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, but not limited to, those discussed below and elsewhere in this annual report. See "Cautionary Statement Regarding Forward-Looking Statements" and "Risk Factors" in this annual report. Our management believes the assumptions underlying the Company's financial statements and accompanying notes are reasonable. However, the Company's financial statements and accompanying notes may not be an indication of our financial condition and results of operations in the future.
Overview
As ofDecember 31, 2020 , our Portfolio consisted of 37 multifamily properties primarily located in the Southeastern andSouthwestern United States encompassing 14,069 units of apartment space that was approximately 94.1% leased with a weighted average monthly effective rent per occupied apartment unit of$1,128 . 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 ofDecember 31, 2020 , there were 23,819,402 OP Units outstanding, of which 23,746,169, or 99.7%, were owned by us and 73,233, or 0.3%, were owned by an unaffiliated limited partner (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 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 15, 2021 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 of Jefferies,Raymond James , KeyBanc and Truist, 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 . 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,Raymond James , Truist, or their respective affiliates, through the 2020 ATM Program. During the year endedDecember 31, 2020 , the Company issued 718,306 shares of common stock at an average price of$43.92 per share for gross proceeds of$31.5 million under the 2020 ATM Program. The Company paid approximately$0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$0.6 million , both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020 ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM Program reach$225,000,000 (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 years endedDecember 31, 2020 , 2019 and 2018.
For information on the effects the COVID-19 pandemic had on our business, see Note 13 "Subsequent Events-COVID-19" to our consolidated financial statements included in this annual report.
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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. 45 --------------------------------------------------------------------------------
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.
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 Years Ended
The year ended
The following table sets forth a summary of our operating results for the years
ended
For the Year Ended December 31, 2020 2019 $ Change Total revenues$ 204,800 $ 181,066 $ 23,734 Total expenses (191,236 ) (166,157 ) (25,079 ) Operating income before gain on sales of real estate 13,564 14,909 (1,345 ) Gain on sales of real estate 69,151 127,684 (58,533 ) Operating income 82,715 142,593 (59,878 ) Interest expense (44,753 ) (37,385 ) (7,368 ) Loss on extinguishment of debt and modification costs (1,470 ) (2,869 ) 1,399 Casualty gains (losses) 5,886 (3,488 ) 9,374 Miscellaneous income 1,772 587 1,185 Net income 44,150 99,438 (55,288 ) Net income attributable to redeemable noncontrolling interests in the Operating Partnership 132 298 (166 ) Net income attributable to common stockholders $ 44,018 $ 99,140$ (55,122 ) The change in our net income between the periods primarily relates to a decrease in gain on sales of real estate of$58.5 million and increases in total property operating expenses of$4.5 million and depreciation and amortization expense of$13.3 million , partially offset by an increase in total revenues of$23.7 million . The change in our net income between the periods was also due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions (we purchased three properties in the first quarter of 2019, one property in the second quarter of 2019, four properties in the third quarter of 2019, three properties in the fourth quarter of 2019, and disposed of six properties in the third quarter of 2019; we disposed of three properties in the first quarter of 2020, one property in the third quarter of 2020, and purchased one property in the fourth quarter of 2020).
Revenues
Rental income was$199.2 million for the year endedDecember 31, 2020 compared to$177.2 million for the year endedDecember 31, 2019 , which was an increase of approximately$22.0 million . The increase between the periods was primarily due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above, and a 2.3% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to$1,128 as ofDecember 31, 2020 from$1,103 as ofDecember 31, 2019 , 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$5.6 million for the year endedDecember 31, 2020 compared to$3.9 million for the year endedDecember 31, 2019 , which was an increase of approximately$1.7 million . The increase between the periods was primarily due to a$1.9 million increase in cable TV income partially offset by a$0.1 million decrease in application fees.
Expenses
Property operating expenses. Property operating expenses were$47.2 million for the year endedDecember 31, 2020 compared to$42.7 million for the year endedDecember 31, 2019 , which was an increase of approximately$4.5 million . The increase between the periods was primarily due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above. The increase between periods was also due to a$0.8 million , or 4.0%, increase in payroll expenses. 46 -------------------------------------------------------------------------------- Real estate taxes and insurance. Real estate taxes and insurance costs were$31.7 million for the year endedDecember 31, 2020 compared to$25.1 million for the year endedDecember 31, 2019 , which was an increase of approximately$6.6 million . The increase between the periods was primarily due to a$5.1 million , or 23.1%, increase in property taxes. The increase between the periods was also due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above. 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$6.0 million for the year endedDecember 31, 2020 compared to$5.4 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.6 million . The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on. Advisory and administrative fees. Advisory and administrative fees were$7.7 million for the year endedDecember 31, 2020 compared to$7.5 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.2 million . For the year endedDecember 31, 2020 , our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the properties we acquired subsequent toOctober 2016 , excludingHollister Place ,Stone Creek atOld Farm and The Heritage, which totaled approximately$15.4 million and are considered to be permanently waived. For the year endedDecember 31, 2019 , our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the properties we acquired subsequent toOctober 2016 , excludingHollister Place andStone Creek atOld Farm , which totaled approximately$9.1 million and are considered to be permanently waived for the period. The advisory and administrative fees waived by our Adviser for the years endedDecember 31, 2020 and 2019 are considered to be permanently waived for the periods. 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$10.0 million for the year endedDecember 31, 2020 compared to$9.6 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.4 million . The increase was primarily due to an increase in stock compensation expense of$0.4 million . Property general and administrative expenses. Property general and administrative expenses were$6.2 million for the year endedDecember 31, 2020 compared to$6.8 million for the year endedDecember 31, 2019 , which was a decrease of approximately$0.6 million . The decrease between the periods was primarily due to decreases in eviction fees of$0.2 million . Depreciation and amortization. Depreciation and amortization costs were$82.4 million for the year endedDecember 31, 2020 compared to$69.1 million for the year endedDecember 31, 2019 , which was an increase of approximately$13.3 million . The increase between the periods was primarily due to an increase of depreciation expense of$19.2 million , partially offset by the amortization of intangible lease assets of$6.8 million related to six properties for the year endedDecember 31, 2020 compared to$12.7 million related to fourteen properties for the year endedDecember 31, 2019 , which was a decrease of approximately$5.9 million . Other Income and Expense Interest expense. Interest expense was$44.8 million for the year endedDecember 31, 2020 compared to$37.4 million for the year endedDecember 31, 2019 , which was an increase of approximately$7.4 million . The increase between the periods was primarily due to an increase in interest rate swap expense of approximately$15.8 million , partially offset by a decrease in interest on debt of$9.2 million . The following table details the various costs included in interest expense for the years endedDecember 31, 2020 and 2019 (in thousands): For the Year Ended December 31, 2020 2019 $ Change Interest on debt$ 32,546 $ 41,744 $ (9,198 ) Amortization of deferred financing costs 2,837 2,083 754 Interest rate swaps 9,337 (6,472 ) 15,809 Interest rate caps expense 33 30 3 Total$ 44,753 $ 37,385 $ 7,368 47
-------------------------------------------------------------------------------- Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was$1.5 million for the year endedDecember 31, 2020 compared to$2.9 million for the year endedDecember 31, 2019 , which was a decrease of approximately$1.4 million . The decrease between periods was primarily due to a decrease in prepayment penalties and defeasance costs of$0.7 million and a decrease in write-offs of deferred financing costs of$0.7 million . The following table details the various costs included in loss on extinguishment of debt and modification costs for the years endedDecember 31, 2020 and 2019 (in thousands): For the Year Ended December 31, 2020 2019 $ Change Prepayment penalties and defeasance costs $ 711 $ 1,449$ (738 ) Write-off of deferred financing costs 756 1,419 (663 ) Write-off of fair market value adjustment of assumed debt - - - Debt modification and other extinguishment costs 3 1 2 Total $ 1,470 $ 2,869$ (1,399 ) Casualty gains (losses). Casualty gains were$5.9 million for the year endedDecember 31, 2020 compared to casualty losses of$3.5 million for the year endedDecember 31, 2019 . The increase between periods was primarily due to significant damages sustained at Cutter's Point, Venue 8651, andTimber Creek (see Note 5 to our consolidated financial statements). Miscellaneous income. Miscellaneous income was$1.8 million for the year endedDecember 31, 2020 compared to$0.6 million for the year endedDecember 31, 2019 , which was an increase of approximately$1.2 million . The increase between the periods was primarily due to business interruption proceeds received from insurance for lost rents at Cutter's Point and Venue 8651 (see Note 5 to our consolidated financial statements). Gain on sales of real estate. Gain on sales of real estate was$69.2 million for the year endedDecember 31, 2020 compared to$127.7 million for the year endedDecember 31, 2019 , which was a decrease of approximately$58.5 million . During the year endedDecember 31, 2020 , we sold four properties; during the year endedDecember 31, 2019 , we sold six properties.
The year ended
The following table sets forth a summary of our operating results for the years
ended
For the Year Ended December 31, 2019 2018 $ Change Total revenues$ 181,066 $ 146,597 $ 34,469 Total expenses (166,157 ) (129,805 ) (36,352 ) Operating income 14,909 16,792 (1,883 ) Interest expense (37,385 ) (28,572 ) (8,813 ) Loss on extinguishment of debt and modification costs (2,869 ) (3,576 ) 707 Gain on sales of real estate 127,684 13,742 113,942 Casualty losses (3,488 ) - (3,488 ) Miscellaneous income 587 - 587 Net income (loss) 99,438 (1,614 ) 101,052 Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership 298 (5 ) 303 Net income (loss) attributable to common stockholders $ 99,140 $ (1,609 )$ 100,749 The change in our net income (loss) for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 primarily relates to an increase in gain on sales of real estate and an increase in total revenues, and was partially offset by increases in total property operating expenses and depreciation and amortization expense. The change in our net income (loss) between the periods was also due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions (we acquired three properties in the third quarter of 2018, and disposed of one property in the first quarter of 2018; we purchased three properties in the first quarter of 2019, one property in the second quarter of 2019, four properties in the third quarter of 2019, three properties in the fourth quarter of 2019, and disposed of six properties in the third quarter of 2019). 48 --------------------------------------------------------------------------------
Revenues
Rental income was$177.2 million for the year endedDecember 31, 2019 compared to$143.2 million for the year endedDecember 31, 2018 , which was an increase of approximately$34.0 million . The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above, and a 12.0% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to$1,103 as ofDecember 31, 2019 from$985 as ofDecember 31, 2018 , 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$3.9 million for the year endedDecember 31, 2019 compared to$3.4 million for the year endedDecember 31, 2018 , which was an increase of approximately$0.5 million . The increase between the periods was primarily due to a$0.6 million increase in cable TV income.
Expenses
Property operating expenses. Property operating expenses were$42.7 million for the year endedDecember 31, 2019 compared to$35.8 million for the year endedDecember 31, 2018 , which was an increase of approximately$6.9 million . The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above. The increase between periods was also due to a$3.1 million , or 16.5%, increase in payroll expenses. Real estate taxes and insurance. Real estate taxes and insurance costs were$25.1 million for the year endedDecember 31, 2019 compared to$20.7 million for the year endedDecember 31, 2018 , which was an increase of approximately$4.4 million . The increase between the periods was primarily due to a$3.8 million , or 21.0%, increase in property taxes. 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$5.4 million for the year endedDecember 31, 2019 compared to$4.4 million for the year endedDecember 31, 2018 , which was an increase of approximately$1.0 million . The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on. Advisory and administrative fees. Advisory and administrative fees remained flat at$7.5 million for the years endedDecember 31, 2019 and 2018. The amount incurred during the years endedDecember 31, 2019 and 2018 represents the maximum fee allowed on properties defined as Contributed Assets under the Advisory Agreement plus$2.1 million and$2.1 million , respectively, of advisory and administrative fees incurred on certain properties defined as New Assets. For the year endedDecember 31, 2019 , our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the nineteen properties we acquired subsequent toOctober 2016 , which totaled approximately$9.1 million and are considered to be permanently waived. For the year endedDecember 31, 2018 , our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the eight properties we acquired subsequent toOctober 2016 , which totaled approximately$4.1 million and are considered to be permanently waived for the period. The advisory and administrative fees waived by our Adviser for the years endedDecember 31, 2019 and 2018 are considered to be permanently waived for the periods. 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$9.6 million for the year endedDecember 31, 2019 compared to$7.8 million for the year endedDecember 31, 2018 , which was an increase of approximately$1.8 million . The increase between the periods was primarily due to approximately$5.1 million of equity-based compensation expense recognized during the year endedDecember 31, 2019 related to the grants of restricted stock units to our directors, officers, employees and certain key employees of our Adviser pursuant to our long-term incentive plan (the "2016 LTIP"), compared to$4.2 million of equity-based compensation expense recognized during the year endedDecember 31, 2018 (see Note 8 to our consolidated financial statements). Subject to the Expense Cap, corporate general and administrative expenses may increase in future periods as we acquire additional properties. Property general and administrative expenses. Property general and administrative expenses were$6.8 million for the year endedDecember 31, 2019 compared to$6.1 million for the year endedDecember 31, 2018 , which was an increase of approximately$0.7 million . The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above. Depreciation and amortization. Depreciation and amortization costs were$69.1 million for the year endedDecember 31, 2019 compared to$47.5 million for the year endedDecember 31, 2018 , which was an increase of approximately$21.6 million . The increase between the periods was primarily due to the amortization of intangible lease assets of$12.7 million related to fourteen 49 -------------------------------------------------------------------------------- properties for the year endedDecember 31, 2019 compared to$2.5 million related to four properties for the year endedDecember 31, 2018 , which was an increase of approximately$10.3 million . 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$37.4 million for the year endedDecember 31, 2019 compared to$28.6 million for the year endedDecember 31, 2018 , which was an increase of approximately$8.8 million . The increase between the periods was primarily due to an increase in interest on debt of approximately$10.9 million , partially offset by a decrease in interest rate swap expense of$2.2 million . The following table details the various costs included in interest expense for the years endedDecember 31, 2019 and 2018 (in thousands): For the Year Ended December 31, 2019 2018 $ Change Interest on debt$ 41,744 $ 30,870 $ 10,874 Amortization of deferred financing costs 2,083 1,650 433 Interest rate swaps - effective portion (6,472 ) (4,224 ) (2,248 ) Interest rate caps expense 30 276 (246 ) Total$ 37,385 $ 28,572 $ 8,813 Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was$2.9 million for the year endedDecember 31, 2019 compared to$3.6 million for the year endedDecember 31, 2018 , which was a decrease of approximately$0.7 million . The decrease between periods was primarily due to a decrease in debt modification and other extinguishment costs of$0.5 million . The following table details the various costs included in loss on extinguishment of debt and modification costs for the years endedDecember 31, 2019 and 2018 (in thousands): For the Year Ended December 31, 2019 2018 $ Change
Prepayment penalties and defeasance costs $ 1,449 $
1,706$ (257 ) Write-off of deferred financing costs 1,419 1,412 7 Write-off of fair market value adjustment of assumed debt - (27 ) 27 Debt modification and other extinguishment costs 1 485 (484 ) Total $ 2,869 $ 3,576$ (707 ) Casualty losses. Casualty losses were$3.5 million for the year endedDecember 31, 2019 ; there were no casualty losses for the year endedDecember 31, 2018 . This is related to significant damages sustained at Cutter's Point due to a tornado hitting the property (see Note 5 to our consolidated financial statements). Miscellaneous income. Miscellaneous income was$0.6 million for the year endedDecember 31, 2019 ; there was no miscellaneous income for the year endedDecember 31, 2018 . This is related to business interruption proceeds received from insurance for lost rents at Cutter's Point (see Note 5 to our consolidated financial statements). Gain on sales of real estate. Gain on sales of real estate was$127.7 million for the year endedDecember 31, 2019 compared to$13.7 million for the year endedDecember 31, 2018 , which was an increase of approximately$114.0 million . During the year endedDecember 31, 2019 , we sold six properties; during the year endedDecember 31, 2018 , we sold one property.
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 not affected by (1) the cost of funds, (2) acquisition costs, (3) advisory and administrative fees, (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, (5) corporate general and administrative expenses, (6) other gains and losses that are specific to us, (7) casualty-related expenses/(recoveries) and gains or losses, (8) miscellaneous income derived from recognition of lost rents covered by insurance, (9) pandemic expenses and (10) 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 and franchise tax fees. 50 -------------------------------------------------------------------------------- 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. Casualty-related expenses and recoveries and gains and losses are excluded because they do not reflect continuing operating costs of the property owner. Miscellaneous income is eliminated as the income is derived from recognition of lost rents covered by insurance. Corporate level general and administrative expenses are eliminated because they do not reflect the operating activity performed at the properties. 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. 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.
Net Operating Income for Our 2019-2020 Same Store and
There are 24 properties encompassing 9,074 units of apartment space in our same store pool for the years endedDecember 31, 2020 and 2019 (our "2019-2020 Same Store" properties). Our 2019-2020 Same Store properties exclude the following 13 properties in our Portfolio as ofDecember 31, 2020 :Bella Vista , The Enclave, The Heritage,Summers Landing ,Residences at Glenview Reserve ,Residences at West Place , Avant at Pembroke Pines, Arbors of Brentwood, Torreyana, Bloom, Bella Solara, Fairways at San Marcos and Cutter's Point. 51 -------------------------------------------------------------------------------- The following table reflects the revenues, property operating expenses and NOI for the years endedDecember 31, 2020 and 2019 for our 2019-2020 Same Store andNon-Same Store properties (dollars in thousands): For the Year Ended December 31, 2020 2019 $ Change % Change Revenues Same Store Rental income$ 120,109 $ 115,588 $ 4,521 3.9 % Other income 2,106 2,331 (225 ) -9.7 % Same Store revenues 122,215 117,919 4,296 3.6 % Non-Same Store Rental income 79,128 61,574 17,554 28.5 % Other income 3,457 1,573 1,884 119.8 % Non-Same Store revenues 82,585 63,147 19,438 30.8 % Total revenues 204,800 181,066 23,734 13.1 % Operating expenses Same Store Property operating expenses (1) 27,910 27,484 426 1.5 % Real estate taxes and insurance 19,301 17,331 1,970 11.4 % Property management fees (2) 3,629 3,518 111 3.2 % Property general and administrative expenses (3) 3,225 3,532 (307 ) -8.7 % Same Store operating expenses 54,065 51,865 2,200 4.2 % Non-Same Store Property operating expenses (4) 17,991 15,242 2,749 18.0 % Real estate taxes and insurance 12,408 7,782 4,626 59.4 % Property management fees (2) 2,342 1,870 472 25.2 % Property general and administrative expenses (5) 1,902 1,716 186 10.8 % Non-Same Store operating expenses 34,643 26,610 8,033 30.2 % Total operating expenses 88,708 78,475 10,233 13.0 % NOI Same Store 68,150 66,054 2,096 3.2 % Non-Same Store 47,942 36,537 11,405 31.2 % Total NOI$ 116,092 $ 102,591 $ 13,501 13.2 %
(1) For the years ended
(2) Fees incurred to an unaffiliated third party that is an affiliate of the
noncontrolling limited partner of the OP.
(3) For the years 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 years ended
(5) For the years 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.
See reconciliation of net income (loss) to NOI below under "NOI and 2019-2020
Same Store NOI for the Years Ended
2019-2020 Same Store Results of Operations for the Years Ended
As ofDecember 31, 2020 , our 2019-2020 Same Store properties were approximately 94.2% leased with a weighted average monthly effective rent per occupied apartment unit of$1,047 . As ofDecember 31, 2019 , our 2019-2020 Same Store properties were approximately 94.3% leased with a weighted average monthly effective rent per occupied apartment unit of$1,033 . For our 2019-2020 Same Store properties, we recorded the following operating results for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 : 52 --------------------------------------------------------------------------------
Revenues
Rental income. Rental income was$120.1 million for the year endedDecember 31, 2020 compared to$115.6 million for the year endedDecember 31, 2019 , which was an increase of approximately$4.5 million , or 3.9%. The majority of the increase is related to a 1.4% increase in the weighted average monthly effective rent per occupied apartment unit to$1,047 as ofDecember 31, 2020 from$1,033 as ofDecember 31, 2019 . Other income. Other income was$2.1 million for the year endedDecember 31, 2020 compared to$2.3 million for the year endedDecember 31, 2019 , which was a decrease of approximately$0.2 million , or 9.7%. The majority of the decrease is related to a$0.1 million decrease in miscellaneous income.
Expenses
Property operating expenses. Property operating expenses were$27.9 million for the year endedDecember 31, 2020 compared to$27.5 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.4 million , or 1.5%. The majority of the increase is related to a$0.2 million , or 1.4%, increase in payroll expenses. Real estate taxes and insurance. Real estate taxes and insurance costs were$19.3 million for the year endedDecember 31, 2020 compared to$17.3 million for the year endedDecember 31, 2019 , which was an increase of approximately$2.0 million , or 11.4%. The majority of the increase is related to a$1.7 million , or 11.1%, increase in property taxes and a$0.3 million , or 13.7%, increase in insurance expense. Property management fees. Property management fees were$3.6 million for the year endedDecember 31, 2020 compared to$3.5 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.1 million , or 3.2%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$3.2 million for the year endedDecember 31, 2020 compared to$3.5 million for the year endedDecember 31, 2019 , which was a decrease of approximately$0.3 million , or 8.7%. The majority of the decrease is related to a$0.2 million , or 17.6%, decrease in marketing costs.
Net Operating Income for Our 2018-2020 Same Store and
There are 21 properties encompassing 7,990 units of apartment space in our same store pool for the years endedDecember 31, 2020 , 2019 and 2018 (our "2018-2020 Same Store" properties). Our 2018-2020 Same Store properties exclude the following 16 properties in our Portfolio as ofDecember 31, 2020 :Cedar Pointe , Crestmont Reserve, Brandywine I & II,Bella Vista , The Enclave, The Heritage,Summers Landing ,Residences at Glenview Reserve ,Residences at West Place , Avant at Pembroke Pines, Arbors of Brentwood, Torreyana, Bloom, Bella Solara. Fairways at San Marcos and Cutter's Point. 53 --------------------------------------------------------------------------------
The following table reflects the revenues, property operating expenses and NOI
for the years ended
For the Year Ended December 31, 2020 compared to 2019 2020 compared to 2018 2020 2019 2018 $ Change % Change $ Change % Change Revenues Same Store Rental income$ 106,490 $ 102,554 $ 98,013 $ 3,936 3.8 %$ 8,477 8.6 % Other income 1,952 2,145 2,576 (193 ) -9.0 % (624 ) -24.2 % Same Store revenues 108,442 104,699 100,589 3,743 3.6 % 7,853 7.8 % Non-Same Store Rental income 92,747 74,608 45,145 18,139 24.3 % 47,602 105.4 % Other income 3,611 1,759 863 1,852 105.3 % 2,748 318.4 % Non-Same Store revenues 96,358 76,367 46,008 19,991 26.2 % 50,350 109.4 % Total revenues 204,800 181,066 146,597 23,734 13.1 % 58,203 39.7 % Operating expenses Same Store Property operating expenses (1) 24,817 24,462 24,059 355 1.5 % 758 3.2 % Real estate taxes and insurance 17,467 15,876 15,832 1,591 10.0 % 1,635 10.3 % Property management fees (2) 3,219 3,122 3,000 97 3.1 % 219 7.3 % Property general and administrative expenses (3) 2,841 3,119 3,295 (278 ) -8.9 % (454 ) -13.8 % Same Store operating expenses 48,344 46,579 46,186 1,765 3.8 % 2,158 4.7 % Non-Same Store Property operating expenses (4) 21,084 18,264 12,428 2,820 15.4 % 8,656 69.6 % Real estate taxes and insurance 14,242 9,237 4,881 5,005 54.2 % 9,361 191.8 % Property management fees (2) 2,752 2,266 1,382 486 21.4 % 1,370 99.1 % Property general and administrative expenses (5) 2,286 2,129 1,545 157 7.4 % 741 48.0 %Non-Same Store operating expenses 40,364 31,896 20,236 8,468 26.5 % 20,128 99.5 % Total operating expenses 88,708 78,475 66,422 10,233 13.0 % 22,286 33.6 % NOI Same Store 60,098 58,120 54,403 1,978 3.4 % 5,695 10.5 % Non-Same Store 55,994 44,471 25,772 11,523 25.9 % 30,222 117.3 % Total NOI$ 116,092 $ 102,591 $ 80,175 $ 13,501 13.2 %$ 35,917 44.8 %
(1) For the years 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 years ended
reflective of 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 years ended
expenses/(recoveries).
(5) For the years ended
reflective of 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.
See reconciliation of net income (loss) to NOI below under "NOI and 2018-2020
Same Store NOI for the Years Ended
54 --------------------------------------------------------------------------------
2018-2020 Same Store Results of Operations for the Years Ended
As ofDecember 31, 2020 , our 2018-2020 Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,058 . As ofDecember 31, 2019 , our 2018-2020 Same Store properties were approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of$1,040 . For our 2018-2020 Same Store properties, we recorded the following operating results for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 :
Revenues
Rental income. Rental income was$106.5 million for the year endedDecember 31, 2020 compared to$102.6 million for the year endedDecember 31, 2019 , which was an increase of approximately$3.9 million , or 3.8%. The majority of the increase is related to a 1.7% increase in the weighted average monthly effective rent per occupied apartment unit to$1,058 as ofDecember 31, 2020 from$1,040 as ofDecember 31, 2019 , partially offset by a 0.4% decrease in occupancy. Other income. Other income was$2.0 million for the year endedDecember 31, 2020 compared to$2.1 million for the year endedDecember 31, 2019 , which was a decrease of approximately$0.2 million , or 9.0%. The majority of the decrease is related to a$0.1 million decrease in miscellaneous income.
Expenses
Property operating expenses. Property operating expenses were$24.8 million for the year endedDecember 31, 2020 compared to$24.5 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.3 million , or 1.5%. The majority of the increase is related to an increase in payroll costs of$0.2 million . Real estate taxes and insurance. Real estate taxes and insurance costs were$17.5 million for the year endedDecember 31, 2020 compared to$15.9 million for the year endedDecember 31, 2019 , which was an increase of approximately$1.6 million , or 10.0%. The majority of the increase is related to a$1.3 million , or 9.6%, increase in property taxes. Property management fees. Property management fees were$3.2 million for the year endedDecember 31, 2020 compared to$3.1 million for the year endedDecember 31, 2019 , which was an increase of approximately$0.1 million , or 3.1%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$2.8 million for the year endedDecember 31, 2020 compared to$3.1 million for the year endedDecember 31, 2019 , which was a decrease of approximately$0.3 million , or 8.9%. The majority of the decrease is related to a$0.2 million decrease in marketing expenses.
2018-2020 Same Store Results of Operations for the Years Ended
As ofDecember 31, 2020 , our 2018-2020 Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,058 . As ofDecember 31, 2018 , our 2018-2020 Same Store properties were approximately 94.7% leased with a weighted average monthly effective rent per occupied apartment unit of$1,005 . For our 2018-2020 Same Store properties, we recorded the following operating results for the year endDecember 31, 2020 as compared to the year endedDecember 31, 2018 :
Revenues
Rental income. Rental income was$106.5 million for the year endedDecember 31, 2020 compared to$98.0 million for the year endedDecember 31, 2018 , which was an increase of approximately$8.5 million , or 8.6%. The majority of the increase is related to a 5.3% increase in the weighted average monthly effective rent per occupied apartment unit to$1,058 as ofDecember 31, 2020 from$1,005 as ofDecember 31, 2018 , partially offset by a 0.7% decrease in occupancy. Other income. Other income was$2.0 million for the year endedDecember 31, 2020 compared to$2.6 million for the year endedDecember 31, 2018 , which was a decrease of approximately$0.6 million , or 24.2%. The majority of the decrease is related to a$0.4 million decrease in non-refundable fees.
Expenses
Property operating expenses. Property operating expenses were$24.8 million for the year endedDecember 31, 2020 compared to$24.1 million for the year endedDecember 31, 2018 , which was an increase of approximately$0.7 million , or 3.2%. The majority of the increase is related to a$0.6 million , or 5.9%, increase in payroll expenses. 55
-------------------------------------------------------------------------------- Real estate taxes and insurance. Real estate taxes and insurance costs were$17.5 million for the year endedDecember 31, 2020 compared to$15.8 million for the year endedDecember 31, 2018 , which was an increase of approximately$1.7 million , or 10.3%. The majority of the increase is related to a$1.7 million , or 12.2%, increase in property taxes. Property management fees. Property management fees were$3.2 million for the year endedDecember 31, 2020 to$3.0 million for the year endedDecember 31, 2018 , which was an increase of approximately$0.2 million , or 7.3%. The majority of the increase is related to an increase in total revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$2.8 million for the year endedDecember 31, 2020 compared to$3.3 million for the year endedDecember 31, 2018 , which was a decrease of approximately$0.5 million , or 13.8%. The majority of the decrease is related to a$0.3 million , or 26.8%, decrease in marketing expenses.
NOI and 2019-2020 Same Store NOI for the Years Ended
The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2019-2020 Same Store NOI for the years endedDecember 31, 2020 and 2019 to net income, the most directly comparable GAAP financial measure (in thousands): For the Year Ended December 31, 2020 2019 Net income$ 44,150 $ 99,438 Adjustments to reconcile net income to NOI: Advisory and administrative fees 7,670 7,500 Corporate general and administrative expenses 10,035 9,613 Casualty-related expenses/(recoveries) (1) 790 (34 ) Casualty losses (gains) (5,886 ) 3,488 Miscellaneous income (1,772 ) (587 ) Pandemic expense (2) 510 - Property general and administrative expenses (3) 1,112 1,517 Depreciation and amortization 82,411 69,086 Interest expense 44,753 37,385 Loss on extinguishment of debt and modification costs 1,470 2,869 Gain on sales of real estate (69,151 ) (127,684 ) NOI$ 116,092 $ 102,591 Less Non-Same Store Revenues (82,585 ) (63,147 ) Operating expenses 34,643 26,610 Same Store NOI$ 68,150 $ 66,054
(1) Adjustment to net income to exclude certain property operating expenses that
are casualty-related expenses/(recoveries).
(2) Represents additional cleaning, disinfecting and other costs incurred at the
properties related to COVID-19.
(3) Adjustment to net income 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 and franchise tax fees. 56
--------------------------------------------------------------------------------
NOI and 2018-2020 Same Store NOI for the Years Ended
The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2018-2020 Same Store NOI for the years endedDecember 31, 2020 , 2019 and 2018 to net income (loss), the most directly comparable GAAP financial measure (in thousands): For the Year Ended December 31, 2020 2019 2018 Net income (loss)$ 44,150 $ 99,438 $ (1,614 ) Adjustments to reconcile net income to NOI: Advisory and administrative fees 7,670 7,500
7,474
Corporate general and administrative expenses 10,035 9,613
7,808
Casualty-related expenses/(recoveries) (1) 790 (34 ) (663 ) Casualty losses (gains) (5,886 ) 3,488 - Miscellaneous income (1,772 ) (587 ) - Pandemic expense (2) 510 - - Property general and administrative expenses (3) 1,112 1,517
1,294
Depreciation and amortization 82,411 69,086
47,470
Interest expense 44,753 37,385
28,572
Loss on extinguishment of debt and modification costs 1,470 2,869
3,576
Gain on sales of real estate (69,151 ) (127,684 ) (13,742 ) NOI$ 116,092 $ 102,591 $ 80,175 Less Non-Same Store Revenues (96,358 ) (76,367 ) (46,008 ) Operating expenses 40,364 31,896 20,236 Same Store NOI$ 60,098 $ 58,120 $ 54,403
(1) Adjustment to net income (loss) to exclude certain property operating
expenses that are casualty-related expenses/(recoveries).
(2) Represents additional cleaning, disinfecting and other costs incurred at the
properties related to COVID-19.
(3) Adjustment to net income (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 and franchise tax.
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 theNational 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 acquisition expenses, 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 57 -------------------------------------------------------------------------------- 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. 58 -------------------------------------------------------------------------------- The following table reconciles our calculations of FFO, Core FFO and AFFO to net income (loss), the most directly comparable GAAP financial measure, for the years endedDecember 31, 2020 , 2019 and 2018 (in thousands, except per share amounts): ` For the Year Ended December 31, % Change 2020 - % Change 2020 2019 2018 2019 2020 - 2018 Net income (loss)$ 44,150 $ 99,438 $ (1,614 ) -55.6 % N/M Depreciation and amortization 82,411 69,086 47,470 19.3 % 73.6 % Gain on sales of real estate (69,151 ) (127,684 ) (13,742 ) -45.8 % 403.2 % Adjustment for noncontrolling interests (172 ) (122 ) (96 ) 41.0 % 79.2 % FFO attributable to common stockholders 57,238 40,718 32,018 40.6 % 78.8 % FFO per share - basic$ 2.32 $ 1.69 $ 1.51 37.0 % 53.4 % FFO per share - diluted$ 2.27 $ 1.66 $ 1.48 37.0 % 53.5 % Loss on extinguishment of debt and modification costs 1,470 2,869 3,576 -58.9 % -58.9 % Casualty-related expenses/(recoveries) 790 (34 ) (663 ) N/M -219.1 % Casualty losses (gains) (5,886 ) 3,488 - N/M N/M Pandemic expense (1) 510 - - N/M N/M Amortization of deferred financing costs - acquisition term notes 1,384 553 159 150.3 % 770.4 % Adjustment for noncontrolling interests 6 (21 ) (9 ) -128.6 % -166.7 % Core FFO attributable to common stockholders 55,512 47,573 35,081 16.7 % 58.2 % Core FFO per share - basic$ 2.25 $ 1.97 $ 1.66 13.9 % 35.7 % Core FFO per share - diluted$ 2.20 $ 1.93 $ 1.62 13.7 % 35.9 % Amortization of deferred financing costs - long term debt 1,453 1,530 1,491 -5.0 % -2.5 % Equity-based compensation expense 5,504 5,130 4,198 7.3 % 31.1 % Adjustment for noncontrolling interests (21 ) (20 ) (17 ) 5.0 % 23.5 % AFFO attributable to common stockholders 62,448 54,213 40,753 15.2 % 53.2 % AFFO per share - basic$ 2.53 $ 2.25 $ 1.92 12.4 % 31.4 % AFFO per share - diluted$ 2.47 $ 2.20 $ 1.88 12.3 % 31.6 % Weighted average common shares outstanding - basic 24,715 24,116 21,189 2.5 % 16.6 % Weighted average common shares outstanding - diluted 25,234 24,593 21,667 2.6 % 16.5 % Dividends declared per common share$ 1.279 $ 1.138 $ 1.025 12.4 % 24.8 % FFO Coverage - diluted (2) 1.77x 1.46x 1.44x 21.9 % 23.0 % Core FFO Coverage - diluted (2) 1.72x 1.70x 1.58x 1.2 % 8.9 % AFFO Coverage - diluted (2) 1.94x 1.94x 1.84x -0.1 % 5.5 %
(1) Represents additional cleaning, disinfecting and other costs incurred at the
properties related to COVID-19.
(2) Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over
dividends declared per common share during the period.
The year ended
FFO was$57.2 million for the year endedDecember 31, 2020 compared to$40.7 million for the year endedDecember 31, 2019 , which was an increase of approximately$16.5 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$23.7 million , partially offset by an increase in total property operating expenses of$11.2 million , interest 59 --------------------------------------------------------------------------------
expense of
Core FFO was$55.5 million for the year endedDecember 31, 2020 compared to$47.6 million for the year endedDecember 31, 2019 , which was an increase of approximately$7.9 million . The change in our Core FFO between the periods primarily relates to an increase in FFO and an increase in amortization of deferred financing costs for acquisition term notes of$0.8 million , partially offset by an increase in casualty gains of$9.4 million and a decrease in loss on extinguishment of debt and modification costs of$1.4 million . AFFO was$62.4 million for the year endedDecember 31, 2020 compared to$54.2 million for the year endedDecember 31, 2019 , which was an increase of approximately$8.2 million . The change in our AFFO between the periods primarily relates to increases in Core FFO and equity-based compensation expense of$0.4 million .
The year ended
FFO was$57.2 million for the year endedDecember 31, 2020 compared to$32.0 million for the year endedDecember 31, 2018 , which was an increase of approximately$25.2 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$58.2 million , partially offset by an increase in total property operating expenses of$11.4 million , interest expense of$16.2 million , and corporate general and administrative expenses of$2.2 million . Core FFO was$55.5 million for the year endedDecember 31, 2020 compared to$35.1 million for the year endedDecember 31, 2018 , which was an increase of approximately$20.4 million . The change in our Core FFO between the periods primarily relates to an increase in FFO and an increase in amortization of deferred financing costs for acquisition term notes of$1.2 million , partially offset by an increase in casualty gains of$5.9 million . AFFO was$62.4 million for the year endedDecember 31, 2020 compared to$40.8 million for the year endedDecember 31, 2018 , which was an increase of approximately$21.6 million . The change in our AFFO between the periods primarily relates to increases in Core FFO and equity-based compensation expense of$1.3 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; • acquisitions 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. As ofDecember 31, 2020 , we had approximately$10.6 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. Additionally, we had$42.0 million of unused capacity on the Corporate Credit Facility as ofDecember 31, 2020 . 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 60 -------------------------------------------------------------------------------- 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, 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. OnFebruary 20, 2019 , the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies,Raymond James and Truist (collectively, the "2019 ATM Sales Agents"), pursuant to which the Company could 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$100,000,000 (the "2019 ATM Program"). Sales of shares of common stock, if any, could 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 could enter into forward sale agreements with each of Jefferies andRaymond James , or their respective affiliates, through the 2019 ATM Program. During the year endedDecember 31, 2019 , the Company issued 1,565,322 shares of common stock at an average price of$45.98 per share for gross proceeds of approximately$72.0 million . The Company paid approximately$1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$1.0 million , both of which were netted against the gross proceeds and recorded in additional paid in capital. During the year endedDecember 31, 2020 , the Company issued 560,000 shares of common stock at an average price of$50.00 per share for gross proceeds of$28.0 million under the 2019 ATM Program. The Company paid approximately$0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$0.4 million , both of which were netted against the gross proceeds and recorded in additional paid in capital. OnFebruary 27, 2020 , the 2019 ATM Program reached aggregate sales of$100,000,000 and therefore expired. OnMarch 4, 2020 , the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies,Raymond James , KeyBanc and Truist, 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 . 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,Raymond James , Truist, or their respective affiliates, through the 2020 ATM Program. During the year endedDecember 31, 2020 , the Company issued 718,306 shares of common stock at an average price of$43.92 per share for gross proceeds of$31.5 million under the 2020 ATM Program. The Company paid approximately$0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately$0.6 million , both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020 ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM Program reach$225,000,000 (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 followingDecember 31, 2020 . 61 --------------------------------------------------------------------------------
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the years endedDecember 31, 2020 , 2019 and 2018 (in thousands): For the Year Ended December 31, 2020 2019 2018
Net cash provided by operating activities
$ 41,743 Net cash provided by (used in) investing activities 11,503 (553,129 ) (135,248 ) Net cash provided by (used in) financing activities (82,896 ) 529,816
93,386
Net increase (decrease) in cash, cash equivalents and restricted cash (14,167 ) 28,053 (119 ) Cash, cash equivalents and restricted cash, beginning of period 71,182 43,129
43,248
Cash, cash equivalents and restricted cash, end of period$ 57,015 $ 71,182 $ 43,129
The year ended
Cash flows from operating activities. During the year endedDecember 31, 2020 , net cash provided by operating activities was$57.2 million compared to net cash provided by operating activities of$51.4 million for the year endedDecember 31, 2019 . Cash flows from investing activities. During the year endedDecember 31, 2020 , net cash provided by investing activities was$11.5 million compared to net cash used in investing activities of$553.1 million for the year endedDecember 31, 2019 . The change in cash flows from investing activities was mainly due to our acquisition and disposition activity in 2020 and 2019 and the timing of the transactions. Cash flows from financing activities. During the year endedDecember 31, 2020 , net cash used in financing activities was$82.9 million compared to net cash provided by financing activities of$529.8 million for the year endedDecember 31, 2019 . The change in cash flows from financing activities was mainly due to a net decrease in debt of approximately$555.8 million between the periods.
The year ended
Cash flows from operating activities. During the year endedDecember 31, 2019 , net cash provided by operating activities was$51.4 million compared to net cash provided by operating activities of$41.7 million for the year endedDecember 31, 2018 . The change in cash flows from operating activities was mainly due to an increase in total revenues, partially offset by an increase in total property operating expenses. Cash flows from investing activities. During the year endedDecember 31, 2019 , net cash used in investing activities was$553.1 million compared to net cash used in investing activities of$135.2 million for the year endedDecember 31, 2018 . The change in cash flows from investing activities was mainly due to an increase in acquisitions, partially offset by an increase in dispositions. We sold six properties for net proceeds of approximately$286.5 million and acquired eleven properties for a combined purchase price of approximately$876.7 million during the period in 2019; we sold one property for net proceeds of approximately$29.6 million and acquired three properties for a combined purchase price of approximately$131.0 million during 2018. Cash flows from financing activities. During the year endedDecember 31, 2019 , net cash provided by financing activities was$529.8 million compared to net cash provided by financing activities of$93.4 million for the year endedDecember 31, 2018 . The change in cash flows from financing activities was mainly due to a net increase in debt of approximately$450.6 million between the periods.
Debt, Derivatives and Hedging Activity
Mortgage Debt
As ofDecember 31, 2020 , our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately$1.2 billion at a weighted average interest rate of 1.83% and an adjusted weighted average interest rate of 3.06%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3792% for one-month LIBOR on our combined$1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on$1.1 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information. 62 -------------------------------------------------------------------------------- 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 ofDecember 31, 2020 , interest rate swap agreements effectively covered 100% of our$1.1 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 ofDecember 31, 2020 , interest rate cap agreements covered$393.0 million of our$1.1 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on$393.0 million of our floating rate mortgage debt at a weighted average rate of 5.16%. 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 OnJanuary 28, 2019 , the Company, through the OP, entered into a$75.0 million credit facility (the "Corporate Credit Facility") withTruist Bank , as administrative agent and the lenders party thereto, and immediately drew$52.5 million to fund a portion of the purchase price ofBella Vista , The Enclave, and The Heritage. The Corporate Credit Facility is a full-term, interest-only facility with an initial 24-month term, has one 12-month extension at the option of the Company, and the Company has the right to request an increase in the facility amount up to$150 million (the "Accordion Feature"). The facility bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on the Company's leverage level as determined under the Corporate Credit Facility agreement, and is guaranteed by the Company. OnJune 29, 2019 , the Company, through the OP, exercised its option under the Accordion Feature of the Corporate Credit Facility and increased the amount of the facility from$75 million to$125 million . In conjunction with the increase in the facility, the Company incurred costs of$0.5 million in obtaining the additional financing through the Accordion Feature (see Note 6 for additional information related to our deferred financing costs). OnAugust 28, 2019 , the Company, through the OP, increased the amount of the Corporate Credit Facility by$25 million , resulting in aggregate commitments of$150 million as ofSeptember 30, 2019 . In conjunction with the increase in the facility, the Company incurred costs of$0.2 million of deferred financing costs. OnNovember 20, 2019 , the Company, through the OP, increased the amount of the Corporate Credit Facility by$75 million , resulting in aggregate commitments of$225 million as ofDecember 31, 2019 . In conjunction with the increase in the facility, the Company incurred costs of$0.8 million of deferred financing costs. As ofDecember 31, 2020 , there was$183.0 million in aggregate principal outstanding on the Corporate Credit Facility. OnOctober 13, 2020 , the Company extended the maturity date of the Corporate Credit Facility fromJanuary 28, 2021 toJanuary 28, 2022 . There are currently no more extension options available under the existing agreement. OnOctober 13, 2020 , the Company extended the maturity date of the Corporate Credit Facility fromJanuary 28, 2021 toJanuary 28, 2022 (the "Maturity Date"), which falls within one year ofFebruary 19, 2021 . During 2020, the Company repaid$35.0 million in principal on the Corporate Credit Facility and had sufficient cash flow to fund operations as well as close on a new acquisition (Fairways at San Marcos) in the fourth quarter of 2020. Management recognizes that finding an alternative source of funding is necessary to repay the facility by the Maturity Date. Management is evaluating multiple options to fund the repayment of the$183.0 million principal balance outstanding, including recasting the Corporate Credit Facility, securing additional equity or debt financing, selling a portion of the portfolio, or any combination thereof. Management believes that there is sufficient time before the Maturity Date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they become due. 63 -------------------------------------------------------------------------------- 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 ofDecember 31, 2020 , the Company believes it is compliant with all provisions.
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 withTruist Bank (collectively the "Counterparties") with a combined notional amount of$1.2 billion which are effective as ofDecember 31, 2020 . As ofDecember 31, 2020 , the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to$1.1 billion of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3792%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3792%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting underFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.
The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):
Effective Date Termination Date Counterparty Notional Fixed Rate (1) July 1, 2016 June 1, 2021 KeyBank$ 100,000 1.1055 % July 1, 2016 June 1, 2021 KeyBank 100,000 1.0210 % July 1, 2016 June 1, 2021 KeyBank 100,000 0.9000 % September 1, 2016 June 1, 2021 KeyBank 100,000 0.9560 % April 1, 2017 April 1, 2022 KeyBank 100,000 1.9570 % May 1, 2017 April 1, 2022 KeyBank 50,000 1.9610 % 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 %$ 1,167,500 1.3792 % (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.
The following table contains summary information regarding our forward interest rate swaps (dollars in thousands):
Effective Date Termination Date Counterparty Notional Amount
Fixed Rate (1)
0.8450 % June 1, 2021 September 1, 2026 KeyBank 200,000 0.9530 % September 1, 2026 January 1, 2027 KeyBank 92,500 1.7980 % $ 492,500 1.0678 % (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.
64 --------------------------------------------------------------------------------
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as ofDecember 31, 2020 for the next five calendar years subsequent toDecember 31, 2020 . We used one-month LIBOR as ofDecember 31, 2020 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 2021 2022 2023 2024 2025 ThereafterOperating Properties Mortgage Debt Principal payments$ 1,168,078 $ 896 $ 1,509 $ 21,293 $ 395,168 $ 245,780 $ 503,432 Interest expense (1) 155,861 34,200 29,946 28,656 25,558 20,769 16,732 Total$ 1,323,939 $ 35,096 $ 31,455 $ 49,949 $ 420,726 $ 266,549 $ 520,164 Credit Facility Principal payments$ 183,000 $ -$ 183,000 $ - $ - $ - $ - Interest expense 4,782 4,453 329 - - - - Total$ 187,782 $ 4,453 $ 183,329 $ - $ - $ - $ - Total contractual obligations and commitments$ 1,511,721 $ 39,549 $ 214,784 $ 49,949 $ 420,726 $ 266,549 $ 520,164
(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 ofDecember 31, 2020 , we had entered into thirteen interest rate swap transactions with a combined notional amount of$1.2 billion . We have allocated the total impact of expected settlements on the$1.2 billion
notional amount of interest rate swaps to "Operating Properties Mortgage
Debt." We used one-month LIBOR as of
expected settlements through the terms of the interest rate swaps.
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 ofDecember 31, 2020 , we had approximately$10.6 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,205 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the years endedDecember 31, 2020 , 2019 and 2018 (in thousands): For the Year Ended December 31, Rehab Expenditures 2020 2019 2018 Interior (1)$ 10,093 $ 12,044 $ 8,559
Exterior and common area 20,447 11,242 9,133
Total rehab expenditures
(1) Includes total capital expenditures during the period on completed and
in-progress interior rehabs. For the years ended
2018, we completed full and partial interior rehabs on 1,679, 2,516 and 1,432
units, respectively. 65
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Freddie Mac Multifamily Green Advantage Program
In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, the Company decided to participate in Freddie Mac's Multifamily Green Advantage program (the "Green Program"). As ofDecember 31, 2020 , the Company has completed its Green Program improvements on all but one property. We will complete the green improvements on this property during 2021. We expect to reduce water/sewer costs at each property where the Green Program is implemented by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. Due to changes in Freddie Mac's requirements to participate in the Green Program, we are not implementing this on acquisitions going forward.
Income Taxes
We anticipate that we will continue to qualify to be taxed as a REIT forU.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 years endedDecember 31, 2020 , 2019 and 2018. If we fail to qualify as a REIT in any taxable year, we will be subject toU.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 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 ofDecember 31, 2020 . We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2019, 2018 and 2017 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. 66 -------------------------------------------------------------------------------- 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 fourth quarterly dividend of 2020 of$0.34125 per share onOctober 26, 2020 , which was paid onDecember 31, 2020 and funded out of cash flows from operations.
Off-Balance Sheet Arrangements
As ofDecember 31, 2020 and 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 annual report.
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. 67 --------------------------------------------------------------------------------
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to a relatively low inflation rate. 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. Should inflation return, 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, interest rates are less than historical averages. However, theFederal Reserve , in response to or in anticipation of continued inflation concerns, could continue to raise interest rates. 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 years endedDecember 31, 2020 , 2019 and 2018. 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.
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