nxrt-10q_20150630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2015

OR

o

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

For the transition period from                      to                     

Commission File Number 001-36663

 

NexPoint Residential Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland

 

47-1881359

(State or other Jurisdiction of

Incorporation or Organization

 

(I.R.S. Employer

Identification No.)

 

300 Crescent Court, Suite 700, Dallas, Texas

 

75201

(Address or Principal Executive Offices)

 

(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

None

(Former name, former address or former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

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

 

Large Accelerated Filer

o

 

Accelerated Filer

o

Non-Accelerated Filer

x

      (Do not check if a smaller reporting company)

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act).  Yes  o   No  x

As of August 7, 2015, the registrant had 21,293,825 shares of common stock, $0.01 par value, outstanding.

 

 

 


NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

June 30, 2015

 

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

 

 

 

 

 

Consolidated Balance Sheet as of June 30, 2015 (Unaudited) and Combined Consolidated Balance Sheet as of December 31, 2014

1

 

 

 

 

Combined Consolidated Unaudited Statements of Operations and Comprehensive Loss for the Three Months Ended June 30, 2015 and 2014 and the Six Months Ended June 30, 2015 and 2014

2

 

 

 

 

Combined Consolidated Unaudited Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

3

 

 

 

 

Combined Consolidated Unaudited Statement of Equity for the Six Months Ended June 30, 2015

5

 

 

 

 

Notes to Combined Consolidated Unaudited Financial Statements

6

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

34

 

 

 

Item 4.

Controls and Procedures.

34

 

 

 

PART II—OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

36

 

 

 

Item 1A.

Risk Factors.

36

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

36

 

 

 

Item 3.

Defaults Upon Senior Securities.

36

 

 

 

Item 4.

Mine Safety Disclosures.

36

 

 

 

Item 5.

Other Information.

36

 

 

 

Item 6.

Exhibits.

36

 

 

 

Signatures

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i


Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, the performance of our properties and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

·

unfavorable changes in market and economic conditions in the United States and globally and in the specific markets where our properties are located;  

·

risks associated with ownership of real estate;  

·

limited ability to dispose of assets because of the relative illiquidity of real estate investments;

·

the risk that we may fail to consummate our pending property acquisitions;  

·

intense competition in the real estate market that, combined with low residential mortgage rates that could encourage potential renters to purchase residences rather than lease them, may limit our ability to acquire or lease and re-lease property or increase or maintain rent;  

·

failure of acquisitions and development projects to yield anticipated results;  

·

risks associated with our strategy for acquiring value-enhancement multifamily properties, which involves greater risks than more conservative investment strategies;  

·

the lack of experience of NexPoint Real Estate Advisors, L.P. (our “Adviser”) in operating under the constraints imposed by REIT requirements;  

·

loss of key personnel;  

·

the risk that we may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser, members of our Adviser’s management team or by Highland Capital Management (our “Sponsor”) or its affiliates;  

·

risks associated with our Adviser’s ability to terminate the Advisory Agreement;  

·

our ability to change our major policies, operations and targeted investments without stockholder consent;  

·

substantial fees and expenses we will pay to our Adviser and its affiliates;  

·

risks associated with the potential internalization of our management functions;  

·

the risk that we may compete with other entities affiliated with our Sponsor or property manager for tenants;  

·

conflicts of interest and competing demands for time faced by our Adviser, our Sponsor and their officers and employees;  

·

our dependence on information systems;  

·

lack of or insufficient amounts of insurance;  

·

contingent or unknown liabilities related to properties or businesses that we have acquired or may acquire;  

·

high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical vapor, subsurface contamination and mold growth;  

·

the risk that our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient;  

 

ii


·

high costs associated with the compliance with various accessibility, environmental, building and health and safety laws and regulations, such as the ADA and FHA;  

·

risks associated with our high concentrations of investments in the Southeastern United States and Texas;  

·

risks associated with limited warranties we may obtain when purchasing properties;  

·

exposure to decreases in market rents due to our short-term leases;  

·

risks associated with operating through joint ventures and funds;  

·

potential reforms to Fannie Mae and Freddie Mac;  

·

risks associated with our reduced public company reporting requirements as an “emerging growth company”;  

·

costs associated with being a public company, including compliance with securities laws;

·

risks associated with breaches of our data security;  

·

the risk that our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting;  

·

risks associated with our substantial current indebtedness and indebtedness we may incur in the future;  

·

risks associated with derivatives or hedging activity;  

·

the risk that we may be unable to achieve some or all of the benefits that we expect to achieve from the spin-off;  

·

failure to qualify as or to maintain our status as a REIT;  

·

compliance with REIT requirements, which may limit our ability to hedge our liabilities effectively and cause us to forgo otherwise attractive opportunities, liquidate certain of our investments or incur tax liabilities;  

·

failure of our operating partnership to qualify as a partnership for federal income tax purposes, causing us to fail to qualify for or to maintain REIT status;  

·

the ineligibility of dividends payable by REITs for the reduced tax rates available for some dividends;  

·

risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter;  

·

the ability of the NXRT board to revoke our REIT qualification without stockholder approval;  

·

potential legislative or regulatory tax changes or other actions affecting REITs;  

·

risks associated with the market for our common stock and the general volatility of the capital and credit markets;  

·

failure to generate sufficient cash flows to service our outstanding indebtedness or pay distributions at expected levels;  

·

risks associated with our ability to issue additional debt or equity securities in the future;  

·

risks associated with limitations of liability for and our indemnification of our directors and officers; or  

·

any of the other risks included under the heading “Risk Factors,” in our Registration Statement on Form 10, as amended (Registration No. 001-36663), which was declared effective on March 18, 2015.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

 

 

 

 

iii


 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Operating Real Estate Investments

 

 

 

 

 

 

 

 

Land (including from VIEs of $163,630,000 and $127,740,000, respectively)

 

$

165,210,000

 

 

$

129,320,000

 

Buildings and improvements (including from VIEs of $631,369,109 and $479,904,527,

   respectively)

 

 

639,751,506

 

 

 

488,260,399

 

Intangible lease assets (including from VIEs of $4,832,000 and $17,594,000,

   respectively)

 

 

4,832,000

 

 

 

17,884,000

 

Construction in progress (including from VIEs of $9,703,550 and $6,529,884,

   respectively)

 

 

9,754,658

 

 

 

6,529,884

 

Furniture, fixtures, and equipment (including from VIEs of $14,336,658 and $7,886,210,

   respectively)

 

 

14,818,049

 

 

 

8,319,564

 

Total Gross Operating Real Estate Investments

 

 

834,366,213

 

 

 

650,313,847

 

Accumulated depreciation and amortization (including from VIEs of $25,035,193 and

   $21,109,832, respectively)

 

 

(25,564,246

)

 

 

(21,787,940

)

Total Net Operating Real Estate Investments

 

 

808,801,967

 

 

 

628,525,907

 

Cash and cash equivalents (including from VIEs of $21,754,567 and $11,868,779,

   respectively)

 

 

24,156,124

 

 

 

12,661,535

 

Restricted cash (including from VIEs of $56,832,772 and $47,192,578, respectively)

 

 

57,627,898

 

 

 

47,817,342

 

Accounts receivable (including from VIEs of $1,789,384 and $1,134,869, respectively)

 

 

1,818,624

 

 

 

1,151,225

 

Prepaid and other assets (including from VIEs of $3,008,256 and $2,545,660, respectively)

 

 

5,064,393

 

 

 

2,568,933

 

Deferred financing costs, net (including from VIEs of $5,453,716 and $4,535,381,

   respectively)

 

 

5,611,170

 

 

 

4,632,429

 

TOTAL ASSETS

 

$

903,080,176

 

 

$

697,357,371

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Mortgages payable (including from VIEs of $615,120,482 and $480,976,130,

   respectively)

 

$

623,520,482

 

 

$

486,976,130

 

Accounts payable and other accrued liabilities (including from VIEs of $4,609,615 and

   $5,322,045, respectively)

 

 

4,697,373

 

 

 

5,642,297

 

Accrued real estate taxes payable (including from VIEs of $5,144,153 and $3,858,836,

   respectively)

 

 

5,227,337

 

 

 

3,858,836

 

Accrued interest payable (including from VIEs of $1,246,261 and $1,030,962,

   respectively)

 

 

1,263,089

 

 

 

1,030,962

 

Security deposit liability (including from VIEs of $1,465,732 and $1,484,004,

   respectively)

 

 

1,496,363

 

 

 

1,513,431

 

Prepaid rents (including from VIEs of $1,090,643 and $760,046, respectively)

 

 

1,100,986

 

 

 

791,810

 

Dividend payable

 

 

4,386,528

 

 

 

 

Due to affiliates (including from VIEs of $474,286 and $20,000, respectively)

 

 

474,286

 

 

 

20,000

 

Total Liabilities

 

 

642,166,444

 

 

 

499,833,466

 

Invested Equity

 

 

 

 

 

176,549,066

 

NexPoint Residential Trust, Inc. stockholders' equity:

 

 

 

 

 

 

 

 

Preferred Stock: 100,000,000 shares authorized and 0 shares issued at par value $0.01

 

 

 

 

 

 

Common Stock: 500,000,000 shares authorized and 21,293,825 shares issued at par value $0.01

 

 

212,938

 

 

 

 

Additional paid-in capital

 

 

240,775,201

 

 

 

 

Accumulated deficit

 

 

(6,639,149

)

 

 

 

Accumulated other comprehensive loss

 

 

(701,491

)

 

 

(305,860

)

Noncontrolling interests

 

 

27,266,233

 

 

 

21,280,699

 

Total Equity

 

 

260,913,732

 

 

 

197,523,905

 

TOTAL LIABILITIES AND EQUITY

 

$

903,080,176

 

 

$

697,357,371

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

1

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

(UNAUDITED)

 

 

For the Three Months

Ended June 30,

 

 

For the Six Months

Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

$

25,527,979

 

 

$

6,103,787

 

 

$

48,218,515

 

 

$

9,663,992

 

Other

 

3,219,317

 

 

 

714,114

 

 

 

6,066,250

 

 

 

1,147,855

 

Total revenues

 

28,747,296

 

 

 

6,817,901

 

 

 

54,284,765

 

 

 

10,811,847

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses

 

8,292,668

 

 

 

1,900,815

 

 

 

15,611,964

 

 

 

2,938,565

 

Acquisition costs

 

237,664

 

 

 

851,627

 

 

 

2,169,262

 

 

 

2,746,524

 

Real estate taxes and insurance

 

3,577,214

 

 

 

953,721

 

 

 

6,955,140

 

 

 

1,486,301

 

Property management fees (related party)

 

857,687

 

 

 

206,688

 

 

 

1,616,499

 

 

 

329,311

 

Management and administrative fees (related party)

 

1,438,667

 

 

 

115,562

 

 

 

2,715,354

 

 

 

240,720

 

Corporate general and administrative expenses

 

830,984

 

 

 

 

 

 

830,984

 

 

 

 

Property general and administrative expenses

 

1,488,568

 

 

 

224,688

 

 

 

2,635,155

 

 

 

379,698

 

Depreciation and amortization

 

10,050,017

 

 

 

3,568,030

 

 

 

21,660,310

 

 

 

5,579,220

 

Total expenses

 

26,773,469

 

 

 

7,821,131

 

 

 

54,194,668

 

 

 

13,700,339

 

Operating income (loss)

 

1,973,827

 

 

 

(1,003,230

)

 

 

90,097

 

 

 

(2,888,492

)

Interest expense

 

(4,238,816

)

 

 

(1,332,289

)

 

 

(8,247,661

)

 

 

(2,069,858

)

Net loss

 

(2,264,989

)

 

 

(2,335,519

)

 

 

(8,157,564

)

 

 

(4,958,350

)

Net loss attributable to noncontrolling interests

 

(12,368

)

 

 

(354,142

)

 

 

(506,066

)

 

 

(672,171

)

Net loss attributable to common shareholders

$

(2,252,621

)

 

$

(1,981,377

)

 

$

(7,651,498

)

 

$

(4,286,179

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses related to interest rate cap valuations

 

(125,873

)

 

 

 

 

 

(395,631

)

 

 

 

Total comprehensive loss

 

(2,390,862

)

 

 

(2,335,519

)

 

 

(8,553,195

)

 

 

(4,958,350

)

Comprehensive loss attributable to noncontrolling interest

 

(24,666

)

 

 

(354,142

)

 

 

(542,668

)

 

 

(672,171

)

Comprehensive loss attributable to common shareholders

$

(2,366,196

)

 

$

(1,981,377

)

 

$

(8,010,527

)

 

$

(4,286,179

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

21,293,825

 

 

$

21,293,825

 

 

 

21,293,825

 

 

$

21,293,825

 

Dividends declared per common share

$

0.206

 

 

 

 

 

$

0.206

 

 

 

 

Loss per share: Basic and diluted  (See Footnote 2)

$

(0.11

)

 

$

(0.11

)

 

$

(0.38

)

 

$

(0.23

)

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

 

2

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

For the Six Months

Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(8,157,564

)

 

$

(4,958,350

)

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

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,660,310

 

 

 

5,579,220

 

Amortization of deferred financing fees

 

 

540,527

 

 

 

81,949

 

Change in fair value on derivative instruments included in interest expense

 

 

165,599

 

 

 

449,538

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(667,405

)

 

 

(420,688

)

Prepaid and other assets

 

 

(417,536

)

 

 

(904,822

)

Restricted cash

 

 

(4,252,810

)

 

 

(2,868,958

)

Accounts payable and other accrued liabilities

 

 

(1,477,904

)

 

 

2,207,248

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

7,393,217

 

 

 

(834,863

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

(5,557,746

)

 

 

(6,229,712

)

Prepaid acquisition deposits

 

 

(2,088,362

)

 

 

 

Additions to operating real estate investments

 

 

(17,230,421

)

 

 

(2,483,625

)

Acquisitions of operating real estate investments

 

 

(164,577,909

)

 

 

(187,864,183

)

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(189,454,438

)

 

 

(196,577,520

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Mortgage proceeds received

 

 

124,990,032

 

 

 

157,120,000

 

Mortgage payments

 

 

(6,445,680

)

 

 

 

Deferred financing fees paid

 

 

(1,519,268

)

 

 

(1,726,155

)

Interest rate cap fees paid

 

 

(253,110

)

 

 

(114,838

)

Due to affiliates

 

 

454,286

 

 

 

8,459

 

Distributions to noncontrolling interest

 

 

(1,136,055

)

 

 

 

Distributions

 

 

 

 

 

(6,049,933

)

Contributions from noncontrolling interest

 

 

7,627,655

 

 

 

7,563,370

 

Contributions

 

 

69,837,950

 

 

 

46,322,438

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

193,555,810

 

 

 

203,123,341

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

11,494,589

 

 

 

5,710,958

 

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

12,661,535

 

 

 

189,868

 

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

24,156,124

 

 

$

5,900,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

3

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

 

 

Interest paid

 

$

7,309,408

 

 

$

1,191,095

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

 

 

 

 

 

 

 

Capitalized construction costs included in accounts payable and other accrued liabilities

 

 

1,321,945

 

 

 

1,067,836

 

Capitalized construction costs included in due to affiliates

 

 

 

 

 

84,755

 

Change in fair value on hedging derivative instruments

 

 

395,631

 

 

 

 

Liabilities assumed from acquisitions

 

 

1,103,771

 

 

 

1,073,524

 

Dividend declared and payable

 

 

4,386,528

 

 

 

 

Other assets acquired from acquisitions

 

 

297,682

 

 

 

387,704

 

Assumed debt on acquisitions of operating real estate investments

 

 

18,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

4

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

COMBINED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

 

Par Value

 

 

Number of Shares

 

 

Par Value

 

 

Additional

Paid-in Capital

 

 

Accumulated Deficit

 

 

Accumulated Other Comprehensive Loss

 

 

Invested Equity

 

 

Noncontrolling Interest

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2014

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

(305,860

)

 

$

176,549,066

 

 

$

21,280,699

 

 

$

197,523,905

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,837,950

 

 

 

7,627,655

 

 

 

77,465,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions / Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,386,528

)

 

 

 

 

 

 

 

 

(1,136,055

)

 

 

(5,522,583

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(395,631

)

 

 

 

 

 

 

 

 

(395,631

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,252,621

)

 

 

 

 

 

(5,398,877

)

 

 

(506,066

)

 

 

(8,157,564

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of predecessor

  invested equity for common stock

 

 

 

 

 

 

 

 

21,293,825

 

 

 

212,938

 

 

 

240,775,201

 

 

 

 

 

 

 

 

 

(240,988,139

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2015

 

 

 

 

$

 

 

 

21,293,825

 

 

$

212,938

 

 

$

240,775,201

 

 

$

(6,639,149

)

 

$

(701,491

)

 

$

 

 

$

27,266,233

 

 

$

260,913,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Combined Consolidated Financial Statements

 

 

 

 

5

 


 

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated on September 19, 2014, and intends to elect to be taxed as a real estate investment trust (“REIT”) for the 2015 tax year. We are focused on “value-add” multifamily investments primarily located in the Southeastern and Southwestern United States. Substantially all of the Company’s business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”). The Company’s subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC is the sole general partner of the OP. The sole limited partner of the OP is the Company.

The Company began operations on March 31, 2015 as a result of the transfer and contribution by NexPoint Credit Strategies Fund ("NHF") of all but one of the multifamily properties owned by NHF through its subsidiary Freedom REIT, LLC ("Freedom REIT").  NHF is a publicly listed closed-end fund that was formed on June 29, 2006 and is managed by NexPoint Advisors, L.P. ("NexPoint Advisors"), an SEC-registered investment adviser and affiliate of Highland Capital Management, L.P. and our advisor. We use the term “predecessor" to mean the carve out business of Freedom REIT, which owned all or a majority interest in the multifamily properties transferred or contributed to the Company by NHF through its subsidiary Freedom REIT. On March 31, 2015, NHF distributed all of the outstanding shares of the Company's common stock held by NHF to holders of NHF common shares.  We refer to the distribution of our common stock by NHF as the "Spin-Off." The combined consolidated financial statements represent the operations and activities of the predecessor until the Spin-Off. The Company recorded the assets and liabilities associated with the multifamily properties involved in this Spin-Off at their respective historical carrying values at the time of the Spin-Off in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 505-60, Spinoffs and Reverse Spinoffs. Certain properties included in the Spin-Off have interests owned by parties other than the Company that are reflected at historical carrying values in the financial statements of the Company as “noncontrolling interests”, as required under accounting principles generally accepted in the United States of America (“GAAP”).

We are externally managed by NexPoint Real Estate Advisors, L.P., (our "Adviser"), through an agreement dated March 16, 2015 (the “Advisory Agreement”), by and among the Company, the OP and our Adviser.  Our Adviser conducts substantially all of our operations and provides asset management for our real estate investments. We will have only accounting employees while the Advisory Agreement is in effect.  All of our investment decisions will be made by our Adviser, subject to general oversight by our Adviser’s investment committee and our Board of Directors.  Our Adviser is an affiliate of NexPoint Advisors.

The Company’s investment objectives are to maximize the cash flow and value of properties owned, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for its stockholders through targeted management and a capex value-add component. Consistent with the Company’s policy to acquire assets for both income and capital gain, the Company intends to hold majority interests in the properties for long-term appreciation and to engage in the business of directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States consistent with our investment objectives.

The Company may also participate with third parties in property ownership, through limited liability companies, funds or other types of co-ownership or acquire real estate or interests in real estate in exchange for the issuance of common stock, units, preferred stock or options to purchase stock. These types of investments may permit the Company to own interests in larger assets without unduly restricting diversification which provides flexibility in structuring the Company’s portfolio.

The Company may allocate up to thirty percent of the portfolio to investments in real estate-related debt and securities with the potential for high current income or total returns. These allocations may include first and second mortgages, subordinated, bridge, mezzanine, construction and other loans, as well as debt securities related to or secured by multifamily real estate and common and preferred equity securities, which may include securities of other REIT or real estate companies.

 

2. Summary of Significant Accounting Policies

Predecessor

With the exception of a nominal amount of initial cash funded at inception, the Company did not own any assets prior to March 31, 2015. The business and operations of the Company prior to March 31, 2015 occurred under the predecessor. Our predecessor included all of the properties in our portfolio that were held indirectly by Freedom REIT, a wholly owned subsidiary of NHF, prior to the Spin-Off that occurred on March 31, 2015. However, our combined consolidated statements of operations and comprehensive loss and statements of cash flows reflect operations of our predecessor through March 31, 2015 as if they were incurred by us. Our predecessor was determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).

6

 


 

References throughout these combined consolidated financial statements to the Company, we, or our, include the activity of the predecessor defined above.

 

 

Basis of Accounting

The accompanying unaudited interim combined consolidated financial statements of the Company are prepared in accordance with GAAP and with Rule 10-01 Regulation S-X for interim financial statements. The combined consolidated balance sheet includes the accounts of the Company and its subsidiaries. Our predecessor combined consolidated financial statements were derived from the historical accounting records of our predecessor and reflect the historical financial position, results of operations and cash flows for the periods prior to the Spin-Off. All intercompany balances and transactions are eliminated in combination and consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting polices consistent with those of the Company. In addition, the Company evaluates relationships with other entities to identify whether there are variable interest entities (“VIE’s”) as required by FASB ASC 810, Consolidation, and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the financial statements in accordance with FASB ASC 810. In the opinion of the Company’s management, the accompanying combined consolidated financial statements include all adjustments and eliminations, consisting only of normal recurring items necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of operating results for a full year. The unaudited information included in this quarterly report on form 10-Q should be read in conjunction with our predecessor audited financial statements identified as “Freedom REIT Contribution Group” for the year ended December 31, 2014 and notes thereto included in the information statement filed as an exhibit to our registration statement on Form 10 filed on March 12, 2015. There have been no significant changes to the Company’s significant accounting policies during the six months ended June 30, 2015.

Use of Estimates

The preparation of the combined consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the combined consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. It is at least reasonably possible that these estimates could change in the near term.

Real Estate Investments

Upon acquisition, in accordance with FASB ASC 805, Business Combinations, the purchase price of a property is allocated to land, building, improvements, furniture, fixtures, and equipment, and intangible lease assets. The purchase price allocation is based on management’s estimate of the property’s “as-if” vacant fair value, which is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the purchase price to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents.

If any debt is assumed in an acquisition, the difference between the fair value and the face value of debt is recorded as a premium or discount and amortized to interest expense over the life of the debt assumed. Costs associated with the acquisition of a property, including acquisition fees paid, are expensed as incurred upon closing the acquisition.

The results of operations for acquired properties are included in the combined consolidated statements of operations and comprehensive loss from their respective acquisition dates.

 

Real estate assets, including land, building, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

 

Land

 

Not depreciated

Building

 

30 years

Improvements

 

15 years

Furniture, fixtures, and equipment

 

3 years

Intangible lease assets

 

6 months

 

Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete the historical cost of the renovation is placed into service in one of the categories above depending on the renovation project and is depreciated over the estimated useful lives as described in the table above.

7

 


 

Impairment

Real estate assets that are determined to be held and used will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, and the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. For the periods ended June 30, 2015 and 2014, the Company did not record any impairment charges related to real estate assets.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value.

Restricted Cash

Restricted cash is comprised of amounts set aside for security deposits, capital improvements and lender impound reserve accounts on the Company’s borrowings for escrow deposits, and amounts set aside for real estate taxes and insurance. The following is a summary of the restricted cash held as of June 30, 2015 and December 31, 2014:

 

 

June 30, 2015

 

 

December 31, 2014

 

Security Deposits

$

1,457,731

 

 

$

1,574,302

 

Operating Escrows

 

11,668,807

 

 

 

7,299,426

 

Renovation value-add reserves

 

44,501,360

 

 

 

38,943,614

 

 

$

57,627,898

 

 

$

47,817,342

 

 

 

 

 

 

 

 

 

 

Prepaid acquisition deposits

The Company incurs costs in connection with future acquisitions that may include good faith deposits prior to possible acquisitions that are expected to be rolled into the costs of the closing. Until an acquisition closes, the Company reflects these costs as prepaid costs on the balance sheet. As of June 30, 2015, prepaid costs were $2,000,000 in escrow that will be rolled into the cost of the properties at closing in connection with two subsequent acquisitions (Note 10). These costs are included in prepaid and other assets on the consolidated balance sheet. No such costs existed as of December 31, 2014.

 

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to earnings. Deferred financing costs, net of amortization, of $5,611,170 and $4,632,429 are recorded on the accompanying combined consolidated balance sheets as of June 30, 2015 and at December 31, 2014, respectively. Amortization of deferred financing costs of $233,931 and $56,509 is included in interest expense in the combined consolidated statements of operations and comprehensive loss for the three month periods ended June 30, 2015 and 2014, respectively. Amortization of deferred financing costs of $540,527 and $81,949 is included in interest expense in the combined consolidated statements of operations and comprehensive loss for the six month periods ended June 30, 2015 and 2014, respectively.

Noncontrolling Interests

Noncontrolling interests are comprised of the Company’s joint venture partners’ interests in the joint ventures in multifamily properties that the Company combines and consolidates. The Company reports its joint venture partners’ interests in its consolidated real estate joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated

8

 


 

investment’s net income or loss and equity contributions and distributions. These noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on its economic ownership percentage.

Accounting for Joint Ventures

The Company first analyzes its investments in joint ventures to determine if the joint venture is a VIE in accordance with FASB ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests that change with changes in the fair value of the VIE’s net assets. The Company assesses at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If an entity in which the Company holds a joint venture interest qualifies as a VIE and the Company is determined to be the primary beneficiary, the joint venture is consolidated. 

9

 


 

The following table represents the Company’s investments at June 30, 2015 and December 31, 2014:

 

Properties

 

Location

 

Year Acquired

 

Effective Ownership

Percentage at

June 30, 2015

 

 

 

Effective Ownership

Percentage at

December 31, 2014

 

 

The Miramar Apartments

 

Dallas, Texas

 

2013

 

 

100

%

 

 

 

100

%

(1)

Arbors on Forest Ridge

 

Bedford, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Cutter's Point

 

Richardson, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Eagle Crest

 

Irving, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Meridian

 

Austin, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Silverbrook

 

Grand Prairie, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Timberglen

 

Dallas, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Toscana

 

Dallas, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

The Grove at Alban

 

Frederick, Maryland

 

2014

 

 

76

%

 

 

 

76

%

 

Willowdale Crossings

 

Frederick, Maryland

 

2014

 

 

80

%

 

 

 

80

%

 

Edgewater at Sandy Springs

 

Atlanta, Georgia

 

2014

 

 

90

%

 

 

 

90

%

 

Beechwood Terrace

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

 

90

%

 

Willow Grove

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

 

90

%

 

Woodbridge

 

Nashville, Tennessee

 

2014

 

 

90

%

 

 

 

90

%

 

Abbington Heights

 

Antioch, Tennessee

 

2014

 

 

90

%

 

 

 

90

%

 

The Summit at Sabal Park

 

Tampa, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Courtney Cove

 

Tampa, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Colonial Forest

 

Jacksonville, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Park at Blanding

 

Orange Park, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Park at Regency

 

Jacksonville, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Jade Park

 

Daytona Beach, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Mandarin Reserve

 

Jacksonville, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Radbourne Lake

 

Charlotte, North Carolina

 

2014

 

 

90

%

 

 

 

90

%

 

Timber Creek

 

Charlotte, North Carolina

 

2014

 

 

90

%

 

 

 

90

%

 

Belmont at Duck Creek

 

Garland, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

The Arbors

 

Tucker, Georgia

 

2014

 

 

90

%

 

 

 

90

%

 

The Crossings

 

Marietta, Georgia

 

2014

 

 

90

%

 

 

 

90

%

 

The Crossings at Holcomb Bridge

 

Roswell, Georgia

 

2014

 

 

90

%

 

 

 

90

%

 

The Knolls

 

Marietta, Georgia

 

2014

 

 

90

%

 

 

 

90

%

 

Regatta Bay

 

Seabrook, Texas

 

2014

 

 

90

%

 

 

 

90

%

 

Sabal Palm at Lake Buena Vista

 

Orlando, Florida

 

2014

 

 

90

%

 

 

 

90

%

 

Southpoint Reserve at Stoney Creek (FKA Steeplechase Apartments)

 

Fredericksburg, Virginia

 

2014

 

 

85

%

 

 

 

85

%

 

Cornerstone

 

Orlando, Florida

 

2015

 

 

90

%

 

 

 

0

%

(2)

McMillan Place

 

Dallas, Texas

 

2015

 

 

90

%

 

 

 

0

%

(2)

Barrington Mill

 

Marietta, Georgia

 

2015

 

 

90

%

 

 

 

0

%

(2)

Dana Point

 

Dallas, Texas

 

2015

 

 

90

%

 

 

 

0

%

(2)

Heatherstone

 

Dallas, Texas

 

2015

 

 

90

%

 

 

 

0

%

(2)

Versailles

 

Dallas, Texas

 

2015

 

 

90

%

 

 

 

0

%

(2)

Bayberry Apartments

 

West Palm Beach, Florida

 

2015

 

 

90

%

 

 

 

0

%

(2)

 

(1)

The Miramar Apartments has no joint venture interest.

(2)

Properties were acquired in 2015, therefore no ownership as of December 31, 2014.

In connection with its indirect equity investments in the properties acquired, the Company holds LLC membership interests in the operating partnerships. These entities are deemed to be VIEs as we have disproportionately few voting rights (in the form of substantive participating rights over all of the decisions that are made that most significantly affect economic performance) relative to our economic interests in the entities and substantially all of the activities of the entities are performed on our behalf. The Company is considered the primary beneficiary of these VIEs as no single party meets both criteria to be the primary beneficiary, and we are the member of the related party group that has both the power to direct the activities that most significantly impact economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Within the related party group, the Company is the most closely associated to the VIE based on the purpose and design of the entity, the size

10

 


 

of our ownership interests relative to the other investors, and the rights we hold with respect to the other investors’ equity interests, including our ability to preclude any transfers of their interests and ability to drag them along on the sale of our equity interest. All VIEs are consolidated in the Company’s financial statements. The assets of these VIEs can only be used to settle obligations of the VIEs, and the creditors of each entity have no recourse to the assets of other entities or the Company.

The other investor in the VIEs is BH Equity or affiliates of BH Equity.  When these VIEs were formed under our predecessor, BH Equity invested cash in each VIE (with the exception of Miramar) on the same basis as us, receiving a proportional share of each VIE (other than Miramar).  Each VIE has a non-recourse mortgage that has standard scope non-recourse carve outs required by agency lenders and generally call for protection by the borrower and the guarantor against losses by the lender for so-called “bad acts,” such as misrepresentations, and may include full recourse liability for more significant events such as bankruptcy. BH Equity, or its affiliates provided non-recourse carve out guarantees for the mortgage indebtedness currently outstanding relating to the Portfolio.  In consideration of the guarantees provided by BH Equity and its affiliates, they will earn an additional 10% profit interest in the VIE such that distributions will be made to the members of the VIE pro rata in proportion to their relative percentage interests until the members have received an internal rate of return equal to 13%. Then, generally 80% of the distributions will be paid to us and 20% of the distributions will be paid to BH Equity or an affiliate where BH Equity or its affiliates own 10% of the VIE. They will receive more if they own more than 10% and less if they own less than 10%.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, pets, administrative, application and other fees and are recognized when earned.

Asset Management & Property Management Services

Management fee expenses are recognized when incurred in accordance with each management agreement, see additional disclosures at Note 8.

Allowance for Doubtful Accounts

Allowances for rental income receivables are established when management determines that collections of such receivables are doubtful. Balances are considered past due when payment is not received on the contractual due date. When management has determined that receivables are uncollectible, they are written off against the allowance for doubtful accounts.

Income Taxes

The Company intends to elect to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its first taxable year of operations. If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on its taxable income that is distributed to its stockholders as long as it distributes at least 90% of its taxable income to its stockholders and meets certain tests regarding the nature of the Company’s income and assets. The Company intends to operate in a manner that allows the Company to meet the requirements for taxation as a REIT, including creating taxable REIT subsidiaries to hold assets that generate income that would not be consistent with the rules applicable for qualification as a REIT if held directly by the REIT. If the Company were to fail to meet these requirements, it could be subject to federal income tax on the Company’s taxable income at regular corporate rates. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. The Company will also be disqualified for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions.

Reportable Segment

Substantially all of the Company’s consolidated net loss is from investments in real estate properties within the multi-family sector that the Company owns through LLCs. The Company evaluates operating performance on an individual property level and views its real estate assets as one industry segment and, accordingly, its properties are aggregated into one reportable segment.

Concentration of Credit Risk

The Company maintains cash balances with high quality financial institutions, including NexBank, an affiliate of our Advisor, and periodically evaluates the creditworthiness of such institutions and believes that the Company is not exposed to significant credit risk. Cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

11

 


 

Fair Value Measurements

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820, Fair Value Measurement and Disclosures, establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy)

·

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

·

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.

·

Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s 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. The Company utilizes an independent third party to perform the valuation analysis for each property acquisition and also to perform the market valuations on the interest rate caps and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and interest rate caps are fair and consistent as of the measurement date.

Per Share Data

The Company began operations on March 31, 2015 as described above and therefore the Company had no operating activities or earnings (loss) per share before March 31, 2015. However, for purposes of the combined consolidated statements of operations and comprehensive loss the Company has presented basic and diluted earnings (loss) per share as if the operating activities of the predecessor were those of the Company and assuming the shares outstanding at the date of the Spin-Off were outstanding for all periods prior to the Spin-Off. Basic earnings per share will be shown for all periods presented and computed by dividing net income or loss by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any.  There were no potentially dilutive securities for any of the periods presented. The Company incurred a loss per share of $0.11 for the three months ended June 30, 2015, the first interim period following the Spin-Off..

Recent Accounting Pronouncements

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act. The following recent accounting pronouncements reflect effective dates that delay the adoption until those standards would otherwise apply to private companies.

 

 

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changed the requirements for reporting discontinued operations. This ASU limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have a major effect on an entity’s operations and financial results. As a result, under the new standard the Company does not expect to report discontinued operations for most real estate dispositions. The new standard is effective for any disposals of components of the Company in annual reporting periods beginning on or after December 15, 2014. The Company implemented the provisions of ASU 2014-08 as of January 1, 2015.

12

 


 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within that reporting period. The Company will implement the provisions of ASU 2014-09 as of January 1, 2018. The Company has not yet determined the impact of the new standard on its current policies for revenue recognition.

In August 2014, the FASB issued ASU 2014-015, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern, and to provide disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The ASU is effective for annual periods ending after December 15, 2016, with early adoption being permitted. The Company will implement the provisions of ASU 2014-15 as of January 1, 2017. The Company has not yet determined the impact of the new standard.

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed though a contractual arrangement. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016. The Company will implement the provisions of ASU 2015-02 as of January 1, 2017. The Company has not yet determined the impact of the new standard on its current policies for consolidation.

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest, which changes the way reporting enterprises record debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The new standard is effective for annual reporting periods beginning after December 15, 2015. The Company will implement the provisions of ASU 2015-03 as of January 1, 2016. The Company does not expect the new standard to have a material impact on its consolidated financial statements.

 

 

13

 


 

3. Acquisitions

As of June 30, 2015, through its combined consolidated joint ventures, the Company has invested in a total of thirty-nine multifamily properties as listed below (property descriptions including rentable square footage, number of units, average effective monthly rent and occupancy are unaudited):

 

Multifamily Property Name

 

Rentable Square Footage

 

 

Number of Units

 

 

Date Acquired

 

Average

Effective

Monthly Rent

Per Unit (1)

 

 

% Occupied as

of June 30,

2015 (2)

 

 

% Occupied as

of December 31, 2014 (2)

 

The Miramar Apartments

 

 

183,100

 

 

314

 

 

10/31/2013

 

$

561

 

 

 

91.4

%

 

 

92.7

%

Arbors on Forest Ridge

 

 

154,556

 

 

210

 

 

1/31/2014

 

$

787

 

 

 

93.8

%

 

 

92.9

%

Cutter's Point

 

 

197,972

 

 

196

 

 

1/31/2014

 

$

954

 

 

 

95.9

%

 

 

96.4

%

Eagle Crest

 

 

395,951

 

 

447

 

 

1/31/2014

 

$

767

 

 

 

95.7

%

 

 

94.9

%

Meridian

 

 

148,200

 

 

200

 

 

1/31/2014

 

$

791

 

 

 

94.0

%

 

 

95.0

%

Silverbrook

 

 

526,138

 

 

642

 

 

1/31/2014

 

$

696

 

 

 

94.1

%

 

 

91.7

%

Timberglen

 

 

221,376

 

 

304

 

 

1/31/2014

 

$

727

 

 

 

92.8

%

 

 

93.4

%

Toscana

 

 

115,400

 

 

192

 

 

1/31/2014

 

$

634

 

 

 

92.7

%

 

 

93.2

%

The Grove at Alban

 

 

267,300

 

 

290

 

 

3/10/2014

 

$

947

 

 

 

91.4

%

 

 

89.3

%

Willowdale Crossings

 

 

411,800

 

 

432

 

 

5/15/2014

 

$

995

 

 

 

91.9

%

 

 

82.9

%

Edgewater at Sandy Springs

 

 

726,774

 

 

760

 

 

7/18/2014

 

$

791

 

 

 

89.5

%

 

 

92.5

%

Beechwood Terrace

 

 

271,728

 

 

300

 

 

7/21/2014

 

$

760

 

 

 

96.3

%

 

 

98.7

%

Willow Grove

 

 

229,140

 

 

244

 

 

7/21/2014

 

$

723

 

 

 

95.1

%

 

 

94.7

%

Woodbridge

 

 

246,840

 

 

220

 

 

7/21/2014

 

$

848

 

 

 

91.4

%

 

 

90.5

%

Abbington Heights

 

 

238,974

 

 

274

 

 

8/1/2014

 

$

763

 

 

 

95.3

%

 

 

96.0

%

The Summit at Sabal Park

 

 

204,545

 

 

252

 

 

8/20/2014

 

$

811

 

 

 

93.3

%

 

 

88.5

%

Courtney Cove

 

 

224,958

 

 

324

 

 

8/20/2014

 

$

704

 

 

 

93.2

%

 

 

95.1

%

Colonial Forest

 

 

160,093

 

 

174

 

 

8/20/2014

 

$

625

 

 

 

90.8

%

 

 

94.8

%

Park at Blanding

 

 

116,410

 

 

117

 

 

8/20/2014

 

$

762

 

 

 

96.6

%

 

 

88.9

%

Park at Regency

 

 

134,253

 

 

159

 

 

8/20/2014

 

$

739

 

 

 

93.7

%

 

 

91.2

%

Jade Park

 

 

118,392

 

 

144

 

 

8/20/2014

 

$

708

 

 

 

92.4

%

 

 

96.5

%

Mandarin Reserve

 

 

449,276

 

 

520

 

 

9/15/2014

 

$

693

 

 

 

95.2

%

 

 

95.4

%

Radbourne Lake

 

 

246,599

 

 

225

 

 

9/30/2014

 

$

1,057

 

 

 

92.0

%

 

 

92.4

%

Timber Creek

 

 

248,391

 

 

352

 

 

9/30/2014

 

$

725

 

 

 

95.7

%

 

 

93.2

%

Belmont at Duck Creek

 

 

198,279

 

 

240

 

 

9/30/2014

 

$

834

 

 

 

92.9

%

 

 

93.8

%

The Arbors

 

 

127,536

 

 

140

 

 

10/16/2014

 

$

747

 

 

 

96.4

%

 

 

92.1

%

The Crossings

 

 

377,840

 

 

380

 

 

10/16/2014

 

$

715

 

 

 

94.2

%

 

 

94.7

%

The Crossings at Holcomb Bridge

 

 

247,982

 

 

268

 

 

10/16/2014

 

$

747

 

 

 

96.3

%

 

 

93.7

%

The Knolls

 

 

311,160

 

 

312

 

 

10/16/2014

 

$

793

 

 

 

92.9

%

 

 

95.2

%

Regatta Bay

 

 

200,440

 

 

240

 

 

11/4/2014

 

$

972

 

 

 

97.9

%

 

 

96.3

%

Sabal Palm at Lake Buena Vista

 

 

370,768

 

 

400

 

 

11/5/2014

 

$

1,070

 

 

 

93.3

%

 

 

95.0

%

Southpoint Reserve at Stoney Creek (FKA Steeplechase Apartments)

 

 

115,712

 

 

156

 

 

12/18/2014

 

$

1,001

 

 

 

89.1

%

 

 

92.9

%

Cornerstone

 

 

317,565

 

 

430

 

 

1/15/2015

 

$

821

 

 

 

94.7

%

 

(3)

 

McMillan Place

 

 

290,051

 

 

402

 

 

1/15/2015

 

$

668

 

 

 

89.1

%

 

(3)

 

Barrington Mill

 

 

692,180

 

 

752

 

 

2/6/2015

 

$

723

 

 

 

94.5

%

 

(3)

 

Dana Point

 

 

206,276

 

 

264

 

 

2/26/2015

 

$

753

 

 

 

91.7

%

 

(3)

 

Heatherstone

 

 

115,615

 

 

152

 

 

2/26/2015

 

$

752

 

 

 

91.4

%

 

(3)

 

Versailles

 

 

300,908

 

 

388

 

 

2/26/2015

 

$

781

 

 

 

92.3

%

 

(3)

 

Bayberry Apartment

 

 

216,891

 

 

222

 

 

4/15/2015

 

$

961

 

 

 

96.4

%

 

(3)

 

 

 

 

10,327,369

 

 

 

12,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Average effective monthly rent per unit is equal to the average of (i) the contractual rent for commenced leases as of June 30, 2015 minus any tenant concession over the term of the lease, divided by (ii) the number of units under commenced leases as of June 30, 2015.

(2)

Percent occupied is calculated as (i) the number of units occupied as of June 30, 2015, and at December 31, 2014, divided by total number of units, expressed as a percentage.

(3)

Properties acquired in 2015.

14

 


 

 

 

4. Real Estate Investments

As of June 30, 2015, the major components of the Company’s investments in multifamily properties, were as follows (unaudited):

 

Property

 

Land

 

 

Building and Improvements

 

 

Intangible Lease Assets

 

 

Construction in Progress

 

 

Furniture, Fixtures and Equipment

 

 

Totals

 

The Miramar Apartments

 

$

1,580,000

 

 

$

8,382,397

 

 

$

 

 

$

51,108

 

 

$

481,391

 

 

$

10,494,896

 

Arbors on Forest Ridge

 

 

2,330,000

 

 

 

10,933,104

 

 

 

 

 

 

3,066

 

 

 

344,014

 

 

 

13,610,184

 

Cutter's Point

 

 

3,330,000

 

 

 

12,705,851

 

 

 

 

 

 

4,872

 

 

 

454,310

 

 

 

16,495,033

 

Eagle Crest

 

 

5,450,000

 

 

 

21,729,555

 

 

 

 

 

 

9,435

 

 

 

601,546

 

 

 

27,790,536

 

Meridian

 

 

2,310,000

 

 

 

10,292,699

 

 

 

 

 

 

14,261

 

 

 

299,730

 

 

 

12,916,690

 

Silverbrook

 

 

4,860,000

 

 

 

24,760,216

 

 

 

 

 

 

102,240

 

 

 

1,143,201

 

 

 

30,865,657

 

Timberglen

 

 

2,510,000

 

 

 

14,108,874

 

 

 

 

 

 

194,345

 

 

 

385,363

 

 

 

17,198,582

 

Toscana

 

 

1,730,000

 

 

 

7,045,546

 

 

 

 

 

 

244,628

 

 

 

282,110

 

 

 

9,302,284

 

The Grove at Alban

 

 

3,640,000

 

 

 

18,949,455

 

 

 

 

 

 

316,379

 

 

 

340,779

 

 

 

23,246,613

 

Willowdale Crossings

 

 

4,650,000

 

 

 

35,584,957

 

 

 

 

 

 

108,391

 

 

 

551,553

 

 

 

40,894,901

 

Edgewater at Sandy

   Springs

 

 

14,290,000

 

 

 

41,567,414

 

 

 

 

 

 

1,662,215

 

 

 

1,558,001

 

 

 

59,077,630

 

Beechwood Terrace

 

 

1,390,000

 

 

 

20,306,191

 

 

 

 

 

 

13,531

 

 

 

310,704

 

 

 

22,020,426

 

Willow Grove

 

 

3,940,000

 

 

 

10,212,885

 

 

 

 

 

 

335,360

 

 

 

294,493

 

 

 

14,782,738

 

Woodbridge

 

 

3,650,000

 

 

 

12,130,551

 

 

 

 

 

 

384,850

 

 

 

301,092

 

 

 

16,466,493

 

Abbington Heights

 

 

1,770,000

 

 

 

16,133,545

 

 

 

 

 

 

34,556

 

 

 

323,982

 

 

 

18,262,083

 

The Summit at Sabal Park

 

 

5,770,000

 

 

 

13,170,279

 

 

 

 

 

 

97,574

 

 

 

358,546

 

 

 

19,396,399

 

Courtney Cove

 

 

5,880,000

 

 

 

12,700,535

 

 

 

 

 

 

119,112

 

 

 

514,021

 

 

 

19,213,668

 

Colonial Forest

 

 

2,090,000

 

 

 

3,436,453

 

 

 

 

 

 

11,088

 

 

 

240,997

 

 

 

5,778,538

 

Park at Blanding

 

 

2,610,000

 

 

 

3,952,226

 

 

 

 

 

 

65,043

 

 

 

190,986

 

 

 

6,818,255

 

Park at Regency

 

 

2,620,000

 

 

 

5,617,077

 

 

 

 

 

 

11,083

 

 

 

324,987

 

 

 

8,573,147

 

Jade Park

 

 

1,490,000

 

 

 

6,383,222

 

 

 

 

 

 

34,467

 

 

 

197,330

 

 

 

8,105,019

 

Mandarin Reserve

 

 

5,610,000

 

 

 

19,980,761

 

 

 

 

 

 

788,816

 

 

 

531,848

 

 

 

26,911,425

 

Radbourne Lake

 

 

2,440,000

 

 

 

21,115,026

 

 

 

 

 

 

202,433

 

 

 

546,902

 

 

 

24,304,361

 

Timber Creek

 

 

11,260,000

 

 

 

11,983,564

 

 

 

 

 

 

867,295

 

 

 

191,824

 

 

 

24,302,683

 

Belmont at Duck Creek

 

 

1,910,000

 

 

 

16,896,199

 

 

 

 

 

 

3,068

 

 

 

331,496

 

 

 

19,140,763

 

The Arbors

 

 

1,730,000

 

 

 

6,402,658

 

 

 

 

 

 

6,275

 

 

 

170,108

 

 

 

8,309,041

 

The Crossings

 

 

4,150,000

 

 

 

16,587,591

 

 

 

 

 

 

663,995

 

 

 

405,201

 

 

 

21,806,787

 

The Crossings at Holcomb

   Bridge

 

 

5,560,000

 

 

 

9,875,229

 

 

 

 

 

 

651,171

 

 

 

371,562

 

 

 

16,457,962

 

The Knolls

 

 

3,410,000

 

 

 

17,265,489

 

 

 

 

 

 

109,229

 

 

 

361,760

 

 

 

21,146,478

 

Regatta Bay

 

 

1,660,000

 

 

 

15,838,146

 

 

 

 

 

 

186,212

 

 

 

238,560

 

 

 

17,922,918

 

Sabal Palm at Lake Buena

   Vista

 

 

7,580,000

 

 

 

40,245,240

 

 

 

 

 

 

353,329

 

 

 

484,425

 

 

 

48,662,994

 

Southpoint Reserve at Stoney Creek (FKA Steeplechase Apartments)

 

 

6,120,000

 

 

 

10,401,326

 

 

 

 

 

 

344,429

 

 

 

144,441

 

 

 

17,010,196

 

Cornerstone

 

 

1,500,000

 

 

 

29,393,528

 

 

 

894,000

 

 

 

407,323

 

 

 

158,882

 

 

 

32,353,733

 

McMillan Place

 

 

3,610,000

 

 

 

16,787,699

 

 

 

572,000

 

 

 

145,662

 

 

 

105,691

 

 

 

21,221,052

 

Barrington Mill

 

 

10,170,000

 

 

 

46,480,099

 

 

 

1,814,000

 

 

 

449,253

 

 

 

275,266

 

 

 

59,188,618

 

Dana Point

 

 

4,090,000

 

 

 

11,555,782

 

 

 

362,000

 

 

 

99,459

 

 

 

305,887

 

 

 

16,413,128

 

Heatherstone

 

 

2,320,000

 

 

 

6,793,214

 

 

 

208,000

 

 

 

45,565

 

 

 

142,799

 

 

 

9,509,578

 

Versailles

 

 

6,720,000

 

 

 

19,052,192

 

 

 

581,000

 

 

 

190,217

 

 

 

390,675

 

 

 

26,934,084

 

Bayberry Apartments

 

 

7,480,000

 

 

 

12,994,731

 

 

 

401,000

 

 

 

423,323

 

 

 

161,586

 

 

 

21,460,640

 

 

 

 

165,210,000

 

 

 

639,751,506

 

 

 

4,832,000

 

 

 

9,754,658

 

 

 

14,818,049

 

 

 

834,366,213

 

Accumulated depreciation

   and amortization

 

 

 

 

 

(20,101,421

)

 

 

(3,719,371

)

 

 

 

 

 

(1,743,454

)

 

 

(25,564,246

)

 

 

$

165,210,000

 

 

$

619,650,085

 

 

$

1,112,629

 

 

$

9,754,658

 

 

$

13,074,595

 

 

$

808,801,967

 

 

15

 


 

As of December 31, 2014, the major components of the Company’s investments in multifamily properties, were as follows:

 

Property

 

Land

 

 

Building and Improvements

 

 

Intangible Lease Assets

 

 

Construction in Progress

 

 

Furniture, Fixtures and Equipment

 

 

Totals

 

The Miramar Apartments

 

$

1,580,000

 

 

$

8,355,872

 

 

$

290,000

 

 

$

 

 

$

433,354

 

 

$

10,659,226

 

Arbors on Forest Ridge

 

 

2,330,000

 

 

 

10,831,742

 

 

 

312,000

 

 

 

1,556

 

 

 

263,482

 

 

 

13,738,780

 

Cutter's Point

 

 

3,330,000

 

 

 

12,612,164

 

 

 

352,000

 

 

 

27,633

 

 

 

333,204

 

 

 

16,655,001

 

Eagle Crest

 

 

5,450,000

 

 

 

21,454,515

 

 

 

654,000

 

 

 

125,369

 

 

 

474,391

 

 

 

28,158,275

 

Meridian

 

 

2,310,000

 

 

 

10,258,263

 

 

 

299,000

 

 

 

 

 

 

198,449

 

 

 

13,065,712

 

Silverbrook

 

 

4,860,000

 

 

 

24,534,598

 

 

 

793,000

 

 

 

92,461

 

 

 

912,685

 

 

 

31,192,744

 

Timberglen

 

 

2,510,000

 

 

 

14,071,434

 

 

 

408,000

 

 

 

375

 

 

 

314,374

 

 

 

17,304,183

 

Toscana

 

 

1,730,000

 

 

 

6,961,530

 

 

 

230,000

 

 

 

23,145

 

 

 

229,169

 

 

 

9,173,844

 

The Grove at Alban

 

 

3,640,000

 

 

 

18,913,344

 

 

 

796,000

 

 

 

104,844

 

 

 

228,722

 

 

 

23,682,910

 

Willowdale Crossings

 

 

4,650,000

 

 

 

35,543,667

 

 

 

1,172,000

 

 

 

1,200

 

 

 

401,169

 

 

 

41,768,036

 

Edgewater at Sandy

   Springs

 

 

14,290,000

 

 

 

41,094,413

 

 

 

1,930,000

 

 

 

1,261,227

 

 

 

1,005,747

 

 

 

59,581,387

 

Beechwood Terrace

 

 

1,390,000

 

 

 

19,680,820

 

 

 

409,000

 

 

 

164,621

 

 

 

157,222

 

 

 

21,801,663

 

Willow Grove

 

 

3,940,000

 

 

 

9,512,555

 

 

 

298,000

 

 

 

647,246

 

 

 

92,152

 

 

 

14,489,953

 

Woodbridge

 

 

3,650,000

 

 

 

12,020,293

 

 

 

334,000

 

 

 

305,915

 

 

 

178,974

 

 

 

16,489,182

 

Abbington Heights

 

 

1,770,000

 

 

 

15,863,951

 

 

 

400,000

 

 

 

110,310

 

 

 

170,595

 

 

 

18,314,856

 

The Summit at Sabal Park

 

 

5,770,000

 

 

 

12,972,098

 

 

 

404,000

 

 

 

81,884

 

 

 

221,200

 

 

 

19,449,182

 

Courtney Cove

 

 

5,880,000

 

 

 

12,486,882

 

 

 

431,000

 

 

 

80,447

 

 

 

311,573

 

 

 

19,189,902

 

Colonial Forest

 

 

2,090,000

 

 

 

3,116,687

 

 

 

186,000

 

 

 

242,841

 

 

 

166,378

 

 

 

5,801,906

 

Park at Blanding

 

 

2,610,000

 

 

 

3,691,461

 

 

 

177,000

 

 

 

183,739

 

 

 

111,158

 

 

 

6,773,358

 

Park at Regency

 

 

2,620,000

 

 

 

5,343,919

 

 

 

220,000

 

 

 

60,558

 

 

 

196,138

 

 

 

8,440,615

 

Jade Park

 

 

1,490,000

 

 

 

6,061,395

 

 

 

200,000

 

 

 

218,688

 

 

 

89,406

 

 

 

8,059,489

 

Mandarin Reserve

 

 

5,610,000

 

 

 

19,679,711

 

 

 

701,000

 

 

 

701,020

 

 

 

300,213

 

 

 

26,991,944

 

Radbourne Lake

 

 

2,440,000

 

 

 

20,830,406

 

 

 

652,000

 

 

 

148,114

 

 

 

355,391

 

 

 

24,425,911

 

Timber Creek

 

 

11,260,000

 

 

 

10,704,510

 

 

 

799,000

 

 

 

948,430

 

 

 

113,475

 

 

 

23,825,415

 

Belmont at Duck Creek

 

 

1,910,000

 

 

 

16,654,792

 

 

 

436,000

 

 

 

107,063

 

 

 

134,860

 

 

 

19,242,715

 

The Arbors

 

 

1,730,000

 

 

 

5,844,105

 

 

 

199,000

 

 

 

162,100

 

 

 

44,827

 

 

 

7,980,032

 

The Crossings

 

 

4,150,000

 

 

 

16,138,747

 

 

 

834,000

 

 

 

491,672

 

 

 

126,678

 

 

 

21,741,097

 

The Crossings at Holcomb

   Bridge

 

 

5,560,000

 

 

 

9,788,284

 

 

 

616,000

 

 

 

48,173

 

 

 

66,311

 

 

 

16,078,768

 

The Knolls

 

 

3,410,000

 

 

 

16,931,399

 

 

 

759,000

 

 

 

107,984

 

 

 

124,357

 

 

 

21,332,740

 

Regatta Bay

 

 

1,660,000

 

 

 

15,803,412

 

 

 

714,000

 

 

 

1,014

 

 

 

110,384

 

 

 

18,288,810

 

Sabal Palm at Lake Buena

   Vista

 

 

7,580,000

 

 

 

40,130,430

 

 

 

1,387,000

 

 

 

80,255

 

 

 

438,526

 

 

 

49,616,211

 

Southpoint Reserve at Stoney Creek (FKA Steeplechase Apartments)

 

 

6,120,000

 

 

 

10,373,000

 

 

 

492,000

 

 

 

 

 

 

15,000

 

 

 

17,000,000

 

 

 

 

129,320,000

 

 

 

488,260,399

 

 

 

17,884,000

 

 

 

6,529,884

 

 

 

8,319,564

 

 

 

650,313,847

 

Accumulated depreciation

   and amortization

 

 

 

 

 

(8,533,478

)

 

 

(12,442,170

)

 

 

 

 

 

(812,292

)

 

 

(21,787,940

)

 

 

$

129,320,000

 

 

$

479,726,921

 

 

$

5,441,830

 

 

$

6,529,884

 

 

$

7,507,272

 

 

$

628,525,907

 

 

Depreciation expense was $12,499,888 and $2,088,554 for the six months ended June 30, 2015 and 2014, respectively.

Amortization expense related to the Company’s intangible lease assets was $9,160,422 and $3,490,666 for the six months ended June 30, 2015 and 2014, respectively. Amortization expense related to the Company’s intangible lease assets for the remainder of the year ended December 31, 2015 for all acquisitions completed through June 30 2015 is expected to be $1,112,629. Due to the six month useful life attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to December 31, 2014 has been fully amortized and the assets and related accumulated amortization have been written-off as of June 30, 2015.

 

 

16

 


 

5. Pro Forma Financial Information (Unaudited)

The following table summarizes, on an unaudited basis, the combined consolidated pro forma results of operations of the Company for the periods ended June 30, 2015 and 2014. The Company acquired thirty eight properties during the period January 1, 2014 through June 30, 2015 and two additional properties subsequent to the period on August 5, 2015 (see footnote 10). The following unaudited pro forma information for the periods ended June 30, 2015 and 2014 has been provided to give effect to the acquisitions of the properties as if they had occurred on January 1, 2014. This pro forma financial information is not intended to represent what the actual results of operations of the Company would have been had these acquisitions occurred on this date, nor does it purport to predict the results of operations for future periods.

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

Actual

 

 

 

 

 

 

 

 

Total revenue

 

$

54,284,765

 

 

$

10,811,847

 

Net loss

 

 

(8,157,564

)

 

 

(4,958,350

)

 

 

 

 

 

 

 

 

 

Pro forma:

 

 

 

 

 

 

 

 

Total revenues

 

 

60,907,729

 

 

 

58,068,087

 

Net income (loss)

 

 

1,661,232

 

 

 

(22,315,061

)

 

 

 

 

 

 

 

 

 

 

The pro forma information includes adjustments to actual revenues and expenses recorded to reflect operations of all properties acquired as of and subsequent to June 30, 2015, assuming each was owned by the Company and operating as of January 1, 2014. Net loss has been adjusted as follows: (1) interest expense has been adjusted to reflect the additional interest expense that would have been charged had the Company acquired the properties on January 1, 2014 under the same financing arrangements as existed as of the acquisition date; (2) depreciation and amortization has been adjusted based on the Company’s basis in the properties, and all of intangible lease assets have been amortized during the six month period ended June 30, 2014 due to the six month life; (3) acquisition costs have been excluded for pro forma purposes for the acquisition costs of the properties; (4) management and advisory fees have been adjusted to include the acquisitions on a pro forma basis; and (5) general and administrative fees expected to be incurred on a quarterly basis at a parent level have been adjusted to include the acquisitions on a pro forma basis and are estimated to be $950,000 per quarter.

 

 

17

 


 

6. Debt

Mortgages Payable

The following table contains summary information concerning the mortgage debt that is nonrecourse to the Company and encumbers the multifamily properties as of June 30, 2015:

 

Property

 

 

Type

 

Term (months)

 

 

Amortization (months)

 

 

Outstanding Principal

 

 

Interest Rate (1)

 

 

Max Note Rate (2)

 

 

Maturity Date

The Miramar Apartments

(3)

 

Floating

 

 

120

 

 

 

360

 

 

$

8,400,000

 

 

 

2.41%

 

 

 

5.75%

 

 

2/1/2025

Beechwood Terrace

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

17,120,000

 

 

 

2.27%

 

 

 

6.00%

 

 

8/1/2021

Colonial Forest

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

4,125,000

 

 

 

2.35%

 

 

 

6.25%

 

 

9/1/2021

Courtney Cove

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

14,210,000

 

 

 

2.27%

 

 

 

5.75%

 

 

9/1/2021

Edgewater at Sandy Springs

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

43,550,000

 

 

 

2.28%

 

 

 

5.75%

 

 

8/1/2021

The Grove at Alban

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

18,720,000

 

 

 

2.73%

 

 

 

6.50%

 

 

4/1/2021

Park at Blanding

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

4,875,000

 

 

 

2.35%

 

 

 

7.25%

 

 

9/1/2021

Park at Regency

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

6,225,000

 

 

 

2.35%

 

 

 

7.01%

 

 

9/1/2021

The Summit at Sabal Park

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

14,287,000

 

 

 

2.27%

 

 

 

5.75%

 

 

9/1/2021

Mandarin Reserve

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

19,650,000

 

 

 

2.29%

 

 

 

5.50%

 

 

10/1/2021

Willow Grove

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

11,000,000

 

 

 

2.30%

 

 

 

6.00%

 

 

8/1/2021

Willowdale Crossings

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

32,800,000

 

 

 

2.46%

 

 

 

5.75%

 

 

6/1/2021

Jade Park

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

5,850,000

 

 

 

2.34%

 

 

 

6.49%

 

 

9/1/2021

Woodbridge

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

12,800,000

 

 

 

2.28%

 

 

 

6.25%

 

 

8/1/2021

Southpoint Reserve at Stoney Creek (FKA Steeplechase Apartments)

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

13,600,000

 

 

 

2.30%

 

 

 

6.00%

 

 

1/1/2022

Barrington Mill

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

43,500,000

 

 

 

2.15%

 

 

 

5.50%

 

 

3/1/2022

Dana Point

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

12,176,000

 

 

 

2.24%

 

 

 

5.50%

 

 

3/1/2022

Heatherstone

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

7,087,000

 

 

 

2.27%

 

 

 

5.50%

 

 

3/1/2022

Versailles

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

19,623,000

 

 

 

2.22%

 

 

 

5.50%

 

 

3/1/2022

Bayberry

(3)

 

Floating

 

 

84

 

 

 

360

 

 

 

12,660,000

 

 

 

1.99%

 

 

 

5.95%

 

 

5/1/2022

Arbors on Forest Ridge

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

10,244,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Cutter's Point

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

12,676,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Eagle Crest

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

21,860,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Meridian

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

9,840,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Silverbrook

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

24,320,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Timberglen

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

13,560,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Toscana

(4)

 

Floating

 

 

84

 

 

 

360

 

 

 

7,100,000

 

 

 

2.92%

 

 

 

5.75%

 

 

2/1/2021

Timber Creek

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

19,482,000

 

 

 

2.01%

 

 

 

5.96%

 

 

10/1/2024

Radbourne Lake

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

19,213,000

 

 

 

2.00%

 

 

 

6.25%

 

 

10/1/2024

The Arbors

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

5,812,000

 

 

 

2.00%

 

 

 

7.11%

 

 

11/1/2024

The Crossings

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

16,200,000

 

 

 

2.00%

 

 

 

7.21%

 

 

11/1/2024

The Crossings at Holcomb Bridge

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

12,450,000

 

 

 

2.00%

 

 

 

7.35%

 

 

11/1/2024

The Knolls

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

16,038,000

 

 

 

2.00%

 

 

 

7.11%

 

 

11/1/2024

McMillan Place

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

15,738,000

 

 

 

2.11%

 

 

 

5.92%

 

 

2/1/2025

Sabal Palm at Lake Buena Vista

(5)

 

Floating

 

 

120

 

 

 

360

 

 

 

37,680,000

 

 

 

2.00%

 

 

 

6.26%

 

 

12/1/2024

Abbington Heights

(6)

 

Fixed

 

 

120

 

 

 

360

 

 

 

10,498,346

 

 

 

3.79%

 

 

 

3.79%

 

 

9/1/2022

Belmont at Duck Creek

(7)

 

Fixed

 

 

84

 

 

 

360

 

 

 

11,435,520

 

 

 

4.68%

 

 

 

4.68%

 

 

9/1/2018

Regatta Bay

(8)

 

Fixed

 

 

480

 

 

 

480

 

 

 

13,096,011

 

 

 

4.85%

 

 

 

4.85%

 

 

8/1/2050

Cornerstone

(9)

 

Fixed

 

 

120

 

 

 

360

 

 

 

23,672,754

 

 

 

4.24%

 

 

 

4.24%

 

 

3/1/2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

623,173,631

 

 

 

 

 

 

 

 

 

 

 

Valuation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

346,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

623,520,482

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Interest rate is based on one month LIBOR plus an applicable margin, except for Abbington Heights (based on fixed rate of 3.79%), Belmont at Duck Creek (based on fixed rate of 4.68%), Regatta Bay (based on fixed rate of 4.85%) and Cornerstone (based on a blended fixed rate of 4.24%). One month LIBOR as of June 30, 2015 was 0.1865%.

(2)

Represents the maximum rate payable on each note (see Note 7, derivative financial instruments and hedging activities).

(3)

Loan can be pre-paid in the first 12 months of the term at par plus 5.00%. Starting in the 13th month of the term through the 81st month of the term at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

(4)

Loan can be pre-paid in the first 24 months of the term at par plus 5.00%. Starting in the 25th month of the term through the 81st month of the term at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

18

 


 

(5)

Loan can be pre-paid in the first 12 months of the term at par plus 5.00% and can also be prepaid starting in the 13th month of the term through 116th month of the term at par plus 1.00% of the unpaid principal balance and at par during the last four months of the term.

(6)

Debt was assumed upon acquisition of this property and approximated fair value. The loan is open to pre-payment in the last three months of the term.

(7)

Debt was assumed upon acquisition of this property. An adjustment was made to approximate the debt to fair value. The loan is open to pre-payment in the last six months of the term.

(8)

Debt was assumed upon acquisition of this property and is a Housing and Urban Development (“HUD”) loan that is fully amortizing and approximated fair value. Debt is insured by HUD under the Section 221(d)(4) program.  

(9)

Debt in the amount of $18,000,000 was assumed upon acquisition and approximated fair value. The assumed debt carries a 4.09% fixed rate, was originally issued in March 2013 and had a term of 120 months with an initial 24 months of interest only. At the time of acquisition, the principal balance of the first mortgage remained unchanged and had a remaining term of 98 months with 2 months interest only. The first mortgage is prepayable and subject to yield maintenance from month 13 through August 31, 2022 and is prepayable at par September 1, 2022 until maturity.  Concurrently with the acquisition of the property, we placed a supplemental second mortgage on the property with a principal amount of $5,775,000, a fixed rate of 4.70%, and maturing conterminously with the first mortgage. The supplemental second mortgage is prepayable and subject to yield maintenance from the date of issuance through August 31, 2022 and is prepayable at par September 1, 2022 until maturity. As of June 30, 2015, the total indebtedness secured by the property is $23,672,754 and has a blended pay rate of 4.24%.  

The weighted average interest rate of our mortgage indebtedness was 2.53% as of June 30, 2015 and 2.65% as of December 31, 2014. Each of our mortgages is a non-recourse obligation subject to customary exceptions. The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events.

Schedule of Debt Maturities

Debt maturities scheduled for the remainder of 2015, each of the next four years and thereafter, are as follows:

 

Remainder of 2015

 

$

584,273

 

2016

 

 

4,609,592

 

2017

 

 

8,059,713

 

2018

 

 

13,634,121

 

2019

 

 

14,730,436

 

Thereafter

 

 

581,555,496

 

Total

 

$

623,173,631

 

 

 

7. Fair Value Measures and Financial Instruments

From time to time, the Company records certain assets and liabilities at fair value. Real estate assets are recorded at fair value at acquisition and may be stated at fair value if they become impaired in a given period and may be stated at fair value if they are held for sale and the fair value of such assets is below historical cost. Additionally, the Company records derivative financial instruments at fair value. The Company also uses fair value metrics to evaluate the carrying values of its real estate assets and for the disclosure of certain financial instruments.

Real estate acquisitions

As of December 31, 2014 and as further discussed in Notes 2 and 3, the Company had acquired thirty two properties for approximately $633,200,000. The purchase prices of these properties were allocated as follows: land $129,320,000, building, building improvements, furniture, fixtures and equipment $485,996,000, and intangible lease assets $17,884,000 based on their estimated fair values using Level 3 inputs. Of the thirty two properties acquired there were three properties with assumed debt which was recorded based on their estimated fair value using Level 2 inputs.

During the six months ended June 30, 2015 and as further discussed in Notes 2 and 3, the Company acquired seven additional properties for approximately $183,588,400. The purchase prices of these properties were allocated as follows: land $35,890,000, building, building improvements, furniture, fixtures, and equipment $142,866,400, and intangible lease assets $4,832,000 based on their estimated fair values using Level 3 inputs. Of the seven properties acquired there was one property with assumed debt which was recorded based on its estimated fair value using Level 2 inputs.

19

 


 

As discussed in Note 2, fair value measurements at the time of acquisition were determined by management using available market information and appropriate valuation methodologies available to management for the period ended June 30, 2015 and at December 31, 2014. Critical estimates in valuing certain assets and liabilities and the assumptions of what marketplace participants would use in making estimates of fair value include, but are not limited to: future expected cash flows, estimated carrying costs, estimated origination costs, lease up periods and tenant risk attributes, as well as assumptions about the period of time the acquired lease will continue to be used in the Company’s portfolio and discount rates used in these calculations. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may not always reflect unanticipated events and changes in circumstances may occur. In making such estimates, management uses a number of sources, including appraisals, third party cost segregation studies or other market data, as well as, information obtained in its pre-acquisition due diligence, marketing and leasing activities. Considerable judgment is necessary to interpret market data and estimate fair value. Accordingly, there can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate assets or other financial instruments. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The following table represents critical assumptions used and the ranges for those assumptions:

 

Going-in cap rate

 

 

4.8% - 6.2%

  

Terminal cap rate

 

 

5.2% - 6.8%

  

Discount rate

 

 

5.5% - 10.7%

  

Growth rate revenues

 

 

1.6% - 3.3%

  

Growth rate operating costs

 

 

1.6% - 3.3%

  

 

Derivative financial instruments and hedging activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

 

The Company’s objectives in using interest rate derivatives are to add stability to interest expense related to mortgage debt and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate caps related to mortgage debt as part of its interest rate risk management strategy. 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. The rate caps have terms ranging from 3-4 years. During the six-months ended June 30, 2015 and 2014, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The derivatives cap our variable interest rate at a weighted average interest rate of 6.00%.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss (“OCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the six-months ended June 30, 2015, the Company recorded no ineffectiveness in earnings attributable to derivatives designated as cash flow hedges. During the six-months ended June 30, 2014, the Company had no derivatives designated as cash flow hedges.

As of June 30, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

 

Product

 

Number of Instruments

 

 

Notional

 

Interest rate caps

 

 

15

 

 

$

259,659,000

 

 

20

 


 

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of June 30, 2015, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:

 

Product

 

Number of Instruments

 

 

Notional

 

Interest rate caps

 

 

20

 

 

$

304,812,000

 

 

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the combined consolidated balance sheets as of June 30, 2015 and December 31, 2014:

 

 

Asset Derivative

 

 

Liability Derivative

 

 

Balance

Sheet Location

 

June 30,

2015

 

 

December 31,

2014

 

 

Balance

Sheet Location

 

June 30,

2015

 

 

December 31,

2014

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

Other assets

 

 

154,198

 

 

 

263,301

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

Other assets

 

 

49,837

 

 

 

194,732

 

 

Other liabilities

 

 

 

 

 

 

Total

 

 

 

204,035

 

 

 

458,033

 

 

 

 

 

 

 

 

 

 

The tables below present the effect of the Company’s derivative financial instruments on the combined consolidated statements of operations and comprehensive loss for the three months ended June 30, 2015 and 2014 and for the six months ended June 30, 2015 and 2014:

 

 

Amount of gain

(loss) recognized in

OCI on derivative

(effective portion)

 

 

Location of gain

(loss) reclassified

from accumulated

OCI into income

(effective portion)

 

Amount of gain

(loss) reclassified

from accumulated OCI

into income (effective

portion)

 

 

Location of gain

(loss) recognized in

income on derivative

(ineffective portion)

 

Amount of gain

(loss) recognized in

income on derivative

(ineffective portion)

 

 

2015

 

 

2014

 

 

 

 

2015

 

 

2014

 

 

 

 

2015

 

 

2014

 

Derivatives designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

(125,873

)

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

(395,631

)

 

 

 

 

Interest expense

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss)

recognized in income

 

 

 

 

 

 

Location of gain (loss) recognized in income

 

2015

 

 

2014

 

Derivatives not designated as hedging

   instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

 

 

 

Interest expense

 

 

(50,070

)

 

 

(424,098

)

For the six months ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate caps

 

 

 

 

Interest expense

 

 

(165,599

)

 

 

(449,538

)

Other financial instruments

Cash equivalents, rents and accounts receivables, accounts payable, accrued expenses and other liabilities are carried at amounts that reasonably approximate their fair values because of the short-term nature of these instruments.

Long-term indebtedness is carried at amounts that reasonably approximate their fair value because of the limited period in which the amounts were outstanding and owed on some loans and the variable interest rate terms. Management used a market spread from

21

 


 

quoted prices to determine the interest rate on variable rate loans which was 2.01% and 2.02% as of June 30, 2015 and December 31, 2014, respectively. On fixed rate debt management used quoted prices which ranged from 3.7% to 3.9%.

 

 

8. Related Party Transactions

Asset Management Fee

In accordance with the operating agreement of each entity that owns the real estate properties the Company earns an asset management fee for services provided in connection with monitoring the operations of the properties. The asset management fee is equal to 0.5% per annum of the aggregate effective Gross Income of the properties, as defined in each of the operating agreements. For the three months ended June 30, 2015 and 2014, the properties incurred asset management fees to the Company of $141,249 and $31,206, respectively. For the six months ended June 30, 2015 and 2014, the properties incurred asset management fees to the Company of $267,966 and $48,165, respectively. Since the fees are paid to the Company by consolidated properties they have been eliminated in consolidation. However, because our joint venture partner owns a portion of each entity, with the exception of The Miramar Apartments, they absorb their pro rata share of the asset management fee. This amount is reflected on the combined consolidated statements of operations and comprehensive loss in the net loss attributable to non-controlling interest.

Property management and construction fees

The Company has entered into management agreements with BH Management Services, LLC (“BH”), the Company’s property manager, who manages the Company’s properties and supervises the implementation of the Company’s value-add program. BH is an affiliate of the noncontrolling interest member of the Company by virtue of ownership in certain VIEs through its affiliates. The property management fee is approximately 3% of the monthly gross income from each property managed. Currently BH manages all of our properties. Additionally, the Company may pay BH certain other fees, including (1) a fee of $15.00 per unit for the one time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, and other owner approved fees at $55 per hour. For the three months ended June 30, 2015 and 2014, the properties incurred management fees, including one time setup and inspection fees, to BH of $857,687 and $206,688, respectively. For the six months ended June 30, 2015 and 2014, the properties incurred management fees, including one time setup and inspection fees, to BH of $1,616,499 and $329,311, respectively. These are reflected on the combined consolidated statement of operations and comprehensive loss in property management fees. For the three months ended June 30, 2015 and 2014, the properties incurred construction supervision fees to BH of $504,989 and $0, respectively. For the six months ended June 30, 2015 and 2014, the properties incurred construction supervision fees to BH of $675,078 and $0, respectively. These are capitalized on the consolidated balance sheet and reflected in buildings and improvements.

Management and administrative fee

Prior to the Spin-Off, the predecessor paid NexPoint Advisors, an affiliate of the Adviser, an annual fee, paid monthly, in an amount equal to 1.00% of the average weekly value of the predecessor’s “Managed Assets”. The predecessor’s Managed Assets were an amount equal to the total assets of the predecessor, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the predecessor’s investment objectives and policies, and/or (iv) any other means.

Additionally, the predecessor paid NexPoint Advisors an administrative fee for services to the predecessor. The administrative fee was payable monthly, in an amount equal to 0.20% of the average weekly value of the predecessor’s Managed Assets. The advisory and administration fees were paid by the predecessor on behalf of the Company.

Following the Spin-Off and in accordance with the Advisory Agreement, the Company will pay the Adviser a management fee equal to 1.00% of the Average Real Estate Assets, as defined in the Advisory Agreement. The duties performed by our Adviser under the terms of the Advisory Agreement include but are not limited to: providing daily management for us, selecting and working with third party service providers, managing our properties or overseeing the third party property manager, formulating an investment strategy for us and selecting suitable properties and investments for us, managing our outstanding debt on properties, managing our interest rate exposure through derivative instruments, determining when to sell assets, and managing the value add program or overseeing a third party vendor that implements the value-add program. “Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (or partial month) (1) for which any fee under the Advisory Agreement is calculated or (2) during the year for which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related

22

 


 

securities and mortgages and reserves for capital expenditures (the value-add program). The management fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the management fee in shares of common stock, subject to certain limitations.

 

In accordance with the Advisory Agreement, the Company will also pay the Adviser an administrative fee equal to 0.20% of the Average Real Estate Assets. The administrative fee will be payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the advisory fee in shares of common stock, subject to certain limitations. The management and administrative fees to be paid to the Adviser on the Contributed Assets (as defined below) are subject to a stipulated cap.

Pursuant to the terms of the Advisory Agreement, the Company will reimburse the Adviser for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. Operating Expenses include legal, accounting, financial and due diligence services performed by the Advisor that outside professionals or outside consultants would otherwise perform, and the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Advisor required for the Company’s operations. Operating Expenses do not include expenses for the management and administrative services described in the Advisory Agreement. Offering Expenses include all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees. Certain Operating Expenses such as, our ratable share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses incurred by the Adviser or its affiliates that relate to the operations of the Company will be billed monthly to us under a shared services agreement.

Expense Cap

Pursuant to the terms of the Advisory Agreement, expenses paid or incurred by us for management and administrative fees payable to the Adviser, stock-based compensation granted under any Company equity compensation plan, and Operating Expenses will not exceed 1.5% of Average Real Estate Assets (the “1.5% Limitation”) per calendar year (or part thereof that the Advisory Agreement is in effect). The cap does not limit the reimbursement of expenses related to securities offerings or Offering Expenses. The cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisitions or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets.  Also, management and administrative fees are further limited on Contributed Assets to $5,691,428 in any calendar year.  Contributed Assets refers to all Real Estate Assets contributed to the Company as part of the Spin-off.  Management and administrative fees on New Assets (as defined in the Advisory Agreement) are not subject to the above limitation but are subject to the 1.5% Limitation.  New Assets are all Real Estate Assets that are not Contributed Assets.

The amount of management and administration fees incurred were $2,715,354 and $240,720 for the six months ended June 30, 2015 and 2014, respectively. The amount of management and administrative fees incurred were $1,438,667 and $115,562 for the three months ended June 30, 2015 and 2014, respectively. These fees are reflected on the statements of operations and comprehensive loss in management and administrative fees. The allocation is based on the terms of the advisory agreement between our predecessor and NexPoint Advisors prior to the Spin-Off. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation of operating costs borne by our predecessor; however, these allocations may not be indicative of the cost of future operations or the amount of future allocations.

 

 

9. Commitments and Contingencies

Commitments

In the normal course of business, the Company enters into various rehabilitation construction related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. At June 30, 2015, management does not anticipate any material deviations from schedule or budget related to rehabilitation projects currently in process. In addition, the Company incurs costs in the normal course of business to acquire future investments in real estate assets and should the closing of those assets fall through the costs incurred in connection with these future acquisitions could be lost (see footnote 2 prepaid costs). At June 30, 2015 the Company has no prepaid costs outstanding that were lost as a result of a failed acquisition.

 

 

23

 


 

Contingencies

In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive loss of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against us or our properties or subsidiaries, other than routine litigation arising in the ordinary course of business.

 

The Company is not aware of any environmental liability with respect to the properties that could have a material adverse effect on our business, assets or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on our results of operations and cash flows.

 

 

10. Subsequent Events

The Company acquired the following properties subsequent to June 30, 2015 (unaudited):

 

Property

 

Location

 

Closing Date

 

Purchase Price

 

 

Debt

 

 

# Units

 

Noncontrolling Interest

 

 

Effective Ownership

 

Madera Point

 

Mesa, Arizona

 

August 5, 2015

 

$

22,525,000

 

 

$

13,515,000

 

(1)

256

 

 

5

%

 

 

95

%

The Pointe at the Foothills

 

Phoenix, Arizona

 

August 5, 2015

 

$

52,275,000

 

 

$

31,365,000

 

(1)

528

 

 

5

%

 

 

95

%

 

(1) – Madera Point: Funded with a new interest only loan with floating interest rate at 1.90% plus one-month LIBOR with a term of 60 months, that matures on September 1, 2020. The note is pre-payable in the 13th month through the 57th month of the term at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term. We purchased an interest rate cap that caps the maximum rate payable on the loan at 4.10%. The property expects to establish a renovation reserve in the amount of $1,807,666 or $7,061 per unit as part of the value-add program on the property.

     – The Pointe at the Foothills: Funded with a new interest only loan with floating interest rate at 1.90% plus one-month LIBOR with a term of 60 months, that matures on September 1, 2020. The note is pre-payable in the 13th month through the 57th month of the term at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term. We purchased an interest rate cap that caps the maximum rate payable on the loan at 4.10%. The property expects to establish a renovation reserve in the amount of $1,371,252 or $2,597 per unit as part of the value-add program on the property.

 

On August 5, 2015 the Company executed a bridge facility (the “Bridge Facility”) with Key Bank, N.A. in the amount of $29,000,000. The proceeds from the Bridge Facility were used to fund a portion of the purchase price of the Madera Point and The Pointe at the Foothills acquisitions. The Bridge Facility is payable in full on August 4, 2016 but is pre-payable at any time without penalty. The Bridge Facility is non-amortizing during the term it is outstanding and accrues interest at an annual rate of 4.00% plus one-month LIBOR.

 

On August 10, 2015 the Company’s board of directors approved a $.206 per share dividend for record date September 15 and payable September 30.

 

 

 

 

24

 


 

Item 2.

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

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted or expected in these forward-looking statements as a result of various factors, including those which are discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in the information statement filed as an exhibit to our Registration Statement on Form 10, as amended (Registration No. 001-3663), which was declared effective in March 18, 2015. Our management believes the assumptions underlying the Company’s Consolidated Financial Statements and accompanying notes are reasonable. However, the Company’s Consolidated Financial Statements may not necessarily reflect our financial condition and results of operations in the future.

Overview

As of June 30, 2015, we owned all or a majority interest in a portfolio of multifamily properties, or the Portfolio, primarily located in the Southeastern United States and Texas consisting of 39 multifamily properties encompassing 12,038 units of apartment space that is approximately 93% leased. The weighted average monthly effective rent per occupied apartment unit in our Portfolio is $784 as of June 30, 2015.

We are a publicly traded REIT with our shares listed on the NYSE. We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ management and capex value-add programs at a majority of our acquisitions in an attempt to improve rental rates and the net operating income at our properties. We are externally managed by NexPoint Real Estate Advisors L.P., or our Adviser, an affiliate of Highland Capital Management, L.P., a leading global alternative asset manager and an SEC-registered investment adviser which, together with its affiliates, had approximately $21.7 billion in assets under management as of June 30, 2015.

We began operations on March 31, 2015 as a result of the transfer and contribution by NexPoint Credit Strategies Fund ("NHF") of all but one of the multifamily properties owned by NHF through its subsidiary Freedom REIT, LLC (“Freedom REIT”).  We use the term “predecessor" to mean the carve out business of Freedom REIT, which owned all or a majority interest in the multifamily properties transferred or contributed to the Company by NHF through Freedom REIT. On March 31, 2015, NHF distributed all of the outstanding shares of the Company's common stock held by NHF to holders of NHF common shares.  We refer to the distribution of our common stock by NHF as the "Spin-Off."  Substantially all of our operations were conducted by our predecessor prior to March 31, 2015. With the exception of a nominal amount of initial cash funded at inception, the Company did not own any assets prior to March 31, 2015. The business and operations of the Company prior to March 31, 2015 occurred under the predecessor. Our predecessor included all of the properties in our portfolio that were held indirectly by Freedom REIT, a wholly owned subsidiary of NHF, prior to the Spin-Off that occurred on March 31, 2015. Our predecessor was determined in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). References throughout this report to the Company, we, or our, include the activity of the predecessor defined above.

We intend to elect to be taxed and and qualify as a REIT for U.S. federal income tax purposes commencing with our first taxable year of operations. To maintain REIT status, we must meet a number of organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains.

Results of Operations

Our primary business consists of directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. At the time of the Spin-Off, which occurred on March 31, 2015, the Company owned all or a majority interest in a portfolio of 38 multifamily properties. Following the Spin-Off the Company acquired an additional property in April 2015. The Company owned all or a majority interest in a total portfolio of 39 multifamily properties encompassing 12,038 units of apartment space, which was approximately 93% leased and the weighted average monthly effective rent per occupied apartment unit in our Portfolio is $784 as of June 30, 2015. Subsequent to June 30, 2015, we acquired two additional properties which brings our total portfolio to 41 properties, encompassing 12,822 units. In addition, we review our stabilized multifamily communities on a comparable basis between periods, referred to as “Same Store.”  Our Same Store multifamily communities are defined as those that are stabilized and comparable for both the current and the prior reporting year. There are nine properties meeting this definition for the second quarter of 2015: Miramar, Arbors on Forest Ridge, Cutter’s Point, Eaglecrest, Meridian, Silverbrook, Timberglen, Toscana, and The Grove at Alban.

25

 


 

 

The following table sets forth a summary of the Company’s operating results for the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014:

 

 

Three Months

Ended June 30,

 

 

Six Months

Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Total revenue

$

28,747,296

 

 

$

6,817,901

 

 

$

54,284,765

 

 

$

10,811,847

 

Total expenses

 

(26,773,469

)

 

 

(7,821,131

)

 

 

(54,194,668

)

 

 

(13,700,339

)

Operating income (loss)

 

1,973,827

 

 

 

(1,003,230

)

 

 

90,097

 

 

 

(2,888,492

)

Total other expense

 

(4,238,816

)

 

 

(1,332,289

)

 

 

(8,247,661

)

 

 

(2,069,858

)

Net loss

 

(2,264,989

)

 

 

(2,335,519

)

 

 

(8,157,564

)

 

 

(4,958,350

)

Net loss attributable to noncontrolling interest

 

(12,368

)

 

 

(354,142

)

 

 

(506,066

)

 

 

(672,171

)

Net loss attributable to common shareholders

 

(2,252,621

)

 

 

(1,981,377

)

 

 

(7,651,498

)

 

 

(4,286,179

)

 

The changes in the Company’s operating results for both the three and six months ended June 30, 2015 as compared to the operating results for both the three and six months ended June 30, 2014 primarily relate to the Company acquiring, owning and operating an additional 29 properties for a total of 39 properties as of June 30, 2015 as compared to acquiring, owning and operating ten properties as of June 30, 2014.

Revenues

Rental income. Our earnings are primarily attributable to the rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less. Rental income was $25,527,979 for the three months ended June 30, 2015 compared to $6,103,787 for the three months ended June 30, 2014, which was an increase of $19,424,192. Rental income was $48,218,515 for the six months ended June 30, 2015 compared to $9,663,992 for the six months ended June 30, 2014, which was an increase of $38,554,523. The increase for both periods was primarily due to the acquisition of 29 additional properties. Also, eight of the nine properties owned as of June 30, 2014 were acquired during the first quarter of 2014 and therefore did not reflect a full quarter of operations until the second quarter. We would also expect a modest increase in rent growth for our properties based upon increased rents and increased occupancy rates due to the value-add programs that we have implemented as well as organic growth in rents in the markets these properties are located. For the three months ended June 30, 2015, Same Store rental income increased approximately 4.6%. The majority of this increase is related to a 4.0% increase in the monthly rental income per unit from $721 as of June 30, 2014 to $750 as of June 30, 2015 and an increase of 1.1% in occupancy from June 30, 2014 to June 30, 2015.

Other income. Other income includes ancillary income earned from tenants such as application fees, late fees, laundry fees, utility reimbursements, and other rental related fees charged to tenants. Other income was $3,219,317 for the three months ended June 30, 2015 compared to $714,114 for the three months ended June 30, 2014, which was an increase of $2,505,203. Other income was $6,066,250 for the six months ended June 30, 2015 compared to $1,147,855 for the six months ended June 30, 2014, which was an increase of $4,918,395. The increase for both periods was primarily due to the acquisition of 29 additional properties and a full quarter of operations for the properties acquired in the first quarter of 2014. For the three months ended June 30, 2015, Same Store other income increased approximately 22.1%. The majority of this increase is related to a 27.8% or $92,000 increase in utility reimbursements.

Expenses

Property operating expenses. Property-operating expenses include property maintenance costs, salary and employee benefit costs, utilities and other property operating costs. Property operating costs were $8,292,668 for the three months ended June 30, 2015 compared to $1,900,815 for the three months ended June 30, 2014, which was an increase of $6,391,853. Property operating costs were $15,611,964 for the six months ended June 30, 2015 compared to $2,938,565 for the six months ended June 30, 2014, which was an increase of $12,673,399. The increase for both periods was primarily due to the acquisition of 29 additional properties. For the three months ended June 30, 2015, Same Store property operating expenses increased approximately 12.7%. The majority of this increase is related to a 20.8% or $77,000 increase in repair & maintenance costs and a 6.9% or $46,000 increase in labor costs.

26

 


 

Acquisition costs. Acquisition costs include the costs to acquire additional properties. Acquisition costs were $237,664 for the three months ended June 30, 2015 compared to $851,627 for the three months ended June 30, 2014, which was a decrease of $613,963. Acquisition costs were $2,169,262 for the six months ended June 30, 2015 compared to $2,746,524 for the six months ended June 30, 2014, which was a decrease of $577,262. The decrease between both periods was due to the lower level of acquisitions completed during each period. Acquisition costs depend on the specific circumstances of each closing and are one-time costs associated with each acquisition.

 

 

Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authority’s depending on the location of each property. Insurance includes the cost to insure each property under commercial, general liability, and other needed insurance for each property. Real estate taxes and insurance costs were $3,577,214 for the three months ended June 30, 2015 compared to $953,721 for the three months ended June 30, 2014, which was an increase of $2,623,493. Real estate taxes and insurance costs were $6,955,140 for the six months ended June 30, 2015 compared to $1,486,301 for the six months ended June 30, 2014, which was an increase of $5,468,839. The increase for both periods was primarily due to the acquisition of 29 additional properties. However, the costs for property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the costs of real estate taxes.

Property management fees. Property management fees includes fees paid to BH Management or other third party management companies for managing each property. Property management fees were $857,687 for the three months ended June 30, 2015 compared to $206,688 for the three months ended June 30, 2014, which was an increase of $650,999. Property management fees were $1,616,499 for the six months ended June 30, 2015 compared to $329,311 for the six months ended June 30, 2014, which was an increase of $1,287,188. The increase for both periods was primarily due to the acquisition of 29 additional properties.

Management and administration fees.  Management and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement. Advisory and administrative fees were $1,438,667 for the three months ended June 30, 2015 compared to $115,562 for the three months ended June 30, 2014, which was an increase of $1,323,105. Advisory and administrative fees were $2,715,354 for the six months ended June 30, 2015 compared to $240,720 for the six months ended June 30, 2014, which was an increase of $2,474,634. The increase for both periods was due to the acquisition of 29 additional properties which increases the basis on which the fee is earned. The amount paid in the second quarter represents the maximum fee allowed under the cap.

Corporate general and administrative expense. Corporate general and administrative expenses includes but is not limited to payments of reimbursements to the Adviser, audit fees, legal fees, listing fees, board of director fees, and investor relation costs. Prior to the completion of the Spin-Off, the Company did not expect to incur any costs other than management and administrative costs to the predecessor in the first quarter. Following the first quarter, the Company incurred general and administrative expenses of $830,984 for the three months ended June 30, 2015.

The reimbursement of Adviser Operating Expenses, administrative fees and the management fees paid to our Adviser will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect). The cap does not limit the reimbursement by NXRT of expenses related to securities offerings paid by the Adviser. The cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. These amounts were determined based on the experience of our management team and discussions with outside service providers, consultants and advisors.

Property general and administrative expense. Property general and administrative expenses includes the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property. Property general and administrative costs were $1,488,568 for the three months ended June 30, 2015 compared to $224,688 for the three months ended June 30, 2014, which was an increase of $1,263,880. Property general and administrative costs were $2,635,155 for the six months ended June 30, 2015 compared to $379,698 for the six months ended June 30, 2014, which was an increase of $2,255,457. The increase for both periods was primarily due to the acquisition of 29 additional properties.

Depreciation and amortization. Depreciation and amortization costs were $10,050,017 for the three months ended June 30, 2015 compared to $3,568,030 for the three months ended June 30, 2014, which was an increase of $6,481,987. Depreciation and amortization costs were $21,660,310 for the six months ended June 30, 2015 compared to $5,579,220 for the six months ended June 30, 2014, which was an increase of $16,081,090. The increase for both periods was primarily due to the acquisition of 29 additional properties. The amortization of intangible lease assets over a six month period from the point of acquisition is also expected to increase the cost of amortization during the initial year of operations for each property. For the three and six month period ended June 30, 2015 there were seven properties with amortizing intangible lease assets and for the three and six month period ended June 30, 2014 there were nine properties with amortizing intangible lease assets.

27

 


 

 

 

 

Interest expense. Interest expense includes the cost of interest expense on debt, the amortization of debt issuance costs, and the fair value adjustments on interest rate caps that are not designated as hedges. Interest expense costs were $4,238,816 for the three months ended June 30, 2015 compared to $1,332,289 for the three months ended June 30, 2014, which was an increase of $2,906,527. Interest expense costs were $8,247,661 for the six months ended June 30, 2015 compared to $2,069,858 for the six months ended June 30, 2014, which was an increase of $6,177,803. The increase for both periods was primarily due to the acquisition of 29 additional properties. The following is a table that details the various costs included in interest expense for the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Interest on debt

$

3,954,815

 

 

$

1,031,145

 

 

$

7,541,535

 

 

$

1,538,371

 

Amortization of debt issuance  costs

 

233,931

 

 

 

56,509

 

 

 

540,527

 

 

 

81,949

 

Rate cap market adjustments

 

50,070

 

 

 

244,635

 

 

 

165,599

 

 

 

449,538

 

Total

 

4,238,816

 

 

 

1,332,289

 

 

 

8,247,661

 

 

 

2,069,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Measurements

Net Operating Income

Net Operating Income, or NOI, is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties, to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds, (2) acquisition costs, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (5) corporate general and administrative expenses and other gains and losses that are specific to us and (6) entity level general and administrative expenses that are either non-recurring in nature or incurred on behalf of us at the property for expenses such as legal, professional and franchise tax fees. The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Acquisition costs and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner.

Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. Entity level general and administrative are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our JV ownership structuring. Also, non-recurring expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net operating income is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes corporate general and administrative costs, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.

NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different

28

 


 

methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do. The following is a table that details our net operating income for the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014. The net operating income in the following table has not been adjusted for the effects of any noncontrolling interest.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

$

(2,264,989

)

 

$

(2,335,519

)

 

$

(8,157,564

)

 

$

(4,958,350

)

Management and administrative fees

 

1,438,667

 

 

 

115,562

 

 

 

2,715,354

 

 

 

240,720

 

Corporate general and administrative fees

 

830,984

 

 

 

 

 

 

830,984

 

 

 

 

Non-recurring entity level general and administrative fees

 

315,455

 

 

 

34,990

 

 

 

570,240

 

 

 

90,690

 

Depreciation and amortization

 

10,050,017

 

 

 

3,568,030

 

 

 

21,660,310

 

 

 

5,579,220

 

Interest expense

 

4,238,816

 

 

 

1,332,289

 

 

 

8,247,661

 

 

 

2,069,858

 

Acquisition costs

 

237,664

 

 

 

851,627

 

 

 

2,169,262

 

 

 

2,746,524

 

Net operating income

$

14,846,614

 

 

$

3,566,979

 

 

$

28,036,247

 

 

$

5,768,662

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO and AFFO

We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations, or FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), and adjusted funds from operations, or AFFO, are important non-GAAP supplemental measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. We compute FFO attributable to Common Shareholders in accordance with NAREIT’s definition. Our presentation differs slightly in that we begin with Net Loss before adjusting for noncontrolling interest and show the noncontrolling interest as an adjustment to arrive at FFO attributable to common shareholders. AFFO is calculated by adjusting our FFO by adding back items that do not reflect ongoing property operations, such as acquisition expenses, equity-based compensation expenses and the amortization of deferred loan costs. AFFO will also be adjusted to include any gains (losses) from sales of property to the extent excluded from FFO. We will not have any equity-based compensation expenses unless and until our stockholders approve an amendment to the Company’s charter to remove the 1940 Act compliance requirements.

We believe that the use of FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses from real estate dispositions, impairment charges and real estate depreciation and amortization, and, for AFFO, by excluding non-cash expenses such as acquisition expenses, equity-based compensation expenses and the amortization of deferred loan costs, FFO and AFFO can help investors compare our operating performance between periods and to other REITs. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income as defined by GAAP and should not be considered as an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do.

29

 


 

The following table reconciles our calculations of FFO and AFFO to net income, the most directly comparable GAAP financial measure, for the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net loss

$

(2,264,989

)

 

$

(2,335,519

)

 

$

(8,157,564

)

 

$

(4,958,350

)

Depreciation and amortization

 

10,050,017

 

 

 

3,568,030

 

 

 

21,660,310

 

 

 

5,579,220

 

Adjustment for noncontrolling interest

 

(1,062,960

)

 

 

(118,302

)

 

 

(1,800,958

)

 

 

11,830

 

 

FFO attributable to common shareholders

 

6,722,068

 

 

 

1,114,209

 

 

 

11,701,788

 

 

 

632,700

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFO per share

$

0.32

 

 

$

0.05

 

 

$

0.55

 

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition costs

 

237,664

 

 

 

851,627

 

 

 

2,169,262

 

 

 

2,746,524

 

Amortization of deferred loan costs

 

233,931

 

 

 

56,509

 

 

 

540,527

 

 

 

81,949

 

Equity-based compensation expenses

 

 

 

 

 

 

 

 

 

 

 

Adjustment for noncontrolling interest

 

(49,308

)

 

 

(175,461

)

 

 

(265,636

)

 

 

(432,362

)

 

AFFO attributable to common shareholders

 

7,144,355

 

 

 

1,846,885

 

 

 

14,145,941

 

 

 

3,028,812

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFFO per share

$

0.34

 

 

$

0.09

 

 

$

0.66

 

 

$

0.14

 

 

The changes in the Company’s FFO and AFFO for the three months ended June 30, 2015 as compared to the FFO and AFFO for the three months ended June 30, 2014 primarily relate to the Company acquiring, owning and operating an additional 29 properties for a total of 39 properties as of June 30, 2015 as compared to acquiring, owning and operating 10 properties as of June 30, 2014. Additionally, the increases in FFO and AFFO reflect increased Same Store revenue, net of increases in Same Store expenses.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our multifamily properties, including:

·

recurring maintenance necessary to maintain our multifamily properties;

·

interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments”);

·

distributions necessary to qualify for taxation as a REIT;

·

capital expenditures to complete our value-add program and to improve the quality and performance of our multifamily properties;

·

management fees payable to our Adviser;

·

administrative fees payable to our Adviser;

·

reimbursements to our Adviser; and

·

Property management fees payable to BH.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances. As of June 30, 2015, we have reserved approximately $44.5 million for our planned capital expenditures to implement our value-add program.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of

30

 


 

leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

 

In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to remain competitive. Also, acquisitions, redevelopments or expansions of our multifamily properties will require significant capital outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions or redevelopment through retained earnings long-term is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.

We believe that our available cash, expected operating cash flows and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following June 30, 2015.

Cash Flows

The following table presents selected data from the Company’s Combined Consolidated Statements of Cash Flows for the three months ended June 30, 2015 and 2014 and the six months ended June 30, 2015 and 2014:

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net cash provided by (used in) operating activities

$

6,253,832

 

 

$

139,360

 

 

$

7,393,217

 

 

$

(834,863

)

Net cash used in investing activities

 

(26,482,553

)

 

 

(44,021,310

)

 

 

(189,454,438

)

 

 

(196,577,520

)

Net cash provided by financing activities

 

12,461,513

 

 

 

45,014,935

 

 

 

193,555,810

 

 

 

203,123,341

 

Net increase (decrease) in cash and cash equivalents

 

(7,767,208

)

 

 

1,132,985

 

 

 

11,494,589

 

 

 

5,710,958

 

Cash and cash equivalents at beginning of period

 

31,923,332

 

 

 

4,767,841

 

 

 

12,661,535

 

 

 

189,868

 

Cash and cash equivalents at end of period

$

24,156,124

 

 

$

5,900,826

 

 

$

24,156,124

 

 

$

5,900,826

 

 

The changes in the Company’s overall cash flows from operating activities, investing activities and financing activities for the three and six months ended June 30, 2015 as compared to the cash flows for the three and six months ended June 30, 2014 primarily relate to the Company acquiring, owning and operating an additional 29 properties for a total of 39 properties as of June 30, 2015 as compared to acquiring, owning and operating 10 properties as of June 30, 2014.

Cash flows from operating activities. During the three months ended June 30, 2015, net cash provided by operating activities was $4,221,370 compared to net cash provided by operating activities of $139,360 for the three months ended June 30, 2014. During the six months ended June 30, 2015, net cash provided by operating activities was $5,534,216 compared to net cash used in operating activities of (834,863) for the six months ended June 30, 2014. The increase in net cash from operating activities for both periods was mainly due to changes in net loss and working capital items resulting from the acquisition of additional properties.

Cash flows from investing activities. During the three months ended June 30, 2015, net cash used in investing activities was $(24,623,552) compared to net cash used in investing activities of $(44,021,310) for the three months ended June 30, 2014. During the six months ended June 30, 2015, net cash used in investing activities was $(187,595,437) compared to net cash used in investing activities of $(196,577,520) for the six months ended June 30, 2014.The decrease in net cash used in investing activities for both periods was mainly due to the change in acquisition activity, which varies based on specific acquisition and renovation projects that are ongoing at each respective property. In addition, there is a fluctuation of renovation reserves being established at closing for the value-add programs at each property for each period.

Cash flows from financing activities. During the three months ended June 30, 2015, net cash provided by financing activities was $12,634,974 compared to net cash provided by financing activities of $45,014,935 for the three months ended June 30, 2014. During the six months ended June 30, 2015, net cash provided by financing activities was $193,555,810 compared to net cash

31

 


 

provided by financing activities of $203,123,341 for the six months ended June 30, 2014. The decrease for both periods in net cash provided by financing activities was mainly due to the level of activity related to the debt funded on the respective property closings and capital contributed at each closing.

Mortgage Indebtedness

As of June 30, 2015, our subsidiaries have aggregate mortgage indebtedness to third parties of approximately $624 million. As of June 30, 2015, the weighted average interest rate on the outstanding indebtedness related to the Portfolio was 2.53%.

We entered into and expect to continue to enter into interest rate cap agreements with various third parties to cap the variable interest rates on our outstanding indebtedness. These agreements generally have a term of three to four years and cover the outstanding principal amount of the underlying indebtedness. Under these agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. At June 30, 2015, interest rate hedge agreements covered $564 million of the $624 million of total outstanding indebtedness relating to the Portfolio and all of the floating rate indebtedness. These interest rate hedge agreements cap our variable interest rate at a weighted average interest rate of 6.00% as of June 30, 2015.

Each property has a separate non-recourse mortgage which is secured only by that property. These non-recourse mortgages have standard scope non-recourse carve outs required by agency lenders and generally call for protection by the borrower and the guarantor against losses by the lender for so-called “bad acts,” such as misrepresentations, and may include full recourse liability for more significant events such as bankruptcy. Our property manager, BH, and its affiliates provided non-recourse carve out guarantees for the mortgage indebtedness currently outstanding relating to the Portfolio.

We intend to invest in additional multifamily properties as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common stock or other securities. In addition, we may seek financing from U.S. government agencies, including through Freddie Mac and Fannie Mae and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with the acquisition or refinancing of existing mortgage loans.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

Over the next 36 months, we intend to reduce our leverage ratio paying down certain properties’ principal balances, or refinancing existing indebtedness at a lower leverage ratio. Given the flexibility and attractive cost of our current indebtedness, together with the potential for increases in value from our capital expenditures and management programs, we may also elect to reduce the portfolio-wide leverage by reducing the leverage level of future acquisitions and/or funding new acquisitions with a larger portion of equity.

Furthermore, following the completion of our value-add and capital expenditures programs and depending on interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.

Obligations and Commitments

The following table summarizes the Company’s contractual obligations and commitments at June 30, 2015.

 

 

 

Payments Due by Period

 

 

 

Total

 

 

Less than

1 Year

 

 

1 Year to

Less than

3 Years

 

 

Less than

3 Years

 

 

3 Years to

Less than

5 Years

 

 

More than

5 Years

 

 

 

(in thousands)

 

Principal payments on mortgage notes

 

 

610,743

 

 

 

830

 

 

 

12,720

 

 

 

13,550

 

 

 

28,252

 

 

 

568,941

 

Total

 

 

610,743

 

 

 

830

 

 

 

12,720

 

 

 

13,550

 

 

 

28,252

 

 

 

568,941

 

 

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The Company will also have additional contractual obligations and commitments in connection with the subsequent closings (Footnote 10) of Madera Point, The Pointe at the Foothills, and the Bridge Facility financing obtained from Key Bank, N.A. Madera Point will have principal payments on a mortgage note of $13,515,000, The Pointe at the Foothills will have principal payments on a mortgage note of $31,365,000, and the Bridge Facility will have principal payments on a mortgage note of $29,000,000 in addition to the amounts disclosed in the table above.

Capital Expenditures and Value-Add Program

We anticipate incurring average annual repairs and maintenance expense of $575-$725 per unit in connection with the ongoing operations of our business. In addition, we reserve, on average, approximately $250 to $350 per unit for non-recurring capital expenditures and or lender required replacement reserves. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in the Portfolio were underwritten and acquired with the premise that we would invest $4,000-$10,000 per unit in the first 24-36 months of ownership, in an effort to add value to the asset’s exterior and interiors. In most cases, we escrowed equity at closing to fund these planned capital expenditures and value-add improvements. As of June 30, 2015, we will have reserved approximately $44.5 million for our planned capital expenditures and other expenses to implement our value-add program.

Emerging Growth Company

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

Income Taxes

We anticipate that we will qualify to be taxed as a REIT for U.S. federal income tax purposes commencing with our first taxable year of operations as a separate public company, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will generally not be subject to U.S. federal income tax on income that we distribute as dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

Historically, our operations have been included in Freedom REIT’s U.S. federal and state income tax returns and our operations for the current period until the Spin-Off will be included in Freedom REIT’s U.S. federal and state income tax returns for the taxable year ended December 31, 2015. Freedom REIT elected to be taxed as a REIT beginning with its taxable year ending December 31, 2013 and Freedom REIT has covenanted to us to use its reasonable best efforts to maintain its REIT status for its taxable year ending on December 31, 2015. With respect to its taxable years ending December 31, 2013 and December 31, 2014, it distributed 100% of its REIT taxable income and therefore did not owe any U.S. federal income tax. If Freedom REIT fails to qualify as a REIT, it would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on its taxable income at regular corporate income tax rates. In addition, unless we were entitled to relief under certain Code provisions, we also would be disqualified from electing to be taxed as a REIT if Freedom REIT fails to qualify as a REIT for its taxable years ending on or before December 31, 2015 and we are treated as a successor to Freedom REIT for U.S. federal income tax purposes. Although Freedom REIT represented in the separation and distribution agreement that it has no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT, and covenanted in the agreement between us and our advisor to use its reasonable best efforts to maintain its REIT status for each of Freedom REIT’s taxable years ending on or before December 31, 2015 (unless Freedom REIT obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Freedom REIT’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can be given that such representation and covenant would prevent us from failing to qualify as a REIT.

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Dividends

We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Before June 30, 2015, the Company declared its first quarterly dividend of $0.206 per share on May 11, 2015 which was paid on July 1, 2015 and funded out of the operations of the properties.

Significant Accounting Policies and Critical Accounting Estimates

Our significant accounting policies and critical accounting estimates are disclosed in Note 2 “summary of Significant Accounting Policies” to the Combined Consolidated Financial Statements.

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. Our primary market risk exposure is interest rate risk with respect to our indebtedness. As of June 30, 2015, we have mortgage indebtedness of $624 million, of which $564 million is floating rate debt with an adjusting interest rate.

An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate swap agreements. At June 30, 2015, interest rate hedge agreements covered $564 million of the $624 million of total outstanding indebtedness relating to the Portfolio. As of June 30, 2015 these interest rate hedge agreements cap our variable interest rate at a weighted average interest rate of 6.00% for the term of the agreements, which is generally 3-4 years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and variable rates for our indebtedness.

Until our interest rates reach the caps provided by our interest rate hedge agreements, each quarter point change in interest rates on the variable portion of our indebtedness would result in a change of approximately $1,400,000 to our interest expense on an annual basis.

We may also be exposed to credit risk in derivative contracts we may use. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

 

 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15-d15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our President and Chief Financial Officer, evaluated, as of June 30, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13-a15(e) and Rule 15-d15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015, to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is

34

 


 

accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the three months ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

35

 


 

PART II – OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

None.

 

 

Item 1A.

Risk Factors

We have disclosed under the heading “Risk Factors” in our preliminary information statement (the “Information Statement”) included as Exhibit 99.1 to our Registration Statement on Form 10 (File No. 001-36663), filed with the U.S. Securities and Exchange Commission, risk factors which materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the Information Statement and the other information set forth elsewhere in this quarterly report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

 

Item 3.

Defaults upon Senior Securities

None.

 

 

Item 4.

Mine Safety Disclosures

None.

 

 

Item 5.

Other Information

None.

 

 

Item 6.

Exhibits

EXHIBIT INDEX

 

Exhibit Number

 

Exhibit Description

 

31.1

 

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

36

 


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NEXPOINT RESIDENTIAL TRUST, INC.

 

 

 

Dated: August 14, 2015

 

/s/ Jim Dondero

 

 

Jim Dondero

President

(President)

 

 

 

Dated: August 14, 2015

 

/s/ Brian Mitts

 

 

Brian Mitts

Chief Financial Officer

(Principal Financial Officer)

 

37