NEXPOINT RESIDENTIAL TRUST, INC. The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See "Cautionary Statement Regarding Forward-Looking Statements" in this report, and "Risk Factors" in Part I, Item 1A, "Risk Factors" of our annual report on Form 10-K (our "Annual Report"), filed with theSecurities and Exchange Commission (the "SEC") onFebruary 22, 2021 .
Overview
As ofJune 30, 2021 , our Portfolio consisted of 39 multifamily properties primarily located in the Southeastern andSouthwestern United States encompassing 14,709 units of apartment space that was approximately 96.1% leased with a weighted average monthly effective rent per occupied apartment unit of$1,159 . Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As ofJune 30, 2021 , 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 net operating income ("NOI") at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed onFebruary 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 andRaymond James , or their respective affiliates, through the 2020 ATM Program. During the six months endedJune 30, 2021 , no shares were issued under the 2020 ATM Program. 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 six months endedJune 30, 2021 and 2020.
For information on the effects the COVID-19 pandemic has had on our business, see Note 2 "Coronavirus ('COVID-19')" to our consolidated financial statements.
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.
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-------------------------------------------------------------------------------- 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 (the "Expense Cap"). The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due. If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future.
Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.
Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases. Other Income and Expense
Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk.
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment. Casualty losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other abnormal expenses arising from the related event.
Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.
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.
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Results of Operations for the Three and Six Months Ended
The three months ended
The following table sets forth a summary of our operating results for the three
months ended
For the Three Months Ended June 30,
2021 2020 $ Change
Total revenues $ 52,563 $ 50,681 $ 1,882
Total expenses (47,821 ) (49,025 ) 1,204
Operating income before gain on sales of
real estate 4,742 1,656 3,086
Gain on sales of real estate - 19 (19 )
Miscellaneous income 472 1,079 (607 )
Operating income 5,214 2,754 2,460
Interest expense (10,683 ) (10,993 ) 310
Casualty gain (loss) 2,379 (1,079 ) 3,458
Loss on extinguishment of debt and
modification costs (328 ) - (328 )
Net loss (3,418 ) (9,318 ) 5,900
Net loss attributable to redeemable
noncontrolling interests in the Operating
Partnership (10 ) (28 ) 18
Net loss attributable to common
stockholders $ (3,408 ) $ (9,290 ) $ 5,882
The change in our net loss for the three months ended June 30, 2021 as compared
to our net loss for the three months ended June 30, 2020 primarily relates to
increases in casualty gain and total revenues, partially offset by a decrease in
miscellaneous income.
Revenues
Rental income. Rental income was $51.0 million for the three months ended June
30, 2021 compared to $49.3 million for the three months ended June 30, 2020 ,
which was an increase of approximately $1.7 million . The increase between the
periods was primarily due to a 4.5% increase in the weighted average monthly
effective rent per occupied apartment unit in our Portfolio to $1,159 as of June
30, 2021 from $1,109 as of June 30, 2020 . The increase in effective rent was
primarily driven by the value-add program that we have implemented and organic
growth in rents.
Other income. Other income was $1.5 million for the three months ended June 30,
2021 compared to $1.4 million for the three months ended June 30, 2020 , which
was an increase of approximately $0.1 million . The increase between the periods
was primarily due to an increase in application fee income of approximately $0.1
million .
Expenses
Property operating expenses. Property operating expenses was $11.2 million for
the three months ended June 30, 2021 compared to $12.0 , which was a decrease of
approximately $0.8 million . The decrease between periods was primarily due to a
$0.3 million decrease in pandemic expense.
Real estate taxes and insurance. Real estate taxes and insurance costs were $8.5
million for the three months ended June 30, 2021 compared to $7.8 million for
the three months ended June 30, 2020 , which was an increase of approximately
$0.7 million . The increase between the periods was primarily due to our
acquisition and disposition activity in 2020 and 2019 and the timing of the
transactions. The increase between the periods was also due to a $0.8 million ,
or 12.1%, 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 costs of real estate
taxes. Additionally, we have seen and expect state and local municipalities to
make up budget shortfalls due to the COVID-19 pandemic through increased
taxation. During the three months ended June 30, 2021 , we experienced property
value increases.
Property management fees. Property management fees remained flat at $1.5 million
for the three months ended June 30, 2021 and 2020. Property management fees are
primarily based on total revenues.
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Advisory and administrative fees. Advisory and administrative fees were $1.9
million for the three months ended June 30, 2021 compared to $1.9 million for
the three months ended June 30, 2020 . For the three months ended June 30, 2021
and 2020, our Adviser elected to voluntarily waive the advisory and
administrative fees of approximately $4.1 million and $3.8 million . Our Adviser
is not contractually obligated to waive fees on New Assets in the future and may
cease waiving fees on New Assets at its discretion. Advisory and administrative
fees may increase in future periods as we acquire additional properties, which
will be classified as New Assets.
Corporate general and administrative expenses. Corporate general and
administrative expenses were $3.0 million for the three months ended June 30,
2021 compared to $2.9 million for the three months ended June 30, 2020 , which
was an increase of approximately $0.1 million . The increase between the periods
was primarily due to an increase of $0.1 million in professional fees.
Property general and administrative expenses. Property general and
administrative expenses were $1.8 million for the three months ended June 30,
2021 compared to $1.5 million for the three months ended June 30, 2020 , which
was an increase of approximately $0.3 million . The increase between the periods
was primarily due to a $0.1 million increase in eviction fee expense and a $0.1
million increase property tax appeal expense.
Depreciation and amortization. Depreciation and amortization costs were $20.0
million for the three months ended June 30, 2021 compared to $21.4 million for
the three months ended June 30, 2020 , which was a decrease of approximately $1.4
million . The decrease between the periods was primarily due to a decrease of
$1.1 million in amortization of intangible lease assets and a decrease in
depreciation expense of approximately $0.3 million , which was primarily due to
our acquisition activity in 2021 and 2020 and the timing of the transactions.
The amortization of intangible lease assets over a six-month period from the
date of acquisition is expected to increase the amortization expense during the
initial year of operations for each property.
Other Income and Expense
Interest expense. Interest expense was$10.7 million for the three months endedJune 30, 2021 compared to$11.0 million for the three months endedJune 30, 2020 , which was a decrease of approximately$0.3 million . The decrease between the periods was primarily due to a decrease in interest on debt of approximately$1.3 million , partially offset by an increase in interest rate swap expense of approximately$1.1 million . The following table details the various costs included in interest expense for the three months endedJune 30, 2021 and 2020 (in thousands): For the Three Months Ended June 30, 2021 2020 $ Change Interest on debt $ 6,388 $ 7,673$ (1,285 ) Amortization of deferred financing costs 495 702 (207 ) Interest rate swap expense 3,745 2,605 1,140 Interest rate caps expense 55 13 42 Total $ 10,683 $ 10,993$ (310 )
The six months ended
The following table sets forth a summary of our operating results for the six
months ended
For the Six Months Ended June 30,
2021 2020 $ Change
Total revenues $ 104,359 $ 103,262 $ 1,097
Total expenses (96,369 ) (100,054 ) 3,685
Operating income before gain on sales of
real estate 7,990 3,208 4,782
Gain on sales of real estate - 38,991 (38,991 )
Miscellaneous income 940 1,079 (139 )
Operating income 8,930 43,278 (34,348 )
Interest expense (21,299 ) (22,655 ) 1,356
Casualty gain (loss) 2,379 (1,028 ) 3,407
Loss on extinguishment of debt and
modification costs (328 ) (874 ) 546
Net income (loss) (10,318 ) 18,721 (29,039 )
Net income (loss) attributable to
redeemable noncontrolling interests in the
Operating Partnership (31 ) 56 (87 )
Net income (loss) attributable to common
stockholders $ (10,287 ) $ 18,665 $ (28,952 )
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-------------------------------------------------------------------------------- The change in our net loss for the six months endedJune 30, 2021 as compared to the net income for the six months endedJune 30, 2020 primarily relates to a decrease in gain on sales of real estate, partially offset by increases in casualty gain and total revenues and a decrease in total expenses.
Revenues
Rental income. Rental income was$101.4 million for the six months endedJune 30, 2021 compared to$100.4 million for the six months endedJune 30, 2020 , which was an increase of approximately$1.0 million . The increase between the periods was primarily due to a 4.5% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to$1,159 as ofJune 30, 2021 from$1,109 as ofJune 30, 2020 . The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located. Other income. Other income was$3.0 million for the six months endedJune 30, 2021 compared to$2.9 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.1 million . The increase between the periods was primarily due to a$0.1 million increase in application fee income.
Expenses
Property operating expenses. Property operating expenses were$22.4 million for the six months endedJune 30, 2021 compared to$23.7 million for the six months endedJune 30, 2020 , which was a decrease of approximately$1.3 million . The decrease between the periods was primarily due to our acquisition and disposition activity in 2021 and 2020 and the timing of the transactions. The decrease between the periods was also due to a$0.1 million decrease in water and sewer expense and a$0.2 million decrease in pandemic expense which represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19. Real estate taxes and insurance. Real estate taxes and insurance costs were$17.2 million for the six months endedJune 30, 2021 compared to$15.8 million for the six months endedJune 30, 2020 , which was an increase of approximately$1.4 million . The increase between the periods was primarily due to a$1.4 million , or 9.9%, 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. Additionally, we have seen and expect state and local municipalities to make up budget shortfalls due to the COVID-19 pandemic through increased taxation. During the six months endedJune 30, 2021 , we experienced property value increases. Property management fees. Property management fees remained flat at$3.0 million for the six months endedJune 30, 2021 and 2020. Property management fees are primarily based on total revenues. Advisory and administrative fees. Advisory and administrative fees remained flat at$3.8 million for the six months endedJune 30, 2021 and$3.8 million for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 and 2020, our Adviser elected to voluntarily waive the advisory and administrative fees of approximately$8.1 million and$7.7 million . Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets. Corporate general and administrative expenses. Corporate general and administrative expenses were$5.9 million for the six months endedJune 30, 2021 compared to$5.6 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.3 million . The increase was primarily due to an increase in stock compensation expense of$0.8 million , partially offset by a decrease in audit fees of$0.1 million and accounting fees of$0.1 million . Property general and administrative expenses. Property general and administrative expenses were$3.3 million for the six months endedJune 30, 2021 compared to$3.4 million for the six months endedJune 30, 2020 , which was a decrease of approximately$0.1 million . The decrease was primarily due to a decrease in other entity expenses of$0.1 million . Depreciation and amortization. Depreciation and amortization costs were$40.7 million for the six months endedJune 30, 2021 compared to$44.8 million for the six months endedJune 30, 2020 , which was a decrease of approximately$4.1 million . The decrease between the periods was primarily due a decrease in amortization of intangible lease assets of$5.1 million , partially offset by an increase of$1.1 million in depreciation expense, which was primarily due to our acquisition activity in 2021 and 2020 and the timing of the transactions. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property. 34 --------------------------------------------------------------------------------
Other Income and Expense
Interest expense. Interest expense was$21.3 million for the six months endedJune 30, 2021 compared to$22.7 million for the six months endedJune 30, 2020 , which was a decrease of approximately$1.4 million . The decrease between the periods was primarily due a decrease in interest on debt of$6.5 million , partially offset by an increase in interest rate swap expense of approximately$5.4 million . The following table details the various costs included in interest expense for the six months endedJune 30, 2021 and 2020 (in thousands): For the Six Months Ended June 30, 2021 2020 $ Change Interest on debt $ 12,791 $ 19,247$ (6,456 ) Amortization of deferred financing costs 1,056 1,438 (382 ) Interest rate swap expense 7,409 1,998 5,411 Interest rate caps expense 43 (28 ) 71 Total $ 21,299 $ 22,655$ (1,356 ) Loss on extinguishment of debt and modification costs. There was a$0.3 million loss on extinguishment of debt and modification costs for the six months endedJune 30, 2021 compared to a$0.9 million loss for the six months endedJune 30, 2020 , which was a decrease of approximately$0.6 million . The decrease between the periods was primarily due to a decrease in prepayment penalties and defeasance costs of approximately$0.4 million and a decrease in write-off of deferred financing costs of approximately$0.1 million . The following table details the various costs included in loss on extinguishment of debt and modification costs for the six months endedJune 30, 2021 and 2020 (in thousands): For the Six Months Ended June 30, 2021 2020 $ Change Prepayment penalties and defeasance costs $ - $ 416$ (416 ) Write-off of deferred financing costs 328 455 (127 ) Debt modification and other extinguishment costs - 3 (3 ) Total $ 328 $ 874$ (546 ) Gain on sales of real estate. Gain on sale of real estate was$0.0 million during the six months endedJune 30, 2021 compared to$39.0 million for the six months endedJune 30, 2020 , which was a decrease of approximately$39.0 million . The decrease between the periods was primarily due to our acquisition and disposition activity in 2021 and 2020 and the timing of the transactions.
Non-GAAP Measurements
Net Operating Income and Same Store Net Operating Income
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. NOI is
calculated by adjusting net income (loss) to add back (1) interest expense (2)
advisory and administrative fees, (3) the impact of depreciation and
amortization expenses as well as gains or losses from the sale of operating real
estate assets that are included in net income computed in accordance with GAAP,
(4) corporate general and administrative expenses, (5) other gains and losses
that are specific to us including loss on extinguishment of debt and
modification costs, (6) casualty-related expenses/(recoveries) and casualty
gains (losses), (7) pandemic expenses that are not reflective of continuing
operations of the properties and (8) property general and administrative
expenses that are not reflective of the continuing operations of the properties
or are incurred on behalf of the Company at the property for expenses such as
legal, professional and franchise tax fees.
The cost of funds is eliminated from net income (loss) because it is specific to
our particular financing capabilities and constraints. The cost of funds is also
eliminated because it is dependent on historical interest rates and other costs
of capital as well as past decisions made by us regarding the appropriate mix of
capital, which may have changed or may change in the future. Non-operating fees
to affiliates are eliminated because they do not reflect continuing operating
costs of the property owner. Depreciation and amortization expenses as well as
gains or losses from the sale of operating real estate assets are eliminated
because they may not accurately represent the actual change in value in our
multifamily properties that result from use of the properties or changes in
market conditions. While certain aspects of real property do decline in value
over time in a manner that is reasonably captured by depreciation and
amortization, the value of the properties as a whole have historically increased
or decreased as a result of changes in overall economic conditions instead of
from actual use of the property or the passage of time. Gains and losses from
the sale of real property vary from property to property and are affected by
market conditions at the time of sale, which will usually change from period to
period. Casualty-related expenses and recoveries, casualty gains and losses, and
losses of extinguished debt and modification costs are excluded because they do
not reflect continuing operating costs of the property owner. 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
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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.
NOI and Same Store NOI for the Three and Six Months Ended
The following table, which has not been adjusted for the effects of
noncontrolling interests, reconciles our NOI and our Same Store NOI for the
three and six months ended
For the Three Months Ended June
30, For the Six Months Ended June 30,
2021 2020 2021 2020
Net income/(loss) $ (3,418 ) $ (9,318 ) $ (10,318 ) $ 18,721
Adjustments to reconcile net income
(loss) to NOI:
Advisory and administrative fees 1,900 1,936 3,768 3,801
Corporate general and
administrative expenses 2,978 2,932 5,918 5,633
Casualty-related
expenses/(recoveries) (1) (435 ) 723 (392 ) 773
Casualty loss (gain) (2,379 ) 1,079 (2,379 ) 1,028
Pandemic expense (2) 12 274 35 284
Property general and administrative
expenses (3) 374 278 607 747
Depreciation and amortization 19,986 21,418 40,744 44,756
Interest expense 10,683 10,993 21,299 22,655
Loss on extinguishment of debt and
modification costs 328 - 328 874
Gain on sales of real estate - (19 ) - (38,991 )
NOI $ 30,029 $ 30,296 $ 59,610 $ 60,281
Less Non-Same Store
Revenues (1,681 ) (1,473 ) (3,225 ) (4,846 )
Operating expenses 620 741 1,189 2,487
Operating income (304 ) (1,079 ) (645 ) (1,079 )
Same Store NOI $ 28,664 $ 28,485 $ 56,929 $ 56,843
(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 fees.
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Net Operating Income for Our Q2 Same Store and
There are 35 properties encompassing 13,544 units of apartment space in our same store pool for the three months endedJune 30, 2021 and 2020 (our "Q2 Same Store " properties). Our Q2 Same Store properties exclude the following four properties in our Portfolio as ofJune 30, 2021 : Fairways at San Marcos, The Verandas atLake Norman , Creekside at Matthews and Cutter's Point as well as the 113 units (see Note 5) that are currently down.
The following table reflects the revenues, property operating expenses and NOI
for the three months ended
For the Three Months Ended June 30,
2021 2020 $ Change % Change
Revenues
Same Store
Rental income $ 49,401 $ 47,788 $ 1,613 3.4 %
Other income 1,481 1,420 61 4.3 %
Same Store revenues 50,882 49,208 1,674 3.4 %
Non-Same Store
Rental income 1,646 1,465 181 12.4 %
Other income 35 8 27 337.5 %
Non-Same Store revenues 1,681 1,473 208 14.1 %
Total revenues 52,563 50,681 1,882 3.7 %
Operating expenses
Same Store
Property operating expenses (1) 11,251 10,612 639 6.0 %
Real estate taxes and insurance 8,347 7,536 811 10.8 %
Property management fees (2) 1,465 1,400 65 4.6 %
Property general and
administrative expenses (3) 1,323 1,175 148 12.6 %
Same Store operating expenses 22,386 20,723 1,663 8.0 %
Non-Same Store
Property operating expenses (4) 345 355 (10 ) -2.8 %
Real estate taxes and insurance 161 241 (80 ) -33.2 %
Property management fees (2) 51 65 (14 ) -21.5 %
Property general and
administrative expenses (5) 63 80 (17 ) -21.3 %
Non-Same Store operating expenses 620 741 (121 ) -16.3 %
Total operating expenses 23,006 21,464 1,542 7.2 %
Operating income
Same Store
Miscellaneous income 168 - 168 0.0 %
Non-Same Store
Miscellaneous income 304 1,079 (775 ) -71.8 %
Total operating income 472 1,079 (607 ) -56.3 %
NOI
Same Store 28,664 28,485 179 0.6 %
Non-Same Store 1,365 1,811 (446 ) -24.6 %
Total NOI $ 30,029 $ 30,296 $ (267 ) -0.9 %
(1) For the three months ended
(2) Fees incurred to an unaffiliated third party that is an affiliate of the
noncontrolling limited partner of the OP.
(3) For the three months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional and franchise tax fees.
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(4) For the three months ended
expenses/(recoveries).
(5) For the three months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional and franchise tax fees.
See reconciliation of net loss to NOI above under "NOI and Same Store NOI for
the Three and Six Months Ended
Q2 Same Store Results of Operations for the Three Months Ended
As ofJune 30, 2021 , ourQ2 Same Store properties were approximately 96.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,153 . As ofJune 30, 2020 , ourQ2 Same Store properties were approximately 95.3% leased with a weighted average monthly effective rent per occupied apartment unit of$1,113 . For ourQ2 Same Store properties, we recorded the following operating results for the three months endedJune 30, 2021 as compared to the three months endedJune 30, 2020 :
Revenues
Rental income. Rental income was$49.4 million for the three months endedJune 30, 2021 compared to$47.8 million for the three months endedJune 30, 2020 , which was an increase of approximately$1.6 million , or 3.4%. The majority of the increase is related to a 3.6% increase in the weighted average monthly effective rent per occupied apartment unit to$1,153 as ofJune 30, 2021 from$1,113 as ofJune 30, 2020 , and a 0.7% increase in occupancy. Other income. Other income was$1.5 million for the three months endedJune 30, 2021 , compared to$1.4 million for the three months endedJune 30, 2020 , which was an increase of approximately$0.1 million . The majority of the increase is related to a$0.1 million increase in application fee income.
Expenses
Property operating expenses. Property operating expenses were$11.3 million for the three months endedJune 30, 2021 compared to$10.6 million for the three months endedJune 30, 2020 , which was an increase of$0.7 million , or 6.0%. The majority of the increase is related to a$0.5 million , or 13.8% increase in repair and maintenance costs and a$0.1 million , or 1.7% increase in payroll costs. Real estate taxes and insurance. Real estate taxes and insurance costs were$8.3 million for the three months endedJune 30, 2021 compared to$7.5 million for the three months endedJune 30, 2020 , which was an increase of approximately$0.8 million , or 10.8%. The increase is related to a$0.7 million , or 11.2%, increase in property taxes and a$0.1 million , or 8.4%, increase in insurance costs. Property management fees. Property management fees were$1.5 million for the three months endedJune 30, 2021 compared to$1.4 million for the three months endedJune 30, 2020 , which was an increase of approximately$0.1 million . The increase between the periods was primarily due to an increase in revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$1.3 million for the three months endedJune 30, 2021 compared to$1.2 million for the three months endedJune 30, 2020 , which was an increase of approximately$0.1 million . The majority of the increase is related to a$0.1 million increase in eviction fee expense.
Net Operating Income for Our Same Store and
There are 35 properties encompassing 13,544 units of apartment space in our same store pool for the six months endedJune 30, 2021 and 2020 (our "Same Store" properties). Our Same Store properties exclude the following four properties in our Portfolio as ofJune 30, 2021 : Fairways at San Marcos, The Verandas atLake Norman , Creekside at Matthews and Cutter's Point as well as the 113 units (see Note 5) that are currently down. 38 -------------------------------------------------------------------------------- The following table reflects the revenues, property operating expenses and NOI for the six months endedJune 30, 2021 and 2020 for our Same Store andNon-Same Store properties (dollars in thousands): For the Six Months Ended June 30, 2021 2020 $ Change % Change Revenues Same Store Rental income $ 98,212 $ 95,570$ 2,642 2.8 % Other income 2,922 2,846 76 2.7 % Same Store revenues 101,134 98,416 2,718 2.8 % Non-Same Store Rental income 3,175 4,797 (1,622 ) -33.8 % Other income 50 49 1 2.0 % Non-Same Store revenues 3,225 4,846 (1,621 ) -33.5 % Total revenues 104,359 103,262 1,097 1.1 % Operating expenses Same Store Property operating expenses (1) 22,084 21,242 842 4.0 % Real estate taxes and insurance 16,922 15,043 1,879 12.5 % Property management fees (2) 2,901 2,836 65 2.3 % Property general and administrative expenses (3) 2,593 2,452 141 5.8 % Same Store operating expenses 44,500 41,573 2,927 7.0 % Non-Same Store Property operating expenses (4) 662 1,386 (724 ) -52.2 % Real estate taxes and insurance 308 756 (448 ) -59.3 % Property management fees (2) 100 179 (79 ) -44.1 % Property general and administrative expenses (5) 119 166 (47 ) -28.3 % Non-Same Store operating expenses 1,189 2,487 (1,298 ) -52.2 % Total operating expenses 45,689 44,060 1,629 3.7 % Operating income Same Store Miscellaneous income 295 - 295 0.0 % Non-Same Store Miscellaneous income 645 1,079 (434 ) -40.2 % Total operating income 940 1,079 (139 ) -12.9 % NOI Same Store 56,929 56,843 86 0.2 % Non-Same Store 2,681 3,438 (757 ) -22.0 % Total NOI $ 59,610 $ 60,281$ (671 ) -1.1 %
(1) For the six months ended
(2) Fees incurred to an unaffiliated third party that is an affiliate of the
noncontrolling limited partner of the OP.
(3) For the six months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional and franchise tax fees.
(4) For the six months ended
(5) For the six months ended
the continuing operations of the properties or are incurred on our behalf at
the property for expenses such as legal, professional and franchise tax fees.
See reconciliation of net income (loss) to NOI above under "NOI and Same Store
NOI for the Three and Six Months Ended
39
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Same Store Results of Operations for the Six Months Ended
As ofJune 30, 2021 , our Same Store properties were approximately 96.0% leased with a weighted average monthly effective rent per occupied apartment unit of$1,153 . As ofJune 30, 2020 , our Same Store properties were approximately 95.3% leased with a weighted average monthly effective rent per occupied apartment unit of$1,113 . For our Same Store properties, we recorded the following operating results for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 :
Revenues
Rental income. Rental income was$98.2 million for the six months endedJune 30, 2021 compared to$95.6 million for the six months endedJune 30, 2020 , which was an increase of approximately$2.6 million , or 2.8%. The majority of the increase is related to a 3.6% increase in the weighted average monthly effective rent per occupied apartment unit to$1,153 as ofJune 30, 2021 from$1,113 as ofJune 30, 2020 , and a 0.7% increase in occupancy. Other income. Other income was$2.9 million for the six months endedJune 30, 2021 compared to$2.8 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.1 million , or 2.7%. The majority of the increase is related to a$0.1 million increase in application fee income.
Expenses
Property operating expenses. Property operating expenses were$22.1 million for the six months endedJune 30, 2021 compared to$21.2 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.9 million , or 4.0%. The majority of the increase is related to a$0.7 million , or 8.4%, increase in repairs and maintenance and a$0.2 million , or 3.4%, increase in utilities. Real estate taxes and insurance. Real estate taxes and insurance costs were$16.9 million for the six months endedJune 30, 2021 compared to$15.0 million for the six months endedJune 30, 2020 , which was an increase of approximately$1.9 million , or 12.5%. The majority of the increase is related to a$1.5 million , or 11.5%, increase in property taxes due to higher assessments of value by taxing authorities and a$0.4 million , or 18.7%, increase in insurance. Property management fees. Property management fees were$2.9 million for the six months endedJune 30, 2021 compared to$2.8 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.1 million , or 2.3%. The majority of the increase is related to a$2.6 million , or 2.8%, increase in rental income, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were$2.6 million for the six months endedJune 30, 2021 compared to$2.5 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.1 million . The majority of the increase is related to a$0.1 million increase in professional fees.
FFO, Core FFO and AFFO
We believe that net income, as defined by GAAP, is the most appropriate earnings
measure. We also believe that funds from operations ("FFO"), as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), core funds
from operations ("Core FFO") and adjusted funds from operations ("AFFO") are
important non-GAAP supplemental measures of operating performance for a REIT.
Since the historical cost accounting convention used for real estate assets
requires depreciation except on land, such accounting presentation implies that
the value of real estate assets diminishes predictably over time. However, since
real estate values have historically risen or fallen with market and other
conditions, presentations of operating results for a REIT that use historical
cost accounting for depreciation could be less informative. Thus, NAREIT created
FFO as a supplemental measure of operating performance for REITs that excludes
historical cost depreciation and amortization, among other items, from net
income, as defined by GAAP. FFO is defined by NAREIT as net income computed in
accordance with GAAP, excluding gains or losses from real estate dispositions,
plus real estate depreciation and amortization. We compute FFO attributable to
common stockholders in accordance with NAREIT's definition. Our presentation
differs slightly in that we begin with net income (loss) before adjusting for
amounts attributable to noncontrolling interests and we show the combined
amounts attributable to such noncontrolling interests as an adjustment to arrive
at FFO attributable to common stockholders.
Core FFO makes certain adjustments to FFO, which are either not likely to occur
on a regular basis or are otherwise not representative of the ongoing operating
performance of our portfolio. Core FFO adjusts FFO to remove items such as
losses on extinguishment of debt and modification costs (including prepayment
penalties and defeasance costs incurred on the early repayment of debt, the
write-off of unamortized deferred financing costs and fair market value
adjustments of assumed debt related to the early repayment of debt, costs
incurred in a debt modification that are not capitalized as deferred financing
costs and other costs incurred in a debt extinguishment), casualty-related
expenses and recoveries and gains or losses, pandemic expenses, the amortization
of deferred financing costs incurred in connection with obtaining short-term
debt financing, and the noncontrolling interests (as described above) related to
these items. We believe Core FFO is useful to investors as a supplemental gauge
of our operating performance and is useful in comparing our operating
performance with other REITs that are not as involved in the aforementioned
activities.
40
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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.
41
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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
three and six months ended June 30, 2021 and 2020 (in thousands, except per
share amounts):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020 % Change (1)
Net income (loss) $ (3,418 ) $ (9,318 ) $ (10,318 ) $ 18,721 N/M
Depreciation and amortization 19,986 21,418 40,744 44,756 -9.0 %
Gain on sales of real estate - (19 ) - (38,991 ) N/M
Adjustment for noncontrolling
interests (50 ) (36 ) (91 ) (73 ) 24.7 %
FFO attributable to common
stockholders 16,518 12,045 30,335 24,413 24.3 %
FFO per share - basic $ 0.66 $ 0.50 $ 1.21 $ 0.98 23.0 %
FFO per share - diluted $ 0.66 $ 0.50 $ 1.21 $ 0.96 25.4 %
Loss on extinguishment of debt
and modification costs 328 - 328 874 N/M
Casualty-related
expenses/(recoveries) (435 ) 723 (392 ) 773 N/M
Casualty losses/(gains) (2,379 ) 1,079 (2,379 ) 1,028 N/M
Pandemic expense (2) 12 274 35 284 N/M
Amortization of deferred
financing costs - acquisition
term notes 140 345 349 694 -49.7 %
Adjustment for noncontrolling
interests 7 (7 ) 6 (11 ) N/M
Core FFO attributable to common
stockholders 14,191 14,459 28,282 28,055 0.8 %
Core FFO per share - basic $ 0.56 $ 0.59 $ 1.13 $ 1.13 -0.2 %
Core FFO per share - diluted $ 0.56 $ 0.59 $ 1.13 $ 1.11 1.7 %
Amortization of deferred
financing costs - long term debt 355 357 707 744 -5.0 %
Equity-based compensation
expense 1,796 1,335 3,404 2,635 29.2 %
Adjustment for noncontrolling
interests (6 ) (5 ) (12 ) (10 ) 20.0 %
AFFO attributable to common
stockholders 16,336 16,146 32,381 31,424 3.0 %
AFFO per share - basic $ 0.65 $ 0.66 $ 1.29 $ 1.26 2.0 %
AFFO per share - diluted $ 0.65 $ 0.66 $ 1.29 $ 1.24 4.0 %
Weighted average common shares
outstanding - basic 25,140 24,307 25,104 24,847 1.0 %
Weighted average common shares
outstanding - diluted 25,140 24,307 25,104 25,330 -0.9 %
Dividends declared per common
share $ 0.34125 $ 0.3125 $ 0.6825 $ 0.625 9.2 %
FFO Coverage - diluted (3) 1.93x 1.59x 1.77x 1.54x 14.81 %
Core FFO Coverage - diluted (3) 1.65x 1.90x 1.65x 1.77x -6.85 %
AFFO Coverage - diluted (3) 1.90x 2.13x 1.89x 1.98x -4.79 %
(1) Represents the percentage change for the six months ended
compared to the six months ended
(2) Represents additional cleaning, disinfecting and other costs incurred at the
properties related to COVID-19.
(3) Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over
dividends declared per common share during the period.
42
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The three months ended
FFO was$16.5 million for the three months endedJune 30, 2021 compared to$12.0 million for the three months endedJune 30, 2020 , which was an increase of approximately$4.5 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$1.9 million . Core FFO was$14.2 million for the three months endedJune 30, 2021 compared to$14.5 million for the three months endedJune 30, 2020 , which was a decrease of approximately$0.3 million . The change in our Core FFO between the periods primarily relates to increases in casualty gains of$3.5 million and casualty-related recoveries of$1.2 million , partially offset by an increase in FFO. AFFO was$16.3 million for the three months endedJune 30, 2021 compared to$16.1 million for the three months endedJune 30, 2020 , which was an increase of approximately$0.2 million . The change in our AFFO between the periods primarily relates to an increase in equity-based compensation expense of$0.5 million , partially offset by a decrease in Core FFO.
The six months ended
FFO was$30.3 million for the six months endedJune 30, 2021 compared to$24.4 million for the six months endedJune 30, 2020 , which was an increase of approximately$5.9 million . The change in our FFO between the periods primarily relates to an increase in total revenues of$1.1 million . Core FFO was$28.3 million for the six months endedJune 30, 2021 compared to$28.1 million for the six months endedJune 30, 2020 , which was an increase of approximately$0.2 million . The change in our Core FFO between the periods primarily relates to an increase in FFO, partially offset by an increase in casualty gains of approximately$3.4 million . AFFO was$32.4 million for the six months endedJune 30, 2021 compared to$31.4 million for the six months endedJune 30, 2020 , which was an increase of approximately$1.0 million . The change in our AFFO between the periods primarily relates to an increase in Core FFO and an increase of equity-based compensation expense of$0.8 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 ofJune 30, 2021 , we had approximately$9.3 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, 43 -------------------------------------------------------------------------------- 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 six months endedJune 30, 2021 , 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 andRaymond James , 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. During the six months endedJune 30, 2021 , no shares were issued under the 2020 ATM Program. 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 followingJune 30, 2021 . 44 --------------------------------------------------------------------------------
Cash Flows
The following table presents selected data from our consolidated statements of
cash flows for the six months ended
For the Six Months Ended June 30,
2021 2020
Net cash provided by operating activities $ 30,950 $ 25,931
Net cash provided by (used in) investing
activities (139,764 ) 58,621
Net cash provided by (used in) financing
activities 112,026 (70,715 )
Net increase (decrease) in cash, cash equivalents
and restricted cash 3,212 13,837
Cash, cash equivalents and restricted cash,
beginning of period 57,015 71,182
Cash, cash equivalents and restricted cash, end of
period $ 60,227 $ 85,019
Cash flows from operating activities. During the six months ended June 30, 2021 ,
net cash provided by operating activities was $31.0 million compared to net cash
provided by operating activities of $25.9 million for the six months ended June
30, 2020 . The change in cash flows from operating activities was mainly due to
an increase in total revenues and a decrease in property operating expenses.
Cash flows from investing activities. During the six months ended June 30, 2021 ,
net cash used in investing activities was $139.8 million compared to net cash
provided by investing activities of $58.6 million for the six months ended June
30, 2020 . The change in cash flows from investing activities was mainly due to
our acquisition and disposition activity in 2021 and 2020 and the timing of the
transactions.
Cash flows from financing activities. During the six months ended June 30, 2021 ,
net cash provided by financing activities was $112.0 million compared to net
cash used in financing activities of $70.7 million for the six months ended June
30, 2020 . The change in cash flows from financing activities was mainly due to a
net increase in debt of approximately $168.5 million , a decrease in common stock
repurchases of approximately $44.5 million , partially offset by a decrease in
proceeds from the issuance of common stock of approximately $27.4 million (net
of Sales Agents fees and other legal fees) between the periods.
Debt, Derivatives and Hedging Activity
Mortgage Debt
As ofJune 30, 2021 , our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately$1.2 billion at a weighted average interest rate of 1.79% and an adjusted weighted average interest rate of 2.97%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3461% for one-month LIBOR on our combined$1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on$1.2 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information. We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As ofJune 30, 2021 , interest rate swap agreements effectively covered 100% of our$1.2 billion of floating rate mortgage debt outstanding. The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As ofJune 30, 2021 , interest rate cap agreements covered$428.8 million of our$1.2 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on$428.8 million of our floating rate mortgage debt at a weighted average rate of 5.28%. 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. 45 -------------------------------------------------------------------------------- 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 OnJune 30, 2021 , we through our OP entered into a secured$250.0 million revolving and term credit facility with Truist, as administrative agent, and the lenders from time-to-time party thereto (the "Corporate Credit Facility"). Subject to conditions provided in the Corporate Credit Facility, the Corporate Credit Facility may be increased up to an additional$100.0 million at the Company's option if the lenders agree to increase their commitments. The Corporate Credit Facility will mature onJune 30, 2024 , unless the Company exercises its option to voluntarily and permanently reduce all of the commitments before the maturity date or elects to exercise its right and option to extend the facility for a one-year term. As ofJune 30, 2021 , there was$250.0 million in aggregate principal outstanding on the Corporate Credit Facility. Additionally, onJune 30, 2021 , in connection with entering into the Corporate Credit Facility, the Company, through the OP, terminated its$225.0 million revolving credit facility with Truist, as administrative agent, and the lenders from party thereto. Advances under the Corporate Credit Facility accrue interest at a per annum rate equal to, at the Company's election, either LIBOR plus a margin of 1.90% to 2.40%, depending on the Company's total leverage ratio, or a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, (c) LIBOR plus 1.0% or (d) 0.0% plus a margin of 0.90% to 1.40%, depending on the Company's total leverage ratio. An unused commitment fee at a rate of 0.15% or 0.25%, depending on the outstanding aggregate revolving commitments, applies to unutilized borrowing capacity under the Corporate Credit Facility. Amounts owing under the Corporate Credit Facility may be prepaid at any time without premium or penalty. The Corporate Credit Facility is guaranteed by the Company and the obligations under the Corporate Credit Facility are, subject to some exceptions, secured by a continuing security interest in substantially all of the assets of the Company.
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 nine interest rate swap transactions withKeyBank and two with Truist (collectively the "Counterparties") with a combined notional amount of$1.2 billion which are effective as ofJune 30, 2021 . As ofJune 30, 2021 , the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to$1.2 billion of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3461%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3461%, on a weighted average basis, on the notional amounts, while the Counterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.
The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):
Effective Date Termination Date Counterparty Notional Amount
Fixed Rate (1)
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 %
June 1, 2021 September 1, 2026 KeyBank 200,000 0.8450 %
June 1, 2021 September 1, 2026 KeyBank 200,000 0.9530 %
$ 1,167,500 1.3461 % (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.
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As of June 30, 2021 , the Company had the following outstanding interest rate
swaps that were designated as cash flow hedges of interest rate risk with future
effective dates (dollars in thousands):
Effective Date Termination Date Counterparty Notional Amount
Fixed Rate (1)
0.5730 %
March 1, 2022 March 1, 2025 Truist 105,000 0.6140 %
September 1, 2026 January 1, 2027 KeyBank 92,500 1.7980 %
$ 342,500 0.9164 % (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 forward interest rate
swaps.
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of
June 30, 2021 for the next five calendar years subsequent to June 30, 2021 . We
used one-month LIBOR as of June 30, 2021 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 Thereafter
Operating Properties
Mortgage Debt
Principal payments $ 1,193,850 $ 508 $ 1,504 $ 21,252 $ 395,100 $ 205,230 $ 570,256
Interest expense (1) 131,626 10,985 23,040 27,289 27,096 21,723 21,493
Total $ 1,325,476 $ 11,493 $ 24,544 $ 48,541 $ 422,196 $ 226,953 $ 591,749
Held For Sale Property
Mortgage Debt
Principal payments $ 40,665 $ - $ - $ - $ - $ 40,665 $ -
Interest expense 3,645 312 667 852 1,051 763 -
Total $ 44,310 $ 312 $ 667 $ 852 $ 1,051 $ 41,428 $ -
Credit Facility
Principal payments (2) $ 250,000 $ - $ - $ - $ 250,000 $ - $ -
Interest expense 21,957 3,207 6,641 7,772 4,337 - -
Total $ 271,957 $ 3,207 $ 6,641 $ 7,772 $ 254,337 $ - $ -
Total contractual
obligations and
commitments $ 1,641,743 $ 15,012 $ 31,852 $ 57,165 $ 677,584 $ 268,381 $ 591,749 (1) Interest expense obligations includes the impact of expected settlements on
interest rate swaps which have been entered into in order to fix the interest
rate on the hedged portion of our floating rate debt obligations. As of June
30, 2021, we had entered into eleven interest rate swap transactions with a
combined notional amount of
of expected settlements on the
swaps to 'Operating Properties Mortgage Debt.' We used one-month LIBOR as of
interest rate swaps.
(2) On
that has a maturity date of June 30, 2024 .
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Capital Expenditures and Value-Add Program
We anticipate incurring average annual repairs and maintenance expense of$575 to$725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average, approximately$250 to$350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in our Portfolio were underwritten and acquired with the premise that we would invest$4,000 to$10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset's exterior and interiors. In many cases, we reserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As ofJune 30, 2021 , we had approximately$9.3 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,428 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the three and six months endedJune 30, 2021 and 2020 (in thousands): For the Three Months Ended June For the Six Months Ended June 30, 30, Rehab Expenditures 2021 2020 2021 2020 Interior (1)$ 3,027 $ 2,765 $ 5,359 $ 5,123 Exterior and common area 2,321 5,339 5,281 10,958 Total rehab expenditures$ 5,348 $ 8,104 $ 10,640 $ 16,081
(1) Includes total capital expenditures during the period on completed and
in-progress interior rehabs. For the six months ended
we completed full and partial interior rehabs on 621 and 966 units,
respectively.
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 ofJune 30, 2021 , the Company has completed its Green Program improvements on all but one property, which is expected to be completed in 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 six months endedJune 30, 2021 and 2020. 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 (loss) and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. We have no examinations in progress and none are expected at this time. 48 -------------------------------------------------------------------------------- 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 ofJune 30, 2021 . We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2020, 2019 and 2018 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income (loss).
Dividends
We intend to make regular quarterly dividend payments to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities. We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our second quarterly dividend of 2021 of$0.34125 per share onApril 26, 2021 which was paid onJune 30, 2021 and funded out of cash flows from operations.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management's historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of recent accounting pronouncements and our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2 "Summary of Significant Accounting Policies" to our consolidated financial statements included in this quarterly report.
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.
49
-------------------------------------------------------------------------------- The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial statements), is based on management's estimate of the property's "as-if" vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.
Impairment
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company's impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to 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.
REIT Tax Election
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our "REIT taxable income," as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the six months endedJune 30, 2021 and 2020. 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. 50
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