UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): October 29, 2021
Independence Realty Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
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001-36041 |
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26-4567130 |
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(State or other jurisdiction |
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(Commission |
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(I.R.S. Employer |
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of incorporation) |
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File Number) |
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Identification No.) |
1835 Market Street, Suite 2601
Philadelphia, Pennsylvania, 19103
(Address of Principal Executive Office) (Zip Code)
(267) 270-4800
(Registrant’s telephone number, including area code)
N/A
Former name or former address, if changed since last report
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☒ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Securities registered pursuant to Section 12(b) of the Act: |
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common stock |
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IRT |
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NYSE |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
The sole purpose of this Current Report on Form 8-K is to refile the Current Report on Form 8-K filed by Independence Realty Trust, Inc. on October 29, 2021, which was inadvertently submitted to EDGAR under the EDGAR form type for a 425 filing only instead of a dual 425 and Form 8-K filing. The text of the Form 8-K remains unchanged.
Item 8.01Other Events.
As previously disclosed, on July 26, 2021, Independence Realty Trust, Inc., a Maryland corporation (“IRT”) entered into an Agreement and Plan of Merger dated as of July 26, 2021 (the “Merger Agreement”) by and among IRT, Independence Realty Operating Partnership, LP, a Delaware limited partnership and subsidiary of IRT, IRSTAR Sub, LLC, a Maryland limited liability company and wholly-owned subsidiary of IRT, Steadfast Apartment REIT, Inc., a Maryland corporation (“STAR”), and Steadfast Apartment REIT Operating Partnership, L.P., a Delaware limited partnership.
IRT is filing this Current Report on Form 8-K to provide (i) the unaudited financial statements of STAR as of September 30, 2021 and for the nine month periods ended September 30, 2021 and 2020, which are attached as Exhibit 99.1 and incorporated herein by reference and (ii) the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2 of STAR’s Quarterly Report on Form 10-Q for its quarter ended September 30, 2021, as contained in Exhibit 99.2, which is incorporated herein by reference.
IRT is also filing this Current Report on Form 8-K to incorporate by reference herein unaudited pro forma financial information consisting of an unaudited pro forma condensed consolidated balance sheet of IRT as of September 30, 2021 and unaudited pro forma condensed consolidated statements of operations of IRT for the nine month period ended September 30, 2021, which are attached as Exhibit 99.3 and incorporated herein by reference. Such unaudited pro forma condensed consolidated financial statements have been prepared on the basis of certain assumptions and estimates and are subject to other uncertainties and do not purport to reflect what the actual results of operations or financial condition of the combined company would have been had the mergers provided for in the Merger Agreement been consummated on the dates assumed for purposes of such pro forma financial statements or to be indicative of the financial condition or results of operations of the combined company as of or for any future date or period.
Cautionary Statement Regarding Forward-Looking Statements
This Current Report on Form 8-K may include “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements, which are based on current expectations, estimates and projections about the industry and markets in which IRT operates and beliefs of and assumptions made by IRT management, involve uncertainties that could significantly affect the financial results of IRT or the combined company. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, which generally are not historical in nature. Such forward-looking statements include, but are not limited to certain actions to be taken by IRT in connection with the closing of the mergers. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Although IRT believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, IRT can give no assurance that its expectations will be attained. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: IRT’s and STAR’s ability to complete the mergers on the proposed terms or on the anticipated timeline, or at all, including risks and uncertainties related to securing the necessary shareholder approvals and lender consents and satisfaction of other closing conditions to consummate the mergers; the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement; risks related to diverting the attention of IRT and STAR management from ongoing business operations; failure to realize the expected benefits of the mergers; significant transaction costs and/or unknown or inestimable liabilities; the risk of shareholder litigation in connection with the proposed mergers, including resulting expense or delay; the risk that STAR’s business will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; risks related to future opportunities and plans for the combined company, including the uncertainty of expected future financial performance and results of the combined company following completion of the mergers; effects relating to the announcement of the mergers or any further announcements or the consummation of the mergers on the market price of the IRT common stock or STAR common shares; the possibility that, if IRT does not achieve the perceived benefits of the mergers as rapidly or to the extent anticipated by financial analysts or investors, the market price of IRT common stock could decline; general adverse economic and local real estate conditions; the inability of tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; local real estate conditions; adverse changes in financial markets that result in increases in interest rates and reduced availability and increased costs of capital; increases in operating costs and real estate taxes; changes in the dividend policy for IRT common stock or IRT’s ability to pay dividends; impairment charges; unanticipated changes in IRT’s intention or ability to prepay certain debt prior to maturity; inability to sell certain assets within the time frames or at the pricing levels expected; pandemics or other health crises, such as coronavirus disease 2019 (COVID-19); and other risks and uncertainties
affecting IRT and STAR, including those described from time to time under the caption “Risk Factors” and elsewhere in IRT’s and STAR’s SEC filings and reports, including IRT’s Annual Report on Form 10-K for the year ended December 31, 2020, STAR’s Annual Report on Form 10-K for the year ended December 31, 2020, IRT’s and STAR’s subsequently filed quarterly reports on Form 10-Q and future filings and reports by either company. Moreover, other risks and uncertainties of which IRT and STAR are not currently aware may also affect each of the companies’ forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by IRT or STAR on their respective websites or otherwise. Neither IRT nor STAR undertakes any obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made.
Additional Information and Where to Find It
In connection with its announced merger transaction with STAR, IRT filed with the SEC a registration statement on Form S-4 to register the shares of IRT Common Stock to be issued in connection with the proposed merger transaction. The registration statement was declared effective by the SEC on September 29, 2021, and includes a joint proxy statement/prospectus which was sent to the stockholders of IRT and the stockholders of STAR. INVESTORS AND SECURITY HOLDERS OF IRT AND STAR ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC BECAUSE THEY CONTAIN IMPORTANT INFORMATION. Investors and security holders are able to obtain free copies of these documents and other documents filed with the SEC by IRT and/or STAR through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by IRT are available free of charge on IRT’s internet website at http://www.irtliving.com or by contacting IRT’s Investor Relations Department by email at IRT@edelman.com or by phone at +1-917-365-7979. Copies of the documents filed with the SEC by STAR are available free of charge on STAR’s internet website at http://www.steadfastliving.com or by contacting STAR’s Investor Relations Department by phone at +1-888-223-9951.
Participants in Solicitation
IRT, STAR, their respective directors and certain of their respective executive officers may be considered participants in the solicitation of proxies in connection with the announced merger transaction. Information about the directors and executive officers of IRT is set forth in its Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 18, 2021, and its proxy statement for its 2021 annual meeting of stockholders, which was filed with the SEC on March 29, 2021. Information about the directors and executive officers of STAR is set forth in its Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 12, 2021, and in its proxy statement for its 2021 annual meeting of stockholders, which was filed with the SEC on June 14, 2021. These documents can be obtained free of charge from the sources indicated above. Additional information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, is contained in the joint proxy statement/prospectus and other relevant materials filed with the SEC when they become available.
No Offer or Solicitation
This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act.
Item 9.01Financial Statements and Exhibits.
(d) Exhibits
99.1 |
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99.2 |
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99.3 |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Independence Realty Trust, Inc. |
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November 12, 2021 |
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By: |
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/s/ James J. Sebra |
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Name: |
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James J. Sebra |
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Title: |
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Chief Financial Officer and Treasurer |
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2021 |
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December 31, 2020 |
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(Unaudited) |
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ASSETS |
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Assets: |
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Real Estate: |
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Land |
$ |
338,512,553 |
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$ |
331,031,517 |
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Building and improvements |
2,945,070,487 |
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2,813,476,200 |
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Tenant origination and absorption costs |
1,682,900 |
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1,752,793 |
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Total real estate held for investment, cost |
3,285,265,940 |
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3,146,260,510 |
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Less accumulated depreciation and amortization |
(480,154,543) |
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(384,494,007) |
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Total real estate held for investment, net |
2,805,111,397 |
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2,761,766,503 |
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Real estate held for development |
34,870,861 |
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39,891,218 |
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Real estate held for sale, net |
60,367,924 |
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61,975,530 |
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Total real estate, net |
2,900,350,182 |
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2,863,633,251 |
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Cash and cash equivalents |
122,107,875 |
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258,198,326 |
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Restricted cash |
38,360,359 |
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38,998,980 |
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Goodwill |
125,220,448 |
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125,220,448 |
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Due from affiliates |
266,453 |
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377,218 |
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Rents and other receivables |
22,967,608 |
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5,385,108 |
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Other assets |
11,996,018 |
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9,925,714 |
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Total assets |
$ |
3,221,268,943 |
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$ |
3,301,739,045 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||
Liabilities: |
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Accounts payable and accrued liabilities |
$ |
81,920,569 |
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$ |
80,732,664 |
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Notes Payable, net: |
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Mortgage notes payable, net |
1,369,141,135 |
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1,363,796,018 |
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Credit facilities, net |
712,416,114 |
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711,798,953 |
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Notes payable related to real estate held for sale, net |
53,684,875 |
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53,650,700 |
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Total notes payable, net |
2,135,242,124 |
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2,129,245,671 |
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Distributions payable |
4,795,740 |
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8,462,735 |
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Distributions payable to affiliates |
265,620 |
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469,236 |
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Due to affiliates |
228,202 |
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337,422 |
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Liabilities related to real estate held for sale |
1,304,445 |
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865,862 |
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Total liabilities |
2,223,756,700 |
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2,220,113,590 |
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Commitments and contingencies (Note 12) |
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Stockholders’ Equity: |
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Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, no shares issued and outstanding |
— |
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— |
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Common stock, $0.01 par value per share; 999,998,000 shares authorized, 110,188,806 and 110,070,572 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively |
1,101,887 |
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1,100,706 |
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Convertible stock, $0.01 par value per share; 1,000 shares authorized, zero shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
— |
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|
— |
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Class A Convertible stock, $0.01 par value per share; 1,000 shares authorized, zero shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
— |
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— |
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Additional paid-in capital |
1,609,821,541 |
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1,603,989,130 |
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Cumulative distributions and net losses |
(712,272,617) |
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|
(627,787,040) |
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Total Steadfast Apartment REIT, Inc. (“STAR”) stockholders’ equity |
898,650,811 |
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|
977,302,796 |
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Noncontrolling interest |
98,861,432 |
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|
104,322,659 |
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Total equity |
997,512,243 |
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|
1,081,625,455 |
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Total liabilities and stockholders’ equity |
$ |
3,221,268,943 |
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|
$ |
3,301,739,045 |
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See accompanying notes to consolidated financial statements.
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues: |
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Rental income |
$ |
89,905,120 |
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|
$ |
82,937,828 |
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$ |
257,205,237 |
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$ |
215,817,169 |
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Other income |
736,773 |
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|
732,680 |
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|
2,219,106 |
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1,862,873 |
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Total revenues |
90,641,893 |
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83,670,508 |
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259,424,343 |
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217,680,042 |
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Expenses: |
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|||||||||
Operating, maintenance and management |
23,114,563 |
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21,567,499 |
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65,213,378 |
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53,783,824 |
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|||||
Real estate taxes and insurance |
12,819,459 |
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12,935,004 |
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41,263,876 |
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35,346,220 |
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|||||
Fees to affiliates |
4,158 |
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|
8,449,715 |
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12,708 |
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30,586,344 |
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|||||
Depreciation and amortization |
34,051,286 |
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|
47,564,706 |
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|
101,203,302 |
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129,596,268 |
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Interest expense |
20,279,374 |
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|
20,628,159 |
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60,174,405 |
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|
54,734,431 |
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|||||
General and administrative expenses |
14,066,611 |
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|
11,705,698 |
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37,128,402 |
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|
19,408,854 |
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Impairment of real estate |
— |
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|
— |
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|
— |
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|
5,039,937 |
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|||||
Total expenses |
104,335,451 |
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|
122,850,781 |
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|
304,996,071 |
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|
328,495,878 |
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Loss before other income (expense) |
(13,693,558) |
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|
(39,180,273) |
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(45,571,728) |
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|
(110,815,836) |
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Other income (expense): |
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Gain on sale of real estate, net |
— |
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1,392,434 |
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— |
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12,777,033 |
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Interest income |
49,382 |
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|
165,495 |
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|
252,450 |
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|
553,011 |
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Insurance proceeds in excess of losses incurred |
375,931 |
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112,342 |
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511,291 |
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236,754 |
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Equity in loss from unconsolidated joint venture |
— |
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(16,711) |
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— |
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|
(3,020,111) |
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Fees and other income from affiliates |
1,622,096 |
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|
390,099 |
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4,651,364 |
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|
390,099 |
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Loss on debt extinguishment |
— |
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(621,451) |
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— |
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|
(621,451) |
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Total other income |
2,047,409 |
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1,422,208 |
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|
5,415,105 |
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|
10,315,335 |
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Net loss |
(11,646,149) |
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|
(37,758,065) |
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|
(40,156,623) |
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(100,500,501) |
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Loss allocated to noncontrolling interest |
(1,003,675) |
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|
(844,653) |
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(2,445,203) |
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|
(681,339) |
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Net loss attributable to common stockholders |
$ |
(10,642,474) |
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|
$ |
(36,913,412) |
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$ |
(37,711,420) |
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|
$ |
(99,819,162) |
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Loss per common share — basic and diluted |
$ |
(0.10) |
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$ |
(0.34) |
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$ |
(0.34) |
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$ |
(1.04) |
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Weighted average number of common shares outstanding — basic and diluted |
109,901,506 |
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|
109,663,583 |
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109,898,905 |
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|
95,714,116 |
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See accompanying notes to consolidated financial statements.
2
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 (Unaudited)
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Common Stock |
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Convertible Stock |
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Class A Convertible Stock |
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Additional Paid-In Capital |
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Cumulative Distributions & Net Losses |
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Total STAR Stockholders’ Equity |
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Noncontrolling Interest |
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Total Stockholders’ Equity |
|||||||||||||||||||||||||
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Shares |
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Amount |
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Shares |
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Amount |
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Shares |
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Amount |
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||||||||||||||||||||||||
BALANCE, July 1, 2021 |
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110,228,140 |
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|
$ |
1,102,281 |
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|
— |
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|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,607,145,466 |
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|
$ |
(687,044,939) |
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|
$ |
921,202,808 |
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|
$ |
100,805,226 |
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$ |
1,022,008,034 |
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Issuance of common stock |
|
156,293 |
|
|
1,563 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,053,793 |
|
|
— |
|
|
2,055,356 |
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|
— |
|
|
2,055,356 |
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Transfers from redeemable common stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
171,239 |
|
|
— |
|
|
171,239 |
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|
— |
|
|
171,239 |
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Repurchase of common stock |
|
(195,627) |
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|
(1,957) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,957 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
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||||||||
Distributions declared ($0.132 per share of common stock) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(14,585,204) |
|
|
(14,585,204) |
|
|
(940,119) |
|
|
(15,525,323) |
|
||||||||
Amortization of stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
449,086 |
|
|
— |
|
|
449,086 |
|
|
— |
|
|
449,086 |
|
||||||||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,642,474) |
|
|
(10,642,474) |
|
|
(1,003,675) |
|
|
(11,646,149) |
|
||||||||
BALANCE, September 30, 2021 |
|
110,188,806 |
|
|
$ |
1,101,887 |
|
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,609,821,541 |
|
|
$ |
(712,272,617) |
|
|
$ |
898,650,811 |
|
|
$ |
98,861,432 |
|
|
$ |
997,512,243 |
|
|
|
Common Stock |
|
Convertible Stock |
|
Class A Convertible Stock |
|
Additional Paid-In Capital |
|
Cumulative Distributions & Net Losses |
|
Total STAR Stockholders’ Equity |
|
Noncontrolling Interest |
|
Total Stockholders’ Equity |
|||||||||||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
||||||||||||||||||||||||
BALANCE, January 1, 2021 |
|
110,070,572 |
|
|
$ |
1,100,706 |
|
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,603,989,130 |
|
|
$ |
(627,787,040) |
|
|
$ |
977,302,796 |
|
|
$ |
104,322,659 |
|
|
$ |
1,081,625,455 |
|
Issuance of common stock |
|
755,506 |
|
|
7,555 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9,756,893 |
|
|
— |
|
|
9,764,448 |
|
|
— |
|
|
9,764,448 |
|
||||||||
Transfers to redeemable common stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,130,324) |
|
|
— |
|
|
(5,130,324) |
|
|
— |
|
|
(5,130,324) |
|
||||||||
Repurchase of common stock |
|
(637,272) |
|
|
(6,374) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,374 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||||||
Distributions declared ($0.425 per share of common stock) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(46,774,157) |
|
|
(46,774,157) |
|
|
(3,016,024) |
|
|
(49,790,181) |
|
||||||||
Amortization of stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,199,468 |
|
|
— |
|
|
1,199,468 |
|
|
— |
|
|
1,199,468 |
|
||||||||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(37,711,420) |
|
|
(37,711,420) |
|
|
(2,445,203) |
|
|
(40,156,623) |
|
||||||||
BALANCE, September 30, 2021 |
|
110,188,806 |
|
|
$ |
1,101,887 |
|
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,609,821,541 |
|
|
$ |
(712,272,617) |
|
|
$ |
898,650,811 |
|
|
$ |
98,861,432 |
|
|
$ |
997,512,243 |
|
See accompanying notes to consolidated financial statements.
3
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 (Unaudited)
|
|
Common Stock |
|
Convertible Stock |
|
Class A Convertible Stock |
|
Additional Paid-In Capital |
|
Cumulative Distributions & Net Losses |
|
Total STAR Stockholders’ Equity |
|
Noncontrolling Interest |
|
Total Stockholders’ Equity |
|||||||||||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
||||||||||||||||||||||||
BALANCE, July 1, 2020 |
|
109,437,702 |
|
|
$ |
1,094,377 |
|
|
— |
|
|
$ |
— |
|
|
1,000 |
|
|
$ |
10 |
|
|
$ |
1,596,591,653 |
|
|
$ |
(526,888,587) |
|
|
$ |
1,070,797,453 |
|
|
$ |
14,450,000 |
|
|
$ |
1,085,247,453 |
|
Issuance of common stock |
|
824,152 |
|
|
8,242 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
9,693,591 |
|
|
— |
|
|
9,701,833 |
|
|
— |
|
|
9,701,833 |
|
||||||||
Issuance of OP Units |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
93,750,000 |
|
|
93,750,000 |
|
||||||||
Repurchase of common stock |
|
(282,483) |
|
|
(2,825) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,997,175) |
|
|
— |
|
|
(4,000,000) |
|
|
— |
|
|
(4,000,000) |
|
||||||||
Repurchase of Class A convertible stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,000) |
|
|
(10) |
|
|
(990) |
|
|
— |
|
|
(1,000) |
|
|
— |
|
|
(1,000) |
|
||||||||
Distributions declared ($0.226 per share of common stock) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(24,821,896) |
|
|
(24,821,896) |
|
|
(668,742) |
|
|
(25,490,638) |
|
||||||||
Amortization of stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
97,478 |
|
|
— |
|
|
97,478 |
|
|
— |
|
|
97,478 |
|
||||||||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(36,913,412) |
|
|
(36,913,412) |
|
|
(844,653) |
|
|
(37,758,065) |
|
||||||||
BALANCE, September 30, 2020 |
|
109,979,371 |
|
|
$ |
1,099,794 |
|
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,602,384,557 |
|
|
$ |
(588,623,895) |
|
|
$ |
1,014,860,456 |
|
|
$ |
106,686,605 |
|
|
$ |
1,121,547,061 |
|
4
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
|
|
Common Stock |
|
Convertible Stock |
|
Class A Convertible Stock |
|
Additional Paid-In Capital |
|
Cumulative Distributions & Net Losses |
|
Total STAR Stockholders’ Equity |
|
Noncontrolling Interest |
|
Total Stockholders’ Equity |
|||||||||||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
||||||||||||||||||||||||
BALANCE, January 1, 2020 |
|
52,607,695 |
|
|
$ |
526,077 |
|
|
1,000 |
|
|
$ |
10 |
|
|
— |
|
|
$ |
— |
|
|
$ |
698,453,981 |
|
|
$ |
(424,166,210) |
|
|
$ |
274,813,858 |
|
|
$ |
— |
|
|
$ |
274,813,858 |
|
Issuance of common stock |
|
1,840,307 |
|
|
18,404 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
25,322,884 |
|
|
— |
|
|
25,341,288 |
|
|
— |
|
|
25,341,288 |
|
||||||||
Issuance of common stock in connection with the SIR Merger |
|
43,775,314 |
|
|
437,753 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
692,963,221 |
|
|
— |
|
|
693,400,974 |
|
|
— |
|
|
693,400,974 |
|
||||||||
Issuance of common stock in connection with the STAR III Merger |
|
12,240,739 |
|
|
122,407 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
193,770,898 |
|
|
— |
|
|
193,893,305 |
|
|
— |
|
|
193,893,305 |
|
||||||||
Issuance of OP Units |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
108,200,000 |
|
|
108,200,000 |
|
||||||||
Exchange of convertible common stock into Class A convertible common stock |
|
— |
|
|
— |
|
|
(1,000) |
|
|
(10) |
|
|
1,000 |
|
|
10 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||||||||
Transfers to redeemable common stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,383,318) |
|
|
— |
|
|
(1,383,318) |
|
|
— |
|
|
(1,383,318) |
|
||||||||
Repurchase of common stock |
|
(484,684) |
|
|
(4,847) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,902,980) |
|
|
— |
|
|
(6,907,827) |
|
|
— |
|
|
(6,907,827) |
|
||||||||
Repurchase of Class A convertible stock |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,000) |
|
|
(10) |
|
|
(990) |
|
|
— |
|
|
(1,000) |
|
|
— |
|
|
(1,000) |
|
||||||||
Distributions declared ($0.674 per share of common stock) |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(64,638,523) |
|
|
(64,638,523) |
|
|
(832,056) |
|
|
(65,470,579) |
|
||||||||
Amortization of stock-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
160,861 |
|
|
— |
|
|
160,861 |
|
|
— |
|
|
160,861 |
|
||||||||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(99,819,162) |
|
|
(99,819,162) |
|
|
(681,339) |
|
|
(100,500,501) |
|
||||||||
BALANCE, September 30, 2020 |
|
109,979,371 |
|
|
$ |
1,099,794 |
|
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
1,602,384,557 |
|
|
$ |
(588,623,895) |
|
|
$ |
1,014,860,456 |
|
|
$ |
106,686,605 |
|
|
$ |
1,121,547,061 |
|
See accompanying notes to consolidated financial statements.
5
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended September 30, |
||||||
|
2021 |
|
2020 |
||||
Cash Flows from Operating Activities: |
|
|
|
||||
Net loss |
$ |
(40,156,623) |
|
|
$ |
(100,500,501) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
||||
Depreciation and amortization |
101,203,302 |
|
|
129,596,268 |
|
||
Fees to affiliates paid in common stock |
— |
|
|
9,484,039 |
|
||
Loss on disposal of buildings and improvements |
1,433,135 |
|
|
552,793 |
|
||
Loss on disposal of buildings and improvements from winter storm |
12,515,830 |
|
|
— |
|
||
Amortization of deferred financing costs |
1,646,291 |
|
|
1,382,954 |
|
||
Amortization of stock-based compensation |
1,199,468 |
|
|
160,861 |
|
||
Amortization of below market leases |
(5,014) |
|
|
(4,265) |
|
||
Change in fair value of interest rate cap agreements |
39,699 |
|
|
56,287 |
|
||
Gain on sale of real estate |
— |
|
|
(12,777,033) |
|
||
Impairment of real estate |
— |
|
|
5,039,937 |
|
||
Amortization of loan premiums |
(1,677,184) |
|
|
(1,297,874) |
|
||
Accretion of loan discounts |
407,700 |
|
|
338,047 |
|
||
Straight-line of office lease |
3,631 |
|
|
— |
|
||
Interest on finance lease furnishings |
258 |
|
|
47 |
|
||
Loss on debt extinguishment |
— |
|
|
621,451 |
|
||
Insurance claim recoveries |
(14,347,058) |
|
|
(777,353) |
|
||
Equity in loss from unconsolidated joint venture |
— |
|
|
3,020,111 |
|
||
Changes in operating assets and liabilities: |
|
|
|
||||
Rents and other receivables |
(4,225,816) |
|
|
(675,979) |
|
||
Other assets |
(2,328,243) |
|
|
(546,777) |
|
||
Accounts payable and accrued liabilities |
884,910 |
|
|
16,634,701 |
|
||
Due to affiliates |
(232,166) |
|
|
(7,732,288) |
|
||
Due from affiliates |
110,765 |
|
|
(390,099) |
|
||
Net cash provided by operating activities |
56,472,885 |
|
|
42,185,327 |
|
||
|
|
|
|
||||
Cash Flows from Investing Activities: |
|
|
|
||||
Acquisition of real estate investments |
(75,966,685) |
|
|
(69,914,948) |
|
||
Cash acquired in connection with the Mergers, net of acquisition costs |
— |
|
|
98,283,732 |
|
||
Acquisition of assets from Internalization Transaction |
— |
|
|
(29,486,646) |
|
||
Acquisition of real estate held for development |
— |
|
|
(14,321,851) |
|
||
Additions to real estate investments |
(43,476,629) |
|
|
(17,205,299) |
|
||
Additions to real estate held for development |
(25,363,295) |
|
|
(10,687,626) |
|
||
Escrow deposits for pending real estate acquisitions |
(1,500,000) |
|
|
(1,000,000) |
|
||
Purchase of interest rate cap agreements |
(59,700) |
|
|
(67,000) |
|
||
Net proceeds from sale of real estate investments |
— |
|
|
81,208,213 |
|
6
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
7
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
Class A-2 OP Units issued for real estate |
$ |
— |
|
|
$ |
14,450,000 |
|
Class B OP Units issued in exchange for net assets acquired in Internalization Transaction |
$ |
— |
|
|
$ |
93,750,000 |
|
Goodwill acquired in the Internalization Transaction |
$ |
— |
|
|
$ |
125,220,448 |
|
Affiliate assets acquired in the Internalization Transaction |
$ |
— |
|
|
$ |
1,066,219 |
|
|
|
|
|
8
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
|
Nine Months Ended September 30, |
||||||
|
2021 |
|
2020 |
||||
Affiliate liabilities assumed in the Internalization Transaction |
$ |
— |
|
|
$ |
4,701,436 |
|
Assumption of mortgage notes payable to acquire real estate |
$ |
— |
|
|
$ |
81,315,122 |
|
Premiums on assumed mortgage notes payable |
$ |
— |
|
|
$ |
945,235 |
|
Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan |
$ |
9,764,448 |
|
|
$ |
15,857,249 |
|
Redemptions payable |
$ |
— |
|
|
$ |
4,000,000 |
|
Accounts payable and accrued liabilities from additions to real estate investments |
$ |
7,625,126 |
|
|
$ |
111,654 |
|
Due to affiliates from additions to real estate investments |
$ |
— |
|
|
$ |
25,064 |
|
Accounts payable and accrued liabilities from additions to real estate held for development |
$ |
4,023,120 |
|
|
$ |
2,993,037 |
|
Affiliate accounts payable and accrued liabilities from additions to real estate held for development |
$ |
173,303 |
|
|
$ |
56,427 |
|
Due to affiliates for commissions on sales of common stock |
$ |
— |
|
|
$ |
21,237 |
|
Operating and finance lease right-of-use assets, net |
$ |
1,300,961 |
|
|
$ |
2,332,352 |
|
Operating and finance lease liabilities, net |
$ |
1,324,849 |
|
|
$ |
2,347,600 |
|
Fair value of real estate acquired in the SIR merger |
$ |
— |
|
|
$ |
1,100,742,973 |
|
Fair value of STAR III real estate acquired in the STAR III merger |
$ |
— |
|
|
$ |
479,559,505 |
|
Fair value of equity issued to SIR shareholders in the SIR merger |
$ |
— |
|
|
$ |
693,400,974 |
|
Fair value of equity issued to STAR III shareholders in the STAR III merger |
$ |
— |
|
|
$ |
193,893,305 |
|
Fair value of SIR debt assumed in the SIR merger |
$ |
— |
|
|
$ |
506,023,982 |
|
Fair value of STAR III debt assumed in the STAR III merger |
$ |
— |
|
|
$ |
289,407,045 |
|
Fair value of unconsolidated joint venture assumed in the SIR merger |
$ |
— |
|
|
$ |
22,128,691 |
|
Assets assumed in the SIR merger |
$ |
— |
|
|
$ |
3,553,868 |
|
Assets assumed in the STAR III merger |
$ |
— |
|
|
$ |
2,060,898 |
|
Liabilities assumed in the SIR merger |
$ |
— |
|
|
$ |
21,782,302 |
|
Liabilities assumed in the STAR III merger |
$ |
— |
|
|
$ |
7,334,616 |
|
Premiums on assumed mortgage notes payable in the SIR and STAR III mergers |
$ |
— |
|
|
$ |
14,899,631 |
|
Discount on assumed mortgage note payable in the SIR and STAR III mergers |
$ |
— |
|
|
$ |
10,489,075 |
|
See accompanying notes to consolidated financial statements.
9
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Steadfast Apartment REIT, Inc. (the “Company”) was formed on August 22, 2013, as a Maryland corporation that elected to qualify as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2014. On September 3, 2013, the Company was initially capitalized with the sale of 13,500 shares of common stock to Steadfast REIT Investments, LLC, the Company’s former sponsor (“SRI”), at a purchase price of $15.00 per share for an aggregate purchase price of $202,500. SRI is controlled indirectly by Rodney F. Emery, the Company’s Chairman of the board of directors and Chief Executive Officer, through Steadfast REIT Holdings, LLC (“Steadfast Holdings”). Steadfast Apartment Advisor, LLC (the “Former Advisor”), a Delaware limited liability company formed on August 22, 2013 and subsidiary of SRI, invested $1,000 in the Company in exchange for 1,000 shares of non-participating, non-voting convertible stock (the “Convertible Stock”). In connection with the SIR Merger and STAR III Merger (described below), the Former Advisor exchanged the Convertible Stock for new non-participating, non-voting Class A convertible stock (the “Class A Convertible Stock”). In connection with the Internalization Transaction (described below), the Company repurchased the Class A Convertible Stock for $1,000. See Note 8 (Stockholders’ Equity) for further details.
The Company owns and operates a diverse portfolio of multifamily properties located in targeted markets throughout the United States. As of September 30, 2021, the Company owned 70 multifamily properties and three parcels of land held for the development of apartment homes. The Company’s portfolio is comprised of 22,001 apartment homes, including 160 newly constructed apartment homes placed into service at the Garrison Station development project during the nine months ended September 30, 2021. The parcel of land held for the development of the Garrison Station apartments had eight of nine residential buildings placed into service comprising 160 of 176 apartment homes as of September 30, 2021. The Company may acquire additional multifamily properties or pursue multifamily developments in the future. For more information on the Company’s real estate portfolio, see Note 4 (Real Estate).
Public Offering
On December 30, 2013, the Company commenced its initial public offering to offer a maximum of 66,666,667 shares of common stock for sale to the public at an initial price of $15.00 per share (with discounts available for certain categories of purchasers) (the “Primary Offering”). The Company also registered up to 7,017,544 shares of common stock for sale pursuant to the Company’s distribution reinvestment plan (the “DRP,” and together with the Primary Offering, the “Public Offering”) at an initial price of $14.25 per share. The Company terminated its Primary Offering on March 24, 2016, but continued to offer shares of common stock pursuant to the DRP until it was suspended in connection with entering into the Merger Agreement, as defined below. As of the termination of the Primary Offering on March 24, 2016, the Company had sold 48,625,651 shares of common stock in the Public Offering for gross proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to the DRP for gross offering proceeds of $14,414,752. As of September 30, 2021, the Company had issued
10
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
112,299,272 shares of common stock for gross offering proceeds of $1,727,794,175, including 8,669,192 shares of common stock issued pursuant to the DRP for gross offering proceeds of $130,065,017. Additionally, on March 6, 2020, the Company issued 56,016,053 shares of common stock in connection with the Mergers described below.
On March 9, 2021, the Company’s board of directors determined an estimated value per share of the Company’s common stock of $15.55 as of December 31, 2020. Additional information on the Company’s estimated value per share can be found in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 12, 2021. In connection with the determination of an estimated value per share, the Company’s board of directors determined a price per share for the DRP of $15.55, effective April 1, 2021. The Company’s board of directors may again, from time to time, in its sole discretion, change the price at which the Company offers shares pursuant to the DRP to reflect changes in the Company’s estimated value per share and other factors that the Company’s board of directors deems relevant. On July 26, 2021, the Company’s board of directors voted to terminate the DRP effective as of the 10th day after notice was provided to stockholders. For more information, see suspension and contingent termination of the DRP and the amended & restated SRP below.
Merger with Steadfast Income REIT, Inc.
On August 5, 2019, the Company, Steadfast Income REIT, Inc. (“SIR”), Steadfast Apartment REIT Operating Partnership, L.P., a wholly-owned subsidiary of the Company (the “STAR Operating Partnership”), Steadfast Income REIT Operating Partnership, L.P., the operating partnership of SIR (“SIR OP”), and SI Subsidiary, LLC, a wholly-owned subsidiary of the Company (“SIR Merger Sub”), entered into an Agreement and Plan of Merger (the “SIR Merger Agreement”). Pursuant to the terms and conditions of the SIR Merger Agreement, on March 6, 2020, SIR merged with and into SIR Merger Sub with SIR Merger Sub surviving the merger (the “SIR Merger”). Following the SIR Merger, SIR Merger Sub, as the surviving entity, continued as the Company’s wholly-owned subsidiary. In accordance with the applicable provisions of the Maryland General Corporation Law (“MGCL”), the separate existence of SIR ceased.
At the effective time of the SIR Merger, each issued and outstanding share of SIR common stock (or a fraction thereof), $0.01 par value per share, converted into 0.5934 shares of the Company’s common stock.
Merger with Steadfast Apartment REIT III, Inc.
On August 5, 2019, the Company, Steadfast Apartment REIT III, Inc. (“STAR III”), the STAR Operating Partnership, Steadfast Apartment REIT III Operating Partnership, L.P., the operating partnership of STAR III (the “STAR III OP”), and SIII Subsidiary, LLC, a wholly-owned subsidiary of the Company (“STAR III Merger Sub”), entered into an Agreement and Plan of Merger (the “STAR III Merger Agreement”). Pursuant to the terms and conditions of the STAR III Merger Agreement, on March 6, 2020, STAR III merged with and into STAR III Merger Sub with STAR III Merger Sub surviving the merger (the “STAR III Merger”, and together with the SIR Merger, the “Mergers”). Following the STAR III Merger, STAR III Merger Sub, as the surviving entity, continued as a wholly-owned subsidiary of the Company. In accordance with the applicable provisions of the MGCL, the separate existence of STAR III ceased.
11
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
At the effective time of the STAR III Merger, each issued and outstanding share of STAR III common stock (or a fraction thereof), $0.01 par value per share, was converted into 1.430 shares of the Company’s common stock.
Combined Company
Through the Mergers, the Company acquired 36 multifamily properties with 10,166 apartment homes and a 10% interest in one unconsolidated joint venture that owned 20 multifamily properties with a total of 4,584 apartment homes, all of which had a gross real estate value of approximately $1.5 billion. The combined company after the Mergers retained the name “Steadfast Apartment REIT, Inc.” Each merger was intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). For more information on the Mergers, see Note 4 (Real Estate).
Pre-Internalization Operating Partnerships Mergers
On August 28, 2020, pursuant to an Agreement and Plan of Merger (the “SIR OP/STAR OP Merger Agreement”), the STAR Operating Partnership merged with and into the SIR OP (the “SIR OP/STAR OP Merger”). The SIR OP/STAR OP Merger was treated for U.S. federal income tax purposes as a tax-deferred contribution by the Company of all of the assets and liabilities of STAR Operating Partnership to SIR OP under Section 721(a) of the Internal Revenue Code.
Immediately following the consummation of the SIR OP/STAR OP Merger, on August 28, 2020, pursuant to an Agreement and Plan of Merger (the “Operating Partnership Merger Agreement”), STAR III OP merged with and into SIR OP (the “Operating Partnership Merger” and together with the SIR OP/STAR OP Merger, the “Operating Partnership Mergers”). The Operating Partnership Merger was treated as an “asset over partnership merger” governed by Treasury Regulations Section 1.708-1(c)(3)(i), with SIR OP being the “resulting partnership” and STAR III OP terminating.
On August 28, 2020, SIR OP changed its name to “Steadfast Apartment REIT Operating Partnership, L.P.” (the “Operating Partnership”). In addition, on August 28, 2020, prior to completion of the Operating Partnership Mergers, the Company acquired STAR III Merger Sub. On August 28, 2020, SIR Merger Sub, as the initial general partner of the Operating Partnership, transferred all of its general partnership interests to the Company, and the Company was admitted as a substitute general partner of the Operating Partnership.
On August 28, 2020, the Company, Steadfast Income Advisor, LLC, the initial limited partner of the Operating Partnership (“SIR Advisor”), Steadfast Apartment Advisor III, LLC, a Delaware limited liability company and the special limited partner of the Operating Partnership (“STAR III Advisor”), Wellington VVM LLC, a Delaware limited liability company and limited partner of the Operating Partnership (“Wellington”), and Copans VVM, LLC, a Delaware limited liability company and limited partner of the Operating Partnership (“Copans” and together with “Wellington”, “VV&M”), entered into a Second Amended and Restated Agreement of Limited Partnership of Steadfast Apartment REIT Operating Partnership, L.P. (the “Second A&R Partnership Agreement”) in order to, among other things, reflect the consummation of the Operating Partnership Mergers.
The purpose of the Operating Partnership Mergers described above was to simplify the Company’s corporate structure so that the Company has a single operating partnership that is a direct subsidiary of the Company.
12
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Internalization Transaction
On August 31, 2020, the Operating Partnership and the Company entered into a series of transactions and agreements (such transactions and agreements hereinafter collectively referred to as the “Internalization Transaction”), with SRI, which provided for the internalization of the Company’s external management functions previously provided by the Former Advisor and its affiliates. Prior to the Internalization Closing (as defined herein), which took place contemporaneously with the execution of the Contribution & Purchase Agreement (as defined herein) on August 31, 2020 (the “Internalization Closing”), Steadfast Investment Properties, Inc., a California corporation (“SIP”), Steadfast REIT Services, Inc., a California corporation (“REIT Services”), and their respective affiliates owned and operated all of the assets necessary to operate the Company and its subsidiaries as a self-managed company and employed all the employees necessary to operate as a self-managed company.
Pursuant to a Contribution and Purchase Agreement (the “Contribution & Purchase Agreement”) between the Company, the Operating Partnership and SRI, SRI contributed to the Operating Partnership all of the membership interests in STAR RS Holdings, LLC, a Delaware limited liability company (“SRSH”), and the assets and rights necessary to operate as a self-managed company in all material respects, and the liabilities associated with such assets and rights in exchange for $124,999,000, which was paid as follows: (1) $31,249,000 in cash and (2) 6,155,613.92 Class B OP units of limited partnership interests in the Operating Partnership (the “Class B OP Units”) having the agreed value set forth in the Contribution & Purchase Agreement of $15.23 per Class B OP Unit. In addition, the Company purchased all of the Class A Convertible Stock of the Company held by the Former Advisor for $1,000. As a result of the Internalization Transaction, the Company became self-managed and acquired components of the advisory, investment management and property management operations of the Former Advisor by hiring the Transferring Employees (as defined in the Contribution & Purchase Agreement), who comprise the workforce necessary for the management and day-to-day real estate and accounting operations of the Company and the Operating Partnership.
Concurrently with, and as a condition to the execution and delivery of the Contribution & Purchase Agreement, the Company, through STAR REIT Services, LLC, a Delaware limited liability company and indirect subsidiary of the Company (“SRS”), entered into employment agreements with certain key employees. For more information on the Internalization Transaction, see Note 3 (Internalization Transaction).
On July 16, 2021, the Company received a derivative demand letter addressed to the Board, purportedly sent on behalf of two stockholders, relating to the Internalization Transaction. The letter demanded that the Board appoint a committee to investigate the Internalization Transaction and, among other things, determine whether there exists any basis for the Company to pursue claims relating to that transaction, including for recovery of payments made in the transaction. The Company has formed a Demand Review Committee comprised of two of the Company’s independent directors to investigate the claims made related to the Internalization Transaction.
The Former Advisor
13
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Prior to the Internalization Transaction, the business of the Company was externally managed by the Former Advisor, pursuant to the Amended and Restated Advisory Agreement effective as of March 6, 2020, by and between the Company and the Former Advisor (as may be amended, the “Advisory Agreement”). On August 31, 2020, prior to the Internalization Closing, the Company, the Former Advisor and the Operating Partnership entered into a Joinder Agreement (the “Joinder Agreement”) pursuant to which the Operating Partnership became a party to the Advisory Agreement. On August 31, 2020, prior to the Internalization Closing, the Former Advisor and the Company entered into the First Amendment to the Amended and Restated Advisory Agreement in order to remove certain restrictions in the Advisory Agreement related to business combinations and to provide that any amounts accrued to the Former Advisor commencing on September 1, 2020 are paid in cash to the Former Advisor by the Operating Partnership (the “First Amendment”). In connection with the Internalization Transaction, SRS assumed the rights and obligations of the Advisory Agreement from the Former Advisor.
The Operating Partnership
Substantially all of the Company’s business is conducted through the Operating Partnership. The Company is the sole general partner of the Operating Partnership. The Operating Partnership owns, directly or indirectly, all of the properties that the Company has acquired. As of September 30, 2021, the Company owned approximately 94% of the operating partnership units of the Operating Partnership (the “OP Units”). As a result of the Internalization Transaction, SRI owns approximately 5% of the OP Units of the Operating Partnership, including approximately 6,155,613.92 Class B OP Units owned by SRI as of September 30, 2021. The remaining approximate 1% of the OP Units are owned by VV&M, unaffiliated third parties in the form of Class A-2 OP Units (as defined below). The Operating Partnership may conduct certain activities through the Company’s taxable REIT subsidiary, which is an indirect wholly-owned subsidiary of the Operating Partnership. As a condition to the Internalization Closing, on August 31, 2020, the Company, as the general partner and parent of the Operating Partnership, SRI and VV&M entered into a Third Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the “Operating Partnership Agreement”) to restate the Second A&R Partnership Agreement in order to, among other things, remove references to the limited partner interests previously held by SIR Advisor and STAR III Advisor, reflect the consummation of the contribution, and designate Class B OP Units that were issued as consideration pursuant to the Internalization Transaction.
The Operating Partnership Agreement provides that the Operating Partnership is operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code, which classification could result in the Operating Partnership being taxed as a corporation.
Agreement and Plan of Merger
On July 26, 2021, the Company and the Operating Partnership entered into an Agreement and Plan of Merger, (the “IRT Merger Agreement”) with Independence Realty Trust, Inc. (“IRT”), IRT’s operating partnership, Independence Realty Operating Partnership, LP (“IRT OP”), and IRSTAR Sub, LLC, a wholly-owned subsidiary of IRT (“IRT Merger Sub”).
14
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
On the terms, and subject to the conditions of, the IRT Merger Agreement, the Company will merge with and into IRT Merger Sub, which is referred to herein as the “Company Merger”, with IRT Merger Sub surviving the Company Merger as a wholly-owned subsidiary of IRT; and immediately thereafter, the Operating Partnership will merge with and into IRT OP (the “Partnership Merger” and together with the Company Merger, the “IRT Mergers”), with IRT OP surviving the Partnership Merger.
In the Company Merger, each outstanding share of the Company’s common stock, par value $0.01 per share, will be converted automatically into the right to receive 0.905 (the “Exchange Ratio”), of a newly issued share of IRT common stock, par value $0.01 per share, (the “IRT Common Stock”), with cash paid in lieu of fractional shares.
In the Partnership Merger, each outstanding unit of limited partnership of the Operating Partnership will be converted into the right to receive the Exchange Ratio of a newly issued common unit of limited partnership of IRT OP, (the “IRT Common Unit”). Under the agreement of limited partnership of IRT OP, IRT common unitholders may generally tender their IRT Common Units, in whole or in part, to IRT OP for redemption for a cash amount based on the then-market price of an equivalent number of shares of IRT Common Stock, and IRT may thereupon elect, at its option, to satisfy the redemption by issuing one share of IRT Common Stock for each IRT Common Unit tendered for redemption.
Pursuant to the IRT Mergers, the Company’s stockholders will receive, in aggregate, in exchange for their shares of common stock, approximately, 99.7 million shares of IRT Common Stock and limited partners in the Operating Partnership will receive, in aggregate, in exchange for their operating partnership units, approximately 6.4 million IRT OP Common Units.
Consummation of the IRT Mergers is subject to customary closing conditions, including, among others, receipt of IRT stockholder approval and approval of the Company’s stockholders, both of which are scheduled to take place on December 13, 2021, and the closing of the IRT Mergers are expected to occur in the fourth quarter of 2021. For more information on the IRT Mergers, see the Company’s Definitive Proxy Statement filed with the SEC on September 29, 2021.
Suspension and Contingent Termination of the DRP and the Amended and Restated Share Repurchase Plan
In connection with the Company’s entry into the IRT Merger Agreement, on July 26, 2021, the Company announced that the Company’s board of directors, including all of the Company’s independent directors, voted to terminate the DRP and the Amended and Restated Share Repurchase Plan (the “Amended & Restated SRP”), each termination effective as of the effective time of the Company Merger. The Company’s board of directors, including all of the Company’s independent directors, also voted to suspend (1) the DRP, effective as of the 10th day after notice was provided to stockholders and (2) indefinitely suspend the Amended & Restated SRP effective as of the 30th day after notice was provided to stockholders.
As a result of the suspension of the DRP, any distributions paid after the distribution payment date in August 2021 will be paid to the Company’s stockholders in cash. The Company can provide stockholders with assistance on directing cash distribution payments and answering questions. The suspension of the DRP will not affect the payment of distributions to stockholders who previously received their distributions in cash. In addition, as a result of the suspension of the Amended & Restated SRP, the Company will not process or accept any requests for redemption received after July 26, 2021.
15
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
On July 26, 2021, the Company entered into a letter agreement (the “Letter Agreement”) with Rodney Emery, the Company’s Chief Executive Officer and Chairman of the board of directors, and SRI. Pursuant to the Letter Agreement, SRI agreed to indemnify the Company, STAR OP, their subsidiaries and their successors and assigns (including IRT, IRT OP and IRT Merger Sub and their subsidiaries) (collectively, the “Indemnified Parties”), for 75% of any costs, expenses, judgments, liabilities and payments, including settlement payments and attorneys’ fees, incurred or arising in connection with any direct or derivative claims brought by any stockholder of the Company or its successors and assigns alleging breaches of duties under law or contract, including but not limited to breaches by any current or former directors of the Company, in connection with the Internalization Transaction (the “Internalization Claims”), if and to the extent such costs, expenses, judgments, liabilities and payments, including settlement payments and attorneys’ fees are not paid for by the Company’s insurance provider (subject only to the $1.0 million self-insurance retention amount in the Company’s D&O insurance policies, which retention amount would not be included in the covered costs described above).
SRI’s obligations under the Letter Agreement are capped at the lower of $20.3 million or the value of the Collateral (as defined below) at the time payment is owed under the Letter Agreement and any payments made pursuant to the Letter Agreement must be made solely with the delivery of the Collateral.
As used in the Letter Agreement, “Collateral” means the following, now or later held by or on behalf of SRI: (i) 1,277,778 Class B OP Units, or any interests into which they are exchanged or convert, (ii) distributions (cash or in kind) on any such Class B OP Units (or converted interests), (iii) cash payable or securities issuable, from time to time, upon the redemption, conversion or exchange of any of the foregoing, and (iv) all proceeds of any of the foregoing.
In the event litigation is filed challenging the Company Merger that includes Internalization Claims and claims that are not Internalization Claims, then an allocation of costs, expenses, liabilities and payments, including settlement payments and attorneys’ fees (collectively, “Expenses”), shall be made to reflect Expenses that are reasonably attributable to the Company’s internalization transaction and are covered costs under the Letter Agreement, and any Expenses that are not covered costs under the Letter Agreement.
The Letter Agreement would terminate in the event the IRT Merger Agreement terminates without the IRT Mergers having been consummated. SRI and Mr. Emery are relieved of their obligations under the Letter Agreement at such time that all of the Collateral, or Collateral valued at $20.3 million, whichever is first, has been applied in satisfaction of the portion of claims for which SRI is responsible, or when all applicable statute of limitations on Internalization Claims have expired and no Internalization Claims remain pending or unsatisfied.
2. Summary of Significant Accounting Policies
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2020. For further information about the Company’s accounting
16
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries. The portion of the entity not wholly-owned by the Company is presented as noncontrolling interest. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.
The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The unaudited consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Noncontrolling interests
Noncontrolling interests represent the portion of equity that the Company does not own in an entity that is consolidated. The Company’s noncontrolling interests are comprised of Class A-2 operating partnership units (“Class A-2 OP Units”) and Class B OP Units of the Operating Partnership. The Company accounts for noncontrolling interests in accordance with ASC 810, Consolidation (“ASC 810”). In accordance with ASC 810, the Company reports noncontrolling interests in subsidiaries within equity in the consolidated financial statements, but separate from stockholders’ equity. In accordance with ASC 480, Distinguishing Liabilities from Equity (“ASC 480”), noncontrolling interests that are determined to be redeemable are carried at their fair value or redemption value as of the balance sheet date and reported as liabilities or temporary equity depending on their terms. A noncontrolling interest that fails to qualify as permanent equity will be reclassified as a liability or temporary equity. As of September 30, 2021, the Company’s noncontrolling interests qualified as permanent equity. For more information on the Company’s noncontrolling interests, see Note 9 (Noncontrolling Interest).
17
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
18
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Casualty loss
The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to property damage and business interruption. The Company records the estimated amount of expected insurance proceeds for property damage and other losses incurred as an asset (typically a receivable from the insurer) and income up to the amount of the losses incurred when receipt of insurance proceeds is deemed probable. Any amount of insurance recovery in excess of the amount of the losses incurred is considered a gain contingency and is recorded in other income when the proceeds are received. During the nine months ended September 30, 2021, the Company wrote off $12,515,830 of carrying value of the Company’s fixed assets and recorded $10,800,111 of estimated repair expenses, with a corresponding increase in general and administrative expenses and an increase in the Company’s accounts payable and accrued liabilities, of which $8,249,358 has been paid as of September 30, 2021. The Company also recorded insurance recoveries of $23,315,941 for the estimated insurance claims proceeds in the amount of total losses incurred (as described above) as an increase in rents and other receivables. As of September 30, 2021, $6,875,000 of proceeds were received and $16,440,941 remained in rents and other receivables.
Real Estate Assets
Real Estate Purchase Price Allocation
Upon the acquisition of real estate properties or other entities owning real estate properties, the Company evaluates whether the acquisition is a business combination or an asset acquisition under ASC 805-50, Business Combinations-Related Issues (“ASC 805”). For both business combinations and asset acquisitions the Company allocates the purchase price of real estate properties to acquired tangible assets, consisting of land, buildings and improvements, and acquired intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases. For asset acquisitions, the Company capitalizes transaction costs and allocates the purchase price using a relative fair value method allocating all accumulated costs. For business combinations, the Company expenses transaction costs incurred and allocates the purchase price based on the estimated fair value of each separately identifiable asset and liability. Acquisition fees and costs associated with transactions determined to be asset acquisitions are capitalized in total real estate, net in the accompanying consolidated balance sheets. For the three and nine months ended September 30, 2021 and 2020, all of the Company’s acquisitions of real estate properties, including pursuant to the Mergers, were determined to be asset acquisitions.
The fair values of the tangible assets of an acquired property (which includes land, buildings and improvements) are determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings and improvements based on management’s determination of the relative fair value of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases, including leasing commissions and other related costs. In estimating carrying costs, management includes real estate taxes, insurance, and other operating expenses during the expected lease-up periods based on current market conditions.
19
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The fair values of above-market and below-market in-place leases are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) an estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease including any fixed rate bargain renewal periods, with respect to a below-market lease. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities. Above-market lease values are amortized as an adjustment of rental revenue over the remaining terms of the respective leases. Below-market leases are amortized as an adjustment of rental revenue over the remaining terms of the respective leases, including any fixed rate bargain renewal periods. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of above-market and below-market in-place lease values related to that lease would be recorded as an adjustment to rental revenue.
The fair values of in-place leases include an estimate of direct costs associated with obtaining a new resident and opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease. Direct costs associated with obtaining a new resident include commissions, resident improvements, and other direct costs and are estimated based on management’s consideration of current market costs to execute a similar lease. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. These lease intangibles are amortized to depreciation and amortization expense over the remaining terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts of in-place lease assets relating to that lease would be expensed.
Impairment of Real Estate Assets
The Company accounts for its real estate assets in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”). ASC 360 requires the Company to continually monitor events and changes in circumstances that could indicate that the carrying amounts of the Company’s real estate and related intangible assets may not be recoverable. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets and liabilities may not be recoverable, the Company assesses the recoverability of the assets by estimating whether the Company will recover the carrying value of the asset through its undiscounted future cash flows and its eventual disposition. Based on this analysis, if the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company records an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities. If any assumptions, projections or estimates regarding an asset changes in the future, the Company may have to record an impairment to reduce the net book value of such individual asset. The Company continues to monitor events in connection with the outbreak of the novel Coronavirus (“COVID-19”) and evaluates any potential indicators that could suggest that the carrying value of its real estate investments and related intangible assets and liabilities may not be recoverable. No impairment charge was recorded during the three and nine months ended September 30, 2021. The Company recorded an impairment charge of $5,039,937 related to two of its real estate assets for the nine months ended September 30, 2020.
20
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Real Estate Held for Sale
The Company classifies certain long-lived assets as held for sale once the criteria, as defined by GAAP, have been met and are expected to sell within one year. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value minus cost to sell, with any write-down recorded to impairment loss on the consolidated statements of operations. Depreciation and amortization is not recorded for assets classified as held for sale. As of each of September 30, 2021 and December 31, 2020, the Company classified three real estate assets, as presented on its consolidated balance sheets. See Note 4 (Real Estate) for details.
Goodwill
Goodwill represents the excess of consideration paid over the fair value of underlying identifiable net assets of a business acquired. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company takes a qualitative approach to consider whether an impairment of goodwill exists prior to quantitatively determining the fair value of the reporting unit in step one of the impairment test. The Company performed its annual assessment on October 1, 2020. The Company recorded goodwill during the year ended December 31, 2020, in connection with the Internalization Transaction. No impairment charge was recorded during the three and nine months ended September 30, 2021 and 2020. See Note 3 (Internalization Transaction) for details.
Revenue Recognition - Operating Leases
The majority of the Company’s revenue is derived from rental revenue, which is accounted for in accordance with ASC 842, Leases (“ASC 842”). The Company leases apartment homes under operating leases with terms generally of one year or less. Generally, credit investigations are performed for prospective residents and security deposits are obtained. In accordance with ASC 842, the Company recognizes minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectability is probable and records amounts expected to be received in later years as deferred rent receivable. For lease arrangements when it is not probable that the Company will collect all or substantially all of the remaining lease payments under the term of the lease, rental revenue is limited to the lesser of the rental revenue that would be recognized on a straight-line basis (as applicable) or the lease payments that have been collected from the lessee. Differences between rental revenue recognized and amounts contractually due under the lease agreements are credited or charged to straight-line rent receivable or straight-line rent liability, as applicable. Tenant reimbursements for common area maintenance and other recoverable expenses, are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements for common area maintenance are accounted for as variable lease payments and are recorded as rental income on the Company’s consolidated statement of operations.
Rents and Other Receivables
21
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
In accordance with ASC 842, the Company makes a determination of whether the collectability of the lease payments in an operating lease is probable. If the Company determines the lease payments are not probable of collection, the Company would fully reserve for any contractual lease payments, deferred rent receivable, and variable lease payments and would recognize rental income only if cash is received. The Company exercises judgment in establishing these allowances and considers payment history and current credit status of residents in developing these estimates. Due to the short-term nature of the operating leases, the Company does not maintain a deferred rent receivable related to the straight-lining of rents. Any changes to the Company’s collectability assessment are reflected as an adjustment to rental income.
Residents’ Payment Plans Due to COVID-19
In April, 2020, the FASB issued the ASC 842 Q&A to respond to some frequently asked questions about accounting for lease concessions related to the effects of the COVID-19 pandemic. Under ASC 842, modified terms and conditions of a company’s existing lease contracts, such as, changes to lease payments, may affect the economics of the lease for the remainder of the term and are generally accounted for as lease modifications. Some contracts may contain explicit or implicit enforceable rights and obligations that require lease concessions if certain circumstances arise that are beyond the control of the parties to the contract. If a lease contract provides enforceable rights and obligations for concessions in the contract and no changes are made to that contract, the concessions are not considered a lease modification pursuant to ASC 842. This means both the lessor and lessee need not remeasure and reallocate the consideration in the lease contract, reassess the lease term or reassess lease classification and lease liability, provided that the concessions are considered to be a separate contract. If concessions granted by lessors are beyond the enforceable rights and obligations in the contract, entities would generally account for those concessions in accordance with the lease modification guidance in ASC 842 as described above.
The FASB staff has been made aware that, given the unprecedented and global nature of the COVID-19 pandemic, it may be exceedingly challenging for entities to determine whether existing contracts provide enforceable rights and obligations for lease concessions and, if so, whether those concessions are consistent with the terms of the contract or are modifications to a contract.
Consequently, for concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance under ASC 842 to those contracts. Entities may make the elections for any lessor-provided concessions related to the effects of the COVID-19 pandemic (e.g., deferrals of lease payments, reduced future lease payments) as long as the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. In addition to that, for concessions that provide a deferral of payments with no substantive changes to the consideration in the original contract, the FASB allows entities to account for the concessions as if no changes to the lease contract were made. Under this method, a lessor would increase its lease receivable and continue to recognize income.
During the fiscal quarter ended June 30, 2020, the Company instituted payment plans for its residents that were experiencing hardship due to COVID-19, which the Company refers to as the “COVID-19 Payment Plan.” Pursuant to the COVID-19 Payment Plan, the Company allowed qualifying residents to defer their rent, which is collected by the Company in monthly installment payments over the duration of the current lease or renewal term (which may not exceed 12 months). Additionally,
22
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
for the months of May and June 2020, the Company began providing certain qualifying residents with a one-time concession to incentivize their performance under the COVID-19 Payment Plan. If the qualifying resident fails to make payments pursuant to the COVID-19 Payment Plan, the concession is immediately terminated, and the qualifying resident is required to immediately repay the amount of the concession. The Company did not offer residents any other payment plans during the remaining months in fiscal year 2020 due to the reduced demand of such payment plans.
In January 2021, the Company began offering an extension to the COVID-19 Payment Plan (the “Extension Plan”), that allows eligible residents to defer their rent, which is collected by the Company in monthly installment payments over the lesser of the duration of the current lease term or a maximum of three months (with the exception of certain states that allow a maximum of six months deferral). Under the Extension Plan, no concessions are offered for residents with a payment plan duration of two months or less and residents who opted for the COVID-19 Payment Plan are not eligible to participate in the Extension Plan unless they paid off the amounts due under the COVID-19 Payment Plan.
During the three months ended September 30, 2020, the Company initiated a debt forgiveness program for certain qualifying residents that were experiencing hardship due to COVID-19 and who were in default of their lease payments (the “Debt Forgiveness Program”). Pursuant to the Debt Forgiveness Program, the Company offered qualifying residents an opportunity to terminate their lease without being liable for any unpaid rent and penalties. The Company determined that accounts receivable of $2,610,927 related to the Debt Forgiveness Program are not probable of collection and therefore included these accounts in its reserve.
The Company elected not to evaluate whether the COVID-19 Payment Plans, the Debt Forgiveness Program and the Extension Plan are lease modifications and therefore the Company’s policy is to account for the lease contracts with COVID-19 Payment Plans, Debt Forgiveness Program and the Extension Plan as if no lease modifications occurred. Under this accounting method, a lessor with an operating lease may account for the concession (which in this case only applies to the COVID-19 Payment Plans) by continuing to recognize a lease receivable until the rental payment is received from the lessee at the revised payment date. If it is determined that the lease receivable is not collectable, the Company would treat that lease contract on a cash basis as defined in ASC 842. As of September 30, 2021 and December 31, 2020, the Company reserved $3,863,876 and $2,245,067 of accounts receivables, respectively, which are considered not probable of collection.
The Company is currently working with residents at our communities to obtain rental relief assistance pursuant to the Emergency Rental Assistance Program (“ERA”), administered by the U.S. Department of Treasury. During the nine months ended September 30, 2021, 1,119 residents applied for the ERA, of which 1,057 residents received rental assistance in the aggregate amount of approximately $3,700,000.
Fair Value Measurements
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the
23
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
|
ARTICLE I |
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
|
ARTICLE II |
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
|
ARTICLE III |
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the nine months ended September 30, 2021 and 2020.
The following describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.
Interest rate cap agreements - The Company has entered into certain interest rate cap agreements. These derivatives are recorded at fair value. Fair value was based on a model-driven valuation using the associated variable rate curve and an implied market volatility, both of which were observable at commonly quoted intervals for the full term of the interest rate cap agreements. Therefore, the Company’s interest rate cap agreements were classified within Level 2 of the fair value hierarchy and are included in other assets in the accompanying consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are recorded as interest expense in the accompanying consolidated statements of operations.
The following tables reflect the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:
|
|
September 30, 2021 |
||||||||||
|
|
Fair Value Measurements Using |
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||||
Assets: |
|
|
|
|
|
|
||||||
Interest rate cap agreements(1) |
|
$ |
— |
|
|
$ |
27,853 |
|
|
$ |
— |
|
|
|
December 31, 2020 |
||||||||||
|
|
Fair Value Measurements Using |
||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
||||||
Assets: |
|
|
|
|
|
|
||||||
Interest rate cap agreements(1) |
|
$ |
— |
|
|
$ |
7,852 |
|
|
$ |
— |
|
_______________
|
(1) |
See Note 14 (Derivative Financial Instruments) for a discussion of the interest rate cap agreements used to manage the exposure to interest rate movement on the Company’s variable rate loans. |
Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
Fair Value of Financial Instruments
The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, rents and other receivables, due from affiliates, accounts payable and accrued liabilities, distributions payable, distributions payable to affiliates, due to affiliates and notes payable.
The Company considers the carrying value of cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities, distributions payable, amounts due from affiliates, amounts due to affiliates and distributions payable to affiliates to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The Company has determined that its notes payable, net are classified as Level 3 within the fair value hierarchy.
The fair value of the notes payable, net is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of September 30, 2021 and December 31, 2020, the fair value of the notes payable was $2,230,749,187 and $2,246,242,677, respectively, compared to the carrying value of $2,135,242,124 and $2,129,245,671, respectively.
Restricted Cash
24
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Restricted cash represents those cash accounts for which the use of funds is restricted by loan covenants and a cash account established in connection with a letter of credit to fund future workers compensation claims. As of September 30, 2021 and December 31, 2020, the Company had a restricted cash balance of $38,360,359 and $38,998,980, respectively, which represented amounts set aside as impounds for future property tax payments, property insurance payments and tenant improvement payments as required by agreements with the Company’s lenders as well as an amount set aside in connection with a letter of credit.
The following table represents the components of the cash, cash equivalents and restricted cash presented on the accompanying consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020:
|
|
September 30, |
||||||
|
|
2021 |
|
2020 |
||||
Cash and cash equivalents |
|
$ |
122,107,875 |
|
|
$ |
311,515,756 |
|
Restricted cash |
|
38,360,359 |
|
|
42,531,779 |
|
||
Other assets related to real estate held for sale |
|
— |
|
|
91,450 |
|
||
Total cash, cash equivalents and restricted cash |
|
$ |
160,468,234 |
|
|
$ |
354,138,985 |
|
Distribution Policy
The Company elected to be taxed, and currently qualifies, as a REIT commencing with the taxable year ended December 31, 2014. To maintain its qualification as a REIT, the Company intends to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). Distributions declared during the month ended January 31, 2021, were based on daily record dates and calculated at a rate of $0.002466 per share of the Company’s common stock per day during the period from January 1, 2021 through January 31, 2021. On January 12, 2021, the Company’s board of directors determined to reduce the daily distribution amount to $0.001438 per share commencing on February 1, 2021 and ending February 28, 2021, which was extended for the months of March through September 2021. As a result, distributions declared during the period from February 1, 2021 through September 30, 2021, were based on daily record dates and calculated at a rate of $0.001438 per share of the Company’s common stock per day.
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three and nine months ended September 30, 2021, the Company declared distributions totaling $0.132 and $0.425 per share of common stock, respectively. During the three and nine months
25
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
ended September 30, 2020, the Company declared distributions totaling $0.226 and $0.674 per share of common stock, respectively.
26
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Lessee Accounting
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires leases with original lease terms of more than 12 months to be recorded on the balance sheet. For leases with terms greater than 12 months, a right-of-use (“ROU”) lease asset and a lease liability are recognized on the balance sheet at commencement date based on the present value of lease payments over the lease term.
Lease renewal or termination options are included in the lease asset and lease liability only if it is reasonably certain that the option to extend or to terminate would be exercised. As the implicit rate in most leases are not readily determinable, the Company’s incremental borrowing rate for each lease at commencement date is used to determine the present value of lease payments. Consideration is given to the Company’s recent debt financing transactions, as well as publicly available data for instruments with similar characteristics, adjusted for the respective lease term, when estimating incremental borrowing rates. Lease expense is recognized over the lease term based on an effective interest method for finance leases and on a straight-line basis for operating leases. On January 1, 2019, the Company adopted ASU 2016-02 and its related amendments (collectively, “ASC 842”) using the modified retrospective method. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carry forward its original assessment of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. The Company also elected the practical expedient that allows lessees the option to account for lease and non-lease components together as a single component for all classes of underlying assets. See Note 15 (Leases).
Equity-Based Compensation
The Company’s stock-based compensation consists of restricted stock issued to key employees and independent directors of the Company. The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award at the time of grant and recognized on a straight-line basis over the requisite service period of the awards. The compensation expense is adjusted for actual forfeitures upon occurrence. Equity-based compensation is classified within general and administrative expenses in the consolidated statements of operations.
Per Share Data
Basic loss per share attributable to common stockholders for all periods presented are computed by dividing net loss by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assume each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.
Segment Disclosure
27
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The Company has determined that it has one reportable segment with activities related to investing in multifamily properties. The Company’s investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of the Company’s assets has similar economic characteristics, residents and products and services, its assets have been aggregated into one reportable segment.
Recent Accounting Pronouncements
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, (“ASU 2020-01”), which clarifies the interaction between the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments in ASU 2020-01 should be applied prospectively. The Company adopted ASU 2020-01 on January 1, 2021. The adoption of this guidance did not have a material impact on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 provided practical expedients to address existing guidance on contract modifications and hedge accounting due to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates (together “IBORs”) to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Company refers to this transition as reference rate reform. The first practical expedient allows companies to elect to not apply certain modification accounting requirements to debt, derivative and lease contracts affected by reference rate reform if certain criteria are met. These criteria include the following: (1) the contract referenced an IBOR rate that is expected to be discontinued; (2) the modified terms directly replace or have the potential to replace the IBOR rate that is expected to be discontinued; and (3) any contemporaneous changes to other terms that change or have the potential to change the amount and timing of contractual cash flows must be related to the replacement of the IBOR rate. If the contract meets all three criteria, there is no requirement for remeasurement of the contract at the modification date or reassessment of the previous accounting determination. The second practical expedient allows companies to change the reference rate and other critical terms related to the reference rate reform in derivative hedge documentation without having to de-designate the hedging relationship. This allows for companies to continue applying hedge accounting to existing cash flow and net investment hedges. ASU 2020-04 was effective upon issuance on a prospective basis beginning January 1, 2020 and may be elected over time as reference rate reform activities occur. Subsequently, in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope ("ASU 2021-01"). The amendments in ASU 2021-01 clarify that certain optional expedients and exceptions for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of the discontinuation of the use of LIBOR as a benchmark interest rate due to reference rate reform. ASU 2021-01 is
28
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
effective immediately for all entities with the option to apply retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, and can be applied prospectively to any new contract modifications made on or after January 7, 2021. The ASUs can be adopted no later than December 1, 2022 with early adoption permitted. The relief provided in this guidance is temporary and generally cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. However, the guidance does allow an entity to continue to apply certain optional expedients related to hedge accounting. The Company identified the instruments influenced by LIBOR to be its variable rate mortgage notes payable and interest rate cap agreements and is currently in the process of liaising with its lenders to assess the nature of potential changes to its variable rate mortgage notes payable and interest rate cap agreements and therefore determining whether it could meet the conditions of the practical expedients provided by the FASB and elect to not apply the modification accounting requirements to its contracts affected by the reference rate reform within the permitted period of December 31, 2022.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 addresses issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. For convertible instruments, ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. ASU 2020-06 also enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings per share guidance. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity and amends the related earnings per share guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted but no earlier than fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The guidance in ASU 2020-06 can be applied through a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently assessing the impact of ASU 2020-06 on its consolidated financial statements and related disclosures from the adoption of ASU 2020-06.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements (“ASU 2020-10”). ASU 2020-10 contains improvements to GAAP by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the disclosure section of GAAP. ASU 2020-10 also contains codifications that are varied in nature and may affect the application of the guidance in cases in which the original guidance may have been unclear. ASU 2020-10 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company adopted ASU 2020-10 on January 1, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In November 2020, the SEC issued Release No. 33-10890, Amendments to Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, to simplify, modernize and enhance certain financial disclosure requirements in Regulation S-K. This amendment became effective on February 10, 2021. Early adoption was permitted. The
29
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Company early adopted these modifications in its Annual Report on Form 10-K filed with the SEC on March 12, 2021. The adoption of this guidance did not have a material impact on the consolidated financial statements.
3. Internalization Transaction
On August 31, 2020, the Operating Partnership and the Company completed the Internalization Transaction with SRI, which provided for the internalization of the Company’s external management functions provided by the Former Advisor and its affiliates.
Pursuant to the Contribution & Purchase Agreement between the Company, the Operating Partnership and SRI, SRI contributed to the Operating Partnership all of the membership interests in SRSH, and the assets and rights necessary to operate as a self-managed company in all material respects, and the liabilities associated with such assets and rights in exchange for $124,999,000, which was paid as follows: (1) $31,249,000 in cash consideration and (2) 6,155,613.92 Class B OP Units having the agreed value of $15.23 per Class B OP Unit. The Company also purchased all of the Class A Convertible Stock of the Company held by the Former Advisor for $1,000. As a result of the Internalization Transaction, the Company became self-managed and acquired the advisory, investment management and property management operations of the Former Advisor by hiring the Transferring Employees (as defined in the Contribution & Purchase Agreement), who comprise the workforce necessary for the management and day-to-day real estate and accounting operations of the Company and the Operating Partnership.
Fair Value of Consideration Transferred
The Company accounted for the Internalization Transaction as a business combination under the acquisition method of accounting. Pursuant to the terms of the Internalization Transaction, the following consideration was given in exchange for all of the membership interests in SRSH:
|
|
Amount |
||
Cash consideration (1) |
|
$ |
31,249,000 |
|
Class B OP Units issued |
|
6,155,613.92 |
|
|
Fair value per Class B OP Unit |
|
$ |
15.23 |
|
Fair value of OP Unit Consideration |
|
93,750,000 |
|
|
Promote price (2) |
|
1,000 |
|
|
Accounting value of total consideration |
|
$ |
125,000,000 |
|
_______________
|
(1) |
Represents the contractual cash consideration before adjustments to reflect affiliates assets acquired in the Internalization Transaction of $2,717,634 and affiliates liabilities assumed in the Internalization Transaction of $4,701,436. |
30
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
|
(2) |
Represents the repurchase of Class A Convertible Stock by the Company. |
Assets Acquired and Liabilities Assumed
The Internalization Transaction was accounted for as a business combination under the acquisition method of accounting under ASC 805, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.
During the year ended December 31, 2020, the Company finalized the purchase price allocation of the fair value of consideration transferred (described above) for the Internalization Transaction. The following table summarizes the finalized purchase price allocation as of the date of the Internalization Transaction:
|
|
Amount |
||
Assets: |
|
|
||
Accounts receivable from affiliates |
|
$ |
3,908,946 |
|
Finance lease right-of-use asset |
|
20,925 |
|
|
Other assets |
|
49,919 |
|
|
Property management agreements intangibles(1) |
|
815,000 |
|
|
Operating lease right-of-use asset |
|
1,651,415 |
|
|
Repurchase of Class A Convertible Stock |
|
1,000 |
|
|
Goodwill |
|
125,220,448 |
|
|
Total assets acquired |
|
131,667,653 |
|
|
Liabilities: |
|
|
||
Accrued personnel costs |
|
(4,995,313) |
|
|
Finance lease liability |
|
(20,925) |
|
|
Operating lease liability |
|
(1,651,415) |
|
|
Total liabilities assumed |
|
(6,667,653) |
|
|
Net assets acquired |
|
$ |
125,000,000 |
|
_______________
|
(1) |
The intangible assets acquired consist of property management agreements that the Company, acting as advisor and property manager through certain subsidiaries, has with affiliates of SRI (as amended from time to time, the “SRI Property Management Agreements”). The value of the SRI Property Management Agreements was determined based on a discounted cash flow valuation of the projected revenues of the acquired agreements. The SRI Property Management Agreements are subject to an estimated useful life of one year. As of September 30, 2021, the SRI Property Management Agreements were 100% amortized. |
Goodwill
31
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
In connection with the Internalization Transaction, the Company recorded goodwill of $125.2 million as a result of the consideration exceeding the fair value of the net assets acquired. Goodwill represents the estimated future benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded represents the Company’s acquired workforce and its ability to generate additional opportunities for revenue and raise additional funds.
Pro Forma Financial Information (unaudited)
The following condensed pro forma operating information is presented as if the Internalization Transaction and Mergers occurred in 2019 and had been included in operations as of January 1, 2019. The operations acquired in the Internalization Transaction earned $96.5 million in revenue in 2019, approximately $93.9 million of which was earned from the Company and will be eliminated in the Company’s consolidated financial statements on a post-acquisition basis, and approximately $2.5 million of which was earned pursuant to the SRI Property Management Agreements and will be recurring revenue to the Company resulting in an immaterial impact on the Company’s net loss of approximately $0.4 million.
The pro forma operating information excludes certain nonrecurring adjustments, such as acquisition fees and expenses incurred, to reflect the pro forma impact the acquisition would have on earnings on a continuous basis:
|
|
Year Ended December 31, |
||||||
|
|
2020 |
|
2019 |
||||
Revenue |
|
$ |
303,851,813 |
|
|
$ |
323,258,776 |
|
Net income (loss)(1)(2) |
|
$ |
(109,151,163) |
|
|
$ |
29,545,827 |
|
Net income (loss) attributable to noncontrolling interests |
|
$ |
(5,759,798) |
|
|
$ |
1,585,124 |
|
Net income (loss) attributable to common stockholders(3) |
|
$ |
(103,391,365) |
|
|
$ |
27,960,703 |
|
Net income (loss) attributable to common stockholders per share - basic and diluted |
|
$ |
(1.04) |
|
|
$ |
0.26 |
|
_______________
|
(1) |
The incremental cost of hiring the existing workforce responsible for the Company’s real estate management and operations of $17,906,923 and $17,742,481, was included in pro forma expenses in arriving at the pro forma net income (loss) for the years ended December 31, 2020 and 2019, respectively. The pro forma impact of the Internalization Transaction on the Company’s historical results of operations based on the historical net income of SRI and its affiliates was $19,083,158 for the year ended December 31, 2019. |
|
(2) |
Contemporaneously with the Internalization Closing, the Company hired 634 employees, previously employed by SRI and its affiliates, to operate all of the assets necessary to operate the business of the Company. |
|
(3) |
Amount is net of net income (loss) attributable to noncontrolling interests and distributions to preferred shareholders. |
32
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Current Period Acquisitions
During the nine months ended September 30, 2021, the Company acquired one multifamily real estate property, which was determined to be an asset acquisition. The following is a summary of the real estate property acquired during the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
Purchase Price Allocation |
|||||||||||||||
Property Name |
|
Location |
|
Purchase Date |
|
Homes |
|
Land |
|
Buildings and Improvements |
|
Tenant Origination and Absorption Costs |
|
Total Purchase Price |
|||||||||
Ballpark Apartments at Town Madison |
|
Huntsville, AL |
|
6/29/2021 |
|
274 |
|
|
$ |
3,773,236 |
|
|
$ |
72,579,544 |
|
|
$ |
1,113,905 |
|
|
$ |
77,466,685 |
|
As of September 30, 2021, the Company owned 70 multifamily properties and three parcels of land held for the development of apartment homes. The Company’s portfolio is comprised of 22,001 apartment homes, including 160 newly constructed apartment homes placed into service at the Garrison Station development project as of September 30, 2021.
The total acquisition price of the Company’s multifamily real estate portfolio was $3,236,068,388, excluding land held for the development of apartment homes of $34,870,861. As of September 30, 2021 and December 31, 2020, the Company’s portfolio was approximately 96.5% and 95.4% occupied and the average monthly rent was $1,237 and $1,173, respectively.
As of September 30, 2021 and December 31, 2020, investments in real estate and accumulated depreciation and amortization related to the Company’s consolidated real estate properties was as follows:
|
|
September 30, 2021 |
||||||||||||||||||||||
|
|
Assets |
||||||||||||||||||||||
|
|
Land |
|
Building and Improvements(1) |
|
Tenant Origination and Absorption Costs |
|
Total Real Estate Held for Investment |
|
Real Estate Under Development |
|
Real Estate Held for Sale |
||||||||||||
Investments in real estate |
|
$ |
338,512,553 |
|
|
$ |
2,945,070,487 |
|
|
$ |
1,682,900 |
|
|
$ |
3,285,265,940 |
|
|
$ |
34,870,861 |
|
|
$ |
75,895,741 |
|
Less: Accumulated depreciation and amortization |
|
— |
|
|
(479,484,461) |
|
|
(670,082) |
|
|
(480,154,543) |
|
|
— |
|
|
(15,527,817) |
|
||||||
Net investments in real estate and related lease intangibles |
|
$ |
338,512,553 |
|
|
$ |
2,465,586,026 |
|
|
$ |
1,012,818 |
|
|
$ |
2,805,111,397 |
|
|
$ |
34,870,861 |
|
|
$ |
60,367,924 |
|
33
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
|
|
December 31, 2020 |
||||||||||||||||||||||
|
|
Assets |
||||||||||||||||||||||
|
|
Land |
|
Building and Improvements(1) |
|
Tenant Origination and Absorption Costs |
|
Total Real Estate Held for Investment |
|
Real Estate Under Development |
|
Real Estate Held for Sale |
||||||||||||
Investments in real estate |
|
$ |
331,031,517 |
|
|
$ |
2,813,476,200 |
|
|
$ |
1,752,793 |
|
|
$ |
3,146,260,510 |
|
|
$ |
39,891,218 |
|
|
$ |
75,226,200 |
|
Less: Accumulated depreciation and amortization |
|
— |
|
|
(384,163,168) |
|
|
(330,839) |
|
|
(384,494,007) |
|
|
— |
|
|
(13,250,670) |
|
||||||
Net investments in real estate and related lease intangibles |
|
$ |
331,031,517 |
|
|
$ |
2,429,313,032 |
|
|
$ |
1,421,954 |
|
|
$ |
2,761,766,503 |
|
|
$ |
39,891,218 |
|
|
$ |
61,975,530 |
|
During the nine months ended September 30, 2021 and 2020, the Company wrote off $12,515,830 and $0, respectively, of fixed assets related to the damage caused to the Company’s multifamily properties impacted by the winter storm that took place in February 2021.
Total depreciation and amortization expenses were $34,051,286 and $101,203,302 for the three and nine months ended September 30, 2021, respectively, and $47,564,706 and $129,596,268 for the three and nine months ended September 30, 2020, respectively.
Depreciation of the Company’s buildings and improvements was $33,320,641 and $99,073,405 for the three and nine months ended September 30, 2021, and $33,055,972 and $89,122,949 for the three and nine months ended September 30, 2020, respectively. Depreciation of the Company’s acquired furniture and fixtures in the Internalization Transaction was $16,057 and $44,243 for the three and nine months ended September 30, 2021, respectively, and $2,490 for each of the three and nine months ended September 30, 2020, respectively.
Amortization of the Company’s intangible assets was $714,588 and $2,085,654 for the three and nine months ended September 30, 2021, respectively, and $14,506,244 and $40,470,829 for the three and nine months ended September 30, 2020, respectively.
Amortization of the Company’s tenant origination and absorption costs was $572,331 and $1,523,041 for the three and nine months ended September 30, 2021, respectively, and $14,431,485 and $40,392,592 for the three and nine months ended September 30, 2020, respectively. Tenant origination and absorption costs had a weighted-average amortization period as of the date of acquisition of less than one year.
Amortization of the Company’s operating ROU assets was $3,367 and $10,101 for the three and nine months ended September 30, 2021, respectively, and $3,367 and $6,845 for the three and nine months ended September 30, 2020, respectively. This represents the amortization of initial indirect costs included in the measurement of the operating ROU assets.
Amortization of the Company’s SRI Property Management Agreements was $138,890 and $552,512 for the three and nine months ended September 30, 2021, respectively, and $71,392 for each of the three and nine months ended September 30, 2020.
34
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Amortization of the Company’s other intangible assets, which consist of below-market leases, was $1,671 and $5,014 for the three and nine months ended September 30, 2021, respectively, and $1,671 and $4,265 for the three and nine months ended September 30, 2020, respectively, and is included as an increase to rental income in the accompanying consolidated condensed statements of operations. Other intangible assets had a weighted-average amortization period as of the date of acquisition of ten years.
Operating Leases
As of September 30, 2021, the Company’s real estate portfolio comprised 22,001 residential apartment homes and was 97.7% leased by a diverse group of residents. For the three and nine months ended September 30, 2021 and 2020, the Company’s real estate portfolio earned in excess of 99% and less than 1% of its rental income from residential tenants and commercial tenants, respectively. The residential tenant lease terms typically consist of lease durations equal to 12 months or less. The commercial tenant leases consist of remaining lease durations varying from 0.25 years to nine years.
Some residential leases contain provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to residents. Generally, upon the execution of a lease, the Company requires security deposits from residents in the form of a cash deposit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in accounts payables and accrued liabilities in the accompanying consolidated balance sheets and totaled $9,207,498 and $8,545,977 as of September 30, 2021 and December 31, 2020, respectively.
35
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The future minimum rental receipts from the Company’s properties under non-cancelable operating leases attributable to commercial tenants as of September 30, 2021, and thereafter is as follows:
October 1 to December 31, 2021 |
$ |
74,821 |
|
2022 |
274,149 |
|
|
2023 |
280,777 |
|
|
2024 |
288,703 |
|
|
2025 |
296,860 |
|
|
Thereafter |
1,059,469 |
|
|
|
$ |
2,274,779 |
|
As of September 30, 2021 and December 31, 2020, no tenant represented over 10% of the Company’s annualized base rent and there were no significant industry concentrations with respect to its commercial leases.
Real Estate Under Development
During the three and nine months ended September 30, 2021, the Company owned the following parcels of land held for the development of apartment homes:
Development Name |
|
Location |
|
Purchase Date |
|
Land Held for Development |
|
Construction in Progress |
|
Total Carrying Value |
||||||
Garrison Station (1) |
|
Murfreesboro, TN |
|
5/30/2019 |
|
$ |
246,527 |
|
|
$ |
2,037,090 |
|
|
$ |
2,283,617 |
|
Arista at Broomfield |
|
Broomfield, CO |
|
3/13/2020 |
|
7,283,803 |
|
|
16,134,724 |
|
|
23,418,527 |
|
|||
Flatirons |
|
Broomfield, CO |
|
6/19/2020 |
|
8,574,704 |
|
|
594,013 |
|
|
9,168,717 |
|
|||
|
|
|
|
|
|
$ |
16,105,034 |
|
|
$ |
18,765,827 |
|
|
$ |
34,870,861 |
|
_______________
|
(1) |
The Company is developing Garrison Station, which consists of nine residential buildings comprised of 176 apartment homes. During the nine months ended September 30, 2021, eight buildings comprised of 160 apartment homes were placed in service totaling $29,690,942, and are included in total real estate held for investment, net in the accompanying consolidated balance sheets. |
Real Estate Held for Sale
Heritage Place Apartments
On April 27, 2015, the Company acquired Heritage Place Apartments, a multifamily property located in Franklin, Tennessee, containing 105 apartment homes. As of September 30, 2021, Heritage Place Apartments met all the criteria to be classified as held for sale. The real estate, other assets, mortgage notes and other liabilities related to Heritage Place Apartments are disclosed separately for the periods presented in the accompanying consolidated balance sheets.
36
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Carrington Park
On August 19, 2015, the Company acquired Carrington Park, a multifamily property located in Kansas City, Missouri, containing 298 apartment homes. As of September 30, 2021, Carrington Park met all the criteria to be classified as held for sale. The real estate, other assets, mortgage notes and other liabilities related to Carrington Park are disclosed separately for the periods presented in the accompanying consolidated balance sheets.
Clarion Park Apartments
On March 6, 2020, the Company acquired Clarion Park Apartments, a multifamily property located in Olathe, Kansas, containing 220 apartment homes. As of September 30, 2021, Clarion Park Apartments met all the criteria to be classified as held for sale. The real estate, other assets, mortgage notes and other liabilities related to Clarion Park Apartments are disclosed separately for the periods presented in the accompanying consolidated balance sheets.
The results of operations from Heritage Place Apartments, Carrington Park and Clarion Park Apartments for the three and nine months ended September 30, 2021, which are summarized in the following table, were included in continuing operations on the Company’s consolidated statements of operations.
|
|
For the Three Months Ended |
|
For the Nine Months Ended |
||||
|
|
September 30, 2021 |
|
September 30, 2021 |
||||
Revenues |
|
$ |
2,075,942 |
|
|
$ |
6,090,669 |
|
Expenses |
|
1,905,518 |
|
|
5,800,728 |
|
||
Net income |
|
$ |
170,424 |
|
|
$ |
289,941 |
|
Completion of SIR and STAR III Mergers
On March 6, 2020, pursuant to the terms and conditions of the SIR Merger Agreement and STAR III Merger Agreement (together the “Merger Agreements”), SIR Merger Sub and STAR III Merger Sub, the surviving entities, continued as wholly-owned subsidiaries of the Company. In accordance with the applicable provisions of the MGCL, the separate existence of SIR and STAR III ceased. The combined company retained the name “Steadfast Apartment REIT, Inc.” At the effective time of the Mergers, each issued and outstanding share of SIR, and STAR III’s common stock (or a fraction thereof), each $0.01 par value per share, was converted into 0.5934 and 1.430 shares of the Company’s common stock, respectively.
The following table summarizes the purchase price of SIR and STAR III as of the date of the Mergers:
|
SIR |
|
STAR III |
||||
Class A common stock issued and outstanding |
— |
|
|
3,458,807 |
|
||
Class R common stock issued and outstanding |
— |
|
|
475,207 |
|
||
Class T common stock issued and outstanding |
— |
|
|
4,625,943 |
|
||
Common stock issued and outstanding |
73,770,330 |
|
|
— |
|
||
Total common stock issued and outstanding |
73,770,330 |
|
|
8,559,957 |
|
||
Exchange ratio |
0.5934 |
|
|
1.430 |
|
||
STAR common stock issued as consideration(1) |
43,775,314 |
|
|
12,240,739 |
|
||
STAR’s estimated value per share at the time of Mergers |
$ |
15.84 |
|
|
$ |
15.84 |
|
Value of STAR’s common stock issued as consideration |
$ |
693,400,974 |
|
|
$ |
193,893,305 |
|
____________________
(1) Represents the number of shares of common stock of SIR and STAR III converted into shares of the Company’s common stock upon consummation of the Mergers.
37
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The following table presents the purchase price allocation of SIR’s and STAR III’s identifiable assets and liabilities assumed as of the date of the Mergers:
|
SIR |
|
STAR III |
||||
Assets: |
|
|
|
||||
Land |
$ |
114,377,468 |
|
|
$ |
58,056,275 |
|
Buildings and improvements |
959,337,747 |
|
|
411,461,858 |
|
||
Acquired intangibles |
27,027,759 |
|
|
10,041,373 |
|
||
Other assets |
122,688,608 |
|
|
21,438,855 |
|
||
Investment in unconsolidated joint venture |
22,128,691 |
|
|
— |
|
||
Total assets: |
$ |
1,245,560,273 |
|
|
$ |
500,998,361 |
|
Liabilities: |
|
|
|
||||
Mortgage notes payable, net |
$ |
(506,023,981) |
|
|
$ |
(289,407,045) |
|
Other liabilities |
(46,135,318) |
|
|
(17,698,011) |
|
||
Total liabilities: |
$ |
(552,159,299) |
|
|
$ |
(307,105,056) |
|
Fair value of net assets acquired |
$ |
693,400,974 |
|
|
$ |
193,893,305 |
|
Capitalized Acquisition Costs Related to the Mergers
The SIR Merger and STAR III Merger were each accounted for as an asset acquisition. In accordance with the asset acquisition method of accounting, costs incurred to acquire the asset were capitalized as part of the acquisition price. Upon the execution of the Merger Agreements on August 5, 2019, the SIR Merger and STAR III Merger were considered probable of occurring, at which point the Company began to capitalize the merger related acquisition costs to building and improvements in the accompanying consolidated balance sheets. Prior to such date, the merger related acquisition costs were expensed to general and administrative expenses in the accompanying consolidated statements of operations.
5. Investment in Unconsolidated Joint Venture
On March 6, 2020, upon consummation of the SIR Merger, the Company acquired a 10% interest in BREIT Steadfast MF JV LP (the “Joint Venture”). On July 16, 2020 (the “JV Disposition Date”), the Company sold its joint venture interest for $19,278,280 to an affiliate of the general partner of the Joint Venture. The Company did not exercise significant influence, nor did it control the Joint Venture and had accounted for its former investment in the Joint Venture under the equity method of accounting. Income, losses, contributions and distributions were generally allocated based on the members’ respective equity interests.
38
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The Company recognized an other-than-temporary impairment (“OTTI”) on its investment in the Joint Venture of $2,442,411 during the three months ended June 30, 2020. The OTTI was a result of the Company receiving an indication of value in connection with negotiating a sale of the Company’s joint venture interest at a disposition price that was less than the carrying value of the Joint Venture. The OTTI was included in equity in loss from unconsolidated joint venture on the Company’s consolidated statements of operations. In determining the fair value of the Joint Venture, the Company considered Level 3 inputs.
As of the JV Disposition Date, the book value of the Company’s investment in the Joint Venture was $18,955,478, which included an accounting outside basis difference of $8,067,010, net and capitalized transaction costs of $594,993, net. The accounting outside basis difference represented the difference between the purchase price the Company paid for its investment in the Joint Venture in connection with the SIR Merger and the book value of the Company’s equity in the Joint Venture as of the JV Disposition Date. The capitalized transaction costs relate to acquiring the interest in the Joint Venture through the consummation of the SIR Merger.
During the three and nine months ended September 30, 2020, $58,144 and $490,586, respectively, of amortization of the basis difference was included in equity in loss from unconsolidated joint venture on the accompanying consolidated statements of operations. The Company recorded the gain on sale of the investment in unconsolidated joint venture of $66,802 in equity in loss from unconsolidated joint venture on the accompanying consolidated statements of operations. The Company received distributions of $0 during each of the three and nine months ended September 30, 2021 and $0 and $360,700 during the three and nine months ended September 30, 2020, related to its investment in the Joint Venture, respectively.
Unaudited financial information for the Joint Venture for the periods from March 6, 2020 through the JV Disposition Date, is summarized below:
|
For the Period from July 1, 2020 through July 16, 2020 |
|
For the Period from March 6, 2020 through July 16, 2020 |
||||
Revenues |
$ |
2,779,246 |
|
|
$ |
23,313,921 |
|
Expenses |
(3,079,277) |
|
|
(25,078,993) |
|
||
Other income |
46,341 |
|
|
225,914 |
|
||
Net loss |
$ |
(253,690) |
|
|
$ |
(1,539,158) |
|
|
|
|
|
||||
Company’s proportional net loss |
$ |
(25,369) |
|
|
$ |
(153,916) |
|
Amortization of outside basis |
(58,144) |
|
|
(490,586) |
|
||
Impairment of unconsolidated joint venture |
— |
|
|
(2,442,411) |
|
||
Gain on sale of unconsolidated joint venture |
66,802 |
|
|
66,802 |
|
||
Equity in loss from unconsolidated joint venture |
$ |
(16,711) |
|
|
$ |
(3,020,111) |
|
39
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
As of September 30, 2021 and December 31, 2020, other assets consisted of:
|
September 30, 2021 |
|
December 31, 2020 |
||||
Prepaid expenses |
$ |
9,548,056 |
|
|
$ |
6,446,847 |
|
SRI Property Management Agreements, net |
— |
|
|
543,332 |
|
||
Interest rate cap agreements (Note 14) |
27,853 |
|
|
7,852 |
|
||
Other deposits |
907,017 |
|
|
649,470 |
|
||
Corporate computers, net |
172,957 |
|
|
132,708 |
|
||
Lease right-of-use assets, net (Note 15)(1) |
1,340,135 |
|
|
2,145,505 |
|
||
Other assets |
$ |
11,996,018 |
|
|
$ |
9,925,714 |
|
_________________
(1) As of September 30, 2021, lease ROU assets, net included finance lease ROU asset, net of $7,665 and operating ROU assets, net of $1,332,470. As of December 31, 2020, lease ROU assets, net included finance lease ROU asset, net of $16,845 and operating ROU assets, net of $2,128,660.
Amortization of the Company’s SRI Property Management Agreements was $138,890 and $552,512 for the three and nine months ended September 30, 2021, respectively, and $71,392 for each of the three and nine months ended September 30, 2020.
Amortization of the Company’s initial indirect costs included in the measurement of the operating ROU assets for the three and nine months ended September 30, 2021, was $3,367 and $10,101, respectively. Amortization of the Company’s initial indirect costs included in the measurement of the operating ROU assets for the three and nine months ended September 30, 2020, was $3,367 and $6,845, respectively. See Note 15 (Leases) for details.
Mortgage Notes Payable
The following is a summary of mortgage notes payable, net, secured by individual properties as of September 30, 2021 and December 31, 2020.
|
|
September 30, 2021 |
||||||||||||
|
|
|
|
|
|
Interest Rate Range |
|
Weighted Average Interest Rate |
|
|
||||
Type |
|
Number of Instruments |
|
Maturity Date Range |
|
Minimum |
|
Maximum |
|
|
Principal Outstanding |
|||
Variable rate(1) |
|
4 |
|
10/16/2022 - 1/1/2027 |
|
1-Mo LIBOR + 1.88% |
|
1-Mo LIBOR + 2.31% |
|
2.20% |
|
$ |
124,175,912 |
|
Fixed rate |
|
42 |
|
10/1/2022 - 10/1/2056 |
|
3.19% |
|
4.66% |
|
3.85% |
|
1,268,773,626 |
|
|
Mortgage notes payable, gross |
|
46 |
|
|
|
|
|
|
|
3.70% |
|
1,392,949,538 |
|
|
Premiums and discounts, net(2) |
|
|
|
|
|
|
|
|
|
|
|
2,540,250 |
|
|
Deferred financing costs, net(3) |
|
|
|
|
|
|
|
|
|
|
|
(5,747,561) |
|
|
Mortgage notes payable, net |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,389,742,227 |
|
|
|
December 31, 2020 |
||||||||||||
|
|
|
|
|
|
Interest Rate Range |
|
Weighted Average Interest Rate |
|
|
||||
Type |
|
Number of Instruments |
|
Maturity Date Range |
|
Minimum |
|
Maximum |
|
|
Principal Outstanding |
|||
Variable rate(1) |
|
4 |
|
10/16/2022 - 1/1/2027 |
|
1-Mo LIBOR + 1.88% |
|
1-Mo LIBOR +2.31% |
|
2.27% |
|
$ |
113,452,357 |
|
Fixed rate |
|
42 |
|
10/1/2022 - 10/1/2056 |
|
3.19% |
|
4.66% |
|
3.85% |
|
1,273,877,535 |
|
|
Mortgage notes payable, gross |
|
46 |
|
|
|
|
|
|
|
3.72% |
|
1,387,329,892 |
|
|
Premiums and discount, net(2) |
|
|
|
|
|
|
|
|
|
|
|
3,809,734 |
|
|
Deferred financing costs, net(3) |
|
|
|
|
|
|
|
|
|
|
|
(6,756,841) |
|
|
Mortgage notes payable, net |
|
|
|
|
|
|
|
|
|
|
|
$ |
1,384,382,785 |
|
________________
(1)See Note 14 (Derivative Financial Instruments) for a discussion of the interest rate cap agreements used to manage the exposure to interest rate movement on the Company’s variable rate loans.
(2) The following table summarizes debt premiums and discounts as of September 30, 2021 and December 31, 2020, including the unamortized portion included in the principal balance as well as amounts amortized included in interest expense in the accompanying consolidated statements of operations:
Net Debt Premium (Discount) before Amortization as of September 30, 2021 |
|
Amortization of Debt (Premium) Discount During the Nine Months Ended September 30, 2021 |
|
Unamortized Net Debt Premium (Discount) as of September 30, 2021 |
||||||
$ |
15,375,305 |
|
|
$ |
(3,513,759) |
|
|
$ |
11,861,546 |
|
(10,179,526) |
|
|
858,230 |
|
|
(9,321,296) |
|
|||
$ |
5,195,779 |
|
|
$ |
(2,655,529) |
|
|
$ |
2,540,250 |
|
Net Debt Premium (Discount) before Amortization as of December 31, 2020 |
|
Amortization of Debt (Premium) Discount During the Year Ended December 31, 2020 |
|
Unamortized Net Debt Premium (Discount) as of December 31, 2020 |
||||||
$ |
15,375,305 |
|
|
$ |
(1,836,575) |
|
|
$ |
13,538,730 |
|
(10,179,526) |
|
|
450,530 |
|
|
(9,728,996) |
|
|||
$ |
5,195,779 |
|
|
$ |
(1,386,045) |
|
|
$ |
3,809,734 |
|
(3)Accumulated amortization related to deferred financing costs as of September 30, 2021 and December 31, 2020 was $4,504,463 and $3,495,183, respectively.
Construction loan
On October 16, 2019, the Company entered into an agreement with PNC Bank, National Association (“PNC Bank”) for a construction loan related to the Garrison Station development project in an aggregate principal amount not to exceed $19,800,000 for a 36 month initial term and two 12 month mini-perm extensions. The rate of interest on the construction loan is daily LIBOR plus 2.00%, which then reduces to daily LIBOR plus 1.80% upon achieving completion as defined in the construction loan agreement and at a debt service coverage ratio (“DSCR”) of 1.15x. The loan includes a 0.4% fee at closing, a 0.1% fee upon exercising the mini-perm and a 0.1% fee upon extending the mini-perm, each payable to PNC Bank. There is an exit fee of 0.1% which will be waived if permanent financing is secured through PNC Bank or one of its affiliates. As of September 30, 2021 and December 31, 2020, the principal outstanding balance on the construction loan was $18,244,300 and $6,264,549, respectively, and was included within mortgage notes payable, net on the accompanying consolidated balance sheets.
Credit Facilities
Master Credit Facility
On July 31, 2018, 16 indirect wholly-owned subsidiaries of the Company entered into a Master Credit Facility Agreement (“MCFA”) with Newmark Group, Inc., formerly Berkeley Point Capital, LLC (“Facility Lender”), for an aggregate principal amount of $551,669,000. On February 11, 2020, in connection with the financing of Patina Flats at the Foundry, the Company and the Facility Lender amended the MCFA to substitute Patina Flats at the Foundry and Fielders Creek, the then-unencumbered multifamily property owned by the Company, as substitute collateral for the three multifamily properties disposed of and released from the MCFA. The Company also increased its outstanding borrowings pursuant to the MCFA by
40
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
$40,468,000, a portion of which was attributable to the acquisition of Patina Flats at the Foundry. The MCFA provides for four tranches: (1) a fixed rate loan in the aggregate principal amount of $331,001,400 that accrues interest at 4.43% per annum; (2) a fixed rate loan in the aggregate principal amount of $137,917,250 that accrues interest at 4.57% per annum; (3) a variable rate loan in the aggregate principal amount of $82,750,350 that accrues interest at the one-month LIBOR plus 1.70% per annum; and (4) a fixed rate loan in the aggregate principal amount of $40,468,000 that accrues interest at 3.34% per annum. The first three tranches have a maturity date of August 1, 2028, and the fourth tranche has a maturity date of March 1, 2030, unless in each case the maturity date is accelerated in accordance with the terms of the loan documents. Interest only payments are payable monthly through August 1, 2025 and April 1, 2027 on the first three tranches and fourth tranche, respectively, with interest and principal payments due monthly thereafter.
41
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
PNC Master Credit Facility
On June 17, 2020, the Company, through seven indirect wholly-owned subsidiaries (each, a “Borrower” and collectively, the “Borrowers”), entered into a Master Credit Facility Agreement (the “PNC MCFA”), a fixed rate Multifamily Note and a variable rate Multifamily Note (collectively, the “Notes”) and the other loan documents for the benefit of PNC Bank. The PNC MCFA provides for two tranches: (1) a fixed rate loan in the aggregate principal amount of $79,170,000 that accrues interest at 2.82% per annum; and (2) a variable rate loan in the aggregate principal amount of $79,170,000 that accrues interest at the one-month LIBOR plus 2.135% per annum. If LIBOR is no longer posted through electronic transmission, is no longer available or, in PNC Bank’s determination, is no longer widely accepted or has been replaced as the index for similar financial instruments, PNC Bank will choose a new index taking into account general comparability to LIBOR and other factors, including any adjustment factor to preserve the relative economic positions of the Borrowers and PNC Bank with respect to any advances made pursuant to the PNC MCFA. The Company paid $633,360 in the aggregate in loan origination fees to PNC Bank in connection with the financings, and paid the Former Advisor a loan coordination fee of $791,700.
Revolving Credit Loan Facility
On June 26, 2020, the Company entered into a revolving credit loan facility (the “Revolver”) with PNC Bank in an amount not to exceed $65,000,000. The Revolver provides for advances (each, a “Revolver Loan”) solely for the purpose of financing costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The Revolver has a maturity date of June 26, 2023, subject to extension. Advances made under the Revolver are secured by the Landings of Brentwood property, as evidenced by the Loan Agreement, the Credit Facility Notes (the “Notes”), the Deed of Trust and a Guaranty from the Company (the “Guaranty,” together with the Loan Agreement and the Notes, the “Loan Documents”).
The Company has the option to select the interest rate in respect of the outstanding unpaid principal amount of each Revolver Loan from the following options: (1) a fluctuating rate per annum equal to the sum of the daily LIBOR rate plus the daily LIBOR rate spread or (2) a fluctuating rate per annum equal to the base rate plus the alternate rate spread. No amounts were outstanding on the Revolver at September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, the advances obtained and certain financing costs incurred under the MCFA, PNC MCFA and the Revolver, which are included in credit facilities, net, in the accompanying consolidated balance sheets, are summarized in the following table.
|
|
Amount of Advance as of |
||||||
|
|
September 30, 2021 |
|
December 31, 2020 |
||||
Principal balance on MCFA, gross |
|
$ |
592,137,000 |
|
|
$ |
592,137,000 |
|
Principal balance on PNC MCFA, gross |
|
158,340,000 |
|
|
158,340,000 |
|
||
Deferred financing costs, net on MCFA(1) |
|
(3,083,410) |
|
|
(3,436,850) |
|
||
Deferred financing costs, net on PNC MCFA(2) |
|
(1,553,045) |
|
|
(1,689,935) |
|
||
Deferred financing costs, net on Revolver(3) |
|
(340,648) |
|
|
(487,329) |
|
||
Credit facilities, net |
|
$ |
745,499,897 |
|
|
$ |
744,862,886 |
|
_______________
(1)Accumulated amortization related to deferred financing costs in respect of the MCFA as of September 30, 2021 and December 31, 2020, was $1,651,705 and $1,298,265, respectively.
(2)Accumulated amortization related to deferred financing costs in respect of the PNC MCFA as of September 30, 2021 and December 31, 2020, was $236,174 and $99,283, respectively.
(3)Accumulated amortization related to deferred financing costs in respect of the Revolver as of September 30, 2021 and December 31, 2020, was $248,230 and $101,549, respectively.
42
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Assumed Debt as a Result of the Completion of Mergers
On March 6, 2020, upon consummation of the Mergers, the Company assumed all of SIR’s and STAR III’s obligations under the outstanding mortgage loans secured by 29 properties. The Company recognized the fair value of the assumed notes payable in the Mergers of $795,431,027, which consists of the assumed principal balance of $791,020,471 and a net premium of $4,410,556.
The following is a summary of the terms of the assumed loans on the date of the Mergers:
|
|
|
|
|
|
Interest Rate Range |
|
|
||||
Type |
|
Number of Instruments |
|
Maturity Date Range |
|
Minimum |
|
Maximum |
|
Principal Outstanding At Merger Date |
||
Variable rate |
|
2 |
|
1/1/2027 - 9/1/2027 |
|
1-Mo LIBOR + 2.195% |
|
1-Mo LIBOR + 2.31% |
|
$ |
64,070,000 |
|
Fixed rate |
|
27 |
|
10/1/2022 - 10/1/2056 |
|
3.19% |
|
4.66% |
|
726,950,471 |
|
|
Assumed Principal Mortgage Notes Payable |
|
29 |
|
|
|
|
|
|
|
$ |
791,020,471 |
|
Maturity and Interest
The following is a summary of the Company’s aggregate maturities as of September 30, 2021:
|
|
|
|
|
|
Maturities During the Years Ending December 31, |
|
|
||||||||||||||||||||
Contractual Obligations |
|
Total |
|
Remainder of 2021 |
|
2022 |
|
2023 |
|
2024 |
|
2025 |
|
Thereafter |
||||||||||||||
Principal payments on outstanding debt (1) |
|
$ |
2,143,426,538 |
|
|
$ |
2,317,869 |
|
|
$ |
53,106,875 |
|
|
$ |
60,666,525 |
|
|
$ |
58,184,121 |
|
|
$ |
197,560,660 |
|
|
$ |
1,771,590,488 |
|
________________
(1)Scheduled principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude deferred financing costs, net and debt premiums (discounts), net associated with the notes payable.
The Company’s notes payable contain customary financial and non-financial debt covenants. At September 30, 2021, the Company was in compliance with all debt covenants.
For the three and nine months ended September 30, 2021, the Company incurred interest expense of $20,279,374 and $60,174,405, respectively. Interest expense for the three and nine months ended September 30, 2021, includes amortization of deferred financing costs totaling $548,726 and $1,646,291, net unrealized loss from the change in fair value of interest rate cap agreements of $40,902 and $39,699, amortization of net loan premiums and discounts of $(428,434) and $(1,269,484), capitalized interest of $284,511 and $844,577, credit facility commitment fees of $32,861 and $98,852, and imputed interest on
43
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
the finance lease portion of the sublease of $65 and $258, respectively. The capitalized interest is included in real estate held for development in the accompanying consolidated balance sheets.
For the three and nine months ended September 30, 2020, the Company incurred interest expense of $20,628,159 and $54,734,431, respectively. Interest expense for the three and nine months ended September 30, 2020, includes amortization of deferred financing costs of $573,078 and $1,382,954, net unrealized loss from the change in fair value of interest rate cap agreements of $29,093 and $56,287, amortization of net loan premiums and discounts of $(431,387) and $(959,827) and costs associated with the refinance of debt of $0 and $42,881, net of capitalized interest of $313,902 and $576,521, and imputed interest on the finance lease portion of the sublease of $47 and $47, respectively. The capitalized interest is included in real estate held for development in the accompanying consolidated balance sheets.
Interest expense of $6,584,586 and $6,806,695 was payable as of September 30, 2021 and December 31, 2020, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
General
Pursuant to the Company’s Articles of Amendment and Restatement (as supplemented, the “Charter”), the total number of shares of capital stock authorized for issuance is 1,100,000,000 shares, consisting of 999,998,000 shares of common stock with a par value of $0.01 per share, 1,000 shares of Class A non-participating, non-voting convertible stock with a par value of $0.01 per share, 1,000 shares of non-participating, non-voting convertible stock with a par value of $0.01 per share and 100,000,000 shares of preferred stock with a par value of $0.01 per share.
Common Stock
The shares of the Company’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the MGCL and to all rights of a stockholder pursuant to the MGCL. The common stock has no preferences or preemptive, conversion or exchange rights.
On September 3, 2013, the Company issued 13,500 shares of common stock to SRI, the Company’s former sponsor, for $202,500. From inception through March 24, 2016, the date of the termination of the Primary Offering, the Company had issued 48,625,651 shares of common stock in its Public Offering for offering proceeds of $640,012,497, including 1,011,561 shares of common stock issued pursuant to the DRP for total proceeds of $14,414,752, net of offering costs of $84,837,134. The offering costs primarily consisted of selling commissions and dealer manager fees paid in the Primary Offering. Following the termination of the Public Offering, the Company continued to offer shares pursuant to the DRP until the DRP was suspended in connection with the entry into the IRT Merger Agreement.
As of September 30, 2021, the Company had issued 112,299,272 shares of common stock for offering proceeds of $1,642,957,041, including 8,669,192 shares of common stock issued pursuant to the DRP, for total DRP proceeds of
44
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
$130,065,017, net of offering costs of $84,837,134 and 56,016,053 shares of common stock issued in connection with the Mergers, described below. The offering costs primarily consisted of selling commissions and dealer manager fees paid in the Primary Offering. On March 6, 2020, the Company issued 43,775,314 shares of its common stock to SIR’s stockholders and 12,240,739 shares of its common stock to STAR III’s stockholders in connection with the Mergers.
As further discussed in Note 11 (Incentive Award Plan and Independent Director Compensation), the shares of restricted common stock granted to the Company’s independent directors prior to the Internalization Transaction vest and become non-forfeitable in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant. On September 15, 2020, the Company’s board of directors approved an amendment to the independent directors’ compensation plan, pursuant to which, each of the Company’s current independent directors is entitled to receive an annual retainer of $75,000 in cash and $75,000 in shares of restricted common stock upon election or re-election to the Company’s board of directors. The shares of restricted common stock granted pursuant to the Company’s independent directors’ compensation plan generally vest in two equal annual installments beginning on the first anniversary of the date of grant and ending on the second anniversary of the date of grant; provided, however, that the restricted stock will become fully vested on the earlier to occur of: (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company.
45
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The issuance and vesting activity for the nine months ended September 30, 2021 and year ended December 31, 2020, for the restricted stock issued to the Company’s independent directors were as follows:
|
|
Nine Months Ended September 30, 2021 |
|
Year Ended December 31, 2020 |
||
Nonvested shares at the beginning of the period |
|
33,369 |
|
|
7,497 |
|
Granted shares |
|
24,116 |
|
|
31,288 |
|
Vested shares |
|
(2,916) |
|
|
(5,416) |
|
Nonvested shares at the end of the period |
|
54,569 |
|
|
33,369 |
|
Additionally, the weighted average fair value of restricted common stock issued to the Company’s independent directors for the nine months ended September 30, 2021 and year ended December 31, 2020 was as follows:
Grant Year |
|
Weighted Average Fair Value |
||
2020 |
|
$ |
15.36 |
|
2021 |
|
15.55 |
Included in general and administrative expenses is $85,579 and $211,915 for the three and nine months ended September 30, 2021, respectively, and $18,309 and $81,692 for the three and nine months ended September 30, 2020, respectively, for compensation expense related to the issuance of restricted common stock. As of September 30, 2021, the compensation expense related to the issuance of the restricted common stock not yet recognized was $629,250. The weighted average remaining term of the restricted common stock was approximately one year as of September 30, 2021. As of September 30, 2021, no shares of restricted common stock issued to the independent directors have been forfeited.
Issuance of Restricted Stock Awards to Key Employees
2020 Restricted Stock Awards
In connection with the Internalization Transaction, on September 1, 2020, certain key employees of the Company were issued restricted stock grants under the terms of the Company’s Amended and Restated 2013 Incentive Plan (the “Incentive Award Plan”), which grants had been approved by the board of directors and the special committee formed for the purpose of reviewing, considering, investigating, evaluating, proposing and negotiating the Mergers (the “Special Committee”). The grants to the key employees of the Company were made pursuant to a restricted stock grant agreement. The grants vest 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date (collectively, the “2020 Restricted Stock Awards”).
The 2020 Restricted Stock Award provides that vesting is subject to the key employee’s continued employment with the Company through each applicable vesting date, except in the event of death or disability, in which case, any unvested portion of the awards will become fully vested. In addition, the Restricted Stock Award provides the key employee with rights as a stockholder in respect of the awards’ vested and unvested shares, including the right to vote and the right to dividends.
46
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
In the event of a termination of a key employee’s employment by the Company without cause or by the key employee for good reason within 12 months following a change in control, any unvested portion of the 2020 Restricted Stock Award will become fully vested at the time of such termination, provided that if the 2020 Restricted Stock Award is unvested at the time of a change in control of the Company and is not assumed or substituted for equivalent awards as part of the change in control transaction, the 2020 Restricted Stock Awards will become fully vested at the time of the change in control transaction. The fair value of grants issued was approximately $2,850,000.
2021 Restricted Stock Awards
Pursuant to employment agreements with key employees, on March 15, 2021, the Company granted key employees an award of time-based restricted stock (the “Time-Based 2021 Award”) with a total grant date fair value of $1,512,000 subject to the terms of the Incentive Award Plan. The Time-Based 2021 Awards vest ratably over three years following the grant date, subject to the key employee’s continuous employment through the applicable vesting dates, with certain exceptions.
Total compensation expense related to the 2020 Restricted Stock Awards and the Time-Based 2021 Award for the three and nine months ended September 30, 2021 and 2020 was $363,507, $987,553, $79,169 and $79,169, respectively, and was included in general and administrative costs on the accompanying consolidated statements of operations. As of September 30, 2021, the compensation expense related to the issuance of the restricted common stock to the key employees not yet recognized was $3,057,771. The weighted average remaining term of the restricted common stock issued to the Company’s key employees was approximately 1.4 years as of September 30, 2021. As of September 30, 2021, no shares of restricted common stock issued to the Company’s key employees have been forfeited.
Investment Management Fee and Loan Coordination Fee Paid to Former Advisor in Shares
Following the completion of the Mergers on March 6, 2020 and until the Internalization Closing, and pursuant to the Advisory Agreement, the Company paid the Former Advisor a monthly investment management fee, payable 50% in cash and 50% in shares of the Company’s common stock at the estimated value per share at the time of issuance. The shares of common stock fully vested and became non-forfeitable upon payment of the monthly investment management fee. The fair value of the vested common stock at the date of issuance, using the then-most recent publicly disclosed estimated value per share, was recorded in stockholders’ equity in the accompanying consolidated balance sheets. No investment management fees were incurred in shares for the three and nine months ended September 30, 2021. Investment management fees of $2,863,215 and $8,367,340 were incurred in shares for the three and nine months ended September 30, 2020, respectively.
Following the closing of the Mergers on March 6, 2020 and until the closing of the Internalization Transaction, pursuant to the Advisory Agreement, the Company paid the Former Advisor a loan coordination fee in shares of the Company’s common stock at the estimated value per share at the time of issuance. The loan coordination fee was payable in shares equal to 0.5% of the amount of debt financed or refinanced (in each case, other than at the time of the acquisition of a property) or the Company’s proportionate share of the amount refinanced in the case of investments made through a joint venture. No loan coordination fees were incurred in shares for the three and nine months ended September 30, 2021. Loan coordination fees incurred in shares and
47
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
included in fees to affiliates in the accompanying consolidated statements of operations were $0 and $1,116,700 for the three and nine months ended September 30, 2020, respectively.
Convertible Stock and Class A Convertible Stock
Prior to the completion of the Mergers on March 6, 2020, the Company’s then-outstanding Convertible Stock would have been converted into shares of the Company’s common stock if and when: (A) the Company had made total distributions on the then-outstanding shares of the Company’s common stock equal to the original issue price of those shares plus an aggregate 6.0% cumulative, non-compounded, annual return on the original issue price of those shares, (B) the Company listed its common stock for trading on a national securities exchange, or (C) the Advisory Agreement was terminated or not renewed (other than for “cause” as defined in the Advisory Agreement). In general, each share of Convertible Stock would convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 15% of the excess of (1) the Company’s “enterprise value” plus the aggregate value of distributions paid to date on the then outstanding shares of the Company’s common stock over (2) the aggregate purchase price paid by stockholders for those outstanding shares of common stock plus an aggregated 6.0% cumulative, non-compounded, annual return on the original issue price of those outstanding shares, divided by (B) the Company’s enterprise value divided by the number of outstanding shares of common stock on an as-converted basis, in each case calculated as of the date of the conversion. In the event of a termination or non-renewal of the Advisory Agreement for cause, all of the shares of the Convertible Stock would have been repurchased by the Company for $1.00.
In connection with the Mergers, the Company and the Former Advisor exchanged the then-outstanding Convertible Stock for new Class A Convertible Stock. The Class A Convertible Stock would have been converted into shares of the Company’s common stock if (1) the Company had made total distributions of money or other property to its stockholders or by SIR and STAR III to their respective holders of common shares (with respect to SIR and STAR III, including in each case distributions paid to SIR and STAR III stockholders prior to the closing of the Mergers), which the Company refers to collectively as the “Class A Distributions,” equal to the sum of the original issue price of the Company’s shares of common stock, shares of common stock of SIR and shares of common stock of STAR III (the “Common Equity”), plus an aggregate 6.0% cumulative, non-compounded, annual return on the original issue price of those shares, (2) the Company listed its common stock for trading on a national securities exchange or entered into a merger whereby holders of the Company’s common stock receive listed securities of another issuer or (3) the Company’s Advisory Agreement was terminated or not renewed (other than for “cause” as defined in the Advisory Agreement), each of the above is referred to as a “Triggering Event.” Upon any of these Triggering Events, each share of Class A Convertible Stock would have been converted into a number of shares of the Company’s common stock equal to 1/1000 of the quotient of (A) 15% of the amount, if any, by which (i) the “Class A Enterprise Value” plus the aggregate value of the Distributions paid to date on the Common Equity exceeded (ii) the aggregate purchase price paid by stockholders for the Common Equity plus an aggregated 6.0% cumulative, non-compounded, annual return on the original issue price of the Common Equity as of the date of the Triggering Event, divided by (B) the Class A Enterprise Value divided by the number of the Company’s outstanding common shares on an as-converted basis as of the date of Triggering Event.
48
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
As discussed in Note 1 (Organization and Business), in connection with the Internalization Transaction, the Company repurchased all of the Class A Convertible Stock from the Former Advisor for $1,000.
Preferred Stock
The Charter provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of September 30, 2021 and December 31, 2020, no shares of the Company’s preferred stock were issued and outstanding.
Distribution Reinvestment Plan
The Company’s board of directors has approved the DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares of the Company’s common stock in lieu of receiving cash distributions. The purchase price per share under the DRP initially was $14.25. On March 9, 2021 and April 17, 2020, the Company’s board of directors approved a price per share for the DRP of $15.55 and $15.23, effective April 1, 2021 and May 1, 2020, respectively, in connection with the determination of an estimated value per share of the Company’s common stock.
No sales commissions or dealer manager fees are payable on shares sold through the DRP. The Company’s board of directors may amend, suspend or terminate the DRP at its discretion at any time upon ten days notice to the Company’s stockholders. Following any termination of the DRP, all subsequent distributions to stockholders will be made in cash.
Suspension and Contingent Termination of the DRP
In connection with the approval of the IRT Mergers, on July 26, 2021, the Company announced that the Company’s board of directors, including all of the Company’s independent directors, voted to terminate the DRP as of the effective time of the Company Merger. The Company’s board of directors, including all of the Company’s independent directors, also voted to suspend the DRP, effective as of the 10th day after notice was provided to stockholders.
As a result of the suspension of the DRP, any distributions paid after the distribution payment date in August 2021 were paid to the Company’s stockholders in cash. The Company can provide stockholders with assistance on directing cash distribution payments and answering questions. The suspension of the DRP did not affect the payment of distributions to stockholders who previously received their distributions in cash.
Share Repurchase Plan and Redeemable Common Stock
The Company’s share repurchase plan may provide an opportunity for stockholders to have their shares of common stock repurchased by the Company, subject to certain restrictions and limitations. No shares can be repurchased under the Company’s
49
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
share repurchase plan until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder.
In connection with the announcement of the then-proposed Mergers, on August 5, 2019, the Company’s board of directors approved the Amended & Restated SRP, which became effective September 5, 2019, and applied with repurchases made on the repurchase dates subsequent to the effective date of the Amended & Restated SRP. Under the Amended & Restated SRP, the Company only repurchased shares of common stock in connection with the death or qualifying disability (as defined in the Amended & Restated SRP) of a stockholder. Repurchases pursuant to the Amended & Restated SRP were limited to $2,000,000 per quarter.
On March 3, 2020, in connection with the closing of the Mergers, the Company’s board of directors amended the Amended & Restated SRP to: (1) allow all stockholders to request repurchases (as opposed to death and disability only), (2) limit the amount of shares repurchased pursuant to the Amended & Restated SRP each quarter to $4,000,000 and (3) set the repurchase price in all instances (including death and disability) to an amount equal to 93% of the most recent publicly disclosed estimated value per share. The $4,000,000 quarterly limit was first in effect on the repurchase date at April 30, 2020, with respect to repurchases for the three months ended March 31, 2020, but was limited to death and disability only. The Amended & Restated SRP was open to all repurchase requests beginning April 1, 2020.
On January 12, 2021, the board of directors further amended the Amended & Restated SRP. The amendment (1) limited repurchase requests to death and qualifying disability only and (2) set a $3,000,000 per calendar quarter limit on the amount of repurchases by the Company. The amendment took effect 30 days from January 14, 2021, and was in effect on April 30, 2021, the Repurchase Date (as defined below), with respect to repurchases for the fiscal quarter ending March 31, 2021. Share repurchase requests that did not meet the requirements for death and disability were cancelled (including any requests received during the first fiscal quarter of 2021). Prior to the suspension of the SRP discussed below, the share repurchase price was $14.46 per share, which represented 93% of the most recently published estimated value per share of $15.55.
In connection with the approval of the IRT Mergers, on July 26, 2021, the Company announced that the Company’s board of directors, including all of the Company’s independent directors, voted to terminate the Amended & Restated SRP as of the effective time of the Company Merger. The Company’s board of directors, including all of the Company’s independent directors, also voted to indefinitely suspend the Amended & Restated SRP effective as of the 30th day after notice was provided to stockholders. In addition, as a result of the suspension of the Amended & Restated SRP, the Company will not process or accept any requests for redemption received after July 26, 2021.
Prior to the March 3, 2020 amendments (described above), the share repurchase price was further reduced based on how long the stockholder had held the shares as follows:
Share Purchase Anniversary |
|
Repurchase Price on Repurchase Date(1) |
Less than 1 year |
|
No Repurchase Allowed |
1 year |
|
92.5% of the Share Repurchase Price(2) |
2 years |
|
95.0% of the Share Repurchase Price(2) |
3 years |
|
97.5% of the Share Repurchase Price(2) |
4 years |
|
100% of the Share Repurchase Price(2) |
In the event of a stockholder’s death or disability(3) |
|
Average Issue Price for Shares(4) |
________________
(1) As adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock. Repurchase price includes the full amount paid for each share, including all sales commissions and dealer manager fees.
(2) The “Share Repurchase Price” equaled 93% of the most recently publicly disclosed estimated value per share determined by the Company’s board of directors.
(3)The required one-year holding period did not apply to repurchases requested within two years after the death or disability of a stockholder.
(4)The purchase price per share for shares repurchased upon the death or disability of a stockholder was equal to the average issue price per share for all of the stockholder’s shares.
The purchase price per share for shares repurchased pursuant to the Amended & Restated SRP was further reduced by the aggregate amount of net proceeds per share, if any, distributed to the Company’s stockholders prior to the Repurchase Date (defined below) as a result of the sale of one or more of the Company’s assets that constituted a return of capital as a result of such sales.
Repurchases of shares of the Company’s common stock were made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests were honored approximately 30 days following the end of the applicable quarter (“Repurchase Date”). Stockholders could withdraw their repurchase request at any time up to three business days prior to the Repurchase Date.
The Company was not obligated to repurchase shares of its common stock under the Amended & Restated SRP. In no event did repurchases under the Amended & Restated SRP exceed 5% of the weighted average number of shares of common stock outstanding during the prior calendar year or the $3,000,000 limit for any quarter put in place by the Company’s board of directors. There was no fee in connection with a repurchase of shares of the Company’s common stock pursuant to the Amended & Restated SRP. As of September 30, 2021 and December 31, 2020, the Company had recorded $0 and $4,000,000, respectively, which represented 0 and 282,477 (pursuant to the Amended & Restated SRP) shares of common stock, respectively, in accounts payable and accrued liabilities on the accompanying consolidated balance sheets related to these unfulfilled repurchase requests.
50
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
During the three and nine months ended September 30, 2021, the Company repurchased a total of 195,627 and 637,272 shares with a total repurchase value of $2,828,761 and $9,130,324, and received requests for repurchases of 0 and 345,303 shares with a total repurchase value of $0 and $4,993,073, respectively.
During the three and nine months ended September 30, 2020, the Company repurchased a total of 282,483 and 484,684 shares with a total repurchase value of $4,000,000 and $6,907,827, and received requests for the repurchase of 1,568,908 and 4,382,676 shares with a total repurchase value of $22,215,732 and $62,058,686, respectively.
The Company could not guarantee that the funds set aside for the Amended & Restated SRP would be sufficient to accommodate all repurchase requests made in any quarter. In the event that the Company did not have sufficient funds available to repurchase all of the shares of the Company’s common stock for which repurchase requests had been submitted for death and disability, repurchase requests were paid on a pro rata basis up to the $3,000,000 quarterly cap.
Distributions
The Company’s long-term goal is to pay distributions solely from cash flow from operations. However, because the Company may receive income from interest or rents at various times during the Company’s fiscal year and because the Company may need cash flow from operations during a particular period to fund capital expenditures and other expenses, the Company expects that at times during the Company’s operational stage, the Company will declare distributions in anticipation of cash flow that the Company expects to receive during a later period, and the Company expects to pay these distributions in advance of its actual receipt of these funds. The Company’s board of directors has the authority under its organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances. The Company has not established a limit on the amount of proceeds it may use to fund distributions from sources other than cash flow from operations. If the Company pays distributions from sources other than cash flow from operations, the Company will have fewer funds available and stockholders’ overall return on their investment in the Company may be reduced.
To maintain the Company’s qualification as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of its REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.
51
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Distributions Declared and Paid
The Company’s board of directors approved a cash distribution that accrued at a rate of $0.002466 per day for each share of the Company’s common stock during the month ended January 31, 2021, which, if paid over a 365-day period is equivalent to $0.90 per share. On January 12, 2021, the Company’s board of directors approved a cash distribution that accrues at a rate of $0.001438 per day for each share of the Company’s common stock for the period commencing on February 1, 2021 and ending on February 28, 2021, which was extended for the months of March through September, 2021, and which, if paid over a 365-day period is equivalent to $0.525 per share. The distributions declared accrue daily to stockholders of record as of the close of business on each day and are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month. There is no guarantee that the Company will continue to pay distributions at this rate or at all.
The following tables reflect distributions declared and paid to common stockholders and Class A-2 and Class B OP Unit holders (collectively, the “Noncontrolling Interest OP Unit Holders”) for the three and nine months ended September 30, 2021 and 2020:
|
|
Three Months Ended September 30, 2021 |
|
Nine Months Ended September 30, 2021 |
||||||||||||||||||||
|
|
Common Stockholders |
|
Noncontrolling Interest OP Unit Holders |
|
Total |
|
Common Stockholders |
|
Noncontrolling Interest OP Unit Holders |
|
Total |
||||||||||||
DRP distributions declared (in shares) |
|
67,112 |
|
— |
|
|
67,112 |
|
|
515,952 |
|
|
— |
|
|
515,952 |
|
|||||||
DRP distributions declared (value) |
|
$ |
1,043,598 |
|
|
$ |
— |
|
|
$ |
1,043,598 |
|
|
$ |
7,942,867 |
|
|
$ |
— |
|
|
$ |
7,942,867 |
|
Cash distributions declared |
|
13,541,606 |
|
940,119 |
|
|
14,481,725 |
|
|
38,831,290 |
|
|
3,016,024 |
|
|
41,847,314 |
|
|||||||
Total distributions declared |
|
$ |
14,585,204 |
|
|
$ |
940,119 |
|
|
$ |
15,525,323 |
|
|
$ |
46,774,157 |
|
|
$ |
3,016,024 |
|
|
$ |
49,790,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
DRP distributions paid (in shares) |
|
132,177 |
|
— |
|
|
132,177 |
|
|
634,155 |
|
|
— |
|
|
634,155 |
|
|||||||
DRP distributions paid (value) |
|
$ |
2,055,356 |
|
|
$ |
— |
|
|
$ |
2,055,356 |
|
|
$ |
9,764,448 |
|
|
$ |
— |
|
|
$ |
9,764,448 |
|
Cash distributions paid |
|
12,531,553 |
|
940,119 |
|
|
13,471,672 |
|
|
40,379,699 |
|
|
3,516,645 |
|
|
43,896,344 |
|
|||||||
Total distributions paid |
|
$ |
14,586,909 |
|
|
$ |
940,119 |
|
|
$ |
15,527,028 |
|
|
$ |
50,144,147 |
|
|
$ |
3,516,645 |
|
|
$ |
53,660,792 |
|
52
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
|
Three Months Ended September 30, 2020 |
|
Nine Months Ended September 30, 2020 |
|||||||||||||||||||||
|
|
Common Stockholders |
|
Noncontrolling Interest OP Unit Holders |
|
Total |
|
Common Stockholders |
|
Noncontrolling Interest OP Unit Holders |
|
Total |
||||||||||||
DRP distributions declared (in shares) |
|
352,345 |
|
— |
|
|
352,345 |
|
|
1,028,773 |
|
|
— |
|
|
1,028,773 |
|
|||||||
DRP distributions declared (value) |
|
$ |
5,366,210 |
|
|
$ |
— |
|
|
$ |
5,366,210 |
|
|
$ |
15,865,995 |
|
|
$ |
— |
|
|
$ |
15,865,995 |
|
Cash distributions declared |
|
19,455,686 |
|
668,742 |
|
|
20,124,428 |
|
|
48,772,528 |
|
|
832,056 |
|
|
49,604,584 |
|
|||||||
Total distributions declared |
|
$ |
24,821,896 |
|
|
$ |
668,742 |
|
|
$ |
25,490,638 |
|
|
$ |
64,638,523 |
|
|
$ |
832,056 |
|
|
$ |
65,470,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
DRP distributions paid (in shares) |
|
352,832 |
|
— |
|
|
352,832 |
|
|
1,023,791 |
|
|
— |
|
|
1,023,791 |
|
|||||||
DRP distributions paid (value) |
|
$ |
5,373,636 |
|
|
$ |
— |
|
|
$ |
5,373,636 |
|
|
$ |
15,857,249 |
|
|
$ |
— |
|
|
$ |
15,857,249 |
|
Cash distributions paid |
|
19,567,958 |
|
144,650 |
|
|
19,712,608 |
|
|
45,434,671 |
|
|
307,964 |
|
|
45,742,635 |
|
|||||||
Total distributions paid |
|
$ |
24,941,594 |
|
|
$ |
144,650 |
|
|
$ |
25,086,244 |
|
|
$ |
61,291,920 |
|
|
$ |
307,964 |
|
|
$ |
61,599,884 |
|
As of September 30, 2021 and December 31, 2020, $5,061,360 and $8,931,971 of distributions declared were payable, which included $0 and $1,821,581, or 0 shares and 119,605 shares of common stock, attributable to the DRP, respectively.
As reflected in the table above, for the three and nine months ended September 30, 2021 and 2020, the Company paid total distributions of $15,527,028 and $53,660,792, respectively, and $25,086,244 and $61,599,884, respectively.
Noncontrolling interests represent operating partnership interests in the Operating Partnership of which the Company is the general partner.
Class A-2 Operating Partnership Units
Class A-2 OP Units were issued as part of the consideration to purchase VV&M Apartments. STAR III OP, the Company’s then-indirect subsidiary, agreed to acquire the 310 unit multifamily property located in Dallas, Texas known as VV&M Apartments for an aggregate purchase price of $59,250,000, pursuant to the terms of a Contribution Agreement, dated as of March 20, 2020 (the “Contribution Agreement”), by and among STAR III OP, as Purchaser, and VV&M. On April 21, 2020 (the “VV&M Closing Date”), VV&M contributed the VV&M Apartments to STAR III OP, and STAR III OP issued 948,785 Class A-2 OP Units at an estimated value per unit of $15.23, the fair value determined at the date of transaction, or $14,450,000 in the aggregate, to VV&M, all in accordance with the Contribution Agreement.
On the VV&M Closing Date, STAR III OP and VV&M entered into the Second A&R Partnership Agreement. The Second A&R Partnership Agreement allows for VV&M to request STAR III OP to: (1) repurchase the outstanding Class A-2 OP Units after five years from the VV&M Closing Date (the “Put”), or (2) convert the Class A-2 OP Units into shares of common stock of the Company. STAR III OP has the right to repurchase the Class A-2 OP Units after five years from the VV&M Closing
53
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Date and can exercise its option to settle the Put in shares of common stock of the Company. The Class A-2 OP Units receive distributions at the same rate paid to holders of the Company’s common stock and are allocated a share of the income or loss on a pro rata basis of the then-three operating partnerships combined. The Company has evaluated the terms of the Second A&R Partnership Agreement and in accordance with ASC 480, determined that the Class A-2 OP Units are properly recognized as permanent equity on the consolidated balance sheets.
On August 28, 2020, STAR III OP merged with and into the Operating Partnership, and VV&M owns the Class A-2 operating partnership units in the Operating Partnership pursuant to the Operating Partnership Agreement on substantially the same terms described above.
Class B Operating Partnership Units
Class B OP Units were issued as consideration in the Internalization Transaction as discussed in Note 1 (Organization and Business). The Class B OP Units were valued at $15.23 per unit at the time of the transaction. On August 31, 2020, the date of the Internalization Closing, the Company, VV&M, STAR OP and SRI entered into the Operating Partnership Agreement. The Operating Partnership Agreement includes a provision that allows for SRI to request the repurchase of all outstanding Class B OP Units, one year from the date of the Internalization Closing; however, under the terms of the Contribution & Purchase Agreement, SRI is precluded from redeeming or transferring the Class B OP Units for two years from the date of the Internalization Closing. The Operating Partnership Agreement also includes a provision for the Company to settle the repurchase request in shares of the Company’s common stock rather than in cash, in its sole discretion as the general partner of the Operating Partnership. The Class B OP Units receive distributions at the same rate paid to holders of the Company’s common stock and are allocated a share of the Operating Partnership and its subsidiaries’ net income or losses on a pro rata basis. The Company has evaluated the terms of the Operating Partnership Agreement and in accordance with ASC 480, determined that the Class B OP Units are properly recognized as permanent equity on the consolidated balance sheets.
54
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
As of September 30, 2021, noncontrolling interests were approximately 6.06% of total shares and 6.05% of weighted average shares outstanding (both measures assuming Class A-2 OP Units and Class B OP Units were converted to common stock). The changes in the carrying amount of noncontrolling interests consisted of the following for the three and nine months ended September 30, 2021 and 2020:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||||||
Beginning balance Class A-2 OP Units |
|
$ |
12,749,653 |
|
|
$ |
14,450,000 |
|
|
$ |
13,219,354 |
|
|
$ |
— |
|
Issuance of Class A-2 OP Units |
|
— |
|
|
— |
|
|
— |
|
|
14,450,000 |
|
||||
Loss allocated to Class A-2 OP Units |
|
(134,005) |
|
|
(700,327) |
|
|
(326,469) |
|
|
(537,013) |
|
||||
Distributions to Class A-2 OP Units |
|
(125,552) |
|
|
(214,642) |
|
|
(402,787) |
|
|
(377,956) |
|
||||
Beginning balance Class B OP Units |
|
88,055,573 |
|
|
93,750,000 |
|
|
91,103,305 |
|
|
93,750,000 |
|
||||
Loss allocated to Class B OP Units |
|
(869,670) |
|
|
(144,326) |
|
|
(2,118,734) |
|
|
(144,326) |
|
||||
Distributions to Class B OP Units |
|
(814,567) |
|
|
(454,100) |
|
|
(2,613,237) |
|
|
(454,100) |
|
||||
Noncontrolling interests ending balance |
|
$ |
98,861,432 |
|
|
$ |
106,686,605 |
|
|
$ |
98,861,432 |
|
|
$ |
106,686,605 |
|
10. Related Party Arrangements
Prior to the Internalization Closing on August 31, 2020, the Former Advisor was the Company’s advisor and, as such, supervised and managed the Company’s day-to-day operations and selected the Company’s real property investments and real estate-related assets, subject to oversight by the Company’s board of directors. The Former Advisor also provided marketing, sales and client services on the Company’s behalf. The Former Advisor is owned by SRI, the Company’s former sponsor. Mr. Emery, the Company’s Chairman of the board of directors and Chief Executive Officer, owns a 48.6% interest in Steadfast Holdings, the largest owner of SRI. Ms. del Rio, the Company’s former Secretary and an affiliated director, owns a 6.3% interest in Steadfast Holdings. From 2014 to 2020, Ms. Neyland, the Company’s President, Chief Financial Officer and Treasurer, earned an annual 5% profits interest from Steadfast Holdings. Ms. Neyland’s profits interest was terminated in November 2020.
During the eight months ended August 31, 2020, all of our other officers and directors, other than our independent directors, were officers of our Former Advisor and officers, limited partners and/or members of our former sponsor and other affiliates of our Former Advisor.
Prior to the Internalization Closing, the Company and the Operating Partnership operated pursuant to the Advisory Agreement with the Former Advisor. Pursuant to the Advisory Agreement, the Company was obligated to pay the Former Advisor specified fees upon the provision of certain services, the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to the limitations described below, the Company was also obligated to reimburse the Former Advisor and
55
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
its affiliates for organization and offering costs incurred by the Former Advisor and its affiliates on behalf of the Company, as well as acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.
56
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Summarized below are the related party transactions incurred by the Company for the three and nine months ended September 30, 2021 and 2020, respectively, and any related amounts payable and (receivable) as of September 30, 2021 and December 31, 2020:
|
|
Incurred (Received) For the |
|
Incurred (Received) For the |
|
Payable (Receivable) as of |
||||||||||||||||||
|
|
Three Months Ended Sep 30, |
|
Nine Months Ended Sep 30, |
|
|||||||||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
||||||||||||
Consolidated Statements of Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Expensed |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Investment management fees (1) |
|
$ |
— |
|
|
$ |
5,648,468 |
|
|
$ |
— |
|
|
$ |
19,537,998 |
|
|
$ |
— |
|
|
$ |
— |
|
Due diligence costs (2) |
|
300 |
|
|
10,270 |
|
|
37,466 |
|
|
11,381 |
|
|
300 |
|
|
102,301 |
|
||||||
Loan coordination fees (1) |
|
— |
|
|
— |
|
|
— |
|
|
1,605,652 |
|
|
— |
|
|
— |
|
||||||
Disposition fees (3) |
|
— |
|
|
256,000 |
|
|
— |
|
|
594,750 |
|
|
— |
|
|
— |
|
||||||
Disposition transaction costs (3) |
|
— |
|
|
— |
|
|
— |
|
|
5,144 |
|
|
— |
|
|
— |
|
||||||
Property management: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Fees (1) |
|
4,158 |
|
|
1,618,611 |
|
|
12,708 |
|
|
5,484,468 |
|
|
1,269 |
|
|
5,585 |
|
||||||
Reimbursement of onsite personnel (4) |
|
— |
|
|
4,926,692 |
|
|
— |
|
|
17,402,120 |
|
|
— |
|
|
— |
|
||||||
Reimbursement of other (1) |
|
— |
|
|
1,182,636 |
|
|
— |
|
|
3,958,226 |
|
|
— |
|
|
— |
|
||||||
Reimbursement of property operations (4) |
|
— |
|
|
42,026 |
|
|
9,168 |
|
|
230,225 |
|
|
— |
|
|
— |
|
||||||
Reimbursement of property G&A (2) |
|
— |
|
|
30,480 |
|
|
— |
|
|
114,696 |
|
|
— |
|
|
— |
|
||||||
Other operating expenses (2) |
|
358,643 |
|
|
1,134,085 |
|
|
1,221,329 |
|
|
2,798,549 |
|
|
22,148 |
|
|
158,723 |
|
||||||
Reimbursement of personnel benefits and other costs (5) |
|
41,390 |
|
|
470,925 |
|
|
153,752 |
|
|
470,925 |
|
|
28,006 |
|
|
20,457 |
|
||||||
Insurance proceeds (6) |
|
— |
|
|
— |
|
|
— |
|
|
(150,000) |
|
|
— |
|
|
— |
|
||||||
Property insurance (6) |
|
— |
|
|
9,214 |
|
|
— |
|
|
2,449,166 |
|
|
— |
|
|
— |
|
||||||
Earned |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Rental revenue (7) |
|
— |
|
|
(12,133) |
|
|
— |
|
|
(53,162) |
|
|
— |
|
|
— |
|
||||||
Transition services agreement income (6) |
|
(7,884) |
|
|
(62,000) |
|
|
(22,415) |
|
|
(62,000) |
|
|
(10,309) |
|
|
(103,552) |
|
||||||
SRI Property management agreement income (6) |
|
(366,966) |
|
|
(71,446) |
|
|
(929,725) |
|
|
(71,446) |
|
|
(120,408) |
|
|
(77,760) |
|
||||||
Other reimbursement income under the SRI property management agreements (6) |
|
(134,247) |
|
|
(38,487) |
|
|
(345,779) |
|
|
(38,487) |
|
|
— |
|
|
(21,980) |
|
||||||
Reimbursement of onsite personnel income under the SRI property management agreements (6) |
|
(1,065,967) |
|
|
(218,166) |
|
|
(3,241,507) |
|
|
(218,166) |
|
|
(116,338) |
|
|
(173,927) |
|
||||||
SRI construction management fee income (6) |
|
(47,032) |
|
|
— |
|
|
(111,937) |
|
|
— |
|
|
(16,222) |
|
|
— |
|
||||||
Consolidated Balance Sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Net assets acquired in internalization transaction (8) |
|
— |
|
|
123,236,646 |
|
|
— |
|
|
123,236,646 |
|
|
— |
|
|
— |
|
||||||
Sublease security deposit (9) |
|
— |
|
|
85,000 |
|
|
— |
|
|
85,000 |
|
|
(85,000) |
|
|
(85,000) |
|
||||||
Deferred financing costs (10) |
|
— |
|
|
— |
|
|
— |
|
|
49,050 |
|
|
— |
|
|
— |
|
||||||
Capitalized to Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Capitalized development services fee (11) |
|
173,303 |
|
|
151,071 |
|
|
173,303 |
|
|
453,213 |
|
|
173,303 |
|
|
50,357 |
|
||||||
Capitalized investment management fees (11) |
|
— |
|
|
78,053 |
|
|
— |
|
|
257,721 |
|
|
— |
|
|
— |
|
||||||
Capitalized development costs (11) |
|
900 |
|
|
— |
|
|
2,500 |
|
|
3,030 |
|
|
— |
|
|
— |
|
||||||
Acquisition expenses (12) |
|
— |
|
|
36,470 |
|
|
— |
|
|
426,389 |
|
|
— |
|
|
— |
|
||||||
Acquisition fees (12) |
|
— |
|
|
— |
|
|
— |
|
|
17,717,639 |
|
|
— |
|
|
— |
|
57
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Loan coordination fees (12) |
|
— |
|
|
— |
|
|
— |
|
|
8,812,071 |
|
|
— |
|
|
— |
|
||||||
Construction management: |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Fees (13) |
|
— |
|
|
153,826 |
|
|
— |
|
|
536,098 |
|
|
— |
|
|
— |
|
||||||
Reimbursement of labor costs (13) |
|
— |
|
|
70,238 |
|
|
— |
|
|
236,477 |
|
|
— |
|
|
— |
|
||||||
|
|
Incurred (Received) For the |
|
Incurred (Received) For the |
|
Payable (Receivable) as of |
||||||||||||||||||
|
|
Three Months Ended Sep 30, |
|
Nine Months Ended Sep 30, |
|
|||||||||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
||||||||||||
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Distributions to Class B OP Unit holders(14) |
|
$ |
814,567 |
|
|
$ |
454,378 |
|
|
$ |
2,613,238 |
|
|
$ |
454,378 |
|
|
$ |
265,620 |
|
|
$ |
469,236 |
|
Issuance of Class B OP Units (15) |
|
— |
|
|
93,750,000 |
|
|
— |
|
|
93,750,000 |
|
|
— |
|
|
— |
|
||||||
Redemption of convertible stock (15) |
|
— |
|
|
1,000 |
|
|
— |
|
|
1,000 |
|
|
— |
|
|
— |
|
||||||
|
|
$ |
(228,835) |
|
|
$ |
232,943,857 |
|
|
$ |
(427,899) |
|
|
$ |
300,088,751 |
|
|
$ |
142,369 |
|
|
$ |
344,440 |
|
__________________
1) |
Included in fees to affiliates in the accompanying consolidated statements of operations. Property management fees of $4,158 relate to compliance fees incurred under a compliance agreement with the Former Property Manager, as defined below, to follow certain tax compliance procedures with respect to the leasing of apartment homes to qualified residents. |
2) |
Included in general and administrative expenses in the accompanying consolidated statements of operations. Due diligence costs of $300 represent acquisition expenses related to the Company’s real estate projects that did not come to fruition and which were incurred by an affiliate of SIP on behalf of the Company. Other operating expenses of $358,643 relate to sublease rental expenses of $280,186 and $78,457 of expenses related to information systems costs incurred by SIP on behalf of the Company. |
3) |
Included in gain on sale of real estate, net in the accompanying consolidated statements of operations. |
4) |
Included in operating, maintenance and management in the accompanying consolidated statements of operations. |
5) |
Represents reimbursements of miscellaneous employee related costs to SIP for the period when benefits were administered by SIP. The employer benefit cost portion is included in general and administrative expenses in the accompanying consolidated statements of operations. |
6) |
Included in other income in the accompanying consolidated statements of operations. |
7) |
Included in rental income in the accompanying consolidated statements of operations. |
8) |
In connection with the Internalization Transaction, the Company became self-managed and acquired the advisory, |
asset management and property management business of the Former Advisor resulting in the recognition of net assets
assumed in the Internalization Transaction of $123,236,646, which consists of goodwill of $125,220,448, other assets
of $2,717,634 and accounts payable and accrued liabilities of $4,701,436, all of which are included in the
accompanying consolidated balance sheets.
58
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
9) |
Included in other assets in the accompanying consolidated balance sheets. |
10) |
Included in notes payable, net in the accompanying consolidated balance sheets. |
11) |
Included in real estate held for development in the accompanying consolidated balance sheets. |
12) |
Included in total real estate, net in the accompanying consolidated balance sheets. |
13) |
Included in building and improvements in the accompanying consolidated balance sheets. |
14) |
Included in cumulative distributions and net losses in the accompanying consolidated balance sheets. |
15) |
In connection with the Internalization Transaction, in exchange for acquiring the advisory, asset management and property management business of the Former Advisor and its affiliates, the Company paid its former sponsor, total consideration of $124,999,000 which consists of $31,249,000 in cash consideration and 6,155,613.92 of Class B OP Units valued at $15.23 per unit or $93,750,000. The Class B OP Units are included within noncontrolling interests in the accompanying consolidated balance sheets. In addition, the Company purchased all of the Class A convertible shares of the Company held by the Former Advisor for $1,000. |
Investment Management Fee
Prior to the completion of the Mergers on March 6, 2020, the Company paid the Former Advisor a monthly investment management fee equal to one-twelfth of 1.0% of (1) the cost of real properties and real estate-related assets acquired directly by the Company or (2) the Company’s allocable cost of each investment in real property or real estate related asset acquired through a joint venture. The investment management fee is calculated including the amount actually paid or budgeted to fund acquisition fees, acquisition expenses, cost of development, construction or improvement and any debt attributable to such investments, or the Company’s proportionate share thereof in the case of investments made through joint ventures. Following the completion of the Mergers and until the Internalization Closing, the Company paid the Former Advisor a monthly investment management fee, which was calculated on the same basis as described above, and payable 50% in cash and 50% in shares of the Company’s common stock. Investment management fees paid in shares, included in fees to affiliates in the accompanying consolidated statements of operations were $0 for each of the three and nine months ended September 30, 2021, and $4,328,191 and $8,367,340 for the three and nine months ended September 30, 2020, respectively.
Following the Internalization Closing, investment management fees paid by the Company are intercompany transactions and are eliminated in consolidation.
Acquisition Fees and Expenses
Prior to the completion of the Mergers, the Company paid the Former Advisor an acquisition fee equal to 1.0% of the cost of investment, which includes the amount actually paid or budgeted to fund the acquisition, origination, development, construction or improvement (i.e. value-enhancement) of any real property or real estate-related asset acquired. In addition to acquisition fees, the Company reimbursed the Former Advisor for amounts directly incurred by the Former Advisor and amounts the Former Advisor paid to third parties in connection with the selection, evaluation, acquisition and development of a property or
59
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
acquisition of real estate-related assets, whether or not the Company ultimately acquired the property or the real estate-related assets. Following the completion of the Mergers and until the Internalization Closing, the Company paid the Former Advisor an acquisition fee of 0.5%, which was calculated on the same basis as above. In connection with the Mergers, the Company paid the Former Advisor an acquisition fee of $16,281,487, which was capitalized to the acquired real estate and investment in unconsolidated joint venture in the accompanying consolidated balance sheets.
The Charter limits the Company’s ability to pay acquisition fees if the total of all acquisition fees and expenses relating to the purchase would exceed 4.5% of the contract purchase price. Under the Charter, a majority of the Company’s board of directors, including a majority of the independent directors, is required to approve any acquisition fees (or portion thereof) that would cause the total of all acquisition fees and expenses relating to an acquisition to exceed 4.5% of the contract purchase price.
Following the Internalization Closing, acquisition fees and expenses paid by the Company are intercompany transactions and are eliminated in consolidation.
Loan Coordination Fee
Prior to the completion of the Mergers, the Company paid the Former Advisor or its affiliate a loan coordination fee equal to 1.0% of the initial amount of new debt financed or outstanding debt assumed in connection with the acquisition, development, construction, improvement or origination of a property or a real estate-related asset. In addition, in connection with any debt financing or refinancing (in each case, other than identified at the time of the acquisition of a property or a real estate-related asset), the Company paid the Former Advisor or its affiliate a loan coordination fee equal to 0.75% of the amount of debt financed or refinanced. In some instances, the Company and the Former Advisor agreed to a loan coordination fee of $100,000 per loan refinanced.
Following the completion of the Mergers and until the Internalization Closing, the Company paid the Former Advisor or one of its affiliates, in cash, the loan coordination fee equal to 0.5% of (1) the initial amount of new debt financed or outstanding debt assumed in connection with the acquisition, development, construction, improvement or origination of any type of real estate asset or real estate-related asset acquired directly or (2) the Company’s allocable portion of the purchase price and therefore the related debt in connection with the acquisition or origination of any type of real estate asset or real estate-related asset acquired through a joint venture. In connection with the Mergers, the Company paid the Former Advisor a loan coordination fee of $7,910,205, which was capitalized to the acquired real estate and investment in unconsolidated joint venture in the accompanying consolidated balance sheets.
As compensation for services rendered in connection with any financing or the refinancing of any debt (in each case, other than at the time of the acquisition of a property), the Company also paid the Former Advisor or one of its affiliates, in the form of shares equal to such amount, a loan coordination fee equal to 0.5% of the amount refinanced or the Company’s proportionate share of the amount refinanced in the case of investments made through a joint venture. No loan coordination fee was paid in shares to the Company’s Former Advisor during the three and nine months ended September 30, 2021. Loan coordination fees of $0 and $1,116,700 were paid in shares to the Company’s Former Advisor for each of the three and nine months ended September 30, 2020, respectively.
60
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Following the Internalization Closing, loan coordination fees paid by the Company are intercompany transactions and are eliminated in consolidation.
Property Management Fees and Expenses
Prior to the Internalization Closing, the Company was party to property management agreements (each, as amended from time to time, a “Property Management Agreement”) with Steadfast Management Company, Inc., an affiliate of SRI (the “Former Property Manager”), in connection with the management of each of the Company’s properties. Pursuant to each Property Management Agreement, the Company paid the Former Property Manager a monthly management fee equal to a range from 2.5% to 3.5% of each property’s gross revenues (as defined in the respective Property Management Agreements) for each month, as determined by the Former Advisor and approved by a majority of the Company’s board of directors, including a majority of the independent directors. Each Property Management Agreement had an initial one-year term and continued thereafter on a month-to-month basis unless either party gave 60 days’ prior notice of its desire to terminate the Property Management Agreement, provided that the Company could terminate the Property Management Agreement at any time upon a determination of gross negligence, willful misconduct or bad acts of the Former Property Manager or its employees or upon an uncured breach of the Property Management Agreement upon 30 days’ prior written notice to the Former Property Manager.
In addition to the property management fee, the Property Management Agreements also specified certain other reimbursements payable to the Former Property Manager for benefit administration, information technology infrastructure, licenses, support and training services and capital expenditures supervision. The Company also reimbursed the Former Property Manager for the salaries and related benefits of on-site property management employees.
In connection with the Internalization Transaction, the Company terminated its existing property-level property management agreements with the Former Property Manager. Following the Internalization Closing, property management fees paid by the Company are intercompany transactions and are eliminated in consolidation.
Construction Management Fees and Expenses
Prior to the Internalization Closing, the Company was party to construction management agreements (each, a “Construction Management Agreement”) with Pacific Coast Land & Construction, Inc., an affiliate of SRI (the “Former Construction Manager”), in connection with capital improvements and renovation or value-enhancement projects for certain properties the Company acquired. The construction management fee payable with respect to each property under the Construction Management Agreements ranged from 6.0% to 12.0% of the costs of the improvements for which the Construction Manager had planning and oversight authority. Generally, each Construction Management Agreement could have been terminated by either party with 30 days’ prior written notice to the other party. Construction management fees were capitalized to the respective real estate properties in the period in which they were incurred as such costs relate to capital improvements and renovations for apartment homes taken out of service while they undergo the planned renovation.
The Company also reimbursed the Former Construction Manager for the salaries and related benefits of certain of its employees for time spent working on capital improvements and renovations.
61
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
In connection with the Internalization Transaction, the Company terminated its existing Construction Management Agreements with the Former Construction Manager.
62
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Development Services
The Company is a party to a development services agreement (the “Development Services Agreement”) with Steadfast Multifamily Development, Inc., an affiliate of SRI (the “Developer”), in connection with certain development projects, pursuant to which the Developer receives a development fee and reimbursement for certain expenses for overseeing the development project. The Company entered into a Development Services Agreement with the Developer in connection with the Garrison Station, the Arista at Broomfield and the Flatirons development projects that provide for a development fee equal to 4% of the hard and soft costs of the development project (as defined in the applicable Development Services Agreement) as specified in the Development Services Agreement. 75% of the development fee is paid in 14 monthly installments and the remaining 25% is paid upon delivery of a certificate of occupancy by the Developer to the Company.
On August 12, 2021, the Company and the Developer entered into an amendment to the Development Services Agreement in connection with certain development projects which (1) added an incentive fee of 1% (not to exceed $350,000) of the hard and soft costs, less the cost of the land, related acquisition costs and city permits and fees to the development services fee at Garrison Station and (2) clarified final development fees at the Arista at Broomfield and Flatirons development projects are based on final actual costs.
Property Insurance
Prior to the Internalization Closing, the Company deposited amounts with an affiliate of SRI, the Company’s former sponsor, to fund a prepaid insurance deductible account to cover the cost of required insurance deductibles across all properties of the Company and other affiliated entities of the Company’s former sponsor. Upon filing a major claim, proceeds from the insurance deductible account could be used by the Company or another affiliate of SRI. In addition, the Company deposited amounts with an affiliate of the Company’s former sponsor to cover the cost of property and property related insurance across certain properties of the Company. As a result of the Internalization Transaction, the Company is no longer party to the insurance deductible arrangement with any affiliates of the Former Sponsor.
Other Operating Expense Reimbursement
In addition to the various fees paid to the Former Advisor, the Company was obligated to pay directly or reimburse all expenses incurred by the Former Advisor in providing services to the Company, including the Company’s allocable share of the Former Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. The Company was not to reimburse the Former Advisor for employee costs in connection with services for which the Former Advisor or its affiliates received acquisition fees or disposition fees or for the salaries the Former Advisor paid to the Company’s executive officers.
The Charter limits the Company’s total operating expenses during any four fiscal quarters to the greater of 2% of the Company’s average invested assets or 25% of the Company’s net income for the same period (the “2%/25% Limitation”). The Company was to reimburse the Former Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Former Advisor; provided, however, that the Company did not reimburse the Former Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors determined that such excess expenses were justified based on unusual and non-recurring factors. The Former Advisor was obligated to reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceeded the 2%/25%
63
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Limitation, unless approved by the independent directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts reserves or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company that are in any way related to the Company’s operation, including the Company’s allocable share of the Former Advisor’s overhead, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition expenses (including expenses relating to potential acquisitions that the Company does not close) and investment management fees; (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).
As of September 30, 2021, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation.
Disposition Fee
Prior to the completion of the Mergers, if the Former Advisor or its affiliates provided a substantial amount of services in connection with the sale of a property or real estate-related asset as determined by a majority of the Company’s independent directors, the Company paid the Former Advisor or its affiliates a fee equivalent to one-half of the brokerage commissions paid, but in no event to exceed 1.0% of the sales price of each property or real estate-related asset sold. Following the completion of the Mergers and until the Internalization Closing, the disposition fee payable to the Former Advisor was one-half of the brokerage commissions paid, but in no event to exceed 0.5% of the sales price of each property or real estate-related asset sold.
To the extent the disposition fee was paid upon the sale of any assets other than real property, it was included as an operating expense for purposes of the 2%/25% Limitation.
Following the Internalization Closing, disposition fees paid by the Company are intercompany transactions and are eliminated in consolidation.
Class A Convertible Stock
In connection with the Mergers, the Company and the Former Advisor exchanged the then outstanding Convertible Stock for the new Class A Convertible Stock. The Class A Convertible Stock would convert into shares of the Company’s common stock if (1) the Company had made total Class A Distributions equal to the original issue price of the Common Equity, plus an aggregate 6.0% cumulative, non-compounded, annual return on the original issue price of those shares, (2) the Company listed its common stock for trading on a national securities exchange or entered into a merger whereby holders of the Company’s common stock received listed securities of another issuer or (3) the Company’s Advisory Agreement was terminated or not renewed (other than for “cause” as defined in the Advisory Agreement). Upon any of these Triggering Events, each share of Class A Convertible Stock would have been converted into a number of shares of the Company’s common stock equal to
64
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
1/1000 of the quotient of (A) 15% of the amount, if any, by which (i) the Class A Enterprise Value plus the aggregate value of the Class A Distributions paid to date on the Common Equity exceeds (ii) the aggregate purchase price paid by stockholders for the Common Equity plus an aggregated 6.0% cumulative, non-compounded, annual return on the original issue price of the Common Equity as of the date of the Triggering Event, divided by (B) the Class A Enterprise Value divided by the number of the Company’s outstanding common shares on an as-converted basis as of the date of Triggering Event. In connection with the Internalization Transaction, the Company repurchased the Class A Convertible Stock for $1,000. See Note 8 (Stockholders’ Equity) for details.
Ancillary Internalization Transaction Agreements
Transition Services Agreement
As a condition to Internalization Closing, on August 31, 2020, the Company and SIP entered into a Transition Services Agreement (the “Transition Services Agreement”), pursuant to which, commencing on August 31, 2020 until March 31, 2021, which was subsequently extended through December 16, 2021, unless earlier terminated pursuant to the Transition Services Agreement, SIP will continue to provide certain operational and administrative support at cost plus 15% to the Company, which may include support relating to, without limitation, shared legal, and tax support as set forth in the Transition Services Agreement. Similarly, the Company agreed to provide certain services to SIP and its affiliates at cost plus 15%, which may include acquisition, disposition and financing support, legal support, shared information technology and human resources.
SRI Property Management Agreements
In connection with the Internalization Transaction, the Company terminated its existing property-level property management agreements with the Former Property Manager. On August 31, 2020, SRS, entered into the SRI Property Management Agreements with an affiliate of SRI to provide property management services in connection with certain properties owned by SIP or its affiliates (each a “Property Owner” and collectively, the “Property Owners”). Pursuant to each SRI Property Management Agreement, SRS received a monthly management fee equal to 2.0% of each property’s gross collections for such month (“Gross Collections”). On April 23, 2021, SRS entered into amendments to the SRI Property Management Agreements with affiliates of SRI to (1) provide that SRS is responsible for providing accounting services for the properties owned by the Property Owners and (2) increase the property management fee from 2.0% to 3.0% of Gross Collections. Each SRI Property Management Agreement has an initial one-year term and will continue thereafter on a month-to-month basis unless the Property Owner terminates the SRI Property Management Agreement with 60 days’ prior written notice or upon the determination of gross negligence, willful misconduct or bad acts of SRS or its employees with 30 days’ prior written notice to SRS. After the first one-year term, either party may terminate the SRI Property Management Agreement in the event of a material breach that remains uncured for a period of 30 days after written notification of such breach. As of September 30, 2021 and December 31, 2020, the Company recognized the SRI Property Management Agreements asset, net of $0 and $543,332 within other assets on the accompanying consolidate balance sheets. The SRI Property Management Agreement asset was fully amortized as of September 30, 2021.
In addition to the property management fee earned by SRS, the SRI Property Management Agreements also specify certain other reimbursements payable to SRS for benefit administration, information technology infrastructure, licenses, support and
65
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
training services. SRS is also reimbursed for the salaries and related benefits of on-site property management employees at certain properties owned by SIP or its affiliates.
On October 1, 2021, Steadfast Companies, on behalf of each Property Owner, provided written notice to terminate the SRI Property Management Agreements no later than December 30, 2021.
SRI Construction Management Agreements
On September 1, 2020, SRS, entered into the SRI construction management agreements with an affiliate of SRI (the “SRI Construction Management Agreements”) to provide construction management services in connection with certain properties owned by SIP or its affiliates. Pursuant to each SRI Construction Management Agreement, SRS will receive a construction management fee equal to 7.5% of the total project costs. In addition, SRS will be reimbursed for all agreed upon costs associated with staffing. Each SRI Construction Management Agreement may be terminated by either party with the delivery of a 30-day written notice to the other party.
Registration Rights Agreement
As a condition to the Internalization Closing, on August 31, 2020, the Company, the Operating Partnership and SRI entered into a registration rights agreement (the “Registration Rights Agreement”). Upon the terms and conditions in the Operating Partnership Agreement, the Class B OP Units are redeemable for shares of the Company’s common stock. Pursuant to the Contribution & Purchase Agreement, SRI (or any successor holder) may not transfer the Class B OP Units until August 31, 2022 (the “Lock-Up Expiration”). Beginning on the fifth anniversary of the Internalization Closing, SRI (or any successor holder) may request the Company to register for resale under the Securities Act of 1933, as amended, shares of the Company’s common stock issued or issuable to such holder. The Company agreed to use commercially reasonable efforts to file a registration statement on Form S-3 within 30 days of such request and within 60 days of such request in the case of a registration statement on Form S-11 or such other appropriate form. The Company has agreed to cause such registration statement to become effective as soon as reasonably practicable thereafter. The Registration Rights Agreement also grants SRI (or any successor holder) certain “piggyback” registration rights after the Lock-Up Expiration.
Non-Competition Agreement
As a condition to the Internalization Closing, on August 31, 2020, the Company entered into a Non-Competition Agreement (the “Non-Competition Agreement”) with Rodney F. Emery, the largest indirect owner of SRI and the Company’s Chairman of the board of directors and Chief Executive Officer, providing that from the date of the Internalization Closing until the date that is 30 months from August 31, 2020 (the “Restricted Period”), in general, Mr. Emery shall not, directly or indirectly, (i) solicit certain employees or service providers of the Company, subject to certain exceptions, or (ii) solicit certain customers, vendors, suppliers, agents, partners or other similar parties with the purpose of causing such parties or their affiliates to cease doing business with the Company or otherwise interfere with the Company’s business relationships with third parties.
During the Restricted Period, Mr. Emery, subject to limited exceptions provided in the Non-Competition Agreement, in general (i) shall not, and shall cause his respective affiliates not to, engage in the business of managing, operating, directing and supervising the operations and administration of multifamily assets of the class and type owned by the Company as of August
66
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
31, 2020 (the “Assets”) (such business activities described in this subsection (i) being the “Restricted Business”), (ii) shall, consistent with past practice, present each opportunity and investment fully and accurately to the Company’s board of directors prior to his or his affiliates acquisition of any Assets and only make such investment on behalf of himself or his affiliates if the Company’s board of directors declines the opportunity; and (iii) shall not engage with or otherwise acquire an interest in, directly or indirectly, any business or enterprise that primarily engage in the Restricted Business in an area within a two-mile radius of each Asset owned or managed by the Company as of the Internalization Closing.
Further, each of SRS, the Company and the Operating Partnership agreed that, in general, during the Restricted Period, each will not solicit any employee of SRI or its affiliates or attempt to assist any such employee to enter into any other consulting or business relationship with SRS, the Company and the Operating Partnership, subject to certain limitations.
Sub-Lease
In connection with the Internalization Transaction, SRS, an indirect subsidiary of the Company, entered into a sub-lease agreement (the “Sub-Lease”) with the Former Property Manager on September 1, 2020, for its headquarters in Irvine, California. The Sub-Lease also includes certain furniture and fixtures, that will become the property of SRS at the end of the lease term. As of September 30, 2021, the Sub-Lease has a remaining lease term of eight months with no option to renew. The monthly sub-lease expense is recognized on a straight line basis over the remaining term of the the Sub-Lease. As of September 30, 2021 and December 31, 2020, as it pertains to the Sub-Lease of the office space, the Company recorded an operating lease ROU asset, net of $637,194 and $1,339,591 and an operating lease liability, net of $648,057 and $1,346,835, respectively. As of September 30, 2021 and December 31, 2020, as it pertains to the Sub-Lease of the furniture and fixtures, the Company recognized a finance lease ROU asset, net of $7,665 and $16,845 and a finance lease liability, net of $8,098 and $17,020, respectively. For the three and nine months ended September 30, 2021, the Sub-Lease expense related to the office space was $241,549 and $724,647, respectively, and for the furniture and fixtures $3,125 and $9,438, respectively. For the three and nine months ended September 30, 2020, the Sub-Lease expense related to the office space and the furniture and fixtures was $80,517 and $47, respectively. See Note 15 (Leases) for further details about the Company’s leases.
Certain Conflict Resolution Procedures
Every transaction that the Company enters into with its affiliates is subject to an inherent conflict of interest. The board of directors may encounter conflicts of interest in enforcing the Company’s rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between the Company and the Company’s affiliates. As a general rule, any related party transaction must be approved by a majority of the directors (including a majority of independent directors) not otherwise interested in the transaction. In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between the Company and the related party is fair and reasonable to the Company and has terms and conditions no less favorable to the Company than those available from unaffiliated third parties.
11. Incentive Award Plan and Independent Director Compensation
67
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The Company’s Incentive Award Plan provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards.
Under the independent directors’ compensation plan and subject to such plan’s conditions and restrictions, each of the Company’s independent directors received 3,333 shares of restricted common stock once the Company raised $2,000,000 in gross offering proceeds in the Public Offering. Each subsequent independent director that joins the Company’s board of directors receives 3,333 shares of restricted common stock upon election to the Company’s board of directors. In addition, on the date following an independent director’s re-election to the Company’s board of directors, he or she receives 1,666 shares of restricted common stock.
On March 6, 2020, the Company granted 3,333 shares of restricted common stock pursuant to the independent directors’ compensation plan to each of its two newly elected independent directors. One-fourth of the shares of restricted common stock generally vest and become non-forfeitable upon issuance and the remaining portion will vest in 3 equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the restricted stock will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability or (2) a change in control of the Company. These restricted stock awards entitle the holders to participate in distributions even if the shares are not fully vested.
On September 15, 2020, the Company’s board of directors approved an amendment to the independent directors’ compensation plan, which is described in more detail below. On December 3, 2020, the Company granted 4,924 shares of restricted common stock to each of its five independent directors pursuant to the Incentive Award Plan at a fair value of $15.23 per share in connection with their re-election to the board of directors at the Company’s annual meeting of stockholders. These shares generally vest in 2 equal annual installments beginning on the first anniversary of the date of grant and ending on the second anniversary of the date of grant; provided, however, that the restricted stock will become fully vested on the earlier to occur of: (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company.
The Company recorded a stock-based compensation expense of $85,579 and $211,915 for the three and nine months ended September 30, 2021, respectively, and $18,309 and $81,692 for the three and nine months ended September 30, 2020, respectively, related to the independent directors’ restricted common stock.
In addition to the stock awards, prior to September 15, 2020, the Company paid each of its independent directors an annual retainer of $55,000, prorated for any partial term (the audit committee chairperson received an additional $10,000 annual retainer, prorated for any partial term). The independent directors were also paid for attending meetings as follows: (i) $2,500 for each board meeting attended in person, (ii) $1,500 for each committee meeting attended in person in such director’s capacity as a committee member, (iii) $1,000 for each board meeting attended via teleconference (not to exceed $4,000 for any one set of meetings attended on any given day). In connection with meetings of the special committee, the independent directors received $1,000 for each teleconference meeting and $1,500 for each in-person meeting. All directors also receive
68
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
reimbursement of reasonable out of pocket expenses incurred in connection with attendance at meetings of the board of directors.
Beginning September 15, 2020, the effective date of the amendment to the independent directors’ compensation plan, the Company pays each of its independent directors an annual retainer of $75,000 in cash and $75,000 in shares of restricted common stock, prorated for any partial term (the audit committee chairperson receives an additional $15,000 annual retainer, the compensation committee chairperson receives an additional $10,000 annual retainer, the investment committee chairperson receives an additional $10,000 annual retainer, the nominating and corporate governance committee chairperson receives an additional $10,000 annual retainer, and the lead independent director receives an additional $25,000 annual retainer, prorated for any partial term). The independent directors are also paid $2,000 for each in-person or telephonic board or committee meeting attended (not to exceed $4,000 for any one set of meetings attended on any given day). Further, directors may elect to receive any cash fees in fully-vested shares of common stock of the Company.
On July 16, 2021, the Company received a derivative demand letter addressed to the Company’s board of directors, purportedly sent on behalf of two stockholders, relating to the Internalization Transaction. The letter demanded that the Company’s board of directors appoint a committee to investigate the Internalization Transaction and, among other things, determine whether there exists any basis for the Company to pursue claims relating to that transaction, including for recovery of payments made in the transaction. In September 2021, the Company established the Demand Review Committee, comprised of two independent directors, to pursue the purported claims mentioned above. The Company agreed to pay each member of the Demand Review Committee a one-time retainer in the amount of $50,000, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
Director compensation is an operating expense of the Company that, prior to the Internalization Closing, was subject to the operating expense reimbursement obligation of the Former Advisor discussed in Note 10 (Related Party Arrangements). The Company recorded an operating expense of $321,250 and $807,750 for the three and nine months ended September 30, 2021, respectively, and $228,750 and $765,750 for the three and nine months ended September 30, 2020, respectively, related to the independent directors’ annual cash retainer, attending board and committee meetings and a one-time retainer for the two independent directors serving on the Demand Review Committee, which is included in general and administrative expenses in the accompanying consolidated statements of operations. Upon signing the merger agreements, merger related acquisition expenses including $0 for each of the three and nine months ended September 30, 2021, and $0 and $3,000 for the three and nine months ended September 30, 2020, respectively, related to attending committee meetings, met the definition of capitalized expenses and were therefore capitalized in the accompanying consolidated balance sheets. As of September 30, 2021 and December 31, 2020, $321,250 and $209,250, respectively, related to the independent directors’ annual retainer paid in cash and board and committee meetings attendance is included in accounts payable and accrued liabilities in the consolidated balance sheets.
12. Commitments and Contingencies
Economic Dependency
69
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Prior to the Internalization Closing, the Company was dependent on the Former Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. As a result of the Internalization Transaction, the Company became self-managed and acquired components of the advisory, asset management and property management operations of the Former Advisor by hiring the Transferring Employees (as defined in the Contribution & Purchase Agreement), who comprise the workforce necessary for the management and day-to-day real estate and accounting operations of the Company and the Operating Partnership. The Company’s own employees now provide the services that the Former Advisor provided, as described above.
As of September 30, 2021, the Company is developing a multifamily property known as Garrison Station consisting of nine residential buildings with 176 apartment homes with remaining commitments to fund of approximately $1,800,000 (inclusive of applicable construction loan obligations) and an estimated completion date in the fourth quarter of 2021. As of September 30, 2021, 160 of the 176 apartment homes were placed in service.
Concentration of Credit Risk
The geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Atlanta, Georgia and Dallas/Fort Worth, Texas apartment markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition from other apartment communities, decrease in demand for apartments or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its residents and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
From time to time, the Company is subject, or party, to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition nor is the Company aware of any such legal proceedings contemplated by government agencies.
The following table presents a reconciliation of net loss attributable to common stockholders and shares used in calculating basic and diluted loss per share, or EPS, for the three and nine months ended September 30, 2021 and 2020:
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||||||
Net loss attributable to common stockholders |
|
$ |
(10,642,474) |
|
|
$ |
(36,913,412) |
|
|
$ |
(37,711,420) |
|
|
$ |
(99,819,162) |
|
Less: |
|
|
|
|
|
|
|
|
||||||||
Distributions related to unvested restricted stockholders(1) |
|
(43,359) |
|
|
(16,066) |
|
|
(124,447) |
|
|
(20,840) |
|
||||
Numerator for loss per common share — basic |
|
$ |
(10,685,833) |
|
|
$ |
(36,929,478) |
|
|
$ |
(37,835,867) |
|
|
$ |
(99,840,002) |
|
Weighted average common shares outstanding — basic and diluted(2) |
|
109,901,506 |
|
|
109,663,583 |
|
|
109,898,905 |
|
|
95,714,116 |
|
||||
Loss per common share — basic and diluted |
|
$ |
(0.10) |
|
|
$ |
(0.34) |
|
|
$ |
(0.34) |
|
|
$ |
(1.04) |
|
_____________________
(1)Unvested restricted stockholders that have a right to participate in dividends declared on common stock are accounted for as participating securities and reflected in the calculation of basic and diluted EPS under the two-class method.
(2)The Company excluded all unvested restricted common shares outstanding issued to the Company’s independent directors and certain key employees, the Class A-2 OP Units and the Class B OP Units from the calculation of diluted loss per common share as the effect would have been antidilutive.
14. Derivative Financial Instruments
The Company uses interest rate derivatives with the objective of managing exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect they could have on future cash flows. Interest rate cap agreements are used to accomplish this objective. The following table provides the terms of the Company’s interest rate derivative instruments that were in effect at September 30, 2021 and December 31, 2020:
September 30, 2021 |
||||||||||||||||||
Type |
|
Maturity Date Range |
|
Based on |
|
Number of Instruments |
|
Notional Amount |
|
Variable Rate |
|
Weighted Average Rate Cap |
|
Fair Value |
||||
Interest Rate Cap |
|
9/1/2022 - 8/1/2024 |
|
One-Month LIBOR |
|
5 |
|
$ |
269,300,350 |
|
|
0.08% |
|
4.07% |
|
$ |
27,853 |
|
December 31, 2020 |
||||||||||||||||||
Type |
|
Maturity Date Range |
|
Based on |
|
Number of Instruments |
|
Notional Amount |
|
Variable Rate |
|
Weighted Average Rate Cap |
|
Fair Value |
||||
Interest Rate Cap |
|
1/1/2021 - 7/1/2023 |
|
One-Month LIBOR |
|
9 |
|
$ |
407,935,350 |
|
|
0.14% |
|
3.41% |
|
$ |
7,852 |
|
The interest rate cap agreements are not designated as effective cash flow hedges. Accordingly, the Company records any changes in the fair value of the interest rate cap agreements as interest expense. The change in the fair value of the interest rate cap agreements for the three and nine months ended September 30, 2021, resulted in an unrealized loss of $40,902 and $39,699, respectively, and for the three and nine months ended September 30, 2020, resulted in an unrealized loss of $29,093 and
70
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
$56,287, respectively, which is included in interest expense in the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2021 and 2020, the Company acquired interest rate cap agreements of $47,500 and $59,700 and $20,000 and $67,000, respectively, and did not receive settlement proceeds. The Company also acquired interest rate cap agreements of $6,110 during the nine months ended September 30, 2020, in connection with the Mergers. The fair value of the interest rate cap agreements of $27,853 and $7,852 as of September 30, 2021 and December 31, 2020, respectively, is included in other assets on the accompanying consolidated balance sheets.
Lessee
The Company leases office space, a parking garage, furniture, fixtures and office equipment. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately from each other. A limited number of leases include options to renew or options to extend the lease term. The exercise of lease renewal options is at the Company’s sole discretion. The depreciable life of lease ROU assets are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The components of lease costs were as follows:
|
|
|
|
Three Months Ended September 30, |
||||||
Lease Cost |
|
Classification |
|
2021 |
|
2020 |
||||
Operating Lease cost(1) |
|
Operating, maintenance and management |
|
$ |
10,233 |
|
|
$ |
11,340 |
|
Operating Lease cost(1) |
|
General and administrative |
|
241,549 |
|
|
80,516 |
|
||
Finance lease cost |
|
|
|
|
|
|
||||
Amortization of leased assets |
|
Depreciation and amortization |
|
3,060 |
|
|
1,020 |
|
||
Accretion of lease liabilities |
|
Interest expense |
|
65 |
|
|
47 |
|
||
Total lease cost |
|
|
|
$ |
254,907 |
|
|
$ |
92,923 |
|
|
|
|
|
|
|
|
||||
|
|
|
|
Nine Months Ended September 30, |
||||||
Lease Cost |
|
Classification |
|
2021 |
|
2020 |
||||
Operating Lease cost(1) |
|
Operating, maintenance and management |
|
$ |
26,746 |
|
|
$ |
27,867 |
|
Operating Lease cost(1) |
|
General and administrative |
|
724,647 |
|
|
80,516 |
|
||
Finance lease cost |
|
|
|
|
|
|
||||
Amortization of leased assets |
|
Depreciation and amortization |
|
9,180 |
|
|
1,020 |
|
||
Accretion of lease liabilities |
|
Interest expense |
|
258 |
|
|
47 |
|
||
Total lease cost |
|
|
|
$ |
760,831 |
|
|
$ |
109,450 |
|
_____________________
(1)Includes short-term leases and variable lease costs, which are immaterial.
71
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Other information related to leases was as follows:
Lease Term and Discount Rate |
|
September 30, 2021 |
|
December 31, 2020 |
||
Weighted average remaining lease term (in years) |
|
|
|
|
||
Operating leases |
|
3.6 |
|
3.4 |
||
Finance leases |
|
0.7 |
|
1.4 |
||
Weighted average discount rate |
|
|
|
|
||
Operating Leases |
|
3.4 |
% |
|
3.2 |
% |
Finance Leases |
|
2.9 |
% |
|
2.9 |
% |
|
|
Nine Months Ended September 30, |
||||||
Supplemental Disclosure of Cash Flows Information |
|
2021 |
|
2020 |
||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
||||
Operating cash outflows related to operating leases |
|
$ |
862,107 |
|
|
$ |
213,698 |
|
Operating cash outflows related to finance leases |
|
$ |
9,180 |
|
|
$ |
1,020 |
|
Financing cash outflows related to finance leases |
|
$ |
— |
|
|
$ |
— |
|
Operating Leases
The following table sets forth as of September 30, 2021, the undiscounted cash flows of the Company’s scheduled lease obligations for future minimum payments for the three months ending December 31, 2021 and for each of the next four years ending December 31, and thereafter, as well as the reconciliation of those cash flows to operating lease liabilities on the Company’s accompanying consolidated balance sheets:
Year |
|
Amount |
||
Remainder of 2021 |
|
$ |
297,071 |
|
2022 |
|
611,239 |
|
|
2023 |
|
188,990 |
|
|
2024 |
|
122,026 |
|
|
2025 |
|
94,506 |
|
|
Thereafter |
|
266,910 |
|
|
Total undiscounted operating lease payments |
|
$ |
1,580,742 |
|
Less: interest |
|
(263,991) |
|
|
Present value of operating lease liabilities |
|
$ |
1,316,751 |
|
Finance Leases
72
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
The following table sets forth as of September 30, 2021, the undiscounted cash flows of the Company’s scheduled obligations for future minimum payments for the three months ending December 31, 2021 and for each of the next four years ending December 31 and thereafter, as well as a reconciliation of those cash flows to finance lease liabilities:
Year |
|
Amount |
||
Remainder of 2021 |
|
$ |
3,060 |
|
2022 |
|
5,100 |
|
|
2023 |
|
— |
|
|
2024 |
|
— |
|
|
2025 |
|
— |
|
|
Thereafter |
|
— |
|
|
Total undiscounted finance lease payments |
|
$ |
8,160 |
|
Less: interest |
|
(62) |
|
|
Present value of finance lease liabilities |
|
$ |
8,098 |
|
73
PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(unaudited)
Distributions Paid
On October 1, 2021, the Company paid distributions of $5,061,360, which related to distributions declared for each day in the period from September 1, 2021 through September 30, 2021. All such distributions were paid in cash.
Distributions Declared
On October 26, 2021, the Company’s board of directors approved and authorized a daily distribution to stockholders of record as of the close of business on each day of the period commencing on November 1, 2021 and ending on November 30, 2021. The distributions will be equal to $0.001438 per share of the Company’s common stock per day. The distributions for each record date in November 2021 will be paid in December 2021. The distributions will be payable to stockholders from legally available funds therefor.
Complaints filed in Central District of California and Southern District of New York
On October 18, 2021, and October 21, 2021, the Company and each member of the board of directors was named as a defendant in two separate complaints filed in the United States District Court Central District of California Southern Division and in the United States District Court Southern District of New York (the “Complaints”), respectively. Each Complaint, filed on behalf of someone claiming to be a stockholder of the Company, accuses the defendants of certain violations of Section 14(a) of the Securities Exchange Act of 1934 in connection with the proxy statement mailed to the Company’s stockholders soliciting proxies for the IRT Merger. The Company disagrees with the allegations and intends to vigorously defend itself and its directors.
74
PART I — FINANCIAL INFORMATION (continued)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of Steadfast Apartment REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Steadfast Apartment REIT, Inc., a Maryland corporation.
Certain statements included in this Quarterly Report on Form 10-Q (this “Quarterly Report”) that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. One factor that could have a material adverse effect on our operations and future prospects is the adverse effect of COVID-19 and its variants on the financial condition, results of operations, cash flows and performance of us and our tenants, the real estate market and the global economy and financial markets. The extent to which COVID-19 impacts us and our residents will depend on future developments, including the outbreak of new strains of the virus and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic. Additional factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
|
• |
the fact that we have had a net loss for each quarterly and annual period since inception; |
|
• |
changes in economic conditions generally and the real estate and debt markets specifically; |
|
• |
our ability to secure resident leases for our multifamily properties at favorable rental rates; |
|
• |
risks inherent in the real estate business, including resident defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; |
|
• |
our pending merger with IRT; |
|
• |
our ability to retain our key employees; |
|
• |
our ability to generate sufficient cash flows to pay distributions to our stockholders; |
|
• |
legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts, or REITs); |
|
• |
the impact of severe weather events; |
|
• |
the availability of capital; |
PART I — FINANCIAL INFORMATION (continued)
|
|
|
• |
changes in interest rates; and |
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this Quarterly Report. All forward-looking statements are made as of the date of this Quarterly Report and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.
All forward looking statements included herein should be read in connection with the risks identified in the “Risk Factors” section of this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission, or the SEC, on March 12, 2021.
We were formed on August 22, 2013, as a Maryland corporation that elected to be taxed as, and qualifies as, a REIT. As of September 30, 2021, we owned and managed a diverse portfolio of 70 multifamily properties comprised of 22,001 apartment homes and three parcels of land held for the development of apartment homes. We may acquire additional multifamily properties or pursue multifamily development projects in the future.
Agreement and Plan of Merger
On July 26, 2021, we and Steadfast Apartment REIT Operating Partnership, L.P., our subsidiary operating partnership, or the Operating Partnership, entered into an Agreement and Plan of Merger, or the IRT Merger Agreement, with Independence Realty Trust, Inc., or IRT, IRT’s operating partnership, Independence Realty Operating Partnership, LP, or IRT OP, and IRSTAR Sub, LLC, a wholly-owned subsidiary of IRT, or IRT Merger Sub.
On the terms, and subject to the conditions of, the IRT Merger Agreement, we will merge with and into IRT Merger Sub, which is referred to herein as the “Company Merger”, with IRT Merger Sub surviving the Company Merger as a wholly-owned subsidiary of IRT; and immediately thereafter, the Operating Partnership will merge with and into IRT OP, or the Partnership Merger, and, together with the Company Merger, the “IRT Mergers”, with IRT OP surviving the Partnership Merger.
In the Company Merger, each outstanding share of our common stock, par value $0.01 per share, will be converted automatically into the right to receive 0.905, or the Exchange Ratio, of a newly issued share of IRT common stock, par value $0.01 per share, or the IRT common stock, with cash paid in lieu of fractional shares.
In the Partnership Merger, each outstanding unit of limited partnership of the Operating Partnership will be converted into the right to receive the Exchange Ratio of a newly issued common unit of limited partnership of IRT OP, or the IRT common units. Under the agreement of limited partnership of IRT OP, IRT common unitholders may generally tender their IRT common units, in whole or in part, to IRT OP for redemption for a cash amount based on the then-market price of an equivalent number of shares of IRT common stock, and IRT may thereupon elect, at its option, to satisfy the redemption by issuing one share of IRT common stock for each IRT common unit tendered for redemption.
Pursuant to the IRT Mergers, our stockholders will receive, in aggregate, in exchange for their shares of common stock, approximately, 99.7 million shares of IRT common stock and limited partners in our Operating Partnership will receive, in aggregate, in exchange for their operating partnership units, approximately 6.4 million IRT OP common units.
PART I — FINANCIAL INFORMATION (continued)
Consummation of the IRT Mergers is subject to customary closing conditions, including, among others, receipt of IRT stockholder approval and approval of our stockholders, and is expected to occur in the fourth quarter of 2021. For more information on the Mergers, see our Definitive Proxy Statement filed with the SEC on September 29, 2021.
In connection with the approval of the IRT Mergers, on July 26, 2021, we announced that our board of directors, including all of our independent directors, voted to terminate our distribution reinvestment plan and the share repurchase plan, each termination effective as of the effective time of the Company Merger. Our board of directors, including all of our independent directors, also voted to suspend (1) the distribution reinvestment plan, effective as of the 10th day after notice is provided to stockholders and (2) indefinitely suspend the share repurchase plan, effective as of 30th day after notice is provided to stockholders.
As a result of the suspension of the distribution reinvestment plan, any distributions paid after the distribution payment date in August 2021, will be paid to our stockholders in cash. We can provide stockholders with assistance on directing cash distribution payments and answering questions. The suspension of the distribution reinvestment plan will not affect the payment of distributions to stockholders who previously received their distributions in cash. In addition, as a result of the suspension of the share repurchase plan, we will not process or accept any requests for redemption received after July 26, 2021.
PART I — FINANCIAL INFORMATION (continued)
COVID-19 Impact
We are carefully monitoring the ongoing COVID-19 pandemic and its impact on our business. During the quarter ended June 30, 2020, we instituted payment plans for our residents that were experiencing hardship due to COVID-19, which we refer to as the “COVID-19 Payment Plan.” Pursuant to the COVID-19 Payment Plan, we allowed qualifying residents to defer their rent, which is collected by us in monthly installment payments over the duration of the current lease or renewal term (which may not exceed 12 months). Additionally, for the months of May and June 2020, we provided certain qualifying residents with a one-time concession to incentivize their performance under the payment plan. If the qualifying resident failed to make payments pursuant to the COVID-19 Payment Plan, the concession was immediately terminated, and the qualifying resident was required to immediately repay the amount of the concession. Due to reduced demand, we did not offer residents any other payment plans during the remaining months of 2020. In the aggregate, approximately $2,053,821 in rent was subject to the COVID-19 Payment Plan, with $9,945 still due as of September 30, 2021.
In January 2021, we began offering an extension to the COVID-19 Payment Plan, or the Extension Plan, that allows eligible residents to defer their rent, which is collected by us in monthly installment payments over the lesser of the duration of the current lease term or a maximum of three months (with the exception of certain states that allow a maximum of six months deferral). Under the Extension Plan, no concessions are offered for residents with a payment plan duration of two months or less and residents who opted for the COVID-19 Payment Plan are not eligible to participate in the Extension Plan unless they paid off the amounts due under the COVID-19 Payment Plan. As of October 13, 2021, the number of qualifying residents who opted for the Extension Plan were 55 and approximately $37,000 in rent was subject to the Extension Plan.
During the quarter ended September 30, 2020, we initiated a debt forgiveness program for certain of our residents that were experiencing hardship due to COVID-19 and who were in default on their lease payments, which we refer to as the “Debt Forgiveness Program.” Pursuant to the Debt Forgiveness Program, we offered qualifying residents an opportunity to terminate the lease without being liable for any unpaid rent and penalties. We determined that accounts receivable of $2,610,927 related to the Debt Forgiveness Program are not probable of collection and therefore included these accounts in our reserve. In the aggregate, $298,576 of rent was written off as of September 30, 2021. As of September 30, 2021, approximately 55 of 455 residents that qualified for the Debt Forgiveness Program, vacated their apartment homes, terminating their lease resulting in the forgiveness and write-off of their debt. We may in the future continue to offer various types of payment plans or rent relief depending on the ongoing impact of the COVID-19 pandemic.
During the nine months ended September 30, 2021, we collected an average of 96% in rent due pursuant to our leases. We collected 94% in rent due pursuant to our leases through October 25, 2021. We have reserved approximately $3,863,876 of accounts receivable which we consider not probable for collection. Although the COVID-19 pandemic has not materially impacted our rent collections, the future impact of COVID-19 is still unknown. We are currently working with residents at our communities to obtain rental relief assistance pursuant to the Emergency Rental Assistance Program (“ERA”) adopted by the U.S. Department of Treasury. During the nine months ended September 30, 2021, 1,119 residents applied for the ERA, of which 1,057 residents received rental assistance in the aggregate amount of approximately $3,700,000.
Winter Storm
In February 2021, certain regions of the United States experienced winter storms and extreme cold temperatures, including in the states where we own and operate multifamily properties. The storms and the extreme cold temperatures resulted in power outages and freezing water pipes which negatively impacted some of our properties. Our properties are fully insured, and we expect the costs to be fully recoverable by insurance proceeds, less the plan’s deductible. During the nine months ended September 30, 2021, we wrote off $12,515,830 of carrying value of our fixed assets and recorded $10,800,111 of estimated repair expenses, with a corresponding increase in general and administrative expenses and an increase in our accounts payable and accrued liabilities, of which $8,249,358 has been paid as of September 30, 2021. We also recorded insurance recoveries of $23,315,941 for the estimated insurance claims proceeds in the amount of total losses incurred (as described above) as an increase in rents and other receivables. As of September 30, 2021, $6,875,000 of proceeds were received and $16,440,941 remained in rents and other receivables. As a result, while our net loss for the nine months ended September 30, 2021, was not impacted, we experienced a decrease in the carrying value of our real estate held for investment, net and increases to rents and
PART I — FINANCIAL INFORMATION (continued)
other receivables and accounts payable and accrued liabilities in the consolidated balance sheets for nine months ended September 30, 2021.
Public Offering
On December 30, 2013, we commenced our initial public offering of up to 66,666,667 shares of common stock at an initial price of $15.00 per share and up to 7,017,544 shares of common stock pursuant to our distribution reinvestment plan at an initial price of $14.25 per share. On March 24, 2016, we terminated our initial public offering. As of March 24, 2016, we had sold 48,625,651 shares of common stock for gross offering proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $14,414,752. Following the termination of our initial public offering, we continued to offer shares of our common stock pursuant to our distribution reinvestment plan until it was suspended in connection with entering into the IRT Merger Agreement. As of September 30, 2021, we had sold 112,299,272 shares of common stock for gross offering proceeds of $1,727,794,175, including 8,669,192 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $130,065,017 and 56,016,053 shares of common stock issued in connection with the Mergers (as defined below).
On March 9, 2021, our board of directors determined an estimated value per share of our common stock of $15.55 as of December 31, 2020. In connection with the determination of an estimated value per share, our board of directors determined a purchase price per share for the distribution reinvestment plan of $15.55, effective April 1, 2021. In the future, our board of directors may, in its sole discretion and from time to time, change the price at which we offer shares pursuant to our distribution reinvestment plan to reflect changes in our estimated value per share and other factors that our board of directors deems relevant.
Merger with Steadfast Income REIT, Inc.
On August 5, 2019, we, Steadfast Income REIT, Inc., or SIR, our Operating Partnership, Steadfast Income REIT Operating Partnership, L.P., the operating partnership of SIR, or the SIR OP, and SI Subsidiary, LLC, or SIR Merger Sub, entered into an Agreement and Plan of Merger, or the SIR Merger Agreement. Pursuant to the terms and conditions of the SIR Merger Agreement, on March 6, 2020, SIR merged with and into SIR Merger Sub with SIR Merger Sub surviving the merger, or the SIR Merger. Following the SIR Merger, SIR Merger Sub, as the surviving entity, continued as our wholly-owned subsidiary. In accordance with the applicable provisions of the Maryland General Corporation Law, or MGCL, the separate existence of SIR ceased.
At the effective time of the SIR Merger, each issued and outstanding share of SIR common stock (or a fraction thereof), $0.01 par value per share, converted into 0.5934 shares of our common stock.
Merger with Steadfast Apartment REIT III, Inc.
On August 5, 2019, we, Steadfast Apartment REIT III, Inc., or STAR III, our Operating Partnership, Steadfast Apartment REIT III Operating Partnership, L.P., the operating partnership of STAR III, or the STAR III OP, and SIII Subsidiary, LLC, or STAR III Merger Sub, entered into an Agreement and Plan of Merger, or the STAR III Merger Agreement. Pursuant to the terms and conditions of the STAR III Merger Agreement, on March 6, 2020, STAR III merged with and into STAR III Merger Sub with STAR III Merger Sub surviving the merger, or the STAR III Merger, and together with the SIR Merger, the “Mergers.” Following the STAR III Merger, STAR III Merger Sub, as the surviving entity, continued as our wholly-owned subsidiary. In accordance with the applicable provisions of the MGCL, the separate existence of STAR III ceased.
At the effective time of the STAR III Merger, each issued and outstanding share of STAR III common stock (or a fraction thereof), $0.01 par value per share, was converted into 1.430 shares of our common stock.
Combined Company
Through the Mergers, we acquired 36 multifamily properties with 10,166 apartment homes and a 10% interest in one unconsolidated joint venture that owned 20 multifamily properties with a total of 4,584 apartment homes, all of which had a gross real estate value of approximately $1.5 billion. The combined company after the Mergers retained the name “Steadfast
PART I — FINANCIAL INFORMATION (continued)
Apartment REIT, Inc.” Each merger qualified as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
Pre-Internalization Operating Partnerships Merger
On August 28, 2020, pursuant to an Agreement and Plan of Merger, our Operating Partnership merged with and into the SIR OP, or the SIR OP/STAR OP Merger. The SIR OP/STAR OP Merger was treated for U.S. federal income tax purposes as a tax-deferred contribution by us of all of the assets and liabilities of STAR Operating Partnership to SIR OP under Section 721(a) of the Internal Revenue Code.
Immediately following the consummation of the SIR OP/STAR OP Merger, on August 28, 2020, pursuant to an Agreement and Plan of Merger, STAR III OP merged with and into SIR OP, or the Operating Partnership Merger, and together with the SIR OP/STAR OP Merger, the Operating Partnership Mergers, with SIR OP being the “resulting partnership” and STAR III OP terminating.
On August 28, 2020, SIR OP changed its name to “Steadfast Apartment REIT Operating Partnership, L.P.”, which is referred to herein as the “Operating Partnership.” In addition, on August 28, 2020, prior to completion of the Operating Partnership Mergers, we acquired STAR III Merger Sub. On August 28, 2020, SIR Merger Sub, as the initial general partner of the Operating Partnership, transferred all of its general partnership interests to us, and we were admitted as a substitute general partner of the Operating Partnership.
On August 28, 2020, we, Steadfast Income Advisor, LLC, the initial limited partner of the Operating Partnership, or SIR Advisor, Steadfast Apartment Advisor III, LLC, a Delaware limited liability company and the special limited partner of the Operating Partnership, or STAR III Advisor, Wellington VVM LLC, a Delaware limited liability company and limited partner of the Operating Partnership, or Wellington, and Copans VVM, LLC, a Delaware limited liability company and limited partner of the Operating Partnership, or Copans, and together with Wellington, “VV&M”, entered into a Second Amended and Restated Agreement of Limited Partnership, or the Second A&R Partnership Agreement, in order to, among other things, reflect the consummation of the Operating Partnership Mergers.
The purpose of the pre-internalization Operating Partnership Mergers was to simplify our corporate structure so that we had a single operating partnership as our direct subsidiary.
Internalization Transaction
On August 31, 2020, we and the Operating Partnership entered into a series of transactions and agreements (such transactions and agreements hereinafter collectively referred to as the “Internalization Transaction”), with Steadfast REIT Investments, LLC, our former sponsor, or SRI, which resulted in the internalization of our external management functions provided by Steadfast Apartment Advisor, LLC, our former external advisor, which we refer to as our “Former Advisor,” and its affiliates. Prior to the Internalization Closing, which took place contemporaneously with the execution of the Contribution & Purchase Agreement (as defined below) on August 31, 2020, or the Internalization Closing, Steadfast Investment Properties, Inc., a California corporation, or SIP, Steadfast REIT Services, Inc., a California corporation, or Steadfast REIT Services, and their respective affiliates owned and operated all of the assets necessary to operate as a self-managed company, and employed all the employees necessary to operate as a self-managed company.
Pursuant to a Contribution and Purchase Agreement, between us, the Operating Partnership and SRI, SRI contributed to the Operating Partnership all of the membership interests in STAR RS Holdings, LLC, a Delaware limited liability company, or SRSH, and the assets and rights necessary to operate as a self-managed company in all material respects, and the liabilities associated with such assets and rights, or the Contribution, in exchange for $124,999,000, which was paid as follows: (1) $31,249,000 in cash, or the Cash Consideration, and (2) 6,155,613.92 Class B units of limited partnership interests in the Operating Partnership, or the Class B OP Units, having the agreed value set forth in the Contribution and Purchase Agreement, or the OP Unit Consideration. In addition, we purchased all of our Class A Convertible Stock held by the Former Advisor for $1,000. As a result of the Internalization Transaction, we became self-managed and acquired components of the advisory, asset management and property management operations of the Former Advisor and its affiliates by hiring the employees, who comprise the workforce necessary for the management and day-to-day real estate and accounting operations for us and the Operating Partnership. Additional information on the Internalization Transaction can be found on our Current Report in Form
PART I — FINANCIAL INFORMATION (continued)
8-K filed with the SEC on September 3, 2020. See also Note 3 (Internalization Transaction) to our consolidated financial statements in this Quarterly Report.
On July 16, 2021, we received a derivative demand letter addressed to our board of directors, purportedly sent on behalf of two stockholders, relating to the Internalization Transaction. The letter demanded that our board of directors appoint a committee to investigate the Internalization Transaction and, among other things, determine whether there exists any basis for us to pursue claims relating to that transaction, including for recovery of payments made in the transaction. In September 2021, we established a Demand Review Committee, composed of two independent directors, to pursue the purported claims related to the Internalization Transaction.
The Former Advisor
Prior to the Internalization Transaction, our day-to-day operations were externally managed by the Former Advisor, pursuant to the Amended and Restated Advisory Agreement effective as of March 6, 2020, by and between us and the Former Advisor, as amended, the Advisory Agreement. On August 31, 2020, prior to the Internalization Closing, we, the Former Advisor and the Operating Partnership entered into a Joinder Agreement pursuant to which the Operating Partnership became a party to the Advisory Agreement. On August 31, 2020, prior to the Internalization Closing, we and the Former Advisor entered into the First Amendment to Amended and Restated Advisory Agreement in order to remove certain restrictions in the Advisory Agreement related to business combinations and to provide that any amounts accrued to the Former Advisor commencing on September 1, 2020 were paid in cash to the Former Advisor by the Operating Partnership. In connection with the Internalization Transaction, STAR REIT Services, LLC, our subsidiary, or SRS, assumed the rights and obligations of the Advisory Agreement from the Former Advisor.
The Operating Partnership
Substantially all of our business is conducted through the Operating Partnership. We are the sole general partner of the Operating Partnership. As a condition to the Internalization Closing, on August 31, 2020, we, as the general partner and parent of the Operating Partnership, SRI and VV&M entered into the Operating Partnership Agreement (as defined above), to restate the Second A&R Partnership Agreement in order to, among other things, remove references to the limited partner interests previously held by SIR Advisor and STAR III Advisor, reflect the consummation of the Contribution, and designate Class B OP Units that were issued as the OP Unit Consideration.
The Operating Partnership Agreement provides that the Operating Partnership will be operated in a manner that will enable us to (1) satisfy the requirements for being classified as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code, which classification could result in the Operating Partnership being taxed as a corporation, rather than as a disregarded entity.
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2014. As a REIT, we generally will not be subject to federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate rates and would not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.
Market Outlook
The global COVID-19 pandemic and resulting shutdown of large components of the U.S. economy has created significant uncertainty and enhanced investment risk across many asset classes, including real estate. The degree to which our business is impacted by the COVID-19 pandemic will depend on a number of variables, including access to testing and vaccines, the reimposition of “shelter in place” orders, new strains of the virus and the continuation of new COVID-19 cases throughout the world.
PART I — FINANCIAL INFORMATION (continued)
While all property classes have been adversely impacted by last year’s economic downturn, we believe we are well-positioned to navigate this unprecedented period. We believe multifamily properties have been less adversely impacted than hospitality and retail properties, and our portfolio of moderate-income apartments should continue to outperform most other classes of multifamily properties as we benefit from favorable long-run economic and demographic trends. Home ownership rates should remain low. Millennials and Baby Boomers, the two largest demographic groups comprising roughly half of the total population in the United States, are expected to continue to increasingly choose rental housing over home ownership. Baby Boomers are downsizing their suburban homes and relocating to multifamily apartments while Millennials are renting multifamily apartments due to high levels of student debt and increased credit standards in order to qualify for a home mortgage. These factors should lead to continued growth as the economy recovers.
PART I — FINANCIAL INFORMATION (continued)
Our Real Estate Portfolio
As of September 30, 2021, we owned the 70 multifamily apartment communities and three parcels of land held for the development of apartment homes listed below:
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Average Monthly Occupancy(1) |
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Average Monthly Rent(2) |
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Property Name |
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Location |
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Purchase Date |
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Number of Homes |
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Purchase Price |
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Mortgage Debt Outstanding(3) |
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Sep 30, 2021 |
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Dec 31, 2020 |
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Sep 30, 2021 |
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Dec 31, 2020 |
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1 |
|
Villages at Spring Hill Apartments |
|
Spring Hill,
|
|
5/22/2014 |
|
176 |
|
|
$ |
14,200,000 |
|
|
(4) |
|
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98.9 |
% |
|
95.5 |
% |
|
$ |
1,163 |
|
|
$ |
1,093 |
|
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2 |
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Harrison Place Apartments |
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Indianapolis,
|
|
6/30/2014 |
|
307 |
|
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27,864,250 |
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(4) |
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96.4 |
% |
|
96.1 |
% |
|
1,035 |
|
|
967 |
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3 |
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The Residences on McGinnis Ferry |
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Suwanee,
|
|
10/16/2014 |
|
696 |
|
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98,500,000 |
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(4) |
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95.7 |
% |
|
95.1 |
% |
|
1,440 |
|
|
1,331 |
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4 |
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The 1800 at Barrett Lakes |
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Kennesaw,
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11/20/2014 |
|
500 |
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49,000,000 |
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40,684,145 |
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96.4 |
% |
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95.4 |
% |
|
1,152 |
|
|
1,089 |
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5 |
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The Oasis |
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Colorado
|
|
12/19/2014 |
|
252 |
|
|
40,000,000 |
|
|
39,551,880 |
|
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95.2 |
% |
|
94.4 |
% |
|
1,516 |
|
|
1,411 |
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6 |
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Columns on Wetherington |
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Florence, KY |
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2/26/2015 |
|
192 |
|
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25,000,000 |
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(4) |
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99.0 |
% |
|
95.3 |
% |
|
1,249 |
|
|
1,134 |
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7 |
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Preston Hills at Mill Creek |
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Buford, GA |
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3/10/2015 |
|
464 |
|
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51,000,000 |
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(4) |
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97.8 |
% |
|
96.6 |
% |
|
1,262 |
|
|
1,193 |
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8 |
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Eagle Lake Landing Apartments |
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Speedway, IN |
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3/27/2015 |
|
277 |
|
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19,200,000 |
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(4) |
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96.8 |
% |
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91.3 |
% |
|
901 |
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|
826 |
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9 |
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Reveal on Cumberland |
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Fishers, IN |
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3/30/2015 |
|
220 |
|
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29,500,000 |
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20,888,067 |
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97.3 |
% |
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96.8 |
% |
|
1,170 |
|
|
1,125 |
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10 |
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Heritage Place Apartments |
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Franklin, TN |
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4/27/2015 |
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105 |
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9,650,000 |
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8,610,219 |
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96.2 |
% |
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96.2 |
% |
|
1,215 |
|
|
1,132 |
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11 |
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Rosemont at East Cobb |
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Marietta, GA |
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5/21/2015 |
|
180 |
|
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16,450,000 |
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13,281,722 |
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98.9 |
% |
|
95.6 |
% |
|
1,140 |
|
|
1,071 |
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12 |
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Ridge Crossings Apartments |
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Hoover, AL |
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5/28/2015 |
|
720 |
|
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72,000,000 |
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57,759,204 |
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94.9 |
% |
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95.1 |
% |
|
1,067 |
|
|
1,008 |
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13 |
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Bella Terra at City Center |
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Aurora, CO |
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6/11/2015 |
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304 |
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37,600,000 |
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(4) |
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97.0 |
% |
|
95.1 |
% |
|
1,220 |
|
|
1,153 |
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14 |
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Hearthstone at City Center |
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Aurora, CO |
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6/25/2015 |
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360 |
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53,400,000 |
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(4) |
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96.9 |
% |
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93.3 |
% |
|
1,238 |
|
|
1,149 |
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15 |
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Arbors at Brookfield |
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Mauldin, SC |
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6/30/2015 |
|
702 |
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66,800,000 |
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(4) |
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95.3 |
% |
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94.7 |
% |
|
953 |
|
|
901 |
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16 |
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Carrington Park |
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Kansas City, MO |
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8/19/2015 |
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298 |
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39,480,000 |
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(4) |
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98.0 |
% |
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95.0 |
% |
|
1,106 |
|
|
1,063 |
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17 |
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Delano at North Richland Hills |
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North Richland
|
|
8/26/2015 |
|
263 |
|
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38,500,000 |
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31,886,617 |
|
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98.9 |
% |
|
97.0 |
% |
|
1,484 |
|
|
1,492 |
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18 |
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Meadows at North Richland Hills |
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North Richland
|
|
8/26/2015 |
|
252 |
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32,600,000 |
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26,644,808 |
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97.6 |
% |
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97.2 |
% |
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1,463 |
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|
1,417 |
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19 |
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Kensington by the Vineyard |
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Euless, TX |
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8/26/2015 |
|
259 |
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46,200,000 |
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33,188,565 |
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96.9 |
% |
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96.5 |
% |
|
1,548 |
|
|
1,470 |
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20 |
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Monticello by the Vineyard |
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Euless, TX |
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9/23/2015 |
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354 |
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52,200,000 |
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40,662,431 |
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96.6 |
% |
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95.2 |
% |
|
1,372 |
|
|
1,315 |
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21 |
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The Shores |
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Oklahoma City,
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|
9/29/2015 |
|
300 |
|
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36,250,000 |
|
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23,111,833 |
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94.3 |
% |
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96.3 |
% |
|
1,106 |
|
|
1,031 |
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22 |
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Lakeside at Coppell |
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Coppell, TX |
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10/7/2015 |
|
315 |
|
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60,500,000 |
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47,960,360 |
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95.9 |
% |
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94.9 |
% |
|
1,738 |
|
|
1,708 |
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23 |
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Meadows at River Run |
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Bolingbrook, IL |
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10/30/2015 |
|
374 |
|
|
58,500,000 |
|
|
41,258,442 |
|
|
95.2 |
% |
|
95.2 |
% |
|
1,490 |
|
|
1,421 |
|
||||
24 |
|
PeakView at T-Bone Ranch |
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Greeley, CO |
|
12/11/2015 |
|
224 |
|
|
40,300,000 |
|
|
(4) |
|
|
95.5 |
% |
|
94.2 |
% |
|
1,387 |
|
|
1,340 |
|
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25 |
|
Park Valley Apartments |
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Smyrna, GA |
|
12/11/2015 |
|
496 |
|
|
51,400,000 |
|
|
48,686,240 |
|
|
95.4 |
% |
|
96.4 |
% |
|
1,063 |
|
|
1,051 |
|
||||
26 |
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PeakView by Horseshoe Lake |
|
Loveland, CO |
|
12/18/2015 |
|
222 |
|
|
44,200,000 |
|
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38,091,358 |
|
|
97.3 |
% |
|
95.5 |
% |
|
1,477 |
|
|
1,396 |
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PART I — FINANCIAL INFORMATION (continued)
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Average Monthly Occupancy(1) |
|
Average Monthly Rent(2) |
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|
Property Name |
|
Location |
|
Purchase Date |
|
Number of Homes |
|
Purchase Price |
|
Mortgage Debt Outstanding(3) |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
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27 |
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Stoneridge Farms |
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Smyrna, TN |
|
12/30/2015 |
|
336 |
|
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$ |
47,750,000 |
|
|
$ |
45,412,028 |
|
|
97.3 |
% |
|
94.6 |
% |
|
$ |
1,283 |
|
|
$ |
1,239 |
|
28 |
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Fielder’s Creek |
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Englewood, CO |
|
3/23/2016 |
|
217 |
|
|
32,400,000 |
|
|
(4) |
|
|
94.5 |
% |
|
94.9 |
% |
|
1,220 |
|
|
1,180 |
|
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29 |
|
Landings of Brentwood |
|
Brentwood, TN |
|
5/18/2016 |
|
724 |
|
|
110,000,000 |
|
|
— |
|
|
97.8 |
% |
|
95.4 |
% |
|
1,333 |
|
|
1,252 |
|
||||
30 |
|
1250 West Apartments |
|
Marietta, GA |
|
8/12/2016 |
|
468 |
|
|
55,772,500 |
|
|
(4) |
|
|
96.6 |
% |
|
96.4 |
% |
|
1,148 |
|
|
1,051 |
|
||||
31 |
|
Sixteen50 @ Lake Ray Hubbard |
|
Rockwall, TX |
|
9/29/2016 |
|
334 |
|
|
66,050,000 |
|
|
(4) |
|
|
97.6 |
% |
|
96.4 |
% |
|
1,574 |
|
|
1,485 |
|
||||
32 |
|
Garrison Station(5) |
|
Murfreesboro,
|
|
5/30/2019 |
|
160 |
|
|
29,690,942 |
|
|
18,244,300 |
|
|
85.6 |
% |
|
— |
% |
|
1,236 |
|
|
— |
|
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33 |
|
Eleven10 @ Farmers Market |
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Dallas, TX |
|
1/28/2020 |
|
313 |
|
|
62,063,929 |
|
|
34,994,043 |
|
|
94.9 |
% |
|
94.2 |
% |
|
1,406 |
|
|
1,379 |
|
||||
34 |
|
Patina Flats at the Foundry |
|
Loveland, CO |
|
2/11/2020 |
|
155 |
|
|
45,123,782 |
|
|
(4) |
|
|
97.4 |
% |
|
93.5 |
% |
|
1,384 |
|
|
1,275 |
|
||||
35 |
|
Clarion Park Apartments(6) |
|
Olathe, KS |
|
3/6/2020 |
|
220 |
|
|
21,121,795 |
|
|
12,614,109 |
|
|
91.4 |
% |
|
93.6 |
% |
|
788 |
|
|
843 |
|
||||
36 |
|
Spring Creek Apartments(6) |
|
Edmond, OK |
|
3/6/2020 |
|
252 |
|
|
28,186,894 |
|
|
16,894,943 |
|
|
98.4 |
% |
|
96.0 |
% |
|
946 |
|
|
895 |
|
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37 |
|
Montclair Parc Apartment Homes(6) |
|
Oklahoma
|
|
3/6/2020 |
|
360 |
|
|
40,352,125 |
|
|
(7) |
|
|
95.8 |
% |
|
96.1 |
% |
|
972 |
|
|
905 |
|
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38 |
|
Hilliard Park Apartments(6) |
|
Columbus,
|
|
3/6/2020 |
|
201 |
|
|
28,599,225 |
|
|
11,591,441 |
|
|
96.5 |
% |
|
97.0 |
% |
|
1,233 |
|
|
1,149 |
|
||||
39 |
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Sycamore Terrace Apartments(6) |
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Terre Haute,
|
|
3/6/2020 |
|
250 |
|
|
34,419,259 |
|
|
23,017,688 |
|
|
98.0 |
% |
|
94.8 |
% |
|
1,276 |
|
|
1,155 |
|
||||
40 |
|
Hilliard Summit Apartments(6) |
|
Columbus,
|
|
3/6/2020 |
|
208 |
|
|
31,087,442 |
|
|
14,018,311 |
|
|
96.2 |
% |
|
95.7 |
% |
|
1,319 |
|
|
1,260 |
|
||||
41 |
|
Forty 57 Apartments(6) |
|
Lexington,
|
|
3/6/2020 |
|
436 |
|
|
63,030,831 |
|
|
33,313,390 |
|
|
96.6 |
% |
|
95.2 |
% |
|
1,046 |
|
|
964 |
|
||||
42 |
|
Riverford Crossing Apartments(6) |
|
Frankfort,
|
|
3/6/2020 |
|
300 |
|
|
38,139,145 |
|
|
18,994,781 |
|
|
97.3 |
% |
|
95.7 |
% |
|
1,079 |
|
|
1,002 |
|
||||
43 |
|
Hilliard Grand Apartments(6) |
|
Dublin, OH |
|
3/6/2020 |
|
314 |
|
|
50,549,232 |
|
|
23,734,176 |
|
|
97.8 |
% |
|
94.3 |
% |
|
1,369 |
|
|
1,280 |
|
||||
44 |
|
Deep Deuce at Bricktown(6) |
|
Oklahoma
|
|
3/6/2020 |
|
294 |
|
|
52,519,973 |
|
|
33,299,429 |
|
|
96.6 |
% |
|
95.2 |
% |
|
1,314 |
|
|
1,242 |
|
||||
45 |
|
Retreat at Quail North(6) |
|
Oklahoma
|
|
3/6/2020 |
|
240 |
|
|
31,945,162 |
|
|
13,449,828 |
|
|
95.8 |
% |
|
97.1 |
% |
|
1,049 |
|
|
986 |
|
||||
46 |
|
Tapestry Park Apartments(8) |
|
Birmingham,
|
|
3/6/2020 |
|
354 |
|
|
68,840,769 |
|
|
48,701,516 |
|
|
94.4 |
% |
|
97.2 |
% |
|
1,440 |
|
|
1,380 |
|
||||
47 |
|
BriceGrove Park Apartments(6) |
|
Canal
|
|
3/6/2020 |
|
240 |
|
|
27,854,616 |
|
|
(7) |
|
|
97.1 |
% |
|
94.6 |
% |
|
1,013 |
|
|
936 |
|
||||
48 |
|
Retreat at Hamburg Place(6) |
|
Lexington, KY |
|
3/6/2020 |
|
150 |
|
|
21,341,085 |
|
|
(7) |
|
|
98.0 |
% |
|
97.3 |
% |
|
1,131 |
|
|
1,026 |
|
||||
49 |
|
Villas at Huffmeister(6) |
|
Houston, TX |
|
3/6/2020 |
|
294 |
|
|
41,720,117 |
|
|
27,295,543 |
|
|
98.3 |
% |
|
97.6 |
% |
|
1,198 |
|
|
1,190 |
|
||||
50 |
|
Villas of Kingwood(6) |
|
Kingwood,
|
|
3/6/2020 |
|
330 |
|
|
54,428,708 |
|
|
34,722,165 |
|
|
96.1 |
% |
|
95.5 |
% |
|
1,232 |
|
|
1,207 |
|
||||
51 |
|
Waterford Place at Riata Ranch(6) |
|
Cypress, TX |
|
3/6/2020 |
|
228 |
|
|
28,278,262 |
|
|
(7) |
|
|
98.2 |
% |
|
95.2 |
% |
|
1,145 |
|
|
1,122 |
|
||||
52 |
|
Carrington Place(6) |
|
Houston, TX |
|
3/6/2020 |
|
324 |
|
|
42,258,525 |
|
|
(7) |
|
|
97.8 |
% |
|
95.7 |
% |
|
1,087 |
|
|
1,059 |
|
||||
53 |
|
Carrington at Champion Forest(6) |
|
Houston, TX |
|
3/6/2020 |
|
284 |
|
|
37,280,704 |
|
|
(7) |
|
|
96.8 |
% |
|
94.7 |
% |
|
1,052 |
|
|
1,103 |
|
||||
54 |
|
Carrington Park at Huffmeister(6) |
|
Cypress, TX |
|
3/6/2020 |
|
232 |
|
|
33,032,451 |
|
|
20,776,531 |
|
|
96.6 |
% |
|
97.0 |
% |
|
1,226 |
|
|
1,179 |
|
PART I — FINANCIAL INFORMATION (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly Occupancy(1) |
|
Average Monthly Rent(2) |
|||||||||||||||
|
|
Property Name |
|
Location |
|
Purchase Date |
|
Number of Homes |
|
Purchase Price |
|
Mortgage Debt Outstanding(3) |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
|
Sep 30, 2021 |
|
Dec 31, 2020 |
|||||||||||
55 |
|
Heritage Grand at Sienna Plantation(6) |
|
Missouri
|
|
3/6/2020 |
|
240 |
|
|
$ |
32,796,345 |
|
|
$ |
14,063,329 |
|
|
97.5 |
% |
|
95.4 |
% |
|
$ |
1,069 |
|
|
$ |
1,104 |
|
56 |
|
Mallard Crossing Apartments(6) |
|
Loveland,
|
|
3/6/2020 |
|
350 |
|
|
52,002,345 |
|
|
(7) |
|
|
96.3 |
% |
|
94.9 |
% |
|
1,238 |
|
|
1,150 |
|
||||
57 |
|
Reserve at Creekside(6) |
|
Chattanooga,
|
|
3/6/2020 |
|
192 |
|
|
24,522,910 |
|
|
15,041,320 |
|
|
97.9 |
% |
|
95.8 |
% |
|
1,206 |
|
|
1,096 |
|
||||
58 |
|
Oak Crossing Apartments(6) |
|
Fort Wayne,
|
|
3/6/2020 |
|
222 |
|
|
32,391,032 |
|
|
21,530,159 |
|
|
96.4 |
% |
|
94.6 |
% |
|
1,122 |
|
|
1,026 |
|
||||
59 |
|
Double Creek Flats(6) |
|
Plainfield, IN |
|
3/6/2020 |
|
240 |
|
|
35,490,439 |
|
|
23,521,962 |
|
|
98.8 |
% |
|
95.8 |
% |
|
1,138 |
|
|
1,075 |
|
||||
60 |
|
Jefferson at Perimeter Apartments(6) |
|
Dunwoody,
|
|
3/6/2020 |
|
504 |
|
|
113,483,898 |
|
|
73,044,588 |
|
|
95.8 |
% |
|
96.2 |
% |
|
1,359 |
|
|
1,334 |
|
||||
61 |
|
Bristol Village Apartments(6) |
|
Aurora, CO |
|
3/6/2020 |
|
240 |
|
|
62,019,009 |
|
|
34,959,554 |
|
|
96.3 |
% |
|
96.7 |
% |
|
1,455 |
|
|
1,400 |
|
||||
62 |
|
Canyon Resort at Great Hills Apartments(6) |
|
Austin, TX |
|
3/6/2020 |
|
256 |
|
|
48,319,858 |
|
|
31,647,800 |
|
|
95.7 |
% |
|
95.3 |
% |
|
1,434 |
|
|
1,371 |
|
||||
63 |
|
Reflections on Sweetwater Apartments(6) |
|
Lawrenceville,
|
|
3/6/2020 |
|
280 |
|
|
47,727,470 |
|
|
30,818,218 |
|
|
96.8 |
% |
|
97.5 |
% |
|
1,189 |
|
|
1,148 |
|
||||
64 |
|
The Pointe at Vista Ridge(6) |
|
Lewisville,
|
|
3/6/2020 |
|
300 |
|
|
51,625,394 |
|
|
30,998,587 |
|
|
98.3 |
% |
|
96.0 |
% |
|
1,338 |
|
|
1,282 |
|
||||
65 |
|
Belmar Villas(6) |
|
Lakewood,
|
|
3/6/2020 |
|
318 |
|
|
79,351,923 |
|
|
46,582,693 |
|
|
97.5 |
% |
|
94.7 |
% |
|
1,390 |
|
|
1,355 |
|
||||
66 |
|
Sugar Mill Apartments(6) |
|
Lawrenceville,
|
|
3/6/2020 |
|
244 |
|
|
42,784,645 |
|
|
24,711,189 |
|
|
97.5 |
% |
|
96.7 |
% |
|
1,274 |
|
|
1,154 |
|
||||
67 |
|
Avery Point Apartments(6) |
|
Indianapolis,
|
|
3/6/2020 |
|
512 |
|
|
55,706,852 |
|
|
31,112,580 |
|
|
97.1 |
% |
|
95.3 |
% |
|
885 |
|
|
841 |
|
||||
68 |
|
Cottage Trails at Culpepper Landing(6) |
|
Chesapeake,
|
|
3/6/2020 |
|
183 |
|
|
34,657,950 |
|
|
23,067,232 |
|
|
98.9 |
% |
|
97.8 |
% |
|
1,538 |
|
|
1,410 |
|
||||
69 |
|
Arista at Broomfield(8) |
|
Broomfield, CO |
|
3/13/2020 |
|
— |
|
|
23,418,527 |
|
|
— |
|
|
— |
% |
|
— |
% |
|
— |
|
|
— |
|
||||
70 |
|
VV&M Apartments |
|
Dallas, TX |
|
4/21/2020 |
|
310 |
|
|
59,969,074 |
|
|
45,302,903 |
|
|
96.1 |
% |
|
92.6 |
% |
|
1,389 |
|
|
1,363 |
|
||||
71 |
|
Flatirons Apartments(9) |
|
Broomfield, CO |
|
6/19/2020 |
|
— |
|
|
9,168,717 |
|
|
— |
|
|
— |
% |
|
— |
% |
|
— |
|
|
— |
|
||||
72 |
|
Los Robles |
|
San Antonio, TX |
|
11/19/2020 |
|
306 |
|
|
51,620,836 |
|
|
— |
|
|
98.4 |
% |
|
90.5 |
% |
|
1,344 |
|
|
1,261 |
|
||||
73 |
|
Ballpark Apartments at Town Madison |
|
Huntsville,
|
|
6/29/2021 |
|
274 |
|
|
77,466,685 |
|
|
— |
|
|
93.8 |
% |
|
— |
% |
|
1,491 |
|
|
— |
|
||||
|
|
|
|
|
|
|
|
22,001 |
|
|
$ |
3,270,939,249 |
|
|
$ |
1,389,742,227 |
|
|
96.5 |
% |
|
95.4 |
% |
|
$ |
1,237 |
|
|
$ |
1,173 |
|
________________
(1) |
As of September 30, 2021, our portfolio was approximately 97.7% leased, calculated using the number of occupied and contractually leased apartment homes divided by total apartment homes. |
(2) |
Average monthly rent is based upon the effective rental income for the month of September 2021 after considering the effect of vacancies, concessions and write-offs. |
(3) |
Mortgage debt outstanding is net of deferred financing costs, net and premiums and discounts, net associated with the loans for each individual property listed above but excludes the principal balance of $750,477,000 and associated deferred financing costs of $4,977,103 related to the refinancings pursuant to our credit facilities and revolver, each as described herein. |
PART I — FINANCIAL INFORMATION (continued)
(4) |
Properties secured under the terms of the Master Credit Facility Agreement, or MCFA, with Newmark Group Inc., formerly Berkeley Point Capital, LLC, or the Facility Lender. |
(5) |
We acquired the Garrison Station property on May 30, 2019, which included unimproved land, currently zoned as a planned unit development, or PUD. The current zoning permits the development of the property into a multifamily community with 176 apartment homes of 1, 2 and 3-bedrooms with a typical mix for this market. On October 16, 2019, we obtained a loan from PNC Bank, National Association, or PNC Bank, in an amount up to a maximum principal balance of $19,800,000 to finance a portion of the development and construction. As of September 30, 2021, eight buildings comprised of 160 apartment homes were placed in service and were 90.5% leased, and are included within total real estate held for investment, net in the accompanying consolidated balance sheets. |
(6) |
We acquired 36 real estate properties in the Mergers on March 6, 2020, for an aggregate purchase price of $1,575,891,924, which represents the fair value of the acquired real estate assets including capitalized transaction costs. |
(7) |
Properties secured under the terms of a Master Credit Facility Agreement with PNC Bank, or the PNC MCFA. |
(8) |
We acquired the Arista at Broomfield property on March 13, 2020, which included unimproved land, currently zoned as a PUD. The current zoning permits the development of the property into a multifamily community with 325 apartment homes of 1, 2 and 3-bedrooms with a typical mix for this market. |
(9) |
We acquired the Flatirons property on June 19, 2020, which included unimproved land, currently zoned as a PUD. The current zoning permits the development of the property into a multifamily community with 296 apartment homes of studio, 1 and 2-bedrooms with a typical mix for this market. |
The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on March 12, 2021. There have been no significant changes in our critical accounting policies from those reported in our Annual Report, or the Annual Report, except for the accounting policy regarding casualty loss, which is described below. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
Casualty Loss
We carry liability insurance to mitigate our exposure to certain losses, including those relating to property damage and business interruption. We record the estimated amount of expected insurance proceeds for property damage and other losses incurred as an asset (typically a receivable from the insurer) and income up to the amount of the losses incurred when receipt of insurance proceeds is deemed probable. Any amount of insurance recovery in excess of the amount of the losses incurred is considered a gain contingency and is recorded in other income when the proceeds are received. During the nine months ended September 30, 2021, we incurred property damage and other losses of $23,315,941 as a result of winter storms and extreme cold temperatures that led to power outages and freezing water pipes at some of our properties, which was recorded as general and administrative expenses, with a corresponding insurance recoveries income up to the amount of losses incurred (as described above) within general and administrative expenses in the accompanying consolidated statements of operations.
Distributions
PART I — FINANCIAL INFORMATION (continued)
Our board of directors has declared daily distributions that are paid on a monthly basis. We expect to continue paying monthly distributions unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. We may declare distributions in excess of our funds from operations. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year.
Distributions declared (1) accrued daily to our stockholders of record as of the close of business on each day, (2) are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month and (3) were calculated at a rate of $0.002466 per share per day during the month of January 2021, which if paid each day over a 365-day period, is equivalent to $0.90 per share, and were calculated at a rate of $0.001438 per share per day commencing on February 1, 2021 through September 30, 2021, which if paid each day over a 365-day period, is equivalent to $0.525 per share. As a result of the suspension of the DRP on July 26, 2021, any distributions paid after the distribution payment date in August 2021 will be paid to our stockholders in cash.
The distributions declared and paid during the three fiscal quarters of 2021, along with the amount of distributions reinvested pursuant to the distribution reinvestment plan were as follows:
|
|
|
|
|
|
Distributions Paid(3) |
|
Sources of Distributions Paid |
|
|
||||||||||||||||||||||
Period |
|
Distributions Declared(1) |
|
Distributions Declared Per Share(1)(2) |
|
Cash |
|
Reinvested |
|
Total |
|
Cash Flow From Operations |
|
Funds Equal to Amounts Reinvested in our Distribution Reinvestment Plan |
|
Net Cash Provided by Operating Activities |
||||||||||||||||
1st Quarter 2021 |
|
$ |
18,909,212 |
|
|
$ |
0.161 |
|
|
$ |
18,012,522 |
|
|
$ |
4,600,603 |
|
|
$ |
22,613,125 |
|
|
$ |
4,040,865 |
|
|
$ |
18,572,260 |
|
|
$ |
4,040,865 |
|
2nd Quarter 2021 |
|
15,355,645 |
|
|
0.131 |
|
|
12,412,151 |
|
|
3,108,489 |
|
|
15,520,640 |
|
|
15,520,640 |
|
|
— |
|
|
25,001,402 |
|
||||||||
3rd Quarter 2021 |
|
15,525,324 |
|
|
0.132 |
|
|
13,471,671 |
|
|
2,055,356 |
|
|
15,527,027 |
|
|
15,527,027 |
|
|
— |
|
|
27,430,618 |
|
||||||||
|
|
$ |
49,790,181 |
|
|
$ |
0.425 |
|
|
$ |
43,896,344 |
|
|
$ |
9,764,448 |
|
|
$ |
53,660,792 |
|
|
$ |
35,088,532 |
|
|
$ |
18,572,260 |
|
|
$ |
56,472,885 |
|
____________________
(1) |
Distributions during the month ended January 2021 were based on daily record dates and calculated at a rate of $0.002466 per share per day. On January 12, 2021, our board of directors determined to reduce the distribution rate to $0.001438 per share per day commencing on February 1, 2021 and ending February 28, 2021, which was extended through September 30, 2021, and which if paid each day over a 365-day period is equivalent to $0.525 per share. |
(2) |
Assumes each share was issued and outstanding each day during the period presented. |
(3) |
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately three days following month end. |
For the three and nine months ended September 30, 2021, we paid aggregate distributions of $15,527,027 and $53,660,792, including $13,471,671 and $43,896,344 of distributions paid in cash and 132,177 and 634,155 shares of our common stock issued pursuant to our distribution reinvestment plan for $2,055,356 and $9,764,448, respectively. For the three and nine months ended September 30, 2021, our net loss was $11,646,149 and $40,156,623, we had funds from operations, or FFO, of $22,246,823 and $60,439,823 and net cash provided by operations of $27,430,618 and $56,472,885, respectively. For the three and nine months ended September 30, 2021, we funded $15,527,027 and $35,088,532, or 100% and 65%, of total distributions paid, including shares issued pursuant to our distribution reinvestment plan, from net cash provided by operating activities and $0 and $18,572,260, or 0% and 35%, from funds equal to our distribution reinvestment plan, respectively. Since inception, of the $340,057,852 in total distributions paid through September 30, 2021, including shares issued pursuant to our distribution reinvestment plan, 69% of such amounts were funded from cash flow from operations, 25% were funded from funds equal to amounts reinvested in our distribution reinvestment plan and 6% were funded from net public offering proceeds. For
PART I — FINANCIAL INFORMATION (continued)
information on how we calculate FFO and the reconciliation of FFO to net loss, see “—Funds from Operations and Modified Funds from Operations.”
Our goal is to pay distributions solely from cash flow from operations. Because we may receive income from interest or rents at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period, and we expect to pay these distributions in advance of our actual receipt of these funds. In these instances, our board of directors has the authority under our organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings or offering proceeds. We have not established a limit on the amount of proceeds we may use from sources other than cash flow from operations to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have fewer funds available for investments.
We continue to monitor the outbreak of the COVID-19 pandemic and its impact on our liquidity. Our operations could be materially negatively affected if the economic downturn is prolonged, which could adversely affect our operating results and therefore our ability to pay our distributions.
Inflation
Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave at the end of the lease term and therefore will expose us to the effects of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.
With respect to other commercial properties, we expect in the future to include provisions in our leases designed to protect us from the impact of inflation. These provisions include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance.
As of September 30, 2021, we had not entered into any material leases as a lessee, except for a sub-lease entered into in connection with the Internalization Transaction on September 1, 2020. See Note 10 (Related Party Arrangements) to our consolidated financial statements in this Quarterly Report for details.
REIT Compliance
To continue to qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We monitor the operations and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year following the year we initially elected to be taxed as a REIT, we would be subject to federal income tax on our taxable income at regular corporate rates.
Liquidity and Capital Resources
We use secured borrowings, and intend to use in the future secured and unsecured borrowings. At September 30, 2021, our debt was approximately 56% of the value of our properties, as determined by the most recent valuations performed by an independent third-party appraiser as of December 31, 2020. Going forward, we expect that our borrowings (after debt amortization) will be approximately 55% to 60% of the value of our properties and other real estate-related assets. Under our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets, which generally approximates to 75% of the aggregate cost of our assets, though we may exceed this limit only under certain circumstances.
PART I — FINANCIAL INFORMATION (continued)
Our principal demand for funds will be to fund value-enhancement, a portion of development projects and other capital improvement projects, to pay operating expenses and interest on our outstanding indebtedness and to make distributions to our stockholders. Over time, we intend to generally fund our cash needs, other than asset acquisitions, from operations. Otherwise, we expect that our principal sources of working capital will include:
|
• |
unrestricted cash balance, which was $122,107,875 as of September 30, 2021; |
|
• |
various forms of secured and unsecured financing; |
|
• |
equity capital from joint venture partners; and |
|
• |
proceeds from our distribution reinvestment plan. |
Over the short term, we believe that our sources of capital, specifically our cash balances, cash flow from operations, our ability to raise equity capital from joint venture partners and our ability to obtain various forms of secured and unsecured financing will be adequate to meet our liquidity requirements and capital commitments.
Over the longer term, in addition to the same sources of capital we will rely on to meet our short-term liquidity requirements, we may also conduct additional public or private offerings of our securities, refinance debt or dispose of assets to fund our operating activities, debt service, distributions and future property acquisitions and development projects. We expect these resources will be adequate to fund our ongoing operating activities as well as providing capital for investment in future development and other joint ventures along with potential forward purchase commitments.
PART I — FINANCIAL INFORMATION (continued)
Credit Facilities
Master Credit Facility
On July 31, 2018, 16 of our indirect wholly-owned subsidiaries terminated the existing mortgage loans with their lenders for an aggregate principal amount of $479,318,649 and entered into the MCFA with the Facility Lender, for an aggregate principal amount of $551,669,000. On February 11, 2020, in connection with the financing of Patina Flats at the Foundry, we and the Facility Lender amended the MCFA to include Patina Flats at the Foundry and an unencumbered multifamily property owned by us as substitute collateral for three multifamily properties disposed of and released from the MCFA. We also increased our outstanding borrowings pursuant to the MCFA by $40,468,000, a portion of which was attributable to the acquisition of Patina Flats at the Foundry. The MCFA provides for four tranches: (1) a fixed rate loan in the aggregate principal amount of $331,001,400 that accrues interest at 4.43% per annum; (2) a fixed rate loan in the aggregate principal amount of $137,917,250 that accrues interest at 4.57% per annum; (3) a variable rate loan in the aggregate principal amount of $82,750,350 that accrues interest at the one-month London Interbank Offered Rate, or LIBOR, plus 1.70% per annum; and (4) a fixed rate loan in the aggregate principal amount of $40,468,000 that accrues interest at 3.34% per annum. The first three tranches have a maturity date of August 1, 2028, and the fourth tranche has a maturity date of March 1, 2030, unless, in each case, the maturity date is accelerated in accordance with the terms of the loan documents. Interest only payments are payable monthly through August 1, 2025 and April 1, 2027 on the first three tranches and fourth tranche, respectively, with interest and principal payments due monthly thereafter. We paid $2,072,480 in the aggregate in loan origination fees to the Facility Lender in connection with the refinancings, and paid our Former Advisor a loan coordination fee of $3,061,855.
PNC Master Credit Facility
On June 17, 2020, seven of our indirect wholly-owned subsidiaries, each a “Borrower” and collectively, the “Facility Borrowers” entered into the PNC MCFA with PNC Bank, for an aggregate principal amount of $158,340,000. The PNC MCFA provides for two tranches: (1) a fixed rate loan in the aggregate principal amount of $79,170,000 that accrues interest at 2.82% per annum; and (2) a variable rate loan in the aggregate principal amount of $79,170,000 that accrues interest at the one-month LIBOR plus 2.135% per annum. If LIBOR is no longer posted through electronic transmission, is no longer available or, in PNC Bank’s determination, is no longer widely accepted or has been replaced as the index for similar financial instruments, PNC Bank will choose a new index taking into account general comparability to LIBOR and other factors, including any adjustment factor to preserve the relative economic positions of the Borrowers and PNC Bank with respect to any advances made pursuant to the PNC MCFA. We paid $633,360 in the aggregate in loan origination fees to PNC Bank in connection with the financings, and paid the Former Advisor a loan coordination fee of $791,700.
Revolving Credit Loan Facility
On June 26, 2020, we entered into a revolving credit loan facility, or the Revolver, with PNC Bank in an amount not to exceed $65,000,000. The Revolver provides for advances, each, a “Revolver Loan”, solely for the purpose of financing the costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The Revolver has a maturity date of June 26, 2023, subject to extension, as further described in the loan agreement. Advances made under the Revolver are secured by the Landings at Brentwood property.
We have the option to select the interest rate in respect of the outstanding unpaid principal amount of the Revolver Loans from the following options: (1) a fluctuating rate per annum equal to the sum of the daily LIBOR rate plus the daily LIBOR rate spread or (2) a fluctuating rate per annum equal to the base rate plus the alternate rate spread. No amounts were outstanding on the Revolver as of September 30, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, the advances obtained and certain financing costs incurred under the MCFA, PNC MCFA and the Revolver, which is included in credit facilities, net, in the accompanying consolidated balance sheets, are summarized in the following table.
|
|
September 30, 2021 |
|
December 31, 2020 |
||||
Principal balance on MCFA, gross |
|
$ |
592,137,000 |
|
|
$ |
592,137,000 |
|
Principal balance on PNC MCFA, gross |
|
158,340,000 |
|
|
158,340,000 |
|
||
Deferred financing costs, net on MCFA(1) |
|
(3,083,410) |
|
|
(3,436,850) |
|
||
Deferred financing costs, net on PNC MCFA(2) |
|
(1,553,045) |
|
|
(1,689,935) |
|
||
Deferred financing costs, net on Revolver(3) |
|
(340,648) |
|
|
(487,329) |
|
||
Credit facilities, net |
|
$ |
745,499,897 |
|
|
$ |
744,862,886 |
|
_______________
(1) |
Accumulated amortization related to deferred financing costs in respect of the MCFA as of September 30, 2021 and December 31, 2020, was $1,651,705 and $1,298,265, respectively. |
(2) |
Accumulated amortization related to deferred financing costs in respect of the PNC MCFA as of September 30, 2021 and December 31, 2020, was $236,174 and $99,283, respectively. |
(3) |
Accumulated amortization related to deferred financing costs in respect of the Revolver as of September 30, 2021 and December 31, 2020, was $248,230 and $101,549, respectively. |
Forward Contracts
On May 6, 2021 and June 14, 2021, we entered into agreements, or the Forward Contract Obligations, with the general contractor, or GC, to acquire, for a fixed price, a lumber material package and mixed material package to be used in the construction of the Arista at Broomfield development. Under the Forward Contract Obligations, the GC is obligated to deliver the specific package of lumber and mixed materials and we are obligated to pay the agreed upon sum of $8,949,562 and $6,532,344, respectively, to the GC upon delivery, which is estimated to begin in the fourth quarter of 2021. Pursuant to the Forward Contract Obligations, the GC owns and is responsible for storage of the lumber and mixed material packages prior to delivery to us. The Forward Contract Obligations are recorded in the consolidated financial statements in the period in which the Forward Contract Obligations are cancelled or the lumber and or mixed material packages are purchased from the GC for use in the development.
Construction loan
On October 16, 2019, we entered into an agreement with PNC Bank for a construction loan related to the development of Garrison Station, a development project in Murfreesboro, TN, in an aggregate principal amount not to exceed $19,800,000 for a thirty-six month initial term and two twelve month mini-perm extensions. The rate of interest on the construction loan is daily LIBOR plus 2.00%, which then reduces to the daily LIBOR plus 1.80% upon achieving completion as defined in the construction loan agreement and at a debt service coverage ratio of 1.15x. The loan includes a 0.4% fee at closing, a 0.1% fee upon exercising the mini-perm and a 0.1% fee upon extending the mini-perm, each payable to PNC Bank. There is an exit fee of 1% which will be waived if permanent financing is secured through PNC Bank or one of their affiliates. As of September 30, 2021 and December 31, 2020, the principal outstanding balance on the construction loan was $18,244,300 and $6,264,549, respectively.
Assumed Debt as a Result of the Completion of Mergers
On March 6, 2020, upon consummation of the Mergers, we assumed all of SIR’s and STAR III’s obligations under the outstanding mortgage loans secured by 29 properties. We recognized the fair value of the assumed notes payable in the Mergers of $795,431,027, which consisted of the assumed principal balance of $791,020,471 and a net premium of $4,410,556.
The following is a summary of the terms of the assumed loans on the date of the Mergers:
|
|
|
|
|
|
Interest Rate Range |
|
|
||||
Type |
|
Number of Instruments |
|
Maturity Date Range |
|
Minimum |
|
Maximum |
|
Principal Outstanding At Merger Date |
||
Variable rate |
|
2 |
|
1/1/2027 - 9/1/2027 |
|
1-Mo LIBOR + 2.195% |
|
1-Mo LIBOR + 2.31% |
|
$ |
64,070,000 |
|
Fixed rate |
|
27 |
|
10/1/2022 - 10/1/2056 |
|
3.19% |
|
4.66% |
|
726,950,471 |
|
|
Assumed Principal Mortgage Notes Payable |
|
29 |
|
|
|
|
|
|
|
$ |
791,020,471 |
|
Reference Rate Reform
In July 2017, the Financial Conduct Authority announced it intended to stop compelling banks to submit rates for the calculation of LIBOR after 2021. We are monitoring the market transition from LIBOR and other inter bank offered rates to alternative reference rates, such as the secured overnight financing rate, or SOFR, which we refer to as reference rate reform. For more information on reference rate reform, see Note 2 (Summary of Significant Accounting Policies) to our consolidated financial statements in this Quarterly Report for details. We identified the instruments influenced by LIBOR to be our variable rate mortgage notes payable and interest rate cap agreements, a majority of which, are expected to continue to use LIBOR through June 2023 or beyond until lenders and other market participants finalize their transition plans. Once transition plans are finalized, it is expected that SOFR will be used. Given the nature of the expected changes to our interest rate cap agreements and variable rate mortgage notes payable, we expect to meet the conditions of the practical expedients provided by the FASB and elect to not apply the modification accounting requirements to our contracts affected by the reference rate reform within the permitted period of December 31, 2022.
Cash Flows Provided by Operating Activities
During the nine months ended September 30, 2021, net cash provided by operating activities was $56,472,885, compared to $42,185,327 for the nine months ended September 30, 2020. The increase in our net cash provided by operating activities is primarily due to the elimination of investment management fees, loan coordination fees, property management fees and property management reimbursements paid to our Former Advisor prior to the Internalization Transaction, partially offset by an increase in interest payments and an increase related to the damage caused to certain multifamily properties impacted by the winter storm that took place in February 2021, compared to the same prior year period.
Cash Flows (Used in) Provided by Investing Activities
During the nine months ended September 30, 2021, net cash used in investing activities was $145,375,935, compared to $57,369,417 of net cash provided by investing activities during the nine months ended September 30, 2020. The increase in our net cash used in investing activities was primarily due to the increase in cash and restricted cash acquired in connection with the Mergers, net of transaction costs, and the decrease in net proceeds from the sale of real estate investments and the decrease in net proceeds from the sale of our unconsolidated joint venture, partially offset by the decrease in the acquisition of land held for the development of apartment homes during the nine months ended September 30, 2021, compared to the same prior year period. Net cash used in investing activities during the nine months ended September 30, 2021, consisted of the following:
|
• |
$75,966,685 of cash used for the acquisition of real estate investments; |
|
• |
$43,476,629 of cash used for improvements to real estate investments; |
|
• |
$25,363,295 of cash used for additions to real estate held for development; |
|
• |
$1,500,000 of cash used for escrow deposits for real estate acquisitions; |
|
• |
$59,700 of cash used to purchase interest rate cap agreements; and |
|
• |
$990,374 of cash provided by proceeds from insurance claims. |
Cash Flows (Used in) Provided by Financing Activities
PART I — FINANCIAL INFORMATION (continued)
During the nine months ended September 30, 2021, net cash used in financing activities was $47,826,022, compared to $106,044,570 of net cash provided by financing activities during the nine months ended September 30, 2020. The change from net cash provided by financing activities to net cash used in financing activities was primarily due to a decrease in proceeds received from borrowings on the MCFA and PNC MCFA and an increase in repurchases of common stock from common stockholders during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, partially offset by a decrease in payments on our mortgage notes payable, a decrease in deferred financing costs and an increase in proceeds from the issuance of mortgage notes payable during the nine months ended September 30, 2021, compared to the same prior year period. Net cash used in financing activities during the nine months ended September 30, 2021, consisted of the following:
|
• |
$5,200,646 of net cash from the issuance of a mortgage note payable after $6,360,104, of principal payments on mortgage notes payable; |
|
• |
$43,896,344 of net cash distributions to our stockholders, after giving effect to distributions reinvested by stockholders of $9,764,448; |
|
• |
$419,000 of loan financing deposits in connection with the IRT Merger; and |
|
• |
$9,130,324 of cash paid for the repurchase of common stock. |
PART I — FINANCIAL INFORMATION (continued)
Contractual Commitments and Contingencies
As of September 30, 2021, we had (1) indebtedness totaling $2,135,242,124, comprised of an aggregate principal amount of $2,143,426,538, net deferred financing costs of $10,724,664 and net premiums of $2,540,250 and (2) the Forward Contract Obligations of $15,481,906. The following is a summary of our contractual obligations as of September 30, 2021:
|
|
|
|
Payments due by period |
||||||||||||||||
Contractual Obligations |
|
Total |
|
Less than 1 year |
|
1-3 years |
|
3-5 years |
|
More than 5 years |
||||||||||
Interest payments on outstanding debt obligations(1) |
|
$ |
556,468,435 |
|
|
$ |
20,045,419 |
|
|
$ |
156,760,031 |
|
|
$ |
145,521,285 |
|
|
$ |
234,141,700 |
|
Principal payments on outstanding debt obligations(2) |
|
2,143,426,538 |
|
|
2,317,869 |
|
|
113,773,400 |
|
|
255,744,781 |
|
|
1,771,590,488 |
|
|||||
Forward contract obligations(3) |
|
15,481,906 |
|
|
15,481,906 |
|
|
— |
|
|
— |
|
|
— |
|
|||||
Total |
|
$ |
2,715,376,879 |
|
|
$ |
37,845,194 |
|
|
$ |
270,533,431 |
|
|
$ |
401,266,066 |
|
|
$ |
2,005,732,188 |
|
________________
(1) |
Scheduled interest payments on outstanding debt obligations are based on the outstanding principal amounts and interest rates in effect at September 30, 2021. We incurred interest expense of $20,279,374 and $60,174,405 during the three and nine months ended September 30, 2021, including amortization of deferred financing costs totaling $548,726 and $1,646,291, net unrealized loss from the change in fair value of interest rate cap agreements of $40,902 and $39,699, amortization of net loan premiums and discounts of $(428,434) and $(1,269,484), credit facility commitment fees of $32,861 and $98,852, imputed interest on the finance lease portion of the sublease of $65 and $258, and capitalized interest of $284,511 and $844,577, respectively. The capitalized interest is included in real estate on the consolidated balance sheets. |
(2) |
Scheduled principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude net deferred financing costs and any loan premiums or discounts associated with certain notes payable. |
(3) |
Scheduled payments on the Forward Contract Obligations are based on the terms of the forward contract agreements entered into with the GC on May 6, 2021 and June 14, 2021, for the lumber and mixed material packages required to construct the Arista at Broomfield project according to the approved plans, locking in the price of the lumber and mixed materials as of that date. |
Our debt obligations contain customary financial and non-financial debt covenants. As of September 30, 2021 and December 31, 2020, we were in compliance with all debt covenants.
PART I — FINANCIAL INFORMATION (continued)
Overview
The discussion that follows is based on our consolidated results of operations for the three and nine months ended September 30, 2021 and 2020. The ability to compare one period to another is primarily affected by (1) the acquisitions and dispositions of multifamily properties inclusive of 36 multifamily properties acquired in the Mergers during the nine months ended September 30, 2020, the acquisition of two multifamily properties since September 30, 2020, the disposition of one multifamily property since September 30, 2020, and to a lesser extent placing into service 160 apartment homes previously held for development during the nine months ended September 30, 2021, and (2) the Internalization Closing. As of September 30, 2021, we owned 70 multifamily properties and three parcels of land held for the development of apartment homes. Our results of operations were also affected by our value-enhancement activity completed through September 30, 2021. Finally, upon completion of the proposed Mergers with IRT, our operations will be combined with those of IRT which will have a significant impact on the results of operations as both companies operate as a single combined company.
To provide additional insight into our operating results, we are also providing a detailed analysis of same-store versus non-same-store net operating income, or NOI. For more information on NOI and a reconciliation of NOI (a non-GAAP financial measure) to net loss, see “—Net Operating Income.”
Our results of operations for the three and nine months ended September 30, 2021 and 2020, are not indicative of those expected in future periods. We continued to perform value-enhancement projects, which may have an impact on our future results of operations. As a result of the Internalization Transaction, we are now a self-managed REIT and no longer bear the costs of the various fees and expense reimbursements previously paid to our Former Advisor and its affiliates. However, our expenses include the compensation and benefits of our officers, employees and consultants, as well as overhead previously paid by our Former Advisor and its affiliates.
Additionally, the outbreak of COVID-19 impacted our residents’ ability to pay rent which in turn could impact our future revenues and expenses. The impact of COVID-19 on our future results could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information, which may emerge concerning the severity of “future waves” of COVID-19 outbreaks, the success of actions taken to contain or treat COVID-19, access to testing and vaccines, and reactions by consumers, companies, governmental entities and capital markets.
Consolidated Results of Operations for the Three Months Ended September 30, 2021, Compared to the Three Months Ended September 30, 2020
The following table summarizes the consolidated results of operations for the three months ended September 30, 2021 and 2020:
|
|
For the Three Months Ended September 30, |
|
|
|
|
|
$ Change Due to Acquisitions or Dispositions(1) |
|
$ Change Due to Properties Held Throughout Both Periods and Corporate Level Activity(2) |
|||||||||||||
|
|
2021 |
|
2020 |
|
Change $ |
|
Change % |
|
|
|||||||||||||
Total revenues |
|
$ |
90,641,893 |
|
|
$ |
83,670,508 |
|
|
$ |
6,971,385 |
|
|
8 |
% |
|
$ |
1,183,933 |
|
|
$ |
5,787,452 |
|
Operating, maintenance and management |
|
(23,114,563) |
|
|
(21,567,499) |
|
|
(1,547,064) |
|
|
(7) |
% |
|
(282,129) |
|
|
(1,264,935) |
|
|||||
Real estate taxes and insurance |
|
(12,819,459) |
|
|
(12,935,004) |
|
|
115,545 |
|
|
1 |
% |
|
(93,610) |
|
|
209,155 |
|
|||||
Fees to affiliates |
|
(4,158) |
|
|
(8,449,715) |
|
|
8,445,557 |
|
|
100 |
% |
|
221,374 |
|
|
8,224,183 |
|
|||||
Depreciation and amortization |
|
(34,051,286) |
|
|
(47,564,706) |
|
|
13,513,420 |
|
|
28 |
% |
|
(807,676) |
|
|
14,321,096 |
|
|||||
Interest expense |
|
(20,279,374) |
|
|
(20,628,159) |
|
|
348,785 |
|
|
2 |
% |
|
309,131 |
|
|
39,654 |
|
|||||
General and administrative expenses |
|
(14,066,611) |
|
|
(11,705,698) |
|
|
(2,360,913) |
|
|
(20) |
% |
|
3,427 |
|
|
(2,364,340) |
|
|||||
Gain on sale of real estate, net |
|
— |
|
|
1,392,434 |
|
|
(1,392,434) |
|
|
(100) |
% |
|
(1,392,434) |
|
|
— |
|
|||||
Interest income |
|
49,382 |
|
|
165,495 |
|
|
(116,113) |
|
|
(70) |
% |
|
381 |
|
|
(116,494) |
|
|||||
Insurance proceeds in excess of losses incurred |
|
375,931 |
|
|
112,342 |
|
|
263,589 |
|
|
235 |
% |
|
— |
|
|
263,589 |
|
|||||
Equity in loss from unconsolidated joint venture |
|
— |
|
|
(16,711) |
|
|
16,711 |
|
|
100 |
% |
|
— |
|
|
16,711 |
|
|||||
Fees and other income from affiliates |
|
1,622,096 |
|
|
390,099 |
|
|
1,231,997 |
|
|
316 |
% |
|
— |
|
|
1,231,997 |
|
|||||
Loss on debt extinguishment |
|
— |
|
|
(621,451) |
|
|
621,451 |
|
|
100 |
% |
|
621,451 |
|
|
— |
|
|||||
Net loss |
|
$ |
(11,646,149) |
|
|
$ |
(37,758,065) |
|
|
$ |
26,111,916 |
|
|
69 |
% |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
NOI(3) |
|
$ |
54,703,713 |
|
|
$ |
46,519,021 |
|
|
$ |
8,184,692 |
|
|
18 |
% |
|
|
|
|
||||
FFO(4) |
|
$ |
22,246,823 |
|
|
$ |
8,430,520 |
|
|
$ |
13,816,303 |
|
|
164 |
% |
|
|
|
|
||||
MFFO(4) |
|
$ |
25,649,142 |
|
|
$ |
15,217,316 |
|
|
$ |
10,431,826 |
|
|
69 |
% |
|
|
|
|
________________
(1) |
Represents the favorable (unfavorable) dollar amount change for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, related to multifamily properties acquired, disposed of, or placed in service, on or after July 1, 2020. |
(2) |
Represents the favorable (unfavorable) dollar amount change for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, related to multifamily properties and corporate level entities owned by us throughout both periods presented. |
(3) |
NOI is a non-GAAP financial measure used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of our properties and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs, all of which are significant economic costs. For additional information on how we calculate NOI and a reconciliation of NOI to net loss, see “—Net Operating Income.” |
(4) |
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the difference between real estate values and historical |
PART I — FINANCIAL INFORMATION (continued)
cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, established the measurement tool of FFO. Since its introduction, FFO has become a widely used non-GAAP financial measure among REITs. Additionally, we use modified funds from operations, or MFFO, as defined by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association), or IPA, as a supplemental measure to evaluate our operating performance. MFFO is based on FFO but includes certain adjustments we believe are necessary due to changes in accounting and reporting under GAAP since the establishment of FFO. Neither FFO nor MFFO should be considered as alternatives to net loss or other measurements under GAAP as indicators of our operating performance, nor should they be considered as alternatives to cash flow from operating activities or other measurements under GAAP as indicators of liquidity. For additional information on how we calculate FFO and MFFO and a reconciliation of FFO and MFFO to net loss, see “—Funds From Operations and Modified Funds From Operations.” |
Net loss
For the three months ended September 30, 2021, we had a net loss of $11,646,149 compared to a net loss of $37,758,065 for the three months ended September 30, 2020. The decrease in net loss of $26,111,916 over the comparable prior year period was due to the increase in total revenues of $6,971,385, the decrease in real estate taxes and insurance of $115,545, the decrease in fees to affiliates of $8,445,557, the decrease in depreciation and amortization expense of $13,513,420, the decrease in interest expense of $348,785, the increase in insurance proceeds in excess of losses incurred of $263,589, the decrease in loss from unconsolidated joint venture of $16,711, the increase in fees and other income from affiliates of $1,231,997 and the decrease in loss on debt extinguishment of $621,451, partially offset by the increase in operating, maintenance and management expenses of $1,547,064, the increase in general and administrative expenses of $2,360,913, the decrease in gain on sale of real estate, net of $1,392,434 and the decrease in interest income of $116,113.
Total revenues
Total revenues were $90,641,893 for the three months ended September 30, 2021, compared to $83,670,508 for the three months ended September 30, 2020. The increase of $6,971,385 was primarily due to an increase in occupancy from 95.9% as of September 30, 2020 to 96.5% as of September 30, 2021 coupled with an increase in average monthly rents from $1,172 to $1,237 during the same period. We also experienced an increase of $5,787,452 in total revenues at the multifamily properties held throughout both periods as a result of ordinary monthly rent increases and the completion of value-enhancement projects.
Operating, maintenance and management expenses
Operating, maintenance and management expenses for the three months ended September 30, 2021, were $23,114,563 compared to $21,567,499 for the three months ended September 30, 2020. The increase of $1,547,064 was primarily due to increases in payroll, information technology related expenses and repairs and maintenance during the three months ended September 30, 2021 compared to the same prior year period.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $12,819,459 for the three months ended September 30, 2021, compared to $12,935,004 for the three months ended September 30, 2020. The decrease of $115,545 was primarily due to successful challenges to the assessed real estate tax values at certain properties in our portfolio.
Fees to affiliates
PART I — FINANCIAL INFORMATION (continued)
Fees to affiliates were $4,158 for the three months ended September 30, 2021, compared to $8,449,715 for the three months ended September 30, 2020. The net decrease of $8,445,557 was primarily due to the elimination of investment management fees, property management fees, loan coordination fees and the reimbursement of onsite personnel as a result of the Internalization Transaction.
Depreciation and amortization
Depreciation and amortization expenses were $34,051,286 for the three months ended September 30, 2021, compared to $47,564,706 for the three months ended September 30, 2020. The decrease of $13,513,420 was primarily due to the net decrease in tenant origination and absorption costs acquired in connection with the Mergers, subsequently amortized since September 30, 2020. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.
Interest expense
Interest expense for the three months ended September 30, 2021, was $20,279,374 compared to $20,628,159 for the three months ended September 30, 2020. The decrease of $348,785 was primarily due to the decrease in interest expense incurred during the three months ended September 30, 2021 from the sale of one multifamily property during the three months ended September 30, 2020 and the sale of one multifamily property since September 30, 2020.
Included in interest expense is the amortization of deferred financing costs of $548,726 and $573,078, net unrealized loss from the change in fair value of interest rate cap agreements of $40,902 and $29,093, interest on capital leases of $65 and $47, amortization of net loan premiums and discounts of $(428,434) and $(431,387), credit facility commitment fees of $32,861 and $0, net of capitalized interest of $284,511 and $313,902 and interest on construction loans of $64,120 and $0, for the three months ended September 30, 2021 and 2020, respectively. The capitalized interest is included in real estate on the consolidated balance sheets. Our interest expense in future periods will vary based on the impact of changes to LIBOR or the adoption of a replacement to LIBOR, our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
General and administrative expenses
General and administrative expenses for the three months ended September 30, 2021, were $14,066,611 compared to $11,705,698 for the three months ended September 30, 2020. These general and administrative costs consisted primarily of payroll costs, legal fees, IT related expenses, audit fees, other professional fees and independent director compensation. The increase of $2,360,913 was primarily due to an increase of $2,364,340 in general and administrative expenses predominantly due to payroll costs for the acquired personnel as a result of the Internalization Transaction.
Gain on sale of real estate
Gain on sale of real estate for the three months ended September 30, 2021, was $0 compared to $1,392,434 for the three months ended September 30, 2020. The change in gain on sale of real estate consisted of no gain recognized during the three months ended September 30, 2021, compared to the gain on sale from the disposition of one multifamily property at a sales price of $49,500,000 during the three months ended September 30, 2020. Our gain on sales of real estate, computed as the sales price, net of the carrying value of the real estate, selling expenses, and other ancillary costs, will vary in future periods based on the opportunity to sell properties and real estate-related investments.
PART I — FINANCIAL INFORMATION (continued)
Interest income
Interest income for the three months ended September 30, 2021, was $49,382 compared to $165,495 for the three months ended September 30, 2020. Interest income consisted of interest earned on our cash, cash equivalents and restricted cash deposits. In general, we expect interest income to fluctuate with the change in our cash, cash equivalents and restricted cash deposits.
Insurance proceeds in excess of losses incurred
Insurance proceeds in excess of losses incurred for the three months ended September 30, 2021, was $375,931 compared to $112,342 for the three months ended September 30, 2020. In general, we expect insurance proceeds in excess of losses incurred to be correlated to the volume and severity of insurance related incidents at our multifamily properties.
Equity in loss from unconsolidated joint venture
Equity in loss from unconsolidated joint venture for the three months ended September 30, 2021, was $0 compared to $16,711 for the three months ended September 30, 2020. Upon consummation of the SIR Merger on March 6, 2020, we acquired a 10% interest in a joint venture. Our investment in the joint venture had been accounted for as an unconsolidated joint venture under the equity method of accounting. On July 16, 2020, we sold our joint venture interest. See Note 5 (Investment in Unconsolidated Joint Venture) to our consolidated financial statements in this Quarterly Report for details.
Fees and other income from affiliates
Fees and other income from affiliates for the three months ended September 30, 2021, was $1,622,096 compared to $390,099 for the three months ended September 30, 2020. The increase of $1,231,997 was primarily income earned pursuant to the SRI Property Management Agreements and Construction Management Agreements with affiliates of our former sponsor and the Transition Services Agreement entered into in connection with the Internalization Transaction. See Note 10 (Related Party Arrangements) to our consolidated financial statements in this Quarterly Report for details.
Loss on debt extinguishment
Loss on debt extinguishment for the three months ended September 30, 2021, was $0 compared to $621,451 for the three months ended September 30, 2020. The expenses incurred during the three months ended September 30, 2020 consisted of prepayment penalty and the expenses of the unamortized deferred financing costs related to the repayment and extinguishment of the debt in connection with the sale of one multifamily property during the three months ended September 30, 2020. The loss on debt extinguishment will vary in future periods if we repay the remaining outstanding principal prior to the scheduled maturity dates of the notes payable.
Consolidated Results of Operations for the Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September 30, 2020
The following table summarizes the consolidated results of operations for the nine months ended September 30, 2021 and 2020:
|
|
For the Nine Months Ended September 30, |
|
|
|
|
|
$ Change Due to Acquisitions or Dispositions(1) |
|
$ Change Due to Properties Held Throughout Both Periods and Corporate Level Activity(2) |
|||||||||||||
|
|
2021 |
|
2020 |
|
Change $ |
|
Change % |
|
|
|||||||||||||
Total revenues |
|
$ |
259,424,343 |
|
|
$ |
217,680,042 |
|
|
$ |
41,744,301 |
|
|
19 |
% |
|
$ |
34,555,616 |
|
|
$ |
7,188,685 |
|
Operating, maintenance and management |
|
(65,213,378) |
|
|
(53,783,824) |
|
|
(11,429,554) |
|
|
(21) |
% |
|
(8,806,436) |
|
|
(2,623,118) |
|
|||||
Real estate taxes and insurance |
|
(41,263,876) |
|
|
(35,346,220) |
|
|
(5,917,656) |
|
|
(17) |
% |
|
(4,903,263) |
|
|
(1,014,393) |
|
|||||
Fees to affiliates |
|
(12,708) |
|
|
(30,586,344) |
|
|
30,573,636 |
|
|
100 |
% |
|
12,731,112 |
|
|
17,842,524 |
|
|||||
Depreciation and amortization |
|
(101,203,302) |
|
|
(129,596,268) |
|
|
28,392,966 |
|
|
22 |
% |
|
25,022,865 |
|
|
3,370,101 |
|
|||||
Interest expense |
|
(60,174,405) |
|
|
(54,734,431) |
|
|
(5,439,974) |
|
|
(10) |
% |
|
(6,272,206) |
|
|
832,232 |
|
|||||
General and administrative expenses |
|
(37,128,402) |
|
|
(19,408,854) |
|
|
(17,719,548) |
|
|
(91) |
% |
|
355,536 |
|
|
(18,075,084) |
|
|||||
Impairment of real estate |
|
— |
|
|
(5,039,937) |
|
|
5,039,937 |
|
|
100 |
% |
|
5,039,937 |
|
|
— |
|
|||||
Gain on sale of real estate, net |
|
— |
|
|
12,777,033 |
|
|
(12,777,033) |
|
|
(100) |
% |
|
(12,777,033) |
|
|
— |
|
|||||
Interest income |
|
252,450 |
|
|
553,011 |
|
|
(300,561) |
|
|
(54) |
% |
|
(148,159) |
|
|
(152,402) |
|
|||||
Insurance proceeds in excess of losses incurred |
|
511,291 |
|
|
236,754 |
|
|
274,537 |
|
|
116 |
% |
|
468,755 |
|
|
(194,218) |
|
|||||
Equity in loss from unconsolidated joint venture |
|
— |
|
|
(3,020,111) |
|
|
3,020,111 |
|
|
100 |
% |
|
3,020,111 |
|
|
— |
|
|||||
Fees and other income from affiliates |
|
4,651,364 |
|
|
390,099 |
|
|
4,261,265 |
|
|
1,092 |
% |
|
— |
|
|
4,261,265 |
|
|||||
Loss on debt extinguishment |
|
— |
|
|
(621,451) |
|
|
621,451 |
|
|
100 |
% |
|
621,451 |
|
|
— |
|
|||||
Net loss |
|
$ |
(40,156,623) |
|
|
$ |
(100,500,501) |
|
|
$ |
60,343,878 |
|
|
60 |
% |
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
NOI(3) |
|
$ |
152,940,297 |
|
|
$ |
120,351,797 |
|
|
$ |
32,588,500 |
|
|
27 |
% |
|
|
|
|
||||
FFO(4) |
|
$ |
60,439,823 |
|
|
$ |
24,993,259 |
|
|
$ |
35,446,564 |
|
|
142 |
% |
|
|
|
|
||||
MFFO(4) |
|
$ |
64,701,030 |
|
|
$ |
33,162,084 |
|
|
$ |
31,538,946 |
|
|
95 |
% |
|
|
|
|
________________
(1) |
Represents the favorable (unfavorable) dollar amount change for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, related to multifamily properties acquired, disposed of, or placed in service, on or after January 1, 2020. |
(2) |
Represents the favorable (unfavorable) dollar amount change for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, related to multifamily properties and corporate level entities owned by us throughout both periods presented. |
(3) |
See “—Net Operating Income” below for a reconciliation of NOI to net loss. |
(4) |
See “—Funds From Operations and Modified Funds From Operations” below for a reconciliation of FFO and MFFO to net loss. |
Net loss
For the nine months ended September 30, 2021, we had a net loss of $40,156,623 compared to $100,500,501 for the nine months ended September 30, 2020. The decrease in net loss of $60,343,878 over the comparable prior year
PART I — FINANCIAL INFORMATION (continued)
period was due to an increase in total revenues of $41,744,301, a decrease in fees to affiliates of $30,573,636, a decrease in depreciation and amortization expense of $28,392,966, a decrease in impairment of real estate of $5,039,937, an increase in insurance proceeds in excess of losses incurred of $274,537, a decrease in equity in loss from unconsolidated joint venture of $3,020,111, an increase in fees and other income from affiliates of $4,261,265 and a decrease in loss on debt extinguishment of $621,451, partially offset by an increase in operating, maintenance and management expenses of $11,429,554, an increase in real estate taxes and insurance of $5,917,656, an increase in interest expense of $5,439,974, an increase in general and administrative expenses of $17,719,548, a decrease in gain on sale of real estate, net of $12,777,033, and a decrease in interest income of $300,561.
Total revenues
Total revenues were $259,424,343 for the nine months ended September 30, 2021, compared to $217,680,042 for the nine months ended September 30, 2020. The increase of $41,744,301 was primarily due to the increase in total revenues of $34,555,616 due to the increase in the number of properties in our portfolio, primarily from the Mergers, which experienced a full nine months of operations in 2021. In addition, we experienced an increase of $7,188,685 in total revenues at the multifamily properties held throughout both periods as a result of an increase in occupancy, ordinary monthly rent increases and the completion of value-enhancement projects.
Operating, maintenance and management expenses
Operating, maintenance and management expenses were $65,213,378 for the nine months ended September 30, 2021, compared to $53,783,824 for the nine months ended September 30, 2020. The increase of $11,429,554 was primarily due to the increase in the number of properties in our portfolio, primarily from the Mergers, which experienced a full nine months of operations in 2021. In addition, we experienced an increase of $2,623,118 in operating, maintenance and management expenses at the multifamily properties held throughout both periods due to increases in payroll, information technology related expenses, utilities, repairs and maintenance and turnover costs.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $41,263,876 for the nine months ended September 30, 2021, compared to $35,346,220 for the nine months ended September 30, 2020. The increase of $5,917,656 was primarily due to the increase in the number of properties in our portfolio, primarily from the Mergers, which experienced a full nine months of operations in 2021. In addition, we experienced an increase of $1,014,393 in real estate taxes and insurance expenses at the multifamily properties held throughout both periods.
Fees to affiliates
Fees to affiliates were $12,708 for the nine months ended September 30, 2021, compared to $30,586,344 for the nine months ended September 30, 2020. The decrease of $30,573,636 was primarily due to the elimination of investment management fees, property management fees, loan coordination fees and the reimbursement of onsite personnel as a result of costs savings in connection with the Internalization Transaction.
PART I — FINANCIAL INFORMATION (continued)
Depreciation and amortization
Depreciation and amortization expenses were $101,203,302 for the nine months ended September 30, 2021, compared to $129,596,268 for the nine months ended September 30, 2020. The decrease of $28,392,966 was primarily due to the net decrease in tenant origination and absorption costs acquired in connection with the Mergers, subsequently amortized since September 30, 2020. In addition, we experienced a decrease of $3,370,101 in depreciation expenses at the properties held throughout both periods. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.
Interest expense
Interest expense for the nine months ended September 30, 2021, was $60,174,405 compared to $54,734,431 for the nine months ended September 30, 2020. The increase of $5,439,974 was due to the increase in the number of properties in our portfolio, primarily from the Mergers, and entering into the PNC MCFA in June 2020, which experienced a full nine months of expense in 2021.
Included in interest expense is the amortization of deferred financing costs of $1,646,291 and $1,382,954, net, unrealized loss on derivative instruments of $39,699 and $56,287, amortization of net debt premiums of $(1,269,484) and $(959,827), interest on capital leases of $258 and $47, closing costs associated with the refinancing of debt of $0 and $42,881, credit facility commitment fees of $98,852 and $0, net of capitalized interest of $844,577 and $576,521 and interest on construction loans of $69,515 and $0, for the nine months ended September 30, 2021 and 2020, respectively. The capitalized interest is included in real estate held for development on the consolidated balance sheets. Our interest expense in future periods will vary based on the impact of changes to LIBOR or the adoption of a replacement to LIBOR, our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
General and administrative expenses
General and administrative expenses for the nine months ended September 30, 2021, were $37,128,402 compared to $19,408,854 for the nine months ended September 30, 2020. These general and administrative expenses consisted primarily of payroll costs, legal fees, IT related expenses, insurance premiums, audit fees, other professional fees and independent director compensation. The increase of $17,719,548 was primarily due to an increase of $18,075,084 in general and administrative expenses predominantly due to payroll costs for the acquired personnel as a result of the Internalization Transaction, partially offset by the $355,536 change in general and administrative expenses related to properties acquired and or disposed of since September 30, 2020.
Impairment of real estate assets
Impairment charges of real estate assets for the nine months ended September 30, 2021, were $0 compared to $5,039,937 for the nine months ended September 30, 2020. The decrease in impairment charge of $5,039,937 resulted from our efforts to actively market two multifamily properties for sale at disposition prices that were less than their carrying values during the nine months ended September 30, 2020. No impairment charges were recorded during the nine months ended September 30, 2021.
Gain on sale of real estate
Gain on sale of real estate for the nine months ended September 30, 2021, was $0 compared to $12,777,033 for the nine months ended September 30, 2020. The decrease in gain on sale of real estate was due to the gain
PART I — FINANCIAL INFORMATION (continued)
recognized on the disposition of one multifamily property during the nine months ended September 30, 2020, compared to the disposition of no multifamily properties during the nine months ended September 30, 2021. Our gain on sale of real estate in future periods will vary based on the opportunity to sell properties and real estate-related investments.
Interest income
Interest income for the nine months ended September 30, 2021, was $252,450 compared to $553,011 for the nine months ended September 30, 2020. Interest income consisted of interest earned on our cash, cash equivalents and restricted cash deposits. In general, we expect interest income to fluctuate with the change in our cash, cash equivalents and restricted cash deposits.
PART I — FINANCIAL INFORMATION (continued)
Insurance proceeds in excess of losses incurred
Insurance proceeds in excess of losses incurred for the nine months ended September 30, 2021, was $511,291 compared to $236,754 for the nine months ended September 30, 2020. In general, we expect insurance proceeds in excess of losses incurred to be correlated to the volume and severity of insurance related incidents at our multifamily properties.
Equity in loss from unconsolidated joint venture
Equity in loss from unconsolidated joint venture for the nine months ended September 30, 2021, was $0 compared to $3,020,111 for the nine months ended September 30, 2020. Upon consummation of the SIR Merger on March 6, 2020, we acquired a 10% interest in a joint venture. Our investment in the joint venture had been accounted for as an unconsolidated joint venture under the equity method of accounting. On July 16, 2020, we sold our joint venture interest. See Note 5 (Investment in Unconsolidated Joint Venture) to our consolidated financial statements in this Quarterly Report for details.
Fees and other income from affiliates
Fees and other income from affiliates for the nine months ended September 30, 2021, was $4,651,364 compared to $390,099 for the nine months ended September 30, 2020. The increase of $4,261,265 was solely due to income earned pursuant to the SRI Property Management Agreements and Construction Management Agreements with affiliates of our former sponsor and the Transition Services Agreement entered into in connection with the Internalization Transaction. See Note 10 (Related Party Arrangements) to our consolidated financial statements in this Quarterly Report for details.
Loss on debt extinguishment
Loss on debt extinguishment for the nine months ended September 30, 2021, was $0 compared to $621,451 for the nine months ended September 30, 2020. The expenses incurred during the nine months ended September 30, 2020 consisted of prepayment penalty and the expenses of the unamortized deferred financing costs related to the repayment and extinguishment of the debt in connection with the sale of one multifamily property during the nine months ended September 30, 2020. The loss on debt extinguishment will vary in future periods if we repay the remaining outstanding principal prior to the scheduled maturity dates of the notes payable.
Property Operations for the Three Months Ended September 30, 2021, Compared to the Three Months Ended September 30, 2020
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” A “same-store” property is a property that was owned at July 1, 2020. A “non-same-store” property is a property that was acquired, placed into service or disposed of after July 1, 2020. As of September 30, 2021, 68 of our properties were categorized as same-store properties.
The following table presents the same-store results from operations for the three months ended September 30, 2021 and 2020:
|
|
For the Three Months Ended September 30, |
|
|
|
|
|||||||||
|
|
2021 |
|
2020 |
|
Change $ |
|
Change % |
|||||||
Same-store properties: |
|
|
|
|
|
|
|
|
|||||||
Revenues |
|
$ |
87,552,950 |
|
|
$ |
81,765,498 |
|
|
$ |
5,787,452 |
|
|
7.1 |
% |
Operating expenses(1) |
|
34,426,783 |
|
|
36,136,366 |
|
|
(1,709,583) |
|
|
(4.7) |
% |
|||
Net operating income |
|
53,126,167 |
|
|
45,629,132 |
|
|
7,497,035 |
|
|
16.4 |
% |
|||
|
|
|
|
|
|
|
|
|
|||||||
Non-same-store properties: |
|
|
|
|
|
|
|
|
|||||||
Net operating income |
|
1,577,546 |
|
|
889,889 |
|
|
687,657 |
|
|
|
||||
|
|
|
|
|
|
|
|
|
|||||||
Total Net operating income(2) |
|
$ |
54,703,713 |
|
|
$ |
46,519,021 |
|
|
$ |
8,184,692 |
|
|
|
________________
(1) |
Same-store operating expenses include operating, maintenance and management expenses, real estate taxes and insurance, certain fees to affiliates and property-level general and administrative expenses. |
(2) |
See “—Net Operating Income” below for a reconciliation of NOI to net loss. |
Net Operating Income
Same-store net operating income for the three months ended September 30, 2021, was $53,126,167 compared to $45,629,132 for the three months ended September 30, 2020. The 16.4% increase in same-store net operating income was a result of a 7.1% increase in same-store rental revenues and a 4.7% decrease in same-store operating expenses.
Revenues
Same-store revenues for the three months ended September 30, 2021, were $87,552,950 compared to $81,765,498 for the three months ended September 30, 2020. The 7.1% increase in same-store revenues was primarily a result of an increase in same-store occupancy from 95.9% as of September 30, 2020, to 96.6% as of September 30, 2021 and increases in average monthly rents from $1,174 as of September 30, 2020 to $1,232 as of September 30, 2021.
Operating Expenses
Same-store operating expenses for the three months ended September 30, 2021, were $34,426,783 compared to $36,136,366 for the three months ended September 30, 2020. The decrease in same-store operating expenses was primarily attributable to a decrease in property management fees as a result of the Internalization Transaction in addition to a decrease in real estate taxes as a result of successful challenges to assessed property values and a decrease in property related general and administrative expenses, partially offset by increases in insurance and repairs and maintenance costs during the three months ended September 30, 2021, compared to the three months ended September 30, 2020.
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 determine trends in earnings and to compute the fair
PART I — FINANCIAL INFORMATION (continued)
value of our properties as it is not affected by (1) the cost of funds, (2) acquisition costs as applicable, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (5) general and administrative expenses (including excess property insurance) and non-operating other gains and losses that are specific to us or (6) impairment of real estate assets or other investments. 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. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income (loss) is useful because the resulting measure captures the actual 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 general and administrative costs, interest expense, interest income and other expense, acquisition costs as applicable, certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of properties, impairment charges and non-operating other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.
The following is a reconciliation of our NOI to net loss for the three and nine months ended September 30, 2021 and 2020 computed in accordance with GAAP:
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||||||
Net loss |
|
$ |
(11,646,149) |
|
|
$ |
(37,758,065) |
|
|
$ |
(40,156,623) |
|
|
$ |
(100,500,501) |
|
Fees to affiliates(1) |
|
— |
|
|
5,648,468 |
|
|
— |
|
|
21,143,650 |
|
||||
Depreciation and amortization |
|
34,051,286 |
|
|
47,564,706 |
|
|
101,203,302 |
|
|
129,596,268 |
|
||||
Interest expense |
|
20,279,374 |
|
|
20,628,159 |
|
|
60,174,405 |
|
|
54,734,431 |
|
||||
Loss on debt extinguishment |
|
— |
|
|
621,451 |
|
|
— |
|
|
621,451 |
|
||||
General and administrative expenses |
|
14,066,611 |
|
|
11,705,698 |
|
|
37,128,402 |
|
|
19,408,854 |
|
||||
Gain on sale of real estate |
|
— |
|
|
(1,392,434) |
|
|
— |
|
|
(12,777,033) |
|
||||
Other gains(2) |
|
(425,313) |
|
|
(277,837) |
|
|
(763,741) |
|
|
(789,765) |
|
||||
Adjustments for investment in unconsolidated joint venture(3) |
|
— |
|
|
163,001 |
|
|
— |
|
|
1,816,220 |
|
||||
Other-than-temporary impairment of investment in unconsolidated joint venture(4) |
|
— |
|
|
— |
|
|
— |
|
|
2,442,411 |
|
||||
Impairment of real estate(5) |
|
— |
|
|
— |
|
|
— |
|
|
5,039,937 |
|
||||
Fees and other income from affiliates(6) |
|
(1,622,096) |
|
|
(390,099) |
|
|
(4,651,364) |
|
|
(390,099) |
|
||||
Affiliated rental revenue(7) |
|
— |
|
|
5,973 |
|
|
5,916 |
|
|
5,973 |
|
||||
Net operating income |
|
$ |
54,703,713 |
|
|
$ |
46,519,021 |
|
|
$ |
152,940,297 |
|
|
$ |
120,351,797 |
|
_______________
(1) |
Fees to affiliates for the three and nine months ended September 30, 2021, exclude property management fees of $4,158 and $12,708, respectively, that are included in NOI. Fees to affiliates for the three and nine months ended September 30, 2020, exclude property management fees of $1,618,611 and $5,484,468 and other reimbursements of $1,182,636 and $3,958,226, respectively, that are included in NOI. |
(2) |
Other gains for the three and nine months ended September 30, 2021 and 2020, include non-recurring insurance claim recoveries and interest income that are not included in NOI. |
(3) Reflects adjustment to add back our noncontrolling interest share of the adjustments to reconcile our net loss attributable to common stockholders to NOI for our equity investment in the unconsolidated joint venture, which principally consisted of depreciation, amortization and interest expense incurred by the joint venture as well as the amortization of outside basis difference. The adjustment for investment in unconsolidated joint venture also includes a gain on sale of the investment in unconsolidated joint venture of $66,802 for the three and nine months ended September 30, 2020.
(4) Reflects adjustment to add back an other-than-temporary impairment of $2,442,411 in the nine months ended September 30, 2020 related to our investment in BREIT Steadfast MF JV LP (our “Joint Venture”). See Note 5 (Investment in Unconsolidated Joint Venture) to our consolidated unaudited financial statements in this Quarterly Report for details.
(5) Reflects adjustments to add back impairment charges in the nine months ended September 30, 2020 related to our efforts to actively market two multifamily properties for sale at disposition prices that were less than their carrying values.
(6) Reflects adjustment to exclude income earned pursuant to the Transition Services Agreement, Property Management Agreements and Construction Management Agreements entered into in connection with the Internalization Transaction.
PART I — FINANCIAL INFORMATION (continued)
(7) Reflects adjustment to add back rental revenue earned from a consolidated entity following the Internalization Transaction that represent intercompany transactions that are eliminated in consolidation.
PART I — FINANCIAL INFORMATION (continued)
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, an industry trade group, has promulgated a measure known as FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, a non-GAAP financial measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in December 2018, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and non-cash impairment charges of real estate related investments, plus real estate related depreciation and amortization, cumulative effects of accounting changes and after adjustments for unconsolidated partnerships and joint ventures. According to the White Paper, while the majority of equity REITs measure FFO in accordance with NAREIT’s definition, there are variations in the securities to which the reported NAREIT-defined FFO applies (e.g., all equity securities, all common shares, all common shares less shares held by non-controlling interests). While each of these metrics may represent FFO as defined by NAREIT, accurate labeling with respect to applicable securities is important, particularly as it relates to the labeling of the FFO metric and in the reconciliation of GAAP net income (loss) to FFO.
In calculating FFO, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Our FFO calculation complies with NAREIT’s policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and
PART I — FINANCIAL INFORMATION (continued)
administrative expenses, and interest costs, which may not be immediately apparent from net income. We adopted Accounting Standards Update, or ASU, 2016-02, Leases, or ASU 2016-02 on January 1, 2019, which requires us, as a lessee, to recognize a liability for obligations under a lease contract and a right-of-use, or ROU, asset. The carrying amount of the ROU asset is amortized over the term of the lease. Because we have no ownership rights (current or residual) in the underlying asset, NAREIT concluded that the amortization of the ROU asset should not be added back to GAAP net income (loss) in calculating FFO. This amortization expense is included in FFO. The White Paper also states that non-real estate depreciation and amortization such as computer software, company office improvements, furniture and fixtures, and other items commonly found in other industries are required to be recognized as expenses by GAAP in the calculation of net income and, similarly, should be included in FFO.
However, FFO, and MFFO as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.
Due to the above factors and other unique features of publicly registered, non-listed REITs, the IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a public, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that are not capitalized, as discussed below, and affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the public, non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.
We define MFFO, a non-GAAP financial measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice
PART I — FINANCIAL INFORMATION (continued)
Guideline, issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. We do not retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.
Our MFFO calculation complies with the Practice Guideline described above, except with respect to certain acquisition fees and expenses as discussed below. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Historically under GAAP, acquisition fees and expenses were characterized as operating expenses in determining operating net income. However, pursuant to Accounting Standards Codification, or ASC 805-50, Business Combinations — Related Issues, or ASC 805, acquisition fees and expenses are capitalized and depreciated under certain conditions. Prior to the completion of the Internalization Transaction, these expenses were paid in cash by us. All paid acquisition fees and expenses had negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties were generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. The acquisition of properties, and the corresponding acquisition fees and expenses, was the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.
Our management uses MFFO and the adjustments used to calculate MFFO in order to evaluate our performance against other public, non-listed REITs with varying targeted exit strategies. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate MFFO allow us to present our performance in a manner that reflects certain characteristics that are unique to public, non-listed REITs, such as defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. By excluding expensed acquisition costs, that are not capitalized, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market
PART I — FINANCIAL INFORMATION (continued)
conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO or MFFO accordingly.
Our calculation of FFO and MFFO is presented in the following table for the three and nine months ended September 30, 2021 and 2020:
|
|
For the Three Months Ended September 30, |
|
For the Nine Months Ended September 30, |
||||||||||||
|
|
2021 |
|
2020 |
|
2021 |
|
2020 |
||||||||
Reconciliation of net loss to MFFO: |
|
|
|
|
|
|
|
|
||||||||
Net loss |
|
$ |
(11,646,149) |
|
|
$ |
(37,758,065) |
|
|
$ |
(40,156,623) |
|
|
$ |
(100,500,501) |
|
Depreciation of real estate assets |
|
33,320,641 |
|
|
33,055,972 |
|
|
99,073,405 |
|
|
89,122,949 |
|
||||
Amortization of lease-related costs(1) |
|
572,331 |
|
|
14,431,485 |
|
|
1,523,041 |
|
|
40,392,592 |
|
||||
Gain on sale of real estate, net |
|
— |
|
|
(1,392,434) |
|
|
— |
|
|
(12,777,033) |
|
||||
Impairment of real estate(2) |
|
— |
|
|
— |
|
|
— |
|
|
5,039,937 |
|
||||
Impairment of unconsolidated joint venture(3) |
|
— |
|
|
— |
|
|
— |
|
|
2,442,411 |
|
||||
Adjustments for investment in unconsolidated joint venture(4) |
|
— |
|
|
93,562 |
|
|
— |
|
|
1,272,904 |
|
||||
FFO |
|
22,246,823 |
|
|
8,430,520 |
|
|
60,439,823 |
|
|
24,993,259 |
|
||||
Acquisition fees and expenses(5)(6) |
|
3,363,088 |
|
|
6,137,923 |
|
|
4,226,522 |
|
|
7,495,352 |
|
||||
Unrealized loss on derivative instruments |
|
40,902 |
|
|
29,093 |
|
|
39,699 |
|
|
56,287 |
|
||||
Loss on debt extinguishment |
|
— |
|
|
621,451 |
|
|
— |
|
|
621,451 |
|
||||
Amortization of below market leases |
|
(1,671) |
|
|
(1,671) |
|
|
(5,014) |
|
|
(4,265) |
|
||||
MFFO |
|
$ |
25,649,142 |
|
|
$ |
15,217,316 |
|
|
$ |
64,701,030 |
|
|
$ |
33,162,084 |
|
________________
(1) |
Amortization of lease-related costs for the three and nine months ended September 30, 2021 and 2020, exclude amortization of operating lease ROU assets of $3,367 and $10,101 and $3,367 and $6,845, respectively, and |
PART I — FINANCIAL INFORMATION (continued)
exclude the amortization of Property Management Agreements acquired in connection with the Internalization Transaction of $138,890 and $552,512 and $71,392 and $71,392, respectively, that are included in FFO. |
(2) |
Reflects adjustments to add back impairment charges in the nine months ended September 30, 2020 related to our efforts to actively market two multifamily properties for sale at disposition prices that were less than their carrying values during the nine months ended September 30, 2020. |
(3) |
Reflects adjustments to add back impairment charges in the nine months ended September 30, 2020 related to our investment in our Joint Venture. See Note 5 (Investment in Unconsolidated Joint Venture) to our consolidated unaudited financial statements in this Quarterly Report for details. |
(4) |
Reflects adjustments to add back our noncontrolling interest share of the adjustments to reconcile our net loss attributable to common stockholders to FFO for our equity investment in the unconsolidated joint venture, which principally consisted of depreciation and amortization incurred by the joint venture as well as the amortization of outside basis difference and a gain on sale of the investment in unconsolidated joint venture of $66,802 for the three and nine months ended September 30, 2020. |
(5) |
By excluding expensed acquisition costs that are not capitalized, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our Former Advisor or third parties and are capitalized and depreciated under certain conditions. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. |
(6) |
Acquisition fees and expenses for the three and nine months ended September 30, 2021 and 2020 include acquisition expenses of $3,363,088 and $4,226,522 and $6,137,923 and $7,495,352, respectively, which did not meet the criteria for capitalization under ASC 805, and were recorded in general and administrative expenses in the accompanying consolidated statements of operations. These expenses largely pertained to professional services fees incurred in connection with the ongoing pursuit of strategic alternatives and the acquisition expenses related to real estate projects which did not come to fruition. |
FFO and MFFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Related-Party Transactions and Agreements
We have entered into agreements with our Former Sponsor and its affiliates, including in connection with the Internalization Transaction. Prior to the Internalization Transaction, we paid certain fees to, or reimbursed certain expenses of, paid other consideration for the performance of services provided to our Former Advisor or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs. See Note 10 (Related Party Arrangements) to the consolidated financial statements included in this Quarterly Report for a discussion of the various related-party transactions, agreements and fees.
Exhibit 99.3
INDEPENDENCE REALTY TRUST, INC.
Unaudited Pro Forma Condensed Consolidated Financial Data
The following unaudited pro forma condensed combined financial statements and notes thereto present the unaudited pro forma condensed combined balance sheet as of September 30, 2021 and the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020. The following unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X in order to give effect to the Mergers and the IRT Common Stock Sale (as defined below) and the assumptions and adjustments described below and in the accompanying notes to the unaudited pro forma condensed combined financial statements.
Introduction
On July 26, 2021, Independence Realty Trust, Inc. (“IRT”), together with its operating partnership, Independence Realty Operating Partnership, LP (“IRT OP”), and IRSTAR Sub, LLC, a wholly-owned subsidiary of IRT (“IRT Merger Sub”), entered into an agreement and plan of merger (the “Merger Agreement”) with Steadfast Apartment REIT, Inc. (“STAR”) and its operating partnership, Steadfast Apartment REIT Operating Partnership, L.P. (“STAR OP”).
On the terms, and subject to the conditions of, the Merger Agreement, STAR will merge with and into IRT Merger Sub (the “REIT Merger”), with IRT Merger Sub surviving the REIT Merger as a wholly-owned subsidiary of IRT; and immediately thereafter, STAR OP will merge with and into IRT OP (the “Partnership Merger” and, together with the REIT Merger, the “Mergers”), with IRT OP surviving the Partnership Merger.
In the REIT Merger, each outstanding share of STAR common stock, par value $0.01 per share (“STAR common stock”) will be converted automatically into the right to receive 0.905 (the “Exchange Ratio”) of a newly issued share of IRT common stock, par value $0.01 per share (“IRT common stock”). In the Partnership Merger, each outstanding unit of limited partnership of STAR OP (each, a “STAR OP common unit”) will be converted into the right to receive the Exchange Ratio of a newly issued common unit of limited partnership of IRT OP (each, an “IRT OP common unit”). Under the agreement of limited partnership of IRT OP, IRT common unitholders may generally tender their IRT common units, in whole or in part, to IRT OP for redemption for a cash amount based on the then market price of an equivalent number of shares of IRT common stock, and IRT may thereupon elect, at its option, to satisfy the redemption by issuing one share of IRT common stock for each IRT common unit tendered for redemption.
Immediately following the Mergers, and assuming issuance by IRT of 16,100,000 shares of IRT Common Stock in full physical settlement of the Forward Sale Agreements described in Note 7 (Equity Offering Adjustments) below prior to consummation of the Mergers (such issuance, the “IRT Common Stock Sale”), the continuing IRT stockholders and continuing IRT OP common unitholders will collectively hold approximately 53% of the sum of the issued and outstanding shares of IRT common stock and IRT OP common units, and former STAR stockholders and former STAR OP common unitholders will hold approximately 47%.
Consummation of the Mergers is subject to customary closing conditions, including, among others, receipt of IRT stockholder approval and STAR stockholder approval, and is expected to occur in the fourth quarter of 2021.
Pro Forma Information
The following unaudited pro forma condensed combined financial statements have been prepared by applying the acquisition method of accounting, with IRT treated as the acquiror. In applying the acquisition method of accounting specified by generally accepted accounting principles in the United States of America (“GAAP”) it is necessary to identify the accounting acquiror, which may be different from the legal acquiror. Factors considered in identifying an accounting acquiror include, but are not limited to, the relative size of the merging companies, the relative voting
interests of the respective stockholders after consummation of a merger and the composition of senior management and the board of directors after consummation of a merger. After consideration of all applicable factors pursuant to GAAP, IRT has been identified as the accounting acquiror of STAR. Accordingly, the total merger consideration (referred to herein as purchase price) will be allocated to the estimated fair market values of STAR’s assets to be acquired and liabilities to be assumed in the Mergers, with the excess purchase price, if any, allocated to goodwill.
The following unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of IRT and the historical consolidated financial statements of STAR as adjusted to give effect to the Mergers and the IRT Common Stock Sale. The unaudited pro forma condensed combined balance sheet as of September 30, 2021 gives effect to the Mergers and the IRT Common Stock Sale as if they had occurred on September 30, 2021. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 give effect to the Mergers and the IRT Common Stock Sale as if they had occurred on January 1, 2020.
The following unaudited pro forma condensed combined financial statements have been prepared for informational purposes only and are based on assumptions and estimates considered appropriate by IRT’s management. The unaudited pro forma adjustments represent IRT management’s estimates based on information available as of the date of the unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and additional analyses are performed. However, IRT’s management believes that the adjustments to the historical financial statements of IRT and STAR are (i) directly attributable to the Mergers and the IRT Common Stock Sale, (ii) factually supportable and (iii) expected to have a continuing impact on the combined results; and IRT’s management believes that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of what IRT’s financial condition or results of operations actually would have been if the Mergers and the IRT Common Stock Sale had been consummated as of the dates indicated, nor do they purport to represent IRT's financial position or results of operations for future periods.
The following unaudited pro forma condensed combined financial statements do not reflect any adjustments not otherwise described herein, including adjustments associated with: (1) IRT or STAR real estate acquisitions and dispositions that have closed or may close after September 30, 2021 (including assets identified as held for sale as of September 30, 2021) or the related financing or debt repayments in connection with those acquisitions or dispositions, (2) potential synergies that may be achieved following the Mergers, including potential overall savings in general and administrative expense, or any strategies that IRT’s management may consider in order to continue to efficiently manage IRT’s operations, (3) any integration costs that may be incurred following the consummation of the Mergers, and (4) any integration and other costs which may be necessary to achieve the potential synergies, since the extent of such costs are not reasonably certain. However, such costs could affect the combined results following consummation of the Mergers in the period the costs are incurred or recorded.
As of September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IRT Historical |
|
|
STAR Historical |
|
Reclassifications |
|
STAR Historical, as reclassified |
|
|
Merger Transaction Adjustments |
|
|
Equity Offering Adjustments |
|
|
|
Consolidated Pro Forma |
|
|
|||||||
|
|
|
|
|
|
|
|
NOTE 3 |
|
|
|
|
|
|
|
|
|
NOTE 7 |
|
|
|
|
|
|
|
||
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate at cost |
$ |
1,904,760 |
|
|
$ |
3,285,266 |
|
$ |
(1,683 |
) |
$ |
3,283,583 |
|
|
$ |
1,057,681 |
|
(A) |
$ |
- |
|
|
|
$ |
6,246,024 |
|
|
Accumulated depreciation |
|
(223,244 |
) |
|
|
(480,155 |
) |
|
670 |
|
|
(479,485 |
) |
|
|
479,485 |
|
(B) |
|
- |
|
|
|
|
(223,244 |
) |
|
Investments in real estate, net |
|
1,681,516 |
|
|
|
2,805,111 |
|
|
(1,013 |
) |
|
2,804,098 |
|
|
|
1,537,166 |
|
|
|
- |
|
|
|
|
6,022,780 |
|
|
Real estate held for sale |
|
120,409 |
|
|
|
60,368 |
|
|
- |
|
|
60,368 |
|
|
|
- |
|
|
|
- |
|
|
|
|
180,777 |
|
|
Real estate held for development |
|
- |
|
|
|
34,871 |
|
|
- |
|
|
34,871 |
|
|
|
- |
|
|
|
- |
|
|
|
|
34,871 |
|
|
Cash and cash equivalents |
|
8,720 |
|
|
|
122,108 |
|
|
- |
|
|
122,108 |
|
|
|
- |
|
|
|
- |
|
|
|
|
130,828 |
|
|
Restricted cash |
|
6,138 |
|
|
|
38,360 |
|
|
- |
|
|
38,360 |
|
|
|
- |
|
|
|
- |
|
|
|
|
44,498 |
|
|
Investments in unconsolidated real estate entities |
|
13,561 |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
13,561 |
|
|
Other assets |
|
15,053 |
|
|
|
35,230 |
|
|
- |
|
|
35,230 |
|
|
|
- |
|
|
|
- |
|
|
|
|
50,283 |
|
|
Derivative assets |
|
1,168 |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
1,168 |
|
|
Goodwill and intangible assets, net |
|
346 |
|
|
|
125,220 |
|
|
1,013 |
|
|
126,233 |
|
|
|
(81,772 |
) |
(C) |
|
- |
|
|
|
|
44,807 |
|
|
Total Assets |
$ |
1,846,911 |
|
|
$ |
3,221,268 |
|
$ |
- |
|
$ |
3,221,268 |
|
|
$ |
1,455,394 |
|
|
$ |
- |
|
|
|
$ |
6,523,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indebtedness |
$ |
996,270 |
|
|
$ |
2,081,557 |
|
$ |
- |
|
$ |
2,081,557 |
|
|
$ |
81,507 |
|
(D) |
$ |
(272,344 |
) |
(M) |
|
$ |
2,886,990 |
|
|
Indebtedness associated with real estate held for sale |
|
22,459 |
|
|
|
53,685 |
|
|
- |
|
|
53,685 |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
76,144 |
|
|
Accounts payable and accrued expenses |
|
39,593 |
|
|
|
82,149 |
|
|
(17,283 |
) |
|
64,866 |
|
|
|
34,434 |
|
(E) |
|
- |
|
|
|
|
138,893 |
|
|
Accrued interest payable |
|
1,708 |
|
|
|
- |
|
|
6,585 |
|
|
6,585 |
|
|
|
- |
|
|
|
- |
|
|
|
|
8,293 |
|
|
Dividends payable |
|
12,648 |
|
|
|
5,062 |
|
|
- |
|
|
5,062 |
|
|
|
- |
|
|
|
- |
|
|
|
|
17,710 |
|
|
Derivative liabilities |
|
17,492 |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
17,492 |
|
|
Other liabilities |
|
6,756 |
|
|
|
1,303 |
|
|
10,698 |
|
|
12,001 |
|
|
|
- |
|
|
|
- |
|
|
|
|
18,757 |
|
|
Total Liabilities |
|
1,096,926 |
|
|
|
2,223,756 |
|
|
- |
|
|
2,223,756 |
|
|
|
115,941 |
|
|
|
(272,344 |
) |
|
|
|
3,164,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value |
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
Common stock, $0.01 par value |
|
1,051 |
|
|
|
1,102 |
|
|
- |
|
|
1,102 |
|
|
|
(105 |
) |
(F) |
|
161 |
|
(M) |
|
|
2,209 |
|
|
Additional paid-in capital |
|
965,018 |
|
|
|
1,609,822 |
|
|
- |
|
|
1,609,822 |
|
|
|
616,945 |
|
(F) |
|
272,183 |
|
(M) |
|
|
3,463,968 |
|
|
Accumulated other comprehensive income (loss) |
|
(19,507 |
) |
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
(19,507 |
) |
|
Retained earnings (accumulated deficit) |
|
(200,429 |
) |
|
|
(712,273 |
) |
|
- |
|
|
(712,273 |
) |
|
|
677,839 |
|
(F) (E) |
|
- |
|
|
|
|
(234,863 |
) |
|
Total stockholders' equity |
|
746,133 |
|
|
|
898,651 |
|
|
- |
|
|
898,651 |
|
|
|
1,294,679 |
|
|
|
272,344 |
|
|
|
|
3,211,807 |
|
|
Non-controlling interests |
|
3,852 |
|
|
|
98,861 |
|
|
- |
|
|
98,861 |
|
|
|
44,774 |
|
(G) |
|
- |
|
|
|
|
147,487 |
|
|
Total Equity |
|
749,985 |
|
|
|
997,512 |
|
|
- |
|
|
997,512 |
|
|
|
1,339,453 |
|
|
|
272,344 |
|
|
|
|
3,359,294 |
|
|
Total Liabilities and equity |
$ |
1,846,911 |
|
|
$ |
3,221,268 |
|
$ |
- |
|
$ |
3,221,268 |
|
|
$ |
1,455,394 |
|
|
$ |
- |
|
|
|
$ |
6,523,573 |
|
|
For the nine months ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except share or per share amounts) |
|
IRT Historical |
|
|
STAR Historical |
|
Reclassifications |
|
STAR Historical, as reclassified |
|
|
Merger Transaction Adjustments |
|
|
Equity Offering Adjustments |
|
|
Consolidated Pro Forma |
|
|
|||||||
|
|
|
|
|
|
|
|
|
NOTE 3 |
|
|
|
|
|
|
|
|
|
NOTE 7 |
|
|
|
|
|
|
||
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other property income |
|
$ |
172,689 |
|
|
$ |
257,205 |
|
$ |
- |
|
$ |
257,205 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
429,894 |
|
|
Other revenue |
|
|
647 |
|
|
|
2,219 |
|
|
4,651 |
|
|
6,870 |
|
|
|
- |
|
|
|
- |
|
|
|
7,517 |
|
|
Total revenue |
|
|
173,336 |
|
|
|
259,424 |
|
|
4,651 |
|
|
264,075 |
|
|
|
- |
|
|
|
- |
|
|
|
437,411 |
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
66,300 |
|
|
|
106,477 |
|
|
718 |
|
|
107,195 |
|
|
|
- |
|
|
|
- |
|
|
|
173,495 |
|
|
Property management expenses |
|
|
6,318 |
|
|
|
- |
|
|
12,597 |
|
|
12,597 |
|
|
|
- |
|
|
|
- |
|
|
|
18,915 |
|
|
General & administrative expenses |
|
|
14,168 |
|
|
|
37,128 |
|
|
(17,460 |
) |
|
19,668 |
|
|
|
- |
|
|
|
- |
|
|
|
33,836 |
|
|
Depreciation and amortization |
|
|
50,699 |
|
|
|
101,203 |
|
|
- |
|
|
101,203 |
|
|
|
(27,009 |
) |
(H) |
|
- |
|
|
|
124,893 |
|
|
Other expenses |
|
|
359 |
|
|
|
(498 |
) |
|
- |
|
|
(498 |
) |
|
|
- |
|
|
|
- |
|
|
|
(139 |
) |
|
Total expenses |
|
|
137,844 |
|
|
|
244,310 |
|
|
(4,146 |
) |
|
240,164 |
|
|
|
(27,009 |
) |
|
|
- |
|
|
|
350,999 |
|
|
Interest expense |
|
|
(25,644 |
) |
|
|
(60,174 |
) |
|
- |
|
|
(60,174 |
) |
|
|
8,038 |
|
(I) |
|
7,149 |
|
(M) |
|
(70,631 |
) |
|
Gain on sale of real estate assets, net |
|
|
11,492 |
|
|
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,492 |
|
|
Merger and integration costs |
|
|
(5,276 |
) |
|
|
- |
|
|
(4,146 |
) |
|
(4,146 |
) |
|
|
9,422 |
|
(L) |
|
- |
|
|
|
- |
|
|
Interest income |
|
|
- |
|
|
|
252 |
|
|
- |
|
|
252 |
|
|
|
- |
|
|
|
- |
|
|
|
252 |
|
|
Fees and other income from affiliates |
|
|
- |
|
|
|
4,651 |
|
|
(4,651 |
) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss) |
|
|
16,064 |
|
|
|
(40,157 |
) |
|
- |
|
|
(40,157 |
) |
|
|
44,469 |
|
|
|
7,149 |
|
|
|
27,525 |
|
|
(Income) loss allocated to non-controlling interests |
|
|
(90 |
) |
|
|
2,445 |
|
|
- |
|
|
2,445 |
|
|
|
(1,466 |
) |
(J) |
|
(236 |
) |
(J) |
|
653 |
|
|
Net Income (loss) allocable to common shares |
|
$ |
15,974 |
|
|
$ |
(37,712 |
) |
$ |
- |
|
$ |
(37,712 |
) |
|
$ |
43,003 |
|
|
$ |
6,913 |
|
|
$ |
28,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
(0.34 |
) |
|
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
$ |
0.13 |
|
|
Diluted |
|
$ |
0.15 |
|
|
$ |
(0.34 |
) |
|
|
|
$ |
(0.34 |
) |
|
|
|
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
102,882,723 |
|
|
|
109,898,905 |
|
|
|
|
|
109,898,905 |
|
|
|
(10,440,396 |
) |
(K) |
|
16,100,000 |
|
(M) |
|
218,441,232 |
|
|
Diluted |
|
|
104,062,661 |
|
|
|
109,898,905 |
|
|
|
|
|
109,898,905 |
|
|
|
(10,440,396 |
) |
(K) |
|
16,100,000 |
|
(M) |
|
219,621,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except share or per share amounts) |
|
IRT Historical |
|
|
STAR Historical |
|
Reclassifications |
|
Pro Forma Adjustments |
|
STAR Historical, as reclassified & adjusted |
|
|
Merger Transaction Adjustments |
|
|
Equity Offering Adjustments |
|
|
Consolidated Pro Forma |
|
|
||||||||
|
|
|
|
|
|
|
|
|
NOTE 3 |
|
NOTE 4 |
|
|
|
|
|
|
|
|
|
NOTE 7 |
|
|
|
|
|
|
|||
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other property income |
|
$ |
211,167 |
|
|
$ |
297,566 |
|
$ |
- |
|
$ |
26,375 |
|
$ |
323,941 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
535,108 |
|
|
Other revenue |
|
|
739 |
|
|
|
2,535 |
|
|
1,797 |
|
|
337 |
|
|
4,669 |
|
|
|
- |
|
|
|
- |
|
|
|
5,408 |
|
|
Total revenue |
|
|
211,906 |
|
|
|
300,101 |
|
|
1,797 |
|
|
26,712 |
|
|
328,610 |
|
|
|
- |
|
|
|
- |
|
|
|
540,516 |
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses |
|
|
82,978 |
|
|
|
123,415 |
|
|
614 |
|
|
10,698 |
|
|
134,727 |
|
|
|
- |
|
|
|
- |
|
|
|
217,705 |
|
|
Property management expenses |
|
|
8,494 |
|
|
|
- |
|
|
15,288 |
|
|
- |
|
|
15,288 |
|
|
|
- |
|
|
|
- |
|
|
|
23,782 |
|
|
General & administrative expenses |
|
|
15,095 |
|
|
|
32,025 |
|
|
(15,902 |
) |
|
14,673 |
|
|
30,796 |
|
|
|
- |
|
|
|
- |
|
|
|
45,891 |
|
|
Fees to affiliates |
|
|
- |
|
|
|
30,777 |
|
|
- |
|
|
(30,777 |
) |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Depreciation and amortization |
|
|
60,687 |
|
|
|
162,979 |
|
|
- |
|
|
10,448 |
|
|
173,427 |
|
|
|
(30,041 |
) |
(H) |
|
- |
|
|
|
204,073 |
|
|
Other expenses |
|
|
841 |
|
|
|
(38 |
) |
|
- |
|
|
|
|
|
(38 |
) |
|
|
- |
|
|
|
- |
|
|
|
803 |
|
|
Total expenses |
|
|
168,095 |
|
|
|
349,158 |
|
|
- |
|
|
5,041 |
|
|
354,199 |
|
|
|
(30,041 |
) |
|
|
- |
|
|
|
492,254 |
|
|
Interest expense |
|
|
(36,488 |
) |
|
|
(75,171 |
) |
|
|
|
|
(5,657 |
) |
|
(80,828 |
) |
|
|
10,717 |
|
(I) |
|
9,532 |
|
(M) |
|
(97,067 |
) |
|
Interest and other income |
|
|
- |
|
|
|
679 |
|
|
- |
|
|
307 |
|
|
986 |
|
|
|
- |
|
|
|
- |
|
|
|
986 |
|
|
Equity in loss from unconsolidated joint venture |
|
|
- |
|
|
|
(3,020 |
) |
|
- |
|
|
(115 |
) |
|
(3,135 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,135 |
) |
|
Fees and other income from affiliates |
|
|
- |
|
|
|
1,797 |
|
|
(1,797 |
) |
|
- |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
Loss on debt extinguishment |
|
|
- |
|
|
|
(191 |
) |
|
- |
|
|
- |
|
|
(191 |
) |
|
|
- |
|
|
|
- |
|
|
|
(191 |
) |
|
Gain on sale (loss on impairment) of real estate assets, net |
|
|
7,554 |
|
|
|
9,436 |
|
|
- |
|
|
- |
|
|
9,436 |
|
|
|
- |
|
|
|
- |
|
|
|
16,990 |
|
|
Net income (loss) |
|
|
14,877 |
|
|
|
(115,527 |
) |
|
- |
|
|
16,205 |
|
|
(99,322 |
) |
|
|
40,758 |
|
|
|
9,532 |
|
|
|
(34,155 |
) |
|
(Income) loss allocated to non-controlling interests |
|
|
(109 |
) |
|
|
1,438 |
|
|
- |
|
|
(875 |
) |
|
563 |
|
|
|
(1,343 |
) |
(J) |
|
(314 |
) |
(J) |
|
(1,203 |
) |
|
Net Income (loss) allocable to common shares |
|
$ |
14,768 |
|
|
$ |
(114,089 |
) |
$ |
- |
|
$ |
15,330 |
|
$ |
(98,759 |
) |
|
$ |
39,415 |
|
|
$ |
9,218 |
|
|
$ |
(35,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
(1.15 |
) |
|
|
|
|
|
|
$ |
(0.99 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.18 |
) |
|
Diluted |
|
$ |
0.16 |
|
|
$ |
(1.15 |
) |
|
|
|
|
|
|
$ |
(0.99 |
) |
|
|
|
|
|
|
|
|
|
$ |
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Weighted-Average Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
93,660,086 |
|
|
|
99,264,851 |
|
|
|
|
|
|
|
|
99,264,851 |
|
|
|
(9,430,161 |
) |
(K) |
|
16,100,000 |
|
(M) |
|
199,594,776 |
|
|
Diluted |
|
|
94,688,440 |
|
|
|
99,264,851 |
|
|
|
|
|
|
|
|
99,264,851 |
|
|
|
(9,430,161 |
) |
(K) |
|
16,100,000 |
|
(M) |
|
199,594,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NOTE 1: Basis of Presentation
The IRT and STAR historical financial information has been derived from, in the case of IRT, its consolidated financial statements in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, and Annual Report on Form 10-K for the year ended December 31, 2020, and, in the case of STAR, its consolidated financial statements for the quarter ended September 30, 2021, included as Exhibit 99.1 to this Form 8-K and its consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2020. Certain of STAR’s historical amounts have been reclassified to conform to IRT’s financial statement presentation, as discussed further in Note 3. The unaudited pro forma condensed combined financial statements should be read in conjunction with IRT’s and STAR’s historical consolidated financial statements and the notes thereto. The unaudited pro forma condensed combined balance sheet gives effect to the Mergers and the IRT Common Stock Sale as if they had been completed on September 30, 2021. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and for the year ended December 31, 2020 give effect to the Mergers and the IRT Common Stock Sale as if they had occurred on January 1, 2020.
The historical financial statements of IRT and STAR have been adjusted in the unaudited pro forma condensed combined financial statements to give pro forma effect to the accounting for the Mergers under GAAP, as described in Note 5, “Merger Adjustments” and the IRT Common Stock Sale under GAAP, as described in Note 7, “Equity Offering Adjustments”. The unaudited pro forma condensed combined financial statements and related notes were prepared using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with IRT as the acquiror of STAR. ASC 805 requires, among other things, that the assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date. For purposes of the unaudited pro forma condensed combined balance sheet, the estimated purchase consideration has been allocated to the assets acquired and liabilities assumed of IRT based upon IRT management’s preliminary estimate of their fair values as of September 30, 2021. The allocations of the purchase price reflected in these unaudited pro forma condensed combined financial statements have not been finalized and are based upon the best available information at the current time. A final determination of the fair values of the assets and liabilities, which cannot be made prior to the completion of the Mergers and which is anticipated to occur during the fourth quarter of 2021, will be based on the actual valuations of the tangible and intangible assets and liabilities that exist as of the date of completion of the Mergers. The completion of the final valuations, the allocations of the purchase price, the impact of ongoing integration activities, the timing of the completion of the Mergers and other changes in tangible and intangible assets and liabilities that occur prior to the completion of the Mergers could cause material differences in the information presented.
The unaudited pro forma condensed combined financial statements and related notes herein present unaudited pro forma condensed combined financial condition and results of operations of IRT, after giving pro forma effect to (i) the Mergers, which include the issuance of shares of IRT common stock to STAR stockholders at the Exchange Ratio and the issuance of IRT OP Units to STAR common unitholders at the Exchange Ratio and the assumption of STAR’s outstanding debt and (ii) the IRT Common Stock Sale and application of net proceeds therefrom to repay debt.
The Mergers and the related adjustments are described in these accompanying notes to the unaudited pro forma condensed combined financial statements. In the opinion of IRT’s management, all material adjustments have been made that are necessary to present fairly, in accordance with Article 11 of Regulation S-X of the SEC, the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements do not purport to be indicative of the overall financial position or results of operations of the combined company that would have occurred if the Mergers and the IRT Common Stock Sale had been completed on the dates indicated, nor are they indicative of the overall financial position or results of operations that may be expected for any future period or date. In addition, future results may vary significantly from those reflected in the unaudited pro forma condensed combined financial statements due to factors discussed in the IRT Quarterly Report on Form 10-Q filed on October 29, 2021.
NOTE 2: Significant Accounting Policies
The accounting policies used in the preparation of these unaudited pro forma condensed combined financial statements are those set out in IRT’s audited consolidated financial statements as of and for the year ended December 31, 2020 and IRT’s unaudited consolidated financial statements as of and for the nine months ended September 30, 2021. IRT’s management has determined that there were no significant accounting policy differences between IRT and STAR and, therefore, no adjustments are necessary to conform STAR’s financial statements to the accounting policies used by IRT in the preparation of the unaudited pro forma condensed combined financial statements. This conclusion is subject to change as further assessment is performed and finalized for purchase accounting.
As part of the application of ASC 805, IRT will conduct a more detailed review of STAR’s accounting policies in an effort to determine if differences in accounting policies require further reclassification or adjustment of STAR’s results of operations or reclassification or adjustment of assets or liabilities to conform to IRT’s accounting policies and classifications. Therefore, IRT may identify additional differences between the accounting policies of the two companies that, when conformed, could have a material
impact on the unaudited pro forma condensed combined financial information. In certain cases, the information necessary to evaluate the differences in accounting policies and the impacts thereof may not be available until after consummation of the Mergers.
NOTE 3: Reclassification Adjustments
The STAR historical financial statement line items or portions of line items have been reclassified as indicated in the “Reclassifications” column to conform to IRT presentation of these unaudited pro forma condensed combined financial statements. These reclassifications have no effect on previously reported total assets, total liabilities, stockholders’ equity, or net income allocable to common shares of STAR.
NOTE 4: Pro Forma Adjustments to STAR’s 2020 Statement of Operations
STAR’s 2020 historical statement of operations has been adjusted to reflect the following transactions that impacted STAR’s 2020 statement of operations.
REIT Mergers
On March 6, 2020, two affiliated REITs merged with and into STAR (the “STAR REIT Mergers”), with STAR remaining as the surviving entity. Through the STAR REIT mergers, STAR acquired 36 multifamily properties with 10,166 apartment homes and a 10% interest in one unconsolidated joint venture that owned 20 multifamily properties with a total of 4,584 apartment homes. The Pro Forma Adjustments made with respect to this transaction include increasing STAR’s historical 2020 revenues, operating expenses, depreciation and amortization, and interest expense as if the properties acquired on March 6, 2020 as part of the STAR REIT Mergers had been owned by STAR as of January 1, 2020.
Internalization Transaction
On August 31, 2020, STAR and related entities entered into a series of transactions and agreements, which resulted in the internalization of STAR’s external management functions (the “Internalization Transaction”). Prior to the closing of the Internalization Transaction, STAR had been externally managed and had therefore, incurred property management, asset management, and other fees and reimbursements. The Pro Forma Adjustments made with respect to this transaction include eliminating all external management fees included within the caption “Fees to affiliates” and increasing general and administrative expenses for the internal costs STAR would have incurred if the Internalization Transaction had occurred as of January 1, 2020.
In addition, any one-time costs associated with the two transactions above have been deducted from historical general and administrative expenses. These pro forma adjustments to STAR’s 2020 statement of operations are intended to align with how STAR’s business currently operates and how it is expected to continue to operate as part of the combined company.
NOTE 5: Preliminary Purchase Price Allocation
Estimated Preliminary Purchase Price
The unaudited pro forma condensed combined financial statements reflect the preliminary allocation of the purchase consideration to STAR’s identifiable net assets acquired. The preliminary allocation of purchase consideration in these unaudited pro forma condensed combined financial statements is based upon an estimated preliminary purchase price of approximately $4.6 billion with $2.4 billion of consideration transferred. The calculation of the estimated preliminary purchase price related to the Mergers is as follows (in thousands, except share and per share data):
|
Amount |
|
|
Estimated shares of STAR common stock and STAR OP units to be exchanged (a) |
|
117,293,205 |
|
Exchange Ratio |
0.905 |
|
|
Estimated shares of IRT common stock and IRT OP common units to be issued |
|
106,150,351 |
|
Closing stock price of IRT on October 25, 2021 |
|
22.34 |
|
Estimated fair value of IRT common stock and IRT OP units to be issued to former holders of STAR common stock and STAR OP common units (b) -- Consideration transferred |
$ |
2,371,399 |
|
Preliminary fair value of STAR mortgages payable and notes payable assumed by IRT |
|
2,216,749 |
|
Total estimated preliminary purchase price |
$ |
4,588,148 |
|
(a)Includes 110,188,806 shares of STAR common stock outstanding as of September 30, 2021 and 7,104,399 STAR OP common units outstanding as of September 30, 2021. Under the Merger Agreement, these shares and units are to be automatically converted to IRT common stock and IRT OP common units, as applicable, at the Exchange Ratio.
(b)The estimated fair value of IRT common stock and IRT OP common units to be issued to former holders of STAR common stock and STAR OP common units is based upon the per share closing price of IRT’s common stock on October 25, 2021, the most recent date practicable in the preparation of these unaudited pro forma condensed combined financial statements, which was $22.34, multiplied by the estimated number of shares of IRT common stock and IRT OP common units to be issued.
The actual value of the IRT common stock and IRT OP common units to be issued in the Mergers will depend on the market price of shares of IRT’s common stock at the closing date of the Mergers, and therefore, the actual purchase price will fluctuate with the market price of IRT common stock until the Mergers are consummated. As a result, the final purchase price could differ significantly from the current estimate, which could materially impact the unaudited pro forma condensed combined financial statements. A 10% difference in IRT’s common stock price would change the purchase price by approximately $237 million, which would be recorded as an adjustment to the fair value of the net assets acquired, including goodwill as applicable.
The outstanding number of shares of STAR common stock and the outstanding number of STAR OP common units may change prior to the closing of the Mergers due to transactions in the ordinary course of business, including unknown changes in vesting of outstanding STAR equity-based awards and any grants of new STAR equity-based awards. These changes are not expected to have a material impact on the unaudited pro forma condensed combined financial statements.
Preliminary Purchase Price Allocation
The preliminary purchase price allocation to assets acquired and liabilities assumed is provided throughout these notes to the unaudited pro forma condensed combined financial statements. The following table provides a summary of the preliminary purchase price allocation by major categories of assets acquired and liabilities assumed based on IRT management’s preliminary estimate of their respective fair values as of September 30, 2021 (in thousands):
|
Fair Value |
|
|
Assets: |
|
|
|
Real estate held for investment |
$ |
4,446,093 |
|
Real estate held for development |
|
34,871 |
|
Cash and cash equivalents |
|
122,108 |
|
Restricted cash |
|
38,360 |
|
Other assets |
|
35,230 |
|
Total assets acquired |
|
4,676,662 |
|
Liabilities: |
|
|
|
Preliminary fair value estimate of STAR debt assumed |
|
2,216,749 |
|
AP and accrued expenses |
|
71,451 |
|
Dividend payable |
|
5,062 |
|
Other liabilities |
|
12,001 |
|
Total liabilities assumed |
|
2,305,263 |
|
Estimated preliminary fair value of net assets acquired |
|
2,371,399 |
|
Goodwill (Bargain purchase gain) |
$ |
- |
|
The preliminary fair values of identifiable assets acquired and liabilities assumed are based on a valuation as of the assumed consummation date of the Mergers that has been prepared by IRT management. For the preliminary estimate of fair values of assets acquired and liabilities assumed of STAR, IRT used publicly available benchmarking information as well as a variety of other assumptions, including expectations for future cash flow generated by STAR properties, cap rates, and interest rates. The final allocation is dependent upon certain valuation analyses that have not yet been finalized. Accordingly, the pro forma purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed, and such differences could be material. In particular, the fair values of the assets and liabilities were estimated, in part, based upon the allocation of real estate and intangible lease assets and liabilities, and adjusted to reflect reasonable estimations for above-market and below-market leases, in-place lease values, and avoided lease origination costs, and to incorporate estimates for the mark-to-market adjustments (i.e., premiums) of mortgages payable and notes payable to be assumed in the Mergers, all of which are based on IRT’s historical experience with similar assets and liabilities. In determining the estimated fair value of STAR’s tangible assets, IRT utilized customary methods, including the income, market, and cost approaches. Amounts allocated to land, buildings and improvements, and tenant improvements, and lease intangible assets and liabilities were based on estimates considering IRT’s, STAR’s and other portfolios with similar property characteristics.
The purchase price allocation presented above has not been finalized. The final determination of the allocation of the purchase price will be based on the fair value of such assets and liabilities as of the actual consummation date of the Mergers and will be completed after the Mergers are consummated. These final fair values will be determined based on IRT’s management’s judgment, which is based on various factors, including (1) market conditions, (2) the characteristics of the real estate (i.e., location, size, demographics, value and comparative rental rates), (3) apartment community profitability metrics and/or (4) real estate valuations. The final
determination of these estimated fair values, the assets’ useful lives and the depreciation and amortization methods are dependent upon certain valuations and other analyses that have not yet been completed, and as previously stated could differ materially from the amounts presented in the unaudited pro forma condensed combined financial statements. The final determination will be completed as soon as practicable but no later than one year after the consummation of the Mergers. Any increase or decrease in the fair value of the net assets acquired, as compared to the information shown herein, could change the portion of the purchase consideration allocable to goodwill and could impact the operating results of the combined company following the Mergers due to differences in the allocation of the purchase consideration, as well as changes in the depreciation and amortization related to some of the acquired assets.
NOTE 6: Merger Adjustments
Balance Sheet
The following notes explain each pro forma adjustment on the unaudited pro forma condensed combined balance sheet as of September 30, 2021 assuming the Mergers had occurred on September 30, 2021.
(A)– To record the STAR real estate assets at fair value. We estimated fair value by using a cap rate approach using the underlying properties' net operating income and cap rate ranges between 4.0% and 4.6%.
(B)– To remove the historical accumulated depreciation of STAR prior to the Mergers.
(C)– To eliminate historical goodwill and intangible assets of STAR and record the new value of such assets based on their preliminary fair value.
(D)– To record the STAR indebtedness at fair value based upon the preliminary valuation of these liabilities. The preliminary fair value of indebtedness has been estimated using a discounted cash flow analysis using estimates of observable market interest rates.
(E)– "Accounts payable and accrued expenses" and "Retained earnings (accumulated deficit)" were adjusted for estimated remaining merger transaction costs anticipated to be paid by IRT and STAR prior to, or concurrent with, the closing of the Mergers of approximately $34.4 million consisting primarily of fees for investment bankers and legal, accounting, and tax advisors. Estimated costs are based on each party’s best estimate of its remaining fees as provided to IRT and STAR.
(F)– To eliminate the historical equity of STAR and to record the issuance of shares of IRT common stock and IRT OP common units in the Mergers. As described in Note 5, the fair value of IRT common stock and IRT OP common units to be issued to former holders of STAR common stock and STAR OP common units is based on the per share closing price of IRT common stock of $22.34 on October 25, 2021.
(G)– To eliminate the historical non-controlling interest of STAR and to record the issuance of IRT OP common units in conjunction with the Mergers. As described in Note 5, the fair value of IRT OP common units to be issued in the Mergers is based on the per share closing price of IRT common stock of $22.34 on October 25, 2021.
Statements of Operations
The following notes explain each pro forma adjustment on the unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2021 and the year ended December 31, 2020 assuming the Mergers had occurred on January 1, 2020.
(H)– To eliminate STAR's historical depreciation and amortization expense and to recognize depreciation and amortization expense based on the fair value the STAR’s tangible and intangible assets acquired as described above. Given different useful life assumptions and timing of the amortization of intangible assets, pro forma depreciation and amortization are expected to be lower than STAR’s historical depreciation and amortization.
(I)– To adjust interest expense for the amortization of the fair market value adjustment recorded with respect to STAR's indebtedness as described in adjustment (D) above.
(J)– To adjust income (loss) allocated to non-controlling interests for the common unitholders’ combined ownership percentage of 3.3% in the consolidated results of the Combined Company.
(K)- To adjust historical weighted average basic and diluted shares for the IRT stock issued to STAR stockholders in accordance with the Exchange Ratio set forth in the Merger Agreement.
(L)– To eliminate non-recurring merger transaction costs included in the historical financial statements of IRT and STAR.
NOTE 7: Equity Offering Adjustments
On July 26, 2021, IRT commenced an offering (the “IRT Common Stock Offering”) of shares of IRT Common Stock on a forward sale basis, and on July 27, 2021, IRT and IRT OP entered into an underwriting agreement (the “Underwriting Agreement”) with Barclays Capital Inc. and BMO Capital Markets Corp., as representatives of the several underwriters named therein (collectively, the
“Underwriters”), BMO Capital Markets Corp., in its capacity as agent (in such capacity, the “Forward Seller”) for Bank of Montreal, as forward counterparty (the “Forward Counterparty”) and the Forward Counterparty relating to the sale, on a forward basis, of an aggregate of 16,100,000 shares of IRT Common Stock at a price to the Underwriters of $17.04 per share. The IRT Common Stock Offering closed on July 30, 2021. IRT did not initially receive any proceeds from the sale of shares of IRT Common Stock by the Forward Seller to the Underwriters.
In connection with the IRT Common Stock Offering, IRT entered into forward sale agreements with the Forward Seller and Forward Counterparty (collectively, the “Forward Sale Agreements”). In connection with the Forward Sale Agreements, the Forward Seller (or its affiliate) borrowed from third parties and sold to the Underwriters an aggregate of 16,100,000 shares of IRT Common Stock that were sold in the IRT Common Stock Offering. IRT expects to physically settle the Forward Sale Agreements and receive proceeds, subject to certain adjustments, from the sale of those shares upon one or more such physical settlements no later than July 30, 2022, the scheduled maturity date of the Forward Sale Agreements. Although IRT expects to settle the Forward Sale Agreements entirely by the physical delivery of shares of IRT Common Stock for cash proceeds, IRT may also elect to cash or net share settle all or a portion of its obligations under the Forward Sale Agreements, in which case, IRT may receive, or it may owe, cash or shares of IRT Common Stock from or to the Forward Seller. The Forward Sale Agreements provide for an initial forward sale price of $17.04 per share, subject to certain adjustments pursuant to the terms of the Forward Sale Agreements. The Forward Sale Agreements are subject to early termination or settlement under certain circumstances. IRT intends to use substantially all of the net proceeds from the full physical settlement of the Forward Sale Agreements to repay indebtedness, including, potentially, indebtedness that IRT will assume upon consummation of the Mergers, and to use the balance of the net proceeds for general working capital, including to pay fees and expenses that IRT has incurred and will continue to incur in connection with the Mergers. If the pending Mergers are not consummated for any reason, IRT will have broad discretion to use the net proceeds of the IRT Common Stock Offering for general business purposes, including other acquisitions and repayment of indebtedness.
The unaudited pro forma condensed combined financial statements and related notes herein present unaudited pro forma condensed combined financial condition and results of operations of IRT, after giving pro forma effect to the IRT Common Stock Offering, assuming full physical settlement of the Forward Sale Agreements and application of all proceeds received to repay indebtedness. As indicated by note (M) in the unaudited pro forma financial statements, common stock, additional paid in capital, indebtedness, and interest expense have been adjusted assuming the net proceeds of the IRT Common Stock Offering of $272.4 million are used to repay indebtedness and IRT realizes interest expense savings at an estimated weighted average interest rate of 3.5% in connection with such repayments.