based payment transactions are considered participating securities and are reflected in the calculation of basic and diluted earnings per share using the two-class method. The number of common share equivalent securities excluded from the diluted earnings per share calculation for the years ended December 31, 2009, 2008, and 2007, was approximately 4.9 million, 5.2 million, and 4.3 million, respectively. These securities, which include common share options and share awards granted and units convertible into common shares, were excluded from the diluted earnings per share calculation as they were determined to be anti-dilutive.
The following table presents information necessary to calculate basic and diluted earnings per share for the periods indicated:
In April 2007, our Board of Trust Managers approved a program to repurchase up to $500 million of our common equity securities through open market purchases, block purchases, and privately negotiated transactions. Under this program, we repurchased 4.3 million shares for a total of approximately $230.2 million through December 31, 2009. The remaining dollar value of our common equity securities authorized to be repurchased under the program was approximately $269.8 million as of December 31, 2009.
In May 2009, we issued approximately 10.4 million common shares at $27.50 per share in a public equity offering.
We filed a shelf registration statement with the Securities and Exchange Commission during the three months ended June 30, 2009 which became automatically effective upon filing. We may use the shelf registration statement to offer, from time to time, an unlimited amount of common shares, preferred shares, debt securities, or warrants. Our declaration of trust provides we may issue up to 110 million shares of beneficial interest, consisting of 100 million common shares and 10 million preferred shares. As of December 31, 2009, we had approximately 77.0 million common shares and no preferred shares outstanding under our declaration of trust.
4. Operating Partnerships
At December 31, 2009, approximately 11% of our multifamily apartment homes were held in Camden Operating, L.P (“Camden Operating” or the “operating partnership”). Camden Operating has issued both common and preferred limited partnership units. As of December 31, 2009, we held 89.5% of the common limited partnership units and the sole 1% general partnership interest of the operating partnership. The remaining common limited partnership units, comprising 1,125,565 units, are primarily held by former officers, directors, and investors of Paragon Group, Inc., which we acquired in 1997. Each common limited partnership unit is redeemable for one common share of Camden or cash at our election. Holders of common limited partnership units are not entitled to rights as shareholders prior to redemption of their common limited partnership units. No member of our management owns Camden Operating common limited partnership units, and two of our ten trust managers own Camden Operating common limited partnership units.
Camden Operating has $100 million of 7.0% Series B Cumulative Redeemable Perpetual Preferred Units outstanding which are recorded in the consolidated balance sheet at fair value less issuance costs. Distributions on the preferred units are payable quarterly in arrears. The Series B preferred units were redeemable beginning in December 2008 by the operating partnership for cash at par plus the amount of any accumulated and unpaid distributions. There were no redemptions as of December 31, 2009. The preferred units are convertible beginning in 2013 by the holder into a fixed number of corresponding Series B Cumulative Redeemable Perpetual Preferred Shares. The Series B preferred units are subordinate to present and future debt.
We are the controlling managing member interest in Oasis Martinique, LLC, which owns one property in Orange County, California and is included in our consolidated financial statements. The remaining interests, comprising 621,258 units, are exchangeable into 471,535 of our common shares. Subsequent to December 31, 2009, 236,960 units were converted into 179,852 of our common shares.
At December 31, 2009, approximately 24% of our multifamily apartment homes were held in Camden Summit Partnership, L.P. (“the Camden Summit Partnership”). The Camden Summit Partnership has issued common limited partnership units. As of December 31, 2009, we held 93.7% of the common limited partnership units and the sole 1% general partnership interest of the Camden Summit Partnership. The remaining common limited partnership units, comprising 1,207,944 units, are primarily held by former officers, directors, and investors of Summit Properties Inc. (“Summit”), a company we acquired in 2005. Each common limited partnership unit is redeemable for one common share of Camden or cash at our election. Holders of common limited partnership units are not entitled to rights as shareholders prior to redemption of their common limited partnership units. No member of our management owns Camden Summit Partnership common limited partnership units, and two of our ten trust managers own Camden Summit Partnership common limited partnership units.
5. Income Taxes
We have maintained and intend to maintain our election as a REIT under the Internal Revenue Code of 1986, as amended. In order for us to continue to qualify as a REIT we must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to our shareholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. As a REIT, we generally will not be subject to federal income tax on our taxable income at the corporate level to the extent such income is distributed to our shareholders annually. If our taxable income exceeds our dividends in a tax year, REIT tax rules allow us to designate dividends from the subsequent tax year in order to avoid current taxation on undistributed income. If we fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at regular corporate rates, including any applicable alternative minimum tax. In addition, we may not be able to requalify as a REIT for the four subsequent taxable years. Historically, we have incurred only state and local income, franchise and excise taxes. Taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to applicable federal, state, and local income taxes. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level. We have provided for income, franchise, and state income taxes in the consolidated statements of income and comprehensive income for the years ended December 31, 2009, 2008 and 2007. These taxes are primarily for entity level taxes on certain ventures, state income taxes, and federal and state taxes on certain of our taxable REIT subsidiaries. We have no significant temporary differences or tax credits associated with our taxable REIT subsidiaries. We do not believe we have any uncertain tax positions or unrecognized tax benefits requiring disclosure.
The following table reconciles net income to REIT taxable income for the years ended December 31:
A schedule of per share distributions we paid and reported to our shareholders is set forth in the following table:
We have taxable REIT subsidiaries which are subject to federal and state income taxes. At December 31, 2009, our taxable REIT subsidiaries had net operating loss carryforwards (“NOL’s”) of approximately $16.0 million which expire in years 2019 to 2029. Because NOL’s are subject to certain change of ownership, continuity of business, and separate return year limitations, and because it is unlikely the available NOL’s will be utilized, no benefits of these NOL’s have been recognized in our consolidated financial statements.
The carrying value of net assets reported in our consolidated financial statements exceeded the tax basis by approximately $964.5 million.
Income Tax Expense - Current. For the tax years ended December 31, 2009, 2008, and 2007, we had current income tax expense of approximately $1.0 million, $0.8 million, and $3.1 million, respectively, comprised mainly of state income taxes.
Income Tax Expense - Deferred. For the years ended December 31, 2009, 2008, and 2007, our deferred tax accounts were not significant.
6. Property Acquisitions, Dispositions, Assets Held for Sale, and Impairments
Acquisitions. In April 2007, we acquired Camden South Congress, a 253-apartment home community located in Austin, Texas for approximately $42.8 million and in June 2007, we acquired Camden Royal Palms, a 352-apartment home community located in Tampa, Florida for $41.1 million. Both properties were purchased using proceeds from our unsecured line of credit. The purchase prices of these properties were allocated to the tangible and intangible assets and liabilities acquired based on their estimated fair values at the date of acquisition. We did not acquire any operating properties in 2008 or 2009.
Discontinued Operations. For the years ended December 31, 2009, 2008, and 2007, income from discontinued operations included the results of operations of one operating property sold in 2009 through its sale date. For the years ended December 31, 2008 and 2007, income from discontinued operations also included the results of operations of eight operating properties sold during 2008 and ten operating properties sold during 2007 through their sale dates.
The following is a summary of income from discontinued operations for the years presented below:
Dispositions. During the year ended December 31, 2009, we received net proceeds of approximately $28.0 million and recognized a gain of approximately $16.9 million from the sale to an unaffiliated third party of one operating property with a net book value of approximately $11.3 million, containing 671 apartment homes. During the year ended December 31, 2008, we received net proceeds of approximately $121.7 million and recognized gains of approximately $80.2 million from the sales of eight operating properties, containing 2,392 apartment homes, to unaffiliated third parties. During the year ended December 31, 2007, we received net proceeds of approximately $166.4 million and recognized gains of approximately $106.3 million from the sales of ten operating properties, containing 3,054 apartment homes, to unaffiliated third parties; additionally, we sold 0.9 acres of undeveloped land to an unrelated third party, receiving net proceeds of approximately $6.0 million and recognizing gains totaling approximately $0.7 million.
During the year ended December 31, 2008, we recognized a gain of approximately $1.1 million from the sale of land adjacent to our regional office in Las Vegas, Nevada. The gain on this sale was not included in discontinued operations as the operations and cash flows of this asset were not clearly distinguished, operationally or for reporting purposes, from the adjacent assets.
Partial Sales and Dispositions to Joint Ventures included in Continuing Operations. In March 2008, we sold Camden Amber Oaks, a development community in Austin, Texas, to the Camden Multifamily Value Add Fund, L.P., (the “Fund”) for approximately $8.9 million. No gain or loss was recognized on the sale. Concurrent with the transaction, we invested approximately $1.9 million in the Fund. In August 2008, we sold Camden South Congress to the Fund for approximately $44.2 million and recognized a gain of approximately $1.8 million on the sale. In conjunction with the transaction, we invested approximately $2.8 million in the Fund. The gain recognized from the partial sale is included in continuing operations as we retained a partial interest in the venture which owns the community.
There were no partial sales or dispositions to joint ventures for the years ended December 31, 2009 or 2007.
Assets held for Sale. We reclassified the undeveloped land parcels previously included in discontinued operations to continuing operations during December 31, 2009 as management made the decision not to sell these assets after an existing sales contract was terminated. As a result, we reclassified approximately $0.4 million and $0.3 million from discontinued operations to total property expenses for the years ended December 31, 2008 and 2007, respectively, in the consolidated statements of income and comprehensive income.
Impairment. The impairment associated with land development activities for the year ended December 31, 2009 includes approximately $72.2 million related to land holdings for eight projects we have put on hold for the foreseeable future. The impairment associated with land development activities for the year ended December 31, 2008 reflects impairments in the value of land holdings for several potential development projects we no longer plan to pursue, including approximately $48.6 million related to land holdings for five projects we no longer plan to develop, and approximately $1.6 million in the value of a land parcel held for future development. The impairment associated with land development activities for the year ended December 31, 2007 of approximately $1.4 million reflects impairment in the value of one potential development project we no longer plan to pursue. These impairment charges for land are the difference between each parcel’s estimated fair value and the carrying value, which includes pursuit and other costs.
7. Investments in Joint Ventures
As of December 31, 2009, our equity investments in unconsolidated joint ventures, which we account for utilizing the equity method of accounting, consisted of 25 joint ventures, with our ownership percentages ranging from 15% to 72%. We provide property management services to the joint ventures which own operating properties and may provide construction and development services to the joint ventures which own properties under development. The following table summarizes aggregate balance sheet and statement of income data for the unconsolidated joint ventures as of December 31 (in millions):
(1)
Equity in income (loss) excludes our ownership interest in transactions with our joint ventures.
The joint ventures listed above are accounted for using the equity method. The joint ventures in which we have an interest have been funded in part with secured third-party debt. We have guaranteed no more than our proportionate interest, totaling approximately $57.0 million, of five loans utilized for construction and development activities for our joint ventures. Additionally, we eliminate fee income from property management services provided to these joint ventures to the extent of our ownership.
Our contributions of real estate assets to joint ventures at formation in which we receive cash are treated as partial sales provided certain criteria are met. As a result, the amounts recorded as gain on sale of assets to joint ventures represent the change in ownership of the underlying assets. Our initial recorded investment is comprised of our historical carrying value of the assets on the date of the respective transaction multiplied by our ownership percentage in the joint venture.
In May 2009, a maturing $31.7 million construction loan was refinanced from a construction loan to a secured ten-year note in the principal amount of approximately $23.0 million by one of our joint ventures located in Houston, Texas. The note has a fixed annual interest rate of 5.325% with monthly payments of principal and interest due beginning on July 1, 2009. Concurrent with this transaction, each of the two joint venture partners made a mezzanine loan to the joint venture in the amount of $4.6 million, or $9.2 million in the aggregate, each of which has a 10% annual interest rate and matures on June 3, 2019. We had previously made a mezzanine loan to this joint venture of $9.2 million, which was converted into an additional equity interest (with a preference on distribution of cash flows over previously contributed equity) in the joint venture concurrently with the refinancing.
In August 2009, an $82.5 million third-party secured construction note, originally scheduled to mature in August 2009, was extended (as contractually allowed for in the loan agreement) to June 2010 by one of our joint ventures located in Orange County, California. Concurrent with this extension, the joint venture paid $29.3 million to reduce the note balance to $53.2 million. The payment was funded in two parts: (i) approximately $7.1 million was funded by capital from the joint venture partners contributed pro rata in accordance with their respective ownership percentages; and (ii) approximately $22.2 million was funded by us in exchange for an additional equity interest (with a preference on distribution of cash flows over previously contributed equity) in the joint venture.
In December 2009, a $35.9 million third-party secured construction note, originally scheduled to mature in December 2009, was extended (as contractually allowed for in the loan agreement) to December 2010 by one of our joint ventures located in Houston, Texas for a nominal extension fee. We had previously made a mezzanine loan to this joint venture of $9.3 million. Concurrent with the construction note extension, the mezzanine loan was converted into an additional common equity interest in the amount of $7.9 million (with a preference on distribution of cash flows over previously contributed equity) and the remaining $1.4 million was converted into an additional equity interest in the joint venture.
In the fourth quarter of 2009, we recognized an impairment of approximately $13.4 million of costs capitalized and exit costs associated with a land development joint venture we have put on hold for the foreseeable future. The impairment associated with land development activities for the year ended December 31, 2008 included approximately $1.1 million for costs capitalized for a potential joint venture development. There were not any impairments relating to joint venture land development activities for the year ended December 31, 2007.
Mezzanine loans we have made to affiliated joint ventures are recorded as “Notes receivable - affiliates” as discussed in Note 8, “Notes Receivable.”
We earn fees for property management, construction, development, and other services provided primarily to joint ventures in which we own an interest. Fees earned for these services amounted to approximately $8.0 million, $9.2 million, and $8.3 million for the years ended December 31, 2009, 2008, and 2007, respectively.
8. Notes Receivable
Notes receivable - affiliates. We have provided mezzanine construction financing, with rates ranging from the London Interbank Offered Rate (“LIBOR”) plus 3%, to a fixed maximum rate of 12% per year, to certain of our joint ventures. During the year ended December 31, 2009, two mezzanine notes were converted into additional equity interests in the respective related joint ventures. Concurrent with one of the conversions to an equity interest, the joint venture received two separate mezzanine notes which were provided by each of its two joint venture partners. See further discussion of these transactions in Note 7, “Investments in Joint Ventures.” As of December 31, 2009 and 2008, the balance of “Notes receivable - affiliates” totaled $45.8 million and $58.1 million, respectively, on notes maturing through 2019. We eliminate the interest and other income to the extent of our percentage ownership in the joint ventures. We have reviewed the terms and conditions underlying these notes receivable and believe these notes are collectible, and no impairment existed at December 31, 2009.
At December 31, 2009, our commitment to fund additional amounts under the mezzanine loans was an aggregate of approximately $7.3 million.
Notes receivable - other. We have a mezzanine financing program under which from time to time we provide secured financing to third party owners of real estate properties. At December 31, 2008, an aggregate of approximately $8.7 million was outstanding on these loans. This amount, together with accrued interest, was paid in full during the three months ended March 31, 2009.
Notes receivable secured by common shares. In conjunction with our merger with Summit, we acquired employee notes receivable from former employees of Summit. At December 31, 2009 and 2008, the employee notes receivable had an outstanding balance of approximately $0.1 million and $0.3 million, respectively. As of December 31, 2009, there was one remaining employee note receivable which was 100% secured by our common shares and reported as a component of equity in our consolidated balance sheet.
9. Notes Payable
The following is a summary of our indebtedness:
We have a $600 million unsecured credit facility which matures in January 2011. The scheduled interest rate spreads are subject to change as our credit ratings change. Advances under the line of credit may be priced at the scheduled rates, or we may enter into bid rate loans with participating banks at rates below the scheduled rates. These bid rate loans have terms of six months or less and may not exceed the lesser of $300 million or the remaining amount available under the line of credit. The line of credit is subject to customary financial covenants and limitations, all of which we are in compliance.
Our line of credit provides us with the ability to issue up to $100 million in letters of credit. While our issuance of letters of credit does not increase our borrowings outstanding under our line of credit, it does reduce the amount available. At December 31, 2009, we had outstanding letters of credit totaling approximately $9.2 million, and had approximately $590.8 million available under our unsecured line of credit.
As an alternative to our unsecured line of credit, from time to time we may borrow using competitively bid unsecured short-term notes with lenders who may or may not be a part of the unsecured line of credit bank group. We expect such borrowings will vary in term and pricing and will typically be priced at interest rates below those available under the unsecured line of credit.
As part of the 2005 Summit merger, we assumed certain debt and recorded approximately $33.9 million as a fair value adjustment which is being amortized over the respective debt terms. As of December 31, 2009, approximately $1.5 million of the fair value adjustment remained unamortized, and substantially all of the remaining will be recorded as an adjustment to interest expense in 2010 and 2011. We recorded amortization of the fair value adjustment, which resulted in a decrease of interest expense, of approximately $2.3 million, $5.4 million, and $7.1 million during the years ended December 31, 2009, 2008, and 2007, respectively.
During the first quarter of 2009, we repurchased and retired $7.4 million of the principal amount of our $250 million 4.375% senior unsecured notes due 2010 from unrelated third parties for approximately $7.2 million.
On April 17, 2009, we, as guarantor, and five separate subsidiaries as borrowers entered into a $420 million secured credit facility agreement. The facility has a ten-year term with a fixed annual interest rate of 5.12% and monthly payments of interest only and matures on May 1, 2019. We have entered into standard nonrecourse carveout guarantees. The obligations of the borrowers under the credit agreement are secured by cross-collateralized first priority mortgages on 11 of our multifamily communities.
During the second quarter of 2009, we repurchased and retired approximately $317.6 million of certain series of unsecured and secured notes maturing between 2010 and 2012 from unrelated third parties for approximately $320.3 million. These transactions resulted in a net loss on early retirement of debt of approximately $2.7 million which includes a reduction for the write-off of applicable loan costs.
During the third quarter of 2009, we repaid the remaining amount of our $100 million, 4.74% senior unsecured notes maturing in 2009 for a total of approximately $81.9 million.
At December 31, 2009 and 2008, the weighted average interest rate on our floating rate debt, which includes our unsecured line of credit, was approximately 1.2% and 2.7%, respectively.
Our indebtedness, including our unsecured line of credit, had a weighted average maturity of approximately 5.6 years. Scheduled repayments on outstanding debt, including our line of credit and scheduled principal amortizations, and the weighted average interest rate on maturing debt at December 31, 2009 are as follows:
In January 2010, we repaid the remaining principal amount of our $250 million, 4.39% senior unsecured notes for a total of approximately $55.3 million.
10. Derivative Instruments & Hedging Activities
Risk Management Objective of Using Derivatives. We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures arising from business activities resulting in differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings.
Cash Flow Hedges of Interest Rate Risk. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps involve the receipt of variable rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.
Designated Hedges. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period the hedged forecasted transaction affects earnings. Over the next twelve months, we estimate an additional $21.7 million will be reclassified to interest expense. During the years ended December 31, 2009 and 2008, derivatives were used to hedge the variable cash flows associated with existing variable rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. No portion was ineffective during the years ended December 31, 2009, 2008, and 2007.
As of December 31, 2009, we had the following outstanding interest rate derivatives designated as cash flow hedges of interest rate risk:
Non-designated Hedges. Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks. Non-designated hedges are either specifically non-designated by management or do not meet strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings in other income or other expense.
As of December 31, 2009, we had the following outstanding interest rate derivative which was not designated as a hedge of interest rate risk:
The table below presents the fair value of our derivative financial instruments as well as their classification in the consolidated balance sheets at December 31 (in millions):
Fair Values of Derivative Instruments
The tables below present the effect of our derivative financial instruments on the consolidated statements of income and comprehensive income for the years ended December 31 (in millions).
Effect of Derivative Instruments
Credit-risk-related Contingent Features. Derivative financial investments expose us to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. We believe we minimize our credit risk on these transactions by transacting with major creditworthy financial institutions. As part of our on-going control procedures, we monitor the credit ratings of counterparties and our exposure to any single entity, which we believe minimizes credit risk concentration. We believe the likelihood of realized losses from counterparty non-performance is remote.
Our agreements with each of our derivative counterparties contain a provision pursuant to which a default under any of our indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the counterparty has the right to declare a default on our derivative obligations. Our agreements with each of our derivative counterparties also provide if we consolidate with, merge with or into, or transfer all or substantially all our assets to another entity and the creditworthiness of the resulting, surviving, or transferee entity is materially weaker than ours, the counterparty has the right to terminate the derivative obligations.
At December 31, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk (the “termination value”), related to these agreements was approximately $43.1 million. As of December 31, 2009, we had not posted any collateral related to these agreements. If we were in breach of any of these provisions at December 31, 2009, or terminated these agreements, we would have been required to settle our obligations at their termination value of approximately $43.1 million.
11. Share-Based Compensation and Benefit Plans
Incentive Plan. During 2002, our Board of Trust Managers adopted, and our shareholders approved, the 2002 Share Incentive Plan of Camden Property Trust (the “2002 Share Plan”). Under the 2002 Share Plan, we may issue up to 10% of the total of (i) the number of our common shares outstanding as of the plan date, February 5, 2002, plus (ii) the number of our common shares reserved for issuance upon conversion of securities convertible into or exchangeable for our common shares, plus (iii) the number of our common shares held as treasury shares. Compensation awards eligible to be granted under the 2002 Share Plan include various forms of incentive awards, including incentive share options, non-qualified share options, and share awards. The class of eligible persons which can receive grants of incentive awards under the 2002 Share Plan consists of key employees, consultants, and non-employee trust managers as determined by the Compensation Committee of our Board of Trust Managers. The 2002 Share Plan does not have a termination date; however, no incentive share options will be granted under this plan after February 5, 2012.
Options. Options are exercisable, subject to the terms and conditions of the plan, in increments ranging from 20% to 33.33% per year on each of the anniversaries of the date of grant. The plan provides that the exercise price of an option will be determined by the Compensation Committee of the Board of Trust Managers on the day of grant, and to date all options have been granted at an exercise price that equals the fair market value on the date of grant. Options exercised during 2009 were exercised at prices ranging from $25.88 to $36.87 per option. At December 31, 2009, options outstanding were exercisable at prices ranging from $25.88 to $73.32 per share and had a weighted average remaining contractual life of approximately 5.8 years.
The total intrinsic value of options exercised was approximately $0.1 million, $0.5 million, and $2.8 million during the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, there was approximately $2.4 million of total unrecognized compensation cost related to unvested options, which is expected to be amortized over the next five years.
The following table summarizes share options outstanding and exercisable at December 31, 2009:
Valuation Assumptions. Options generally have a vesting period of three to five years. The weighted average fair value of options granted was $3.06, $5.06, and $11.04 per option in 2009, 2008, and 2007, respectively. We estimated the fair value of each option award on the date of grant using the Black-Scholes option pricing model.
The following assumptions were used for options granted during each respective period:
Our computation of expected volatility for 2009 is based on the historical volatility of our common shares over a time period equal to the expected life of the option and ending on the grant date. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The expected dividend yield on our common shares is estimated using the annual dividends paid in the prior year and the market price on the date of grant. Our computation of expected life for 2009 is estimated based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards.
Share Awards and Vesting. Share awards generally have a vesting period of five years. The compensation cost for share awards is based on the market value of the shares on the date of grant and is amortized over the vesting period. To estimate forfeitures, we use actual forfeiture history. At December 31, 2009, the unamortized value of previously issued unvested share awards was approximately $19.3 million. This amount will be amortized into earnings over the next five years. The total fair value of shares vested during the years ended December 31, 2009, 2008, and 2007 was approximately $10.2 million, $8.8 million, and $8.1 million, respectively.
Total compensation cost for option and share awards charged against income was approximately $8.7 million, $7.3 million, and $6.5 million for 2009, 2008, and 2007, respectively. Total capitalized compensation cost for option and share awards was approximately $1.7 million, $2.6 million, and $2.3 million for 2009, 2008 and 2007, respectively.
The following table summarizes activity under our Share Incentive Plans for the three years ended December 31:
Employee Share Purchase Plan (“ESPP”). We have established an ESPP for all active employees and officers who have completed one year of continuous service. Participants may elect to purchase our common shares through payroll deductions and/or through semi-annual contributions. At the end of each six-month offering period, each participant’s account balance is applied to acquire common shares at 85% of the market value, as defined, on the first or last day of the offering period, whichever price is lower. We currently use treasury shares to satisfy ESPP share requirements. Each participant must hold the shares purchased for nine months in order to receive the discount, and a participant may not purchase more than $25,000 in value of shares during any plan year, as defined. The following table presents certain information related to our ESPP:
In January 2010, approximately 18,957 shares were purchased under the ESPP related to the 2009 plan year.
Rabbi Trust. We established a rabbi trust for a select group of participants in which share awards granted under the share incentive plan and salary and other cash amounts earned may be deposited. The rabbi trust is an irrevocable trust and no portion of the trust fund may be used for any purpose other than the delivery of those assets to the participants. The assets held in the rabbi trust are subject to the claims of our general creditors in the event of bankruptcy or insolvency. The rabbi trust is in use only for deferrals made prior to 2005, including bonuses related to service in 2004 but paid in 2005.
The assets of the rabbi trust are consolidated into our financial statements based on GAAP. Granted share awards held by the rabbi trust are classified in equity in a manner similar to the manner in which treasury stock is accounted. Subsequent changes in the fair value of the shares are not recognized. The deferred compensation obligation is classified as an equity instrument and changes in the fair value of the amount owed to the participant are not recognized. At December 31, 2009, 2008, and 2007, approximately 2.1 million share awards were held in the rabbi trust. Additionally, as of December 31, 2009, 2008, and 2007, the rabbi trust was holding trading securities totaling approximately $61.7 million, $50.2 million, and $76.4 million, respectively, which represents cash deferrals made by plan participants. Market value fluctuations on these trading securities are recognized in income in accordance with GAAP and the fair value of the liability due to participants is adjusted accordingly.
At December 31, 2009, 2008, and 2007, approximately $34.7 million, $35.0 million, and $34.9 million, respectively, was required to be paid to us by plan participants upon the withdrawal of any assets from the trust, and is included in “Accounts receivable-affiliates” in our consolidated financial statements.
Non-Qualified Deferred Compensation Plan. The Non-Qualified Deferred Compensation Plan (the “Plan”), effective December 1, 2004, is an unfunded arrangement established and maintained primarily for the benefit of a select group of participants. Eligible participants shall commence participation in the Plan on the date the deferral election first becomes effective. We will credit to the participant’s account an amount equal to the amount designated as the participant’s deferral for the plan year as indicated in the participant’s deferral election(s). Any modification to or termination of the Plan will not reduce a participant’s right to any vested amounts already credited to his or her account. At December 31, 2009, 2008, and 2007, approximately 0.5 million, 0.7 million, and 0.5 million share awards, respectively, were held in the Plan. Additionally, as of December 31, 2009, 2008, and 2007, the Plan was holding trading securities totaling approximately $12.1 million, $18.1 million, and $20.7 million, respectively, which represents cash deferrals made by plan participants. Market value fluctuations on these trading securities are recognized in income in accordance with GAAP and the fair value of the liability due to participants is adjusted accordingly.
401(k) Savings Plan. We have a 401(k) savings plan, which is a voluntary defined contribution plan. Under the savings plan, every employee is eligible to participate, beginning on the date the employee has completed six months of continuous service with us. Each participant may make contributions to the savings plan by means of a pre-tax salary deferral, which may not be less than 1% or more than 60% of the participant’s compensation. The federal tax code limits the annual amount of salary deferrals which may be made by any participant. We may make matching contributions on the participant’s behalf up to a predetermined limit. The matching contributions made for the years ended December 31, 2009, 2008, and 2007 were approximately $1.3 million, $1.4 million, and $1.2 million, respectively. A participant’s salary deferral contribution is 100% vested and nonforfeitable. A participant will become vested in our matching contributions 33% after one year of service, 67% after two years of service and 100% after three years of service. Administrative expenses under the savings plan were paid by us and were not significant for all periods presented.
12. Fair Value Measurements
The following table presents information regarding our assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets we have the ability to access for identical assets or liabilities. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 which are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability, such as interest rates and yield curves observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. To estimate fair values, observable market prices are used if available. In some instances, observable market prices are not readily available for certain financial instruments and fair value is estimated using present value or other techniques appropriate for a particular financial instrument giving consideration to a marketplace participant’s perspective. These techniques involve some degree of judgment and as a result are not necessarily indicative of the amounts we would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts. Disclosures concerning assets and liabilities measured at fair value on a recurring basis are as follows:
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009
(in millions)
Deferred compensation plan investments. The estimated fair values of investment securities classified as deferred compensation plan investments are based on quoted market prices utilizing public information for the same transactions or information provided through third-party advisors. Our deferred compensation plan investments are recorded in other assets.
Derivative financial instruments. We enter into derivative financial instruments, specifically interest rate swaps and caps, for non-trading purposes. We use interest rate swaps and caps to manage interest rate risk arising from interest payments associated with floating rate debt. Through December 31, 2009, we had derivative financial instruments designated and qualifying as cash flow hedges. Derivative contracts with positive net fair values are recorded in other assets. Derivative contracts with negative net fair values are recorded in other liabilities. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk, both our own nonperformance risk and the respective counterparty’s nonperformance risk. The fair value of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts which would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.
Although we have determined the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Effective January 1, 2009, we adopted the provisions of the Fair Value Measurements and Disclosures Topic of the Codification relating to our nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis, which primarily relates to impairment of long-lived assets or investments. Disclosures concerning assets measured at fair value on a non-recurring basis are as follows:
Assets Measured at Fair Value on a Non-Recurring Basis at December 31,
(in millions)
During the quarter ended December 31, 2009, we recognized a $72.2 million impairment charge to the previous carrying value of $109.9 million for land holdings for eight future projects we have put on hold for the foreseeable future. Additionally, we recognized a $13.4 million impairment charge relating to a land development joint venture we have put on hold for the foreseeable future. This development joint venture had a previous carrying value of approximately $8.9 million. The impairment also included exit costs associated with this joint venture. The estimates of fair value were based on what we believe to be marketplace participant expectations, and consider, among other things, the highest and best use of the land (for example, as a multifamily development, or single-family townhome construction), estimated timeframe and current estimates of construction and development costs, estimates of expected market rents and expenses upon completion of development, expected lease-up periods, and expected net operating income (or yield) that a marketplace participant would expect to receive from the developed project. We utilized opinions of value from third-parties to supplement our estimates. There were no significant market-based transactions that have occurred during the previous twelve months for the land parcels that were analyzed.
Other Fair Value Disclosures. As of December 31, 2009 and 2008, management estimated the carrying value of cash and cash equivalents, restricted cash, accounts receivable, liabilities under deferred compensation plans, accounts payable, accrued expenses and other liabilities, and distributions payable were at amounts which reasonably approximated their fair value.
In calculating the fair value of our notes receivable and notes payable, interest rates and spreads reflect current creditworthiness and market conditions available for the issuance of notes receivable and notes payable with similar terms and remaining maturities. In instances where market conditions are not available, we follow the guidance of the Fair Value Measurements and Disclosures Topic of the Codification to estimate fair value in a non-active market. The following table presents the carrying and fair value of our notes receivable and notes payable for the years ended December 31 (in millions):
13. Net Change in Operating Accounts
The effect of changes in the operating accounts on cash flows from operating activities is as follows:
14. Commitments and Contingencies
Construction Contracts. As of December 31, 2009, we were obligated for approximately $9.5 million of additional construction and development expenditures for one development project owned by a consolidated joint venture. Substantially all of the remaining expenditures for this project are expected to be funded from an existing construction loan.
Litigation. In September 2007, the Equal Rights Center (the “ERC”) filed a lawsuit against us and one of our wholly-owned subsidiaries in the United States District Court for the District of Maryland. The suit alleged various violations of the Fair Housing Act and the Americans with Disabilities Act by us in the design, construction, control, management, and/or ownership of various multifamily properties. On September 14, 2009, we entered into a consent decree agreement with the ERC to fully and finally resolve the lawsuit. Pursuant to this consent decree agreement, we agreed to make a one-time payment to the ERC. We previously accrued and reserved the costs related to the settlement. We also agreed to participate in an educational, training, and consulting program administered by the ERC, and to survey approximately 6,500 of our apartment homes to determine compliance with applicable accessibility requirements and to make improvements to the surveyed apartment homes as necessary. The survey and remediation process will extend over a period of approximately four years, and the participation in the educational and training program will extend over a period of ten years. Based on preliminary investigations, the estimated cost of capital improvements to the surveyed apartment homes to meet accessibility requirements is not expected to be material.
We are subject to various other legal proceedings and claims which arise in the ordinary course of business. Matters which arise out of allegations of bodily injury, property damage, and employment practices are generally covered by insurance. While the resolution of these other legal proceedings and claims cannot be predicted with certainty, management believes the final outcome of such matters will not have a material adverse effect on our consolidated financial statements.
Other Contingencies. In the ordinary course of our business, we issue letters of intent indicating a willingness to negotiate for acquisitions, dispositions, or joint ventures and also enter into arrangements contemplating various transactions. Such letters of intent and other arrangements are non-binding as to either party unless and until a definitive contract is entered into by the parties. Even if definitive contracts relating to the purchase or sale of real property are entered into, these contracts generally provide the purchaser with time to evaluate the property and conduct due diligence, during which periods the purchaser will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance definitive contracts will be entered into with respect to any matter covered by letters of intent or we will consummate any transaction contemplated by any definitive contract. Furthermore, due diligence periods for real property are frequently extended as needed. An acquisition or sale of real property becomes probable at the time the due diligence period expires and the definitive contract has not been terminated. We are then at risk under a real property acquisition contract, but generally only to the extent of any earnest money deposits associated with the contract, and are obligated to sell under a real property sales contract.
Lease Commitments. At December 31, 2009, we had long-term leases covering certain land, office facilities, and equipment. Rental expense totaled approximately $3.0 million for all periods presented. Minimum annual rental commitments for the years ending December 31, 2010 through 2014 are approximately $2.5 million, $2.4 million, $2.0 million, $1.9 million, and $1.8 million, respectively, and approximately $1.7 million in the aggregate thereafter.
Investments in Joint Ventures. We have entered into, and may continue in the future to enter into, joint ventures through which we own an indirect economic interest in less than 100% of the community or communities owned directly by the joint venture. Our decision whether to hold the entire interest in an apartment community ourselves, or to have an indirect interest in the community through a joint venture, is based on a variety of factors and considerations, including: (i) our projection, in some circumstances, we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used; (ii) our desire to diversify our portfolio of communities by market; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) the economic and tax terms required by a seller of land or of a community, who may prefer or who may require less payment if the land or community is contributed to a joint venture. Investments in joint ventures are not limited to a specified percentage of our assets. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion is limited to varying degrees in our existing joint venture agreements and may be limited to varying degrees depending on the terms of future joint venture agreements.
We have discretionary investment vehicles (the “Funds”) to make direct and indirect investments in multifamily real estate throughout the United States, primarily through acquisitions of operating properties and certain land parcels which will be acquired by or contributed to the Funds for development. The Funds will serve, until the earlier of (i) December 31, 2011 or (ii) such time as 90% of the Funds’ committed capital is invested, as the exclusive vehicles through which we will acquire fully-developed multifamily properties, subject to certain exceptions. These exceptions include properties acquired in tax-deferred transactions, follow-on investments made with respect to prior investments, significant transactions which include the issuance of our securities, significant individual asset and portfolio acquisitions, significant merger and acquisition activities, acquisitions which are inadvisable or inappropriate for the Funds, transactions with our existing ventures, contributions or sales of properties to or entities in which we remain an investor, and transactions approved by the Funds’ advisory board. The Funds will not restrict our development activities and will terminate on December 31, 2015, subject to two one-year extensions. We are currently targeting acquisitions for the Funds where value creation opportunities are present through one or more of the following: redevelopment activities, market cycle opportunities, or improved property operations. One of our wholly-owned subsidiaries is the general partner of each of the Funds, and we have committed 20% of the total equity of each of the Funds, up to $75 million in the aggregate. We have received commitments to each of the Funds from an unaffiliated investor of $150 million and on December 31, 2008 the Funds were closed to additional investors. As of December 31, 2009, we had made capital contributions of approximately $5.9 million to one of the Funds.
Employment Agreements. At December 31, 2009, we had employment agreements with ten of our senior officers, the terms of which expire at various times through August 20, 2010. Such agreements provide for minimum salary levels, as well as various incentive compensation arrangements, which are payable based on the attainment of specific goals. The agreements also provide for severance payments plus a gross-up payment if certain situations occur, such as termination without cause or a change of control. In the case of seven of the agreements, the severance payment equals one times the respective current annual base salary in the case of termination without cause and 2.99 times the respective average annual base salary over the previous three fiscal years in the case of a change of control and a termination of employment or a material adverse change in the scope of their duties. In the case of one agreement, the severance payment equals one times the respective current annual base salary for termination without cause and 2.99 times the greater of current gross income or average gross income over the previous three fiscal years in the case of a change of control. In the case of the other two agreements, the severance payment generally equals 2.99 times the respective average annual compensation over the previous three fiscal years in connection with, among other things, a termination without cause or a change of control, and the officer would be entitled to receive continuation and vesting of certain benefits in the case of such termination.
15. Postretirement Benefits
We maintain a postretirement benefit for two former officers of Summit, who also serve on our Board of Trust Managers. Benefits received by these former employees include medical benefits and office space. Participants in the postretirement plan contribute to the cost of the medical benefits. Our contribution for medical benefits is limited to amounts between $450 and $900 per month per participant and dependents. We contributed approximately $0.2 million for office space during the year ended December 31, 2009 and expect to contribute $0.2 million for office space in 2010. For measurement purposes, a 10% rate of increase in the per capita cost of covered health care claims were assumed; the rate was assumed to decrease until 2015 at which point the annual rate would be 5.0% and remain at that level thereafter.
As of December 31, the status of our defined postretirement benefit plan, calculated using generally accepted actuarial principles and procedures, was as follows:
(1)
Included in other comprehensive income in our Consolidated Statements of Income and Comprehensive Income.
The weighted average discount rate used to determine the value of accumulated postretirement benefit obligation for the years ended December 31, 2009 and 2008 was 6.29%. As of December 31, 2009, we had accrued for the approximate $2.9 million postretirement liabilities in other liabilities in our consolidated balance sheets.
The benefits expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter, are as follows:
The estimated benefit payments are based on assumptions about future events. Actual benefit payments may vary significantly from these estimates.
A 1% increase or decrease in assumed health care cost trend rates has no significant effect on the interest cost component of net periodic postretirement benefit costs. A 1% increase or decrease in assumed health care cost trend rates would increase or decrease the accumulated postretirement benefit obligation by approximately $0.3 million.
16. Noncontrolling Interests
The following table summarizes the effect of changes in our ownership interest in subsidiaries on the equity attributable to us for each of the years ended December 31:
17. Quarterly Financial Data (unaudited)
Summarized quarterly financial data, which has been adjusted for discontinued operations as discussed in Note 6, “Property Acquisitions, Dispositions, Assets Held for Sale, and Impairments,” for the years ended December 31, 2009 and 2008, is as follows:
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
S-1
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
S-2
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
S-3
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
S-4
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
S-5
Schedule III
Camden Property Trust
Real Estate and Accumulated Depreciation
As of December 31, 2009
(in thousands)
The changes in total real estate assets for the years ended December 31:
The changes in accumulated depreciation for the years ended December 31:
The aggregate cost for federal income tax purposes at December 31, 2009 was $4.6 billion.
S-6
Schedule IV
CAMDEN PROPERTY TRUST
MORTGAGE LOANS ON REAL ESTATE
December 31, 2009
Changes in mortgage loans for the years ended December 31 are summarized below.
S-7