NEXPOINT RESIDENTIAL TRUST, INC. 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 included herein and with our annual report on Form 10-K for the year endedDecember 31, 2021 (our "Annual Report"), filed with theSecurities and Exchange Commission (the "SEC") onFebruary 18, 2022 . 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, but not limited to, those discussed below and elsewhere in this quarterly report. See "Cautionary Statement Regarding Forward-Looking Statements" in this report, and "Risk Factors" in Part I, Item 1A, "Risk Factors" of our Annual Report.
Overview
As ofJune 30, 2022 , our Portfolio consisted of 41 multifamily properties primarily located in the Southeastern andSouthwestern United States encompassing 15,387 units of apartment space that was approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of$1,387 . Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As ofJune 30, 2022 , there were 26,050,945 OP Units outstanding, of which 25,951,154, or 99.6%, were owned by us, and 99,791, or 0.4%, owned by unaffiliated limited partners (see Note 10 to our consolidated financial statements). 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 andSouthwestern United States . We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the net operating income ("NOI") at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed onFebruary 14, 2022 for a one-year term. The Adviser is wholly owned byNexPoint Advisors, L.P. OnMarch 4, 2020 , the Company, the OP and the Adviser entered into separate equity distribution agreements with each ofJefferies LLC ("Jefferies"),Raymond James & Associates, Inc. ("Raymond James"),KeyBanc Capital Markets Inc. ("KeyBanc") andTruist Securities (f/k/aSunTrust Robinson Humphrey, Inc. , "SunTrust," and together with Jefferies, Raymond James and KeyBanc, the "ATM Sales Agents"), pursuant to which the Company may issue and sell from time to time shares of the Company's common stock, par value$0.01 per share, having an aggregate sales price of up to$225,000,000 (the "2020 ATM Program"). Sales of shares of common stock, if any, may be made in transactions that are deemed to be "at the market" offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers' transactions on theNew York Stock Exchange , to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the six months endedJune 30, 2022 , the Company issued 52,091 shares of common stock at an average price of$83.16 per share for gross proceeds of$4.3 million under the 2020 ATM Program. The Company paid approximately$0.1 million in fees to the ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$0.2 million , both of which were netted against the gross proceeds and recorded in additional paid in capital (see Note 8 to our consolidated financial statements). We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the six months endedJune 30, 2022 and 2021. OnOctober 15, 2021 , a lawsuit was filed by a trust set up in connection with the Highland bankruptcy in theUnited States Bankruptcy Court for the Northern District of Texas . The lawsuit makes claims against a number of entities, including our Sponsor andJames Dondero . The lawsuit does not include claims related to our business or our assets or operations. Our Sponsor andMr. Dondero have informed us they believe the lawsuit has no merit and they intend to vigorously defend against the claims. We do not expect the lawsuit will have a material effect on our business, results of operations or financial condition. 29 --------------------------------------------------------------------------------
Components of Our Revenues and Expenses
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 on average. Also included are utility reimbursements, late fees, pet fees, and other rental fees charged to tenants. Other income. Other income includes ancillary income earned from tenants such as non-refundable fees, application fees, laundry fees, cable TV income, and other miscellaneous fees charged to tenants.
Expenses
Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs.
Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property.
Property management fees. Property management fees include fees paid to BH, our property manager, or other third party management companies for managing each property (see Note 10 to our consolidated financial statements). Advisory and administrative fees. Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 11 to our consolidated financial statements). Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser (including advisory and administrative fees on properties defined in the Advisory Agreement as New Assets) will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap. The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense 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 our 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. Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due. If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future.
Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.
Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases. Other Income and Expense
Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk.
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment. Casualty losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other abnormal expenses arising from the related event.
Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.
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Gain on sales of real estate. Gain on sales of real estate includes the gain
recognized upon sales of properties. Gain on sales of real estate is calculated
by deducting the carrying value of the real estate and costs incurred to sell
the properties from the sales prices of the properties.
Results of Operations for the Three and Six Months Ended
The three months ended
The following table sets forth a summary of our operating results for the three
months ended
For the Three Months Ended June 30,
2022 2021 $ Change
Total revenues $ 65,766 $ 52,563 $ 13,203
Total expenses (61,567 ) (47,821 ) (13,746 )
Operating income 4,199 4,742 (543 )
Interest expense (12,402 ) (10,683 ) (1,719 )
Casualty gains 229 2,379 (2,150 )
Miscellaneous income 147 472 (325 )
Loss on extinguishment of debt and
modification costs - (328 ) 328
Net loss (7,827 ) (3,418 ) (4,409 )
Net loss attributable to redeemable
noncontrolling interests in the Operating
Partnership (30 ) (10 ) (20 )
Net loss attributable to common
stockholders $ (7,797 ) $ (3,408 ) $ (4,389 )
The change in our net loss for the three months ended June 30, 2022 as compared
to our net loss for the three months ended June 30, 2021 primarily relates to a
decrease in casualty gains and increases in operating expenses and interest
expense, partially offset by an increase in total revenues.
Revenues
Rental income. Rental income was$64.2 million for the three months endedJune 30, 2022 compared to$51.0 million for the three months endedJune 30, 2021 , which was an increase of approximately$13.2 million . The increase between the periods was primarily due to a 23.6% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to$1,387 as ofJune 30, 2022 from$1,122 as ofJune 30, 2021 . The increase in effective rent was primarily driven by the value-add program that we have implemented, organic growth in rents, and our acquisition activity in 2022 and 2021 and the timing of the transactions. Other income. Other income was$1.6 million for the three months endedJune 30, 2022 compared to$1.5 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.1 million . The increase between the periods was primarily due to an increase in non-refundable fees of approximately$0.1 million . Expenses Property operating expenses. Property operating expenses was$16.7 million for the three months endedJune 30, 2022 compared to$11.2 million for the three months endedJune 30, 2021 , which was an increase of approximately$5.5 million . The increase between periods was primarily due to a$3.0 million increase in casualty losses and a$0.3 million increase in water and sewage expense. Real estate taxes and insurance. Real estate taxes and insurance costs were$9.5 million for the three months endedJune 30, 2022 compared to$8.5 million for the three months endedJune 30, 2021 , which was an increase of approximately$1.0 million . The increase between the periods was primarily due to our acquisition activity in 2022 and 2021 and the timing of the transactions. The increase between the periods was also due to a$0.5 million , or 6.2%, increase in property taxes and a$0.3 million , or 26.3%, increase in property insurance. 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 were$1.9 million for the three months endedJune 30, 2022 compared to$1.5 million for the three months endedJune 30, 2021 which was an increase of$0.4 million . Property management fees are primarily based on total revenues. 31 -------------------------------------------------------------------------------- Advisory and administrative fees. Advisory and administrative fees were$1.9 million for the three months endedJune 30, 2022 compared to$1.9 million for the three months endedJune 30, 2021 . For the three months endedJune 30, 2022 and 2021, our Adviser elected to voluntarily waive the advisory and administrative fees of approximately$5.2 million and$4.1 million . Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets. Corporate general and administrative expenses. Corporate general and administrative expenses were$3.8 million for the three months endedJune 30, 2022 compared to$3.0 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.8 million . The increase between the periods was primarily due to increases of$0.2 million in stock compensation expense and a$0.2 million increase in other professional fees. Property general and administrative expenses. Property general and administrative expenses were$2.2 million for the three months endedJune 30, 2022 compared to$1.8 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.4 million . The increase between the periods was primarily due to a$0.2 million increase in professional fees and a$0.1 million increase in eviction fees. Depreciation and amortization. Depreciation and amortization costs were$25.5 million for the three months endedJune 30, 2022 compared to$20.0 million for the three months endedJune 30, 2021 , which was an increase of approximately$5.5 million . The increase between the periods was primarily due to an increase of$1.5 million in amortization of intangible lease assets and an increase in depreciation expense of approximately$4.1 million , which was primarily due to our acquisition activity in 2022 and 2021 and the timing of the transactions. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property.
Other Income and Expense
Interest expense. Interest expense was$12.4 million for the three months endedJune 30, 2022 compared to$10.7 million for the three months endedJune 30, 2021 , which was an increase of approximately$1.7 million . The increase between the periods was primarily due to an increase in interest on debt of approximately$4.4 million , partially offset by a decrease in interest rate swap expense of approximately$2.7 million . The following table details the various costs included in interest expense for the three months endedJune 30, 2022 and 2021 (in thousands): For the Three Months Ended June 30, 2022 2021 $ Change Interest on debt $ 10,786 $ 6,388$ 4,398 Amortization of deferred financing costs 734 495 239 Interest rate swap expense 1,066 3,745 (2,679 ) Interest rate caps expense (184 ) 55 (239 ) Total $ 12,402 $ 10,683$ 1,719
The six months ended
The following table sets forth a summary of our operating results for the six
months ended
For the Six Months Ended June 30,
2022 2021 $ Change
Total revenues $ 126,552 $ 104,359 $ 22,193
Total expenses (116,693 ) (96,369 ) (20,324 )
Operating income 9,859 7,990 1,869
Interest expense (23,038 ) (21,299 ) (1,739 )
Casualty gains 357 2,379 (2,022 )
Miscellaneous income 328 940 (612 )
Loss on extinguishment of debt and
modification costs - (328 ) 328
Net loss (12,494 ) (10,318 ) (2,176 )
Net loss attributable to redeemable
noncontrolling interests in the Operating
Partnership (44 ) (31 ) (13 )
Net loss attributable to common
stockholders $ (12,450 ) $ (10,287 ) $ (2,163 )
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The change in our net loss for the six months ended
Revenues
Rental income. Rental income was$123.4 million for the six months endedJune 30, 2022 compared to$101.4 million for the six months endedJune 30, 2021 , which was an increase of approximately$22.0 million . The increase between the periods was primarily due to a 23.6% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to$1,387 as ofJune 30, 2022 from$1,122 as ofJune 30, 2021 . The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located. Other income. Other income was$3.1 million for the six months endedJune 30, 2022 compared to$3.0 million for the six months endedJune 30, 2021 , which was an increase of approximately$0.1 million . The increase between the periods was primarily due to a$0.3 million increase in internet and tech income.
Expenses
Property operating expenses. Property operating expenses were$30.3 million for the six months endedJune 30, 2022 compared to$22.4 million for the six months endedJune 30, 2021 , which was an increase of approximately$7.9 million . The increase between the periods was primarily due to our acquisition activity in 2022 and 2021 and the timing of the transactions. The increase between the periods was also due to a$4.0 million increase in casualty losses. Real estate taxes and insurance. Real estate taxes and insurance costs were$18.3 million for the six months endedJune 30, 2022 compared to$17.2 million for the six months endedJune 30, 2021 , which was an increase of approximately$1.1 million . The increase between the periods was primarily due to a$0.7 million , or 4.6%, increase in property taxes and a$0.4 million , or 23.0%, increase in property insurance. 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 cost of real estate taxes. Property management fees. Property management fees were$3.7 million for the six months endedJune 30, 2022 and$3.0 million for the six months endedJune 30, 2021 . Property management fees are primarily based on total revenues. Advisory and administrative fees. Advisory and administrative fees were$3.7 million for the six months endedJune 30, 2022 and$3.8 million for the six months endedJune 30, 2021 which was a decrease of approximately$0.1 million . For the six months endedJune 30, 2022 and 2021, our Adviser elected to voluntarily waive the advisory and administrative fees of approximately$10.1 million and$8.1 million . Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets. Corporate general and administrative expenses. Corporate general and administrative expenses were$7.3 million for the six months endedJune 30, 2022 compared to$5.9 million for the six months endedJune 30, 2021 , which was an increase of approximately$1.4 million . The increase was primarily due to increases in other professional fees of$0.2 million and stock compensation expense of$0.5 million . Property general and administrative expenses. Property general and administrative expenses were$4.2 million for the six months endedJune 30, 2022 compared to$3.3 million for the six months endedJune 30, 2021 , which was an increase of approximately$0.9 million . The increase was primarily due to an increase in professional fees of$0.4 million . Depreciation and amortization. Depreciation and amortization costs were$49.3 million for the six months endedJune 30, 2022 compared to$40.7 million for the six months endedJune 30, 2021 , which was an increase of approximately$8.6 million . The increase between the periods was primarily due a decrease in amortization of intangible lease assets of$1.7 million , partially offset by an increase of$6.8 million in depreciation expense, which was primarily due to our acquisition activity in 2022 and 2021 and the timing of the transactions. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property. 33 --------------------------------------------------------------------------------
Other Income and Expense
Interest expense. Interest expense was$23.0 million for the six months endedJune 30, 2022 compared to$21.3 million for the six months endedJune 30, 2021 , which was an increase of approximately$1.7 million . The increase between the periods was primarily due an increase in interest on debt of$5.7 million , partially offset by decreases in interest rate swap expense of approximately$2.8 million . The following table details the various costs included in interest expense for the six months endedJune 30, 2022 and 2021 (in thousands): For the Six Months Ended June 30, 2022 2021 $ Change Interest on debt $ 18,475 $ 12,791$ 5,684 Amortization of deferred financing costs 1,299 1,056 243 Interest rate swap expense 4,628 7,409 (2,781 ) Interest rate caps expense (1,364 ) 43 (1,407 ) Total $ 23,038 $ 21,299$ 1,739 Loss on extinguishment of debt and modification costs. There were no loss on extinguishment of debt and modification costs for the six months endedJune 30, 2022 compared to a$0.3 million loss for the six months endedJune 30, 2021 , which was a decrease of approximately$0.3 million . The decrease between the periods was due to a decrease in write-off of deferred financing costs of approximately$0.3 million . The following table details the various costs included in loss on extinguishment of debt and modification costs for the six months endedJune 30, 2022 and 2021 (in thousands): For the Six
Months Ended
2022 2021 $ Change
Prepayment penalties and defeasance costs $ - $ - $ -
Write-off of deferred financing costs - 328 (328 )
Debt modification and other extinguishment costs - - -
Total $ - $ 328 $ (328 )
Non-GAAP Measurements
Net Operating Income and Same Store Net Operating Income
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
other comparable properties, to determine trends in earnings and to compute the
fair value of our properties as NOI is calculated by adjusting net income (loss)
to add back (1) interest expense (2) advisory and administrative fees, (3) 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, (4) corporate general and administrative
expenses, (5) other gains and losses that are specific to us including loss on
extinguishment of debt and modification costs, (6) casualty-related
expenses/(recoveries) and casualty gains (losses), and (7) property general and
administrative expenses that are not reflective of the continuing operations of
the properties or are incurred on behalf of the Company at the property for
expenses such as legal, professional, centralized leasing service 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. Corporate general
and administrative expenses, pandemic expense, 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.
Casualty-related expenses and recoveries, casualty gains and losses, and losses
of extinguished debt and modification costs are excluded because they do not
reflect continuing operating costs of the property owner. Entity level general
and administrative expenses incurred at the properties and pandemic expenses are
eliminated as they are specific to the way in which we have chosen to hold our
properties and are the result of our ownership structuring. Also, 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 items from net
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.
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However, the usefulness of NOI is limited because it excludes corporate general
and administrative expenses, interest expense, loss on extinguishment of debt
and modification costs, acquisition costs, certain fees to affiliates such as
advisory and administrative fees, depreciation and amortization expense and
gains or losses from the sale of properties, pandemic expenses, and other gains
and losses as determined under 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 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.
We define "Same Store NOI" as NOI for our properties that are comparable between
periods. We view Same Store NOI as an important measure of the operating
performance of our properties because it allows us to compare operating results
of properties owned for the entirety of the current and comparable periods and
therefore eliminates variations caused by acquisitions or dispositions during
the periods.
NOI and Same Store NOI for the Three and Six Months Ended
The following table, which has not been adjusted for the effects of
noncontrolling interests, reconciles our NOI and our Same Store NOI for the
three and six months ended
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net loss $ (7,827 ) $ (3,418 ) $ (12,494 ) $ (10,318 )
Adjustments to reconcile net loss to NOI:
Advisory and administrative fees 1,868 1,900 3,711 3,768
Corporate general and administrative
expenses 3,812 2,978 7,298 5,918
Casualty-related expenses/(recoveries) (1) 2,592 (435 ) 3,642 (392 )
Casualty gain (229 ) (2,379 ) (357 ) (2,379 )
Pandemic expense - 12 - 35
Property general and administrative expenses (2) 680 572 1,307 948
Depreciation and amortization 25,548 19,986 49,266 40,744
Interest expense 12,402 10,683 23,038 21,299
Loss on extinguishment of debt and
modification costs - 328 - 328
NOI $ 38,846 $ 30,227 $ 75,411 $ 59,951
Less Non-Same Store
Revenues (8,053 ) (2,008 ) (13,335 ) (3,926 )
Operating expenses 2,920 1,029 4,795 2,060
Operating income (11 ) (305 ) (14 ) (645 )
Same Store NOI $ 33,702 $ 28,943 $ 66,857 $ 57,440 (1) Adjustment to net loss to exclude certain property operating expenses that
are casualty-related expenses/(recoveries).
(2) Adjustment to net loss to exclude certain property general and administrative
expenses that are not reflective of the continuing operations of the
properties or are incurred on our behalf at the property for expenses such as
legal, professional, centralized leasing service and franchise tax fees.
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Net Operating Income for Our Q2 Same Store and
There are 34 properties encompassing 13,433 units of apartment space in our same store pool for the three months endedJune 30, 2022 and 2021 (our "Q2 Same Store " properties). Our Q2 Same Store properties exclude the following seven properties in our Portfolio as ofJune 30, 2022 : Cutter's Point, The Verandas atLake Norman , Creekside at Matthews,Six Forks Station , High House at Cary, The Adair and Estates onMaryland as well as the 67 units that are currently down (see Note 5).
The following table reflects the revenues, property operating expenses and NOI
for the three months ended
For the Three Months Ended June 30,
2022 2021 $ Change % Change
Revenues
Same Store
Rental income $ 56,206 $ 49,086 $ 7,120 14.5 %
Other income 1,507 1,469 38 2.6 %
Same Store revenues 57,713 50,555 7,158 14.2 %
Non-Same Store
Rental income 7,946 1,961 5,985 N/M
Other income 107 47 60 N/M
Non-Same Store revenues 8,053 2,008 6,045 N/M
Total revenues 65,766 52,563 13,203 25.1 %
Operating expenses
Same Store
Property operating expenses (1) 12,583 11,013 1,570 14.3 %
Real estate taxes and insurance 8,566 8,191 375 4.6 %
Property management fees (2) 1,683 1,453 230 15.8 %
Property general and
administrative expenses (3) 1,315 1,122 193 17.2 %
Same Store operating expenses 24,147 21,779 2,368 10.9 %
Non-Same Store
Property operating expenses (4) 1,528 583 945 N/M
Real estate taxes and insurance 965 317 648 N/M
Property management fees (2) 229 63 166 N/M
Property general and
administrative expenses (5) 198 66 132 N/M
Non-Same Store operating expenses 2,920 1,029 1,891 N/M
Total operating expenses 27,067 22,808 4,259 18.7 %
Operating income
Same Store
Miscellaneous income 136 167 (31 ) -18.6 %
Non-Same Store
Miscellaneous income 11 305 (294 ) N/M
Total operating income 147 472 (325 ) -68.9 %
NOI
Same Store 33,702 28,943 4,759 16.4 %
Non-Same Store 5,144 1,284 3,860 300.6 %
Total NOI $ 38,846 $ 30,227 $ 8,619 28.5 %
(1) For the three months ended
expenses/(recoveries).
(2) Fees incurred to an unaffiliated third party that is an affiliate of the
noncontrolling limited partner of the OP.
(3) For the three months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional, centralized leasing
service and franchise tax fees.
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(4) For the three months ended
(5) For the three months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional, centralized leasing
service and franchise tax fees.
See reconciliation of net loss to NOI above under "NOI and Same Store NOI for
the Three and Six Months Ended
Q2 Same Store Results of Operations for the Three Months Ended
As ofJune 30, 2022 , ourQ2 Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of$1,385 . As ofJune 30, 2021 , ourQ2 Same Store properties were approximately 96.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,162 . For ourQ2 Same Store properties, we recorded the following operating results for the three months endedJune 30, 2022 as compared to the three months endedJune 30, 2021 :
Revenues
Rental income. Rental income was$56.2 million for the three months endedJune 30, 2022 compared to$49.1 million for the three months endedJune 30, 2021 , which was an increase of approximately$7.1 million , or 14.5%. The majority of the increase is related to a 19.2% increase in the weighted average monthly effective rent per occupied apartment unit to$1,385 as ofJune 30, 2022 from$1,162 as ofJune 30, 2021 , partially offset by a 1.5% decrease in occupancy.
Other income. Other income was
Expenses
Property operating expenses. Property operating expenses were$12.6 million for the three months endedJune 30, 2022 compared to$11.0 million for the three months endedJune 30, 2021 , which was an increase of$1.6 million , or 14.3%. The majority of the increase is related to a$0.9 million , or 20.1% increase in repair and maintenance costs and a$0.4 million , or 9.7% increase in payroll costs. Real estate taxes and insurance. Real estate taxes and insurance costs were$8.6 million for the three months endedJune 30, 2022 compared to$8.2 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.4 million , or 4.6%. The increase is primarily related to a$0.2 million , or 3.2%, increase in property taxes. Property management fees. Property management fees were$1.7 million for the three months endedJune 30, 2022 compared to$1.5 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.2 million . The increase between the periods was primarily due to an increase in revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$1.3 million for the three months endedJune 30, 2022 compared to$1.1 million for the three months endedJune 30, 2021 , which was an increase of approximately$0.2 million . The majority of the increase is related to a$0.1 million increase in office operation expenses. 37 --------------------------------------------------------------------------------
Net Operating Income for Our Same Store and
There are 34 properties encompassing 13,433 units of apartment space in our same store pool for the six months endedJune 30, 2022 and 2021 (our "Same Store" properties). Our Same Store properties exclude the following seven properties in our Portfolio as ofJune 30, 2022 : Cutter's Point, The Verandas atLake Norman , Creekside at Matthews,Six Forks Station , High House at Cary, The Adair and Estates onMaryland as well as the 67 units that are currently down (see Note 5). The following table reflects the revenues, property operating expenses and NOI for the six months endedJune 30, 2022 and 2021 for our Same Store andNon-Same Store properties (dollars in thousands): For the Six Months Ended June 30, 2022 2021 $ Change % Change Revenues Same Store Rental income$ 110,328 $ 97,521$ 12,807 13.1 % Other income 2,889 2,912 (23 ) -0.8 % Same Store revenues 113,217 100,433 12,784 12.7 % Non-Same Store Rental income 13,121 3,866 9,255 N/M Other income 214 60 154 N/M Non-Same Store revenues 13,335 3,926 9,409 N/M Total revenues 126,552 104,359 22,193 21.3 % Operating expenses Same Store Property operating expenses (1) 24,152 21,578 2,574 11.9 % Real estate taxes and insurance 16,676 16,597 79 0.5 % Property management fees (2) 3,289 2,876 413 14.4 % Property general and administrative expenses (3) 2,557 2,237 320 14.3 % Same Store operating expenses 46,674 43,288 3,386 7.8 % Non-Same Store Property operating expenses (4) 2,505 1,168 1,337 N/M Real estate taxes and insurance 1,575 633 942 N/M Property management fees (2) 380 125 255 N/M Property general and administrative expenses (5) 335 134 201 N/M Non-Same Store operating expenses 4,795 2,060 2,735 N/M Total operating expenses 51,469 45,348 6,121 13.5 % Operating income Same Store Miscellaneous income 314 295 19 6.4 % Non-Same Store Miscellaneous income 14 645 (631 ) N/M Total operating income 328 940 (612 ) -65.1 % NOI Same Store 66,857 57,440 9,417 16.4 % Non-Same Store 8,554 2,511 6,043 N/M Total NOI $ 75,411 $ 59,951$ 15,460 25.8 %
(1) For the six months ended
38
--------------------------------------------------------------------------------(2) Fees incurred to an unaffiliated third party that is an affiliate of the
noncontrolling limited partner of the OP.
(3) For the six months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional and franchise tax fees.
(4) For the six months ended
(5) For the six months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional, centralized leasing
service and franchise tax fees.
See reconciliation of net loss to NOI above under "NOI and Same Store NOI for
the Three and Six Months Ended
Same Store Results of Operations for the Six Months Ended
As ofJune 30, 2022 , our Same Store properties were approximately 94.5% leased with a weighted average monthly effective rent per occupied apartment unit of$1,385 . As ofJune 30, 2021 , our Same Store properties were approximately 96.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,162 . For our Same Store properties, we recorded the following operating results for the six months endedJune 30, 2022 as compared to the six months endedJune 30, 2021 :
Revenues
Rental income. Rental income was$110.3 million for the six months endedJune 30, 2022 compared to$97.5 million for the six months endedJune 30, 2021 , which was an increase of approximately$12.8 million , or 13.1%. The majority of the increase is related to a 19.2% increase in the weighted average monthly effective rent per occupied apartment unit to$1,385 as ofJune 30, 2022 from$1,162 as ofJune 30, 2021 , partially offset by a 1.5% decrease in occupancy.
Other income. Other income was
Expenses
Property operating expenses. Property operating expenses were$24.2 million for the six months endedJune 30, 2022 compared to$21.6 million for the six months endedJune 30, 2021 , which was an increase of approximately$2.6 million , or 11.9%. The majority of the increase is related to a$1.3 million , or 15.3%, increase in repairs and maintenance and a$0.7 million , or 9.7%, increase in payroll. Real estate taxes and insurance. Real estate taxes and insurance costs were$16.7 million for the six months endedJune 30, 2022 compared to$16.6 million for the six months endedJune 30, 2021 , which was an increase of approximately$0.1 million , or 0.5%. The majority of the increase is related to a$0.3 million , or 11.5%, increase in insurance. Property management fees. Property management fees were$3.3 million for the six months endedJune 30, 2022 compared to$2.9 million for the six months endedJune 30, 2021 , which was an increase of approximately$0.4 million , or 14.4%. The majority of the increase is related to a$12.8 million , or 13.1%, increase in rental income, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$2.6 million for the six months endedJune 30, 2022 compared to$2.2 million for the six months endedJune 30, 2021 , which was an increase of approximately$0.4 million . The majority of the increase is related to a$0.2 million increase in office operation expenses. 39 --------------------------------------------------------------------------------
FFO, Core 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 ("FFO"), as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), core funds
from operations ("Core FFO") and adjusted funds from operations ("AFFO") are
important non-GAAP supplemental measures of operating performance for a REIT.
Since 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. We compute FFO attributable to
common stockholders in accordance with NAREIT's definition. Our presentation
differs slightly in that we begin with net income (loss) before adjusting for
amounts attributable to noncontrolling interests and we show the combined
amounts attributable to such noncontrolling interests as an adjustment to arrive
at FFO attributable to common stockholders.
Core FFO makes certain adjustments to FFO, which are either not likely to occur
on a regular basis or are otherwise not representative of the ongoing operating
performance of our portfolio. Core FFO adjusts FFO to remove items such as
losses on extinguishment of debt and modification costs (including prepayment
penalties and defeasance costs incurred on the early repayment of debt, the
write-off of unamortized deferred financing costs and fair market value
adjustments of assumed debt related to the early repayment of debt, costs
incurred in a debt modification that are not capitalized as deferred financing
costs and other costs incurred in a debt extinguishment), casualty-related
expenses and recoveries and gains or losses, pandemic expenses, the amortization
of deferred financing costs incurred in connection with obtaining short-term
debt financing, and the noncontrolling interests (as described above) related to
these items. We believe Core FFO is useful to investors as a supplemental gauge
of our operating performance and is useful in comparing our operating
performance with other REITs that are not as involved in the aforementioned
activities.
AFFO makes certain adjustments to Core FFO in order to arrive at a more refined
measure of the operating performance of our Portfolio. There is no industry
standard definition of AFFO and practice is divergent across the industry. AFFO
adjusts Core FFO to remove items such as equity-based compensation expense and
the amortization of deferred financing costs incurred in connection with
obtaining long-term debt financing, and the noncontrolling interests (as
described above) related to these items. We believe AFFO is useful to investors
as a supplemental gauge of our operating performance and is useful in comparing
our operating performance with other REITs that are not as involved in the
aforementioned activities.
The effect of the conversion of OP Units held by noncontrolling limited partners
is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO
per share, as they are exchangeable for common stock on a one-for-one basis. The
FFO, Core FFO and AFFO allocable to such units is allocated on this same basis
and reflected in the adjustments for noncontrolling interests in the table
below. As such, the assumed conversion of these units would have no net impact
on the determination of diluted FFO, Core FFO and AFFO per share. See Note 10 to
our consolidated financial statements for additional information.
We believe that the use of FFO, Core 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. While FFO, Core 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 (loss) as defined by GAAP and should not be
considered as an alternative or substitute to those measures in evaluating our
liquidity or operating performance. FFO, Core FFO and AFFO do not purport to be
indicative of cash available to fund our future cash requirements. Further, our
computation of FFO, Core FFO and AFFO may not be comparable to FFO, Core 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 Core FFO or AFFO differently than we do.
40
--------------------------------------------------------------------------------
The following table reconciles our calculations of FFO, Core FFO and AFFO to net
loss, the most directly comparable GAAP financial measure, for the three and six
months ended June 30, 2022 and 2021 (in thousands, except per share amounts):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2022 2021 2022 2021 % Change (1)
Net loss $ (7,827 ) $ (3,418 ) $ (12,494 ) $ (10,318 ) 21.1 %
Depreciation and amortization 25,548 19,986 49,266 40,744 20.9 %
Adjustment for noncontrolling
interests (72 ) (50 ) (129 ) (91 ) 41.8 %
FFO attributable to common
stockholders 17,649 16,518 36,643 30,335 20.8 %
FFO per share - basic $ 0.69 $ 0.66 $ 1.43 $ 1.21 18.2 %
FFO per share - diluted $ 0.69 $ 0.66 $ 1.43 $ 1.21 18.2 %
Loss on extinguishment of debt
and modification costs - 328 - 328 N/M
Casualty-related
expenses/(recoveries) 2,592 (435 ) 3,642 (392 ) N/M
Casualty gains (229 ) (2,379 ) (357 ) (2,379 ) N/M
Pandemic expense - 12 - 35 N/M
Amortization of deferred
financing costs - acquisition
term notes 326 140 505 349 44.7 %
Adjustment for noncontrolling
interests (10 ) 7 (14 ) 6 N/M
Core FFO attributable to common
stockholders 20,328 14,191 40,419 28,282 42.9 %
Core FFO per share - basic $ 0.79 $ 0.56 $ 1.58 $ 1.13 39.8 %
Core FFO per share - diluted $ 0.79 $ 0.56 $ 1.58 $ 1.13 39.8 %
Amortization of deferred
financing costs - long term debt 408 355 794 707 12.3 %
Equity-based compensation
expense 2,005 1,796 3,881 3,404 14.0 %
Adjustment for noncontrolling
interests (11 ) (6 ) (17 ) (12 ) 41.7 %
AFFO attributable to common
stockholders 22,730 16,336 45,077 32,381 39.2 %
AFFO per share - basic $ 0.89 $ 0.65 $ 1.76 $ 1.29 36.4 %
AFFO per share - diluted $ 0.89 $ 0.65 $ 1.76 $ 1.29 36.4 %
Weighted average common stock
outstanding - basic 25,672 25,140 25,646 25,104 2.2 %
Weighted average common stock
outstanding - diluted 25,672 25,140 25,646 25,104 2.2 %
Dividends declared per common
share $ 0.38 $ 0.34 $ 0.76 $ 0.68 11.4 %
FFO Coverage - diluted (2) 1.81x 1.93x 1.88x 1.77x 6.13 %
Core FFO Coverage - diluted (2) 2.08x 1.65x 2.08x 1.66x 25.56 %
AFFO Coverage - diluted (2) 2.33x 1.90x 2.32x 1.89x 22.52 %
(1) Represents the percentage change for the six months ended
compared to the six months ended
(2) Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over
dividends declared per common share during the period.
41
--------------------------------------------------------------------------------
The three months ended
FFO was$17.6 million for the three months endedJune 30, 2022 compared to$16.5 million for the three months endedJune 30, 2021 , which was an increase of approximately$1.1 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$13.2 million , partially offset by increases in operating expenses. Core FFO was$20.3 million for the three months endedJune 30, 2022 compared to$14.2 million for the three months endedJune 30, 2021 , which was an increase of approximately$6.1 million . The change in our Core FFO between the periods primarily relates to an increase in FFO and a decrease in casualty gains of$2.2 million . AFFO was$22.7 million for the three months endedJune 30, 2022 compared to$16.3 million for the three months endedJune 30, 2021 , which was an increase of approximately$6.4 million . The change in our AFFO between the periods primarily relates to an increase in Core FFO and an increase in equity-based compensation expense of$0.2 million .
The six months ended
FFO was$36.6 million for the six months endedJune 30, 2022 compared to$30.3 million for the six months endedJune 30, 2021 , which was an increase of approximately$6.3 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$22.2 million , partially offset by an increase in operating expenses. Core FFO was$40.4 million for the six months endedJune 30, 2022 compared to$28.3 million for the six months endedJune 30, 2021 , which was an increase of approximately$12.1 million . The change in our Core FFO between the periods primarily relates to an increase in FFO and an increase in casualty related expenses of$4.0 million , partially offset by a decrease in loss on extinguishment of debt and modification costs of$0.3 million . AFFO was$45.1 million for the six months endedJune 30, 2022 compared to$32.4 million for the six months endedJune 30, 2021 , which was an increase of approximately$12.7 million . The change in our AFFO between the periods primarily relates to an increase in Core FFO and an increase of equity-based compensation expense of$0.5 million .
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures directly associated with our multifamily properties, including:
• capital expenditures to continue our value-add program and to improve the
quality and performance of our multifamily properties;
• interest expense and scheduled principal payments on outstanding
indebtedness (see "-Obligations and Commitments" below);
• recurring maintenance necessary to maintain our multifamily properties;
• distributions necessary to qualify for taxation as a REIT; • acquisition of additional properties; • advisory and administrative fees payable to our Adviser; • general and administrative expenses; • 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 and any unused capacity on the Corporate Credit Facility. As ofJune 30, 2022 , we had approximately$19.3 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements. 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, and property dispositions. 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 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 42 -------------------------------------------------------------------------------- performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The Company continues to monitor the impact on COVID-19 and its impact on future rent collections, valuation of real estate investments, impact on cash flow and ability to refinance or repay debt. 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 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. OnMarch 4, 2020 , the Company, the OP and the Adviser entered into separate equity distribution agreements with each of the ATM Sales Agents, pursuant to which the Company may issue and sell from time to time shares of the Company's common stock, par value$0.01 per share, having an aggregate sales price of up to$225,000,000 (the "2020 ATM Program"). Sales of shares of common stock, if any, may be made in transactions that are deemed to be "at the market" offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers' transactions on theNew York Stock Exchange , to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the six months endedJune 30, 2022 , the Company issued 52,091 shares of common stock at an average price of$83.16 per share for gross proceeds of$4.3 million under the 2020 ATM Program. The Company paid approximately$0.1 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$0.2 million , both of which were netted against the gross proceeds and recorded in additional paid in capital (see Note 8 to our consolidated financial statements). 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 followingJune 30, 2022 .
Cash Flows
The following table presents selected data from our consolidated statements of
cash flows for the six months ended
For the Six Months
Ended
2022 2021
Net cash provided by operating activities $ 38,685 $ 30,950 Net cash used in investing activities (165,414 ) (139,764 ) Net cash provided by financing activities 104,251 112,026 Net increase (decrease) in cash, cash equivalents and restricted cash (22,478 ) 3,212 Cash, cash equivalents and restricted cash, beginning of period 88,696 57,015 Cash, cash equivalents and restricted cash, end of period $ 66,218 $ 60,227 Cash flows from operating activities. During the six months endedJune 30, 2022 , net cash provided by operating activities was$38.7 million compared to net cash provided by operating activities of$31.0 million for the six months endedJune 30, 2021 . The change in cash flows from operating activities was mainly due to an increase in total revenues. Cash flows from investing activities. During the six months endedJune 30, 2022 , net cash used in investing activities was$165.4 million compared to net cash used in investing activities of$139.8 million for the six months endedJune 30, 2021 . The change in cash flows from investing activities was mainly due to our acquisition activity in 2022 and 2021 and disposition activity in 2020 and a decrease in insurance proceeds received from casualty losses. Cash flows from financing activities. During the six months endedJune 30, 2022 , net cash provided by financing activities was$104.3 million compared to net cash provided by financing activities of$112.0 million for the six months endedJune 30, 2021 . The change in cash flows from financing activities was mainly due to an increase in repurchases of common stock of$5.1 million . 43 --------------------------------------------------------------------------------
Debt, Derivatives and Hedging Activity
Mortgage Debt
As ofJune 30, 2022 , our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately$1.4 billion at a weighted average interest rate of 3.29% and an adjusted weighted average interest rate of 2.67%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.1245% for one-month LIBOR on our combined$1.3 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on$1.3 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information. We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As ofJune 30, 2022 , interest rate swap agreements effectively covered 98% of our$1.3 billion of floating rate mortgage debt outstanding. The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As ofJune 30, 2022 , interest rate cap agreements covered$537.1 million of our$1.3 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on$537.1 million of our floating rate mortgage debt at a weighted average rate of 4.66%. 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 or property dispositions. 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. Furthermore, following the completion of our value-add and capital expenditures programs and depending on the 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. Corporate Credit Facility OnMarch 25, 2022 , the Company entered into a loan modification agreement by and among the Company, the OP,Truist Bank and the Lenders party thereto, which modified the Company's existing credit agreement, dated as ofJune 30, 2021 (as amended and supplemented, the "Corporate Credit Facility"). As ofJune 30, 2022 , there was$350.0 million available for borrowing under the Corporate Credit Facility. Subject to conditions provided in the Corporate Credit Facility, the commitments under Corporate Credit Facility may be increased up to an additional$150.0 million if the lenders agree to increase their commitments or if the lenders agree for the increase to be funded by any additional lender proposed by the Company, through the OP. The Corporate Credit Facility will mature onJune 30, 2024 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. As ofJune 30, 2022 , there was$335.0 million in aggregate principal outstanding under the Corporate Credit Facility. The Corporate Credit Facility is a non-recourse obligation and contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the document evidencing the loan, defaults in payments under any other security instrument, and bankruptcy or other insolvency events. As ofJune 30, 2022 , the Company believes it is compliant with all provisions. For additional information regarding our Corporate Credit Facility, see Note 6. 44 --------------------------------------------------------------------------------
Interest Rate Swap Agreements
In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into eleven interest rate swap transactions withKeyBank and two with Truist (collectively the "Counterparties") with a combined notional amount of$1.3 billion . As ofJune 30, 2022 , the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to$1.3 billion of our floating rate debt outstanding with a weighted average fixed rate of 1.1245%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.1245%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.
The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):
Effective Date Termination Date Counterparty Notional Amount
Fixed Rate (1)
July 1, 2017 July 1, 2022 KeyBank 100,000 1.7820 %
June 1, 2019 June 1, 2024 KeyBank 50,000 2.0020 %
June 1, 2019 June 1, 2024 Truist 50,000 2.0020 %
September 1, 2019 September 1, 2026 KeyBank 100,000 1.4620 %
September 1, 2019 September 1, 2026 KeyBank 125,000 1.3020 %
January 3, 2020 September 1, 2026 KeyBank 92,500 1.6090 %
March 4, 2020 June 1, 2026 Truist 100,000 0.8200 %
June 1, 2021 September 1, 2026 KeyBank 200,000 0.8450 %
June 1, 2021 September 1, 2026 KeyBank 200,000 0.9530 %
March 1, 2022 March 1, 2025 Truist 145,000 0.5730 %
March 1, 2022 March 1, 2025 Truist 105,000 0.6140 %
$ 1,267,500 1.1245 % (2)
(1) The floating rate option for the interest rate swaps is one-month LIBOR. As
of
(2) Represents the weighted average fixed rate of the interest rate swaps.
As ofJune 30, 2022 , the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands):
Effective Date Termination Date Counterparty Notional Amount
Fixed Rate (1) September 1, 2026 January 1, 2027 KeyBank $ 92,500 1.7980 %
(1) The floating rate option for the interest rate swaps is one-month LIBOR. As
of
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as ofJune 30, 2022 for the next five calendar years subsequent toJune 30, 2022 . We used one-month LIBOR as ofJune 30, 2022 to calculate interest expense due by period on our floating rate debt and net interest expense due by period on our interest rate swaps. Payments Due by Period (in thousands) Total 2022 2023 2024 2025 2026 ThereafterOperating Properties Mortgage Debt Principal payments$ 1,358,675 $ 650 $ 21,003 $ 394,952 $ 205,738 $ 423,149 $ 313,183 Interest expense (1) 143,022 18,539 36,018 29,288 22,626 15,672 20,879 Total$ 1,501,697 $ 19,189 $ 57,021 $ 424,240 $ 228,364 $ 438,821 $ 334,062 Credit Facility Principal payments$ 335,000 $ - $ -$ 335,000 $ - $ - $ - Interest expense 28,436 7,148 14,231 7,057 - - - Total$ 363,436 $ 7,148 $ 14,231 $ 342,057 $ - $ - $ -
Total contractual
obligations and commitments
(1) Interest expense obligations includes the impact of expected settlements on
interest rate swaps which have been entered into in order to fix the interest
rate on the hedged portion of our floating rate debt obligations. As of June
30, 2022, we had entered into eleven interest rate swap transactions with a
combined notional amount of
of
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expected settlements on the
swaps to 'Operating Properties Mortgage Debt.' We used one-month LIBOR as of
interest rate swaps.
Corporate Credit Facility
The Corporate Credit Facility will mature on June 30, 2024 with respect to the
revolving commitments, unless the Company exercises its option to voluntarily
and permanently reduce all of the revolving commitments before the maturity date
or elects to exercise its right and option to extend the facility with respect
to the revolving commitments for a single one-year term.
Advisory Agreement
Our Advisory Agreement requires that we pay our Adviser an annual advisory and
administrative fee of 1.2%. The advisory and administrative fees paid to the
Adviser on the Contributed Assets (as defined in the Advisory Agreement) are
subject to an annual cap of approximately $5.4 million . For the three months
ended June 30, 2022 and 2021, the Company incurred advisory and administrative
fees of $1.9 million and $1.9 million , respectively. For the six months ended
June 30, 2022 and 2021, advisory and administrative fees were $3.7 million and
$3.8 million , respectively.
NLMF Holdco, LLC
The Company's agreement with NLMF Holdco, LLC may result in additional funding
requirements to cover future project costs. The maximum exposure of potential
commitments is expected to be no more than $4.0 million . We expect that these
actions will provide faster, more reliable and lower cost internet to our
residents. We expect to roll out this service to our other properties in the
future. As of June 30, 2022 , the Company has funded approximately $0.3 million
to NLMF Holdco, LLC which is included in prepaid and other assets on the
consolidated balance sheet of the Company. For the six months ended June 30,
2022 , the Company incurred expenses of $0.1 million for fiber internet service
which is included in property operating expenses on the consolidated statement
of operations and comprehensive income (loss).
Capital Expenditures and Value-Add Program
We anticipate incurring average annual repairs and maintenance expense of$575 to$725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average, approximately$250 to$350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. 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 our Portfolio were underwritten and acquired with the premise that we would invest$4,000 to$10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset's exterior and interiors. In many cases, we reserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As ofJune 30, 2022 , we had approximately$19.3 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program. The following table sets forth a summary of our capital expenditures related to our value-add program for the three and six months endedJune 30, 2022 and 2021 (in thousands): For the Three Months Ended June For the Six Months Ended June 30, 30, Rehab Expenditures 2022 2021 2022 2021 Interior (1)$ 5,924 $ 3,027 $ 10,638 $ 5,359 Exterior and common area 2,437 2,321 3,354 5,281 Total rehab expenditures$ 8,361 $ 5,348
(1) Includes total capital expenditures during the period on completed and
in-progress interior rehabs. For the six months ended
we completed full and partial interior rehabs on 1,181 and 621 units,
respectively.
Income Taxes
We anticipate that we will continue to qualify to be taxed as a REIT for U.S.
federal income tax purposes, 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 be subject to federal income tax on
our undistributed REIT taxable income and net capital gain and to a 4%
nondeductible excise tax on any amount by which distributions we pay with
respect to any calendar year are less than the sum of (1) 85% of our ordinary
income, (2) 95% of our capital gain net income and (3) 100% of our undistributed
income from prior years. Taxable income from certain non-REIT activities is
managed through a TRS and is subject to applicable federal, state, and local
income and margin taxes. We had no significant taxes associated with our TRS for
the six months ended June 30, 2022 and 2021.
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If we fail to qualify as a REIT in any taxable year, we will be subject to U.S.
federal income 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 (loss) 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.
We evaluate the accounting and disclosure of tax positions taken or expected to
be taken in the course of preparing our tax returns to determine whether the tax
positions are "more-likely-than-not" (greater than 50 percent probability) of
being sustained by the applicable tax authority. Tax positions not deemed to
meet the more-likely-than-not threshold would be recorded as a tax benefit or
expense in the current year. Our management is required to analyze all open tax
years, as defined by the statute of limitations, for all major jurisdictions,
which include federal and certain states. We have no examinations in progress
and none are expected at this time.
We recognize our tax positions and evaluate them using a two-step process.
First, we determine whether a tax position is more likely than not to be
sustained upon examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. Second, we
will determine the amount of benefit to recognize and record the amount that is
more likely than not to be realized upon ultimate settlement.
We had no material unrecognized tax benefit or expense, accrued interest or
penalties as of June 30, 2022 . We and our subsidiaries are subject to federal
income tax as well as income tax of various state and local jurisdictions. The
2021, 2020 and 2019 tax years remain open to examination by tax jurisdictions to
which our subsidiaries and we are subject. When applicable, we recognize
interest and/or penalties related to uncertain tax positions on our consolidated
statements of operations and comprehensive income (loss).
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. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. 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. Before we make any dividend payments, whether forU.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. Our Board declared our second quarterly dividend of 2022 of$0.38 per share onApril 25, 2022 which was paid onJune 30, 2022 and funded out of cash flows from operations.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements
requires our management to make judgments, assumptions and estimates that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate these judgments,
assumptions and estimates for changes that would affect the reported amounts.
These estimates are based on management's historical industry experience and on
various other judgments and assumptions that are believed to be reasonable under
the circumstances. Actual results may differ from these judgments, assumptions
and estimates. Below is a discussion of the accounting policies that we consider
critical to understanding our financial condition or results of operations where
there is uncertainty or where significant judgment is required. A discussion of
recent accounting pronouncements and our significant accounting policies,
including further discussion of the accounting policies described below, can be
found in Note 2 "Summary of Significant Accounting Policies" to our consolidated
financial statements included in this quarterly report.
47
--------------------------------------------------------------------------------Purchase Price Allocation
Upon acquisition of a property considered to be an asset acquisition, the
purchase price and related acquisition costs ("total consideration") are
allocated to land, buildings, improvements, furniture, fixtures, and equipment,
and intangible lease assets based on relative fair value in accordance with FASB
ASC 805, Business Combinations. Acquisition costs are capitalized in accordance
with FASB ASC 805.
The allocation of total consideration, which is determined using inputs that are
classified within Level 3 of the fair value hierarchy established by FASB ASC
820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated
financial statements), is based on management's estimate of the property's
"as-if" vacant fair value and 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. If any debt is assumed in an
acquisition, the difference between the fair value, which is estimated using
inputs that are classified within Level 2 of the fair value hierarchy, and the
face value of debt is recorded as a premium or discount and amortized as
interest expense over the life of the debt assumed.
Impairment
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we 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. The Company's impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to increases in rents nationwide. The majority of our lease terms are for a period of one year or less and reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities. Due to the short-term nature of our leases, we do not believe our results will be materially affected. Inflation may also affect the overall cost of debt, as the implied cost of capital increases. Currently, theFederal Reserve is raising interest rates in response to or in anticipation of continued inflation concerns. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements. REIT Tax Election We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our "REIT taxable income," as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the six months endedJune 30, 2022 and 2021. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. 48
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