UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ______
Commission File Number 001-36369
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Maryland | 26-3136483 | |
| (State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
| 712 Fifth Avenue, 9th Floor, New York, NY | 10019 | |
| (Address or Principal Executive Offices) | (Zip Code) |
(212) 843-1601
(Registrant’s Telephone Number, Including Area Code)
None
(Former name, former address or former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx No¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ¨ | Accelerated Filer | x | ||||
| Non-Accelerated Filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
| 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.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
Number of shares outstanding of the registrant’s
classes of common stock, as of November 2, 2017:May 4, 2018:
Class A Common Stock: 24,207,53923,753,489 shares
Class C Common Stock: 76,603 shares
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
FORM 10-Q
September 30, 2017March 31, 2018
| 2 |
PART I – FINANCIAL INFORMATION
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| (Unaudited) | (Unaudited) | |||||||||||||||
| September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
| ASSETS | ||||||||||||||||
| Net Real Estate Investments | ||||||||||||||||
| Land | $ | 157,420 | $ | 142,274 | $ | 172,095 | $ | 169,135 | ||||||||
| Buildings and improvements | 1,015,262 | 848,445 | 1,302,990 | 1,244,193 | ||||||||||||
| Furniture, fixtures and equipment | 32,991 | 27,617 | 40,998 | 38,446 | ||||||||||||
| Construction in progress | 32,696 | 10,878 | 1,571 | 985 | ||||||||||||
| Total Gross Real Estate Investments | 1,238,369 | 1,029,214 | 1,517,654 | 1,452,759 | ||||||||||||
| Accumulated depreciation | (44,171 | ) | (42,137 | ) | (67,163 | ) | (55,177 | ) | ||||||||
| Total Net Real Estate Investments | 1,194,198 | 987,077 | 1,450,491 | 1,397,582 | ||||||||||||
| Cash and cash equivalents | 134,632 | 82,047 | 31,509 | 35,015 | ||||||||||||
| Restricted cash | 32,653 | 45,402 | 25,376 | 29,575 | ||||||||||||
| Notes and accrued interest receivable from related parties | 56,771 | 21,267 | 162,912 | 140,903 | ||||||||||||
| Due from affiliates | 1,756 | 948 | 2,243 | 2,003 | ||||||||||||
| Accounts receivable, prepaid and other assets | 15,945 | 8,610 | 13,950 | 9,689 | ||||||||||||
| Preferred equity investments and investments in unconsolidated real estate joint ventures | 94,912 | 91,132 | 71,309 | 71,145 | ||||||||||||
| In-place lease intangible assets, net | 4,330 | 4,839 | 2,038 | 4,635 | ||||||||||||
| Total Assets | $ | 1,535,197 | $ | 1,241,322 | $ | 1,759,828 | $ | 1,690,547 | ||||||||
| LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY | ||||||||||||||||
| Mortgages payable | $ | 847,162 | $ | 710,575 | $ | 978,473 | $ | 939,494 | ||||||||
| Revolving credit facilities | 99,165 | 67,670 | ||||||||||||||
| Accounts payable | 3,158 | 1,669 | 1,168 | 1,652 | ||||||||||||
| Other accrued liabilities | 25,159 | 13,431 | 20,052 | 22,952 | ||||||||||||
| Due to affiliates | 3,269 | 2,409 | 700 | 1,575 | ||||||||||||
| Distributions payable | 8,580 | 7,328 | 11,483 | 14,287 | ||||||||||||
| Total Liabilities | 887,328 | 735,412 | 1,111,041 | 1,047,630 | ||||||||||||
| 8.250% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, 10,875,000 shares authorized, and 5,721,460 issued and outstanding as of September 30, 2017 and December 31, 2016 | 138,622 | 138,316 | ||||||||||||||
| Series B Redeemable Preferred Stock, liquidation preference $1,000 per share, 225,000 shares authorized, 137,708 and 21,482 issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 120,925 | 18,938 | ||||||||||||||
| 7.6250% Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, 4,000,000 shares authorized, 2,323,750 issued and outstanding as of September 30, 2017 and December 31, 2016 | 56,127 | 56,095 | ||||||||||||||
| 8.250% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, 10,875,000 shares authorized; and 5,721,460 issued and outstanding as of March 31, 2018 and December 31, 2017 | 138,939 | 138,801 | ||||||||||||||
| 6.000% Series B Redeemable Preferred Stock, liquidation preference $1,000 per share, 725,000 shares authorized; 202,144 and 184,130 issued and outstanding as of March 31, 2018 and December 31, 2017, respectively | 178,433 | 161,742 | ||||||||||||||
| 7.625% Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share, 4,000,000 shares authorized; and 2,323,750 issued and outstanding as of March 31, 2018 and December 31, 2017 | 56,250 | 56,196 | ||||||||||||||
| Equity | ||||||||||||||||
| Stockholders’ Equity | ||||||||||||||||
| Preferred stock, $0.01 par value, 230,900,000 shares authorized; none issued and outstanding | — | — | ||||||||||||||
| 7.125% Series D Cumulative Preferred Stock, liquidation preference $25.00 per share, 4,000,000 shares authorized, 2,850,602 issued and outstanding as of September 30, 2017 and December 31, 2016 | 68,705 | 68,760 | ||||||||||||||
| Common stock - Class A, $0.01 par value, 747,586,185 shares authorized; 24,193,109 and 19,567,506 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 242 | 196 | ||||||||||||||
| Preferred stock, $0.01 par value, 230,400,000 shares authorized; none issued and outstanding | — | — | ||||||||||||||
| 7.125% Series D Cumulative Preferred Stock, liquidation preference $25.00 per share, 4,000,000 shares authorized; 2,850,602 issued and outstanding at March 31, 2018 and December 31, 2017 | 68,705 | 68,705 | ||||||||||||||
| Common stock - Class A, $0.01 par value, 747,509,582 shares authorized; 23,733,296 and 24,218,359 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively | 237 | 242 | ||||||||||||||
| Common stock - Class C, $0.01 par value, 76,603 shares authorized; 76,603 shares issued and outstanding as of March 31, 2018 and December 31, 2017 | 1 | 1 | ||||||||||||||
| Additional paid-in-capital | 329,219 | 257,403 | 315,833 | 318,170 | ||||||||||||
| Distributions in excess of cumulative earnings | (106,838 | ) | (84,631 | ) | (173,632 | ) | (164,286 | ) | ||||||||
| Total Stockholders’ Equity | 291,328 | 241,728 | 211,144 | 222,832 | ||||||||||||
| Noncontrolling Interests | ||||||||||||||||
| Operating partnership units | 1,799 | 2,216 | 41,428 | 42,999 | ||||||||||||
| Partially owned properties | 39,068 | 48,617 | 22,593 | 20,347 | ||||||||||||
| Total Noncontrolling Interests | 40,867 | 50,833 | 64,021 | 63,346 | ||||||||||||
| Total Equity | 332,195 | 292,561 | 275,165 | 286,178 | ||||||||||||
| TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND EQUITY | $ | 1,535,197 | $ | 1,241,322 | $ | 1,759,828 | $ | 1,690,547 | ||||||||
See Notes to Consolidated Financial Statements
| 3 |
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended | Nine Months Ended | Three Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | March 31, | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
| Revenues | ||||||||||||||||||||||||
| Net rental income | $ | 24,871 | $ | 18,572 | $ | 72,354 | $ | 52,013 | $ | 32,729 | $ | 23,859 | ||||||||||||
| Other property revenues | 3,072 | 2,005 | 8,639 | 5,376 | 3,946 | 2,801 | ||||||||||||||||||
| Interest income from related parties | 2,120 | — | 5,741 | — | 5,196 | 1,523 | ||||||||||||||||||
| Total revenues | 30,063 | 20,577 | 86,734 | 57,389 | 41,871 | 28,183 | ||||||||||||||||||
| Expenses | ||||||||||||||||||||||||
| Property operating | 11,969 | 7,896 | 33,935 | 22,592 | 15,658 | 10,619 | ||||||||||||||||||
| Property management fees | 781 | 595 | 2,250 | 1,659 | 992 | 732 | ||||||||||||||||||
| General and administrative | 1,103 | 1,177 | 4,249 | 4,155 | 4,669 | 1,449 | ||||||||||||||||||
| Management fees | 2,802 | 1,866 | 11,733 | 4,495 | ||||||||||||||||||||
| Management fees to related parties | — | 2,768 | ||||||||||||||||||||||
| Acquisition and pursuit costs | 15 | 689 | 3,215 | 2,143 | 43 | 3,182 | ||||||||||||||||||
| Management internalization | 826 | — | 1,647 | — | — | 481 | ||||||||||||||||||
| Weather-related losses, net | 678 | — | 678 | — | 168 | — | ||||||||||||||||||
| Depreciation and amortization | 11,763 | 7,166 | 33,094 | 22,465 | 15,640 | 10,944 | ||||||||||||||||||
| Total expenses | 29,937 | 19,389 | 90,801 | 57,509 | 37,170 | 30,175 | ||||||||||||||||||
| Operating income (loss) | 126 | 1,188 | (4,067 | ) | (120 | ) | 4,701 | (1,992 | ) | |||||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Other income | — | 26 | 17 | 26 | ||||||||||||||||||||
| Preferred returns and equity in income of unconsolidated real estate joint ventures | 2,688 | 3,074 | 7,865 | 8,617 | 2,461 | 2,572 | ||||||||||||||||||
| Gain on sale of real estate investments | — | 4,947 | 50,040 | 4,947 | — | 16,466 | ||||||||||||||||||
| Gain on sale of real estate joint venture interest, net | — | — | 10,238 | — | ||||||||||||||||||||
| Loss on early extinguishment of debt | — | (2,393 | ) | (1,639 | ) | (2,393 | ) | |||||||||||||||||
| Interest expense, net | (7,395 | ) | (5,274 | ) | (22,339 | ) | (14,091 | ) | (10,117 | ) | (7,118 | ) | ||||||||||||
| Total other (expense) income | (4,707 | ) | 380 | 44,182 | (2,894 | ) | (7,656 | ) | 11,920 | |||||||||||||||
| Net (loss) income | (4,581 | ) | 1,568 | 40,115 | (3,014 | ) | (2,955 | ) | 9,928 | |||||||||||||||
| Preferred stock dividends | (7,038 | ) | (3,940 | ) | (19,271 | ) | (8,391 | ) | (8,248 | ) | (5,851 | ) | ||||||||||||
| Preferred stock accretion | (905 | ) | (275 | ) | (1,889 | ) | (568 | ) | (1,112 | ) | (338 | ) | ||||||||||||
| Net (loss) income attributable to noncontrolling interests | ||||||||||||||||||||||||
| Operating partnership units | (125 | ) | (37 | ) | 4 | (173 | ) | (2,675 | ) | (56 | ) | |||||||||||||
| Partially-owned properties | (382 | ) | (59 | ) | 18,388 | (73 | ) | |||||||||||||||||
| Partially owned properties | (215 | ) | 8,785 | |||||||||||||||||||||
| Net (loss) income attributable to noncontrolling interests | (507 | ) | (96 | ) | 18,392 | (246 | ) | (2,890 | ) | 8,729 | ||||||||||||||
| Net (loss) income attributable to common stockholders | $ | (12,017 | ) | $ | (2,551 | ) | $ | 563 | $ | (11,727 | ) | |||||||||||||
| Net loss attributable to common stockholders | $ | (9,425 | ) | $ | (4,990 | ) | ||||||||||||||||||
| Net (loss) income per common share - Basic | $ | (0.45 | ) | $ | (0.12 | ) | $ | 0.02 | $ | (0.57 | ) | |||||||||||||
| Net loss per common share – Basic | $ | (0.40 | ) | $ | (0.20 | ) | ||||||||||||||||||
| Net (loss) income per common share – Diluted | $ | (0.45 | ) | $ | (0.12 | ) | $ | 0.02 | $ | (0.57 | ) | |||||||||||||
| Net loss per common share – Diluted | $ | (0.40 | ) | $ | (0.20 | ) | ||||||||||||||||||
| Weighted average basic common shares outstanding | 26,474,093 | 20,908,543 | 25,851,536 | 20,706,338 | 24,143,382 | 24,989,621 | ||||||||||||||||||
| Weighted average diluted common shares outstanding | 26,474,093 | 20,908,543 | 25,852,059 | 20,706,338 | 24,143,382 | 24,989,621 | ||||||||||||||||||
See Notes to Consolidated Financial Statements
| 4 |
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2018
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands, except share and per share amounts)
| Class A Common Stock | Series D Preferred Stock | |||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Value | Additional Paid- in Capital | Cumulative Distributions | Net (loss) income to Common Stockholders | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||
| Balance, January 1, 2017 | 19,567,506 | $ | 196 | 2,850,602 | $ | 68,760 | $ | 257,403 | $ | (70,807 | ) | $ | (13,824 | ) | $ | 50,833 | $ | 292,561 | ||||||||||||||||||
| Issuance of Class A common stock, net | 4,603,236 | 46 | - | - | 57,313 | - | - | - | 57,359 | |||||||||||||||||||||||||||
| Issuance costs for Series D preferred stock, net | - | - | - | (55 | ) | - | - | - | - | (55 | ) | |||||||||||||||||||||||||
| Vesting of restricted stock compensation | - | - | - | - | 9 | - | - | - | 9 | |||||||||||||||||||||||||||
| Issuance of LTIP Units for director compensation | - | - | - | - | 100 | - | - | - | 100 | |||||||||||||||||||||||||||
| Issuance of LTIP Units for compensation | - | - | - | - | 1,208 | - | - | - | 1,208 | |||||||||||||||||||||||||||
| Issuance of Long-Term Incentive Plan ("LTIP") units | - | - | - | - | 10,946 | - | - | - | 10,946 | |||||||||||||||||||||||||||
| Series B warrants | - | - | - | - | 2,048 | - | - | - | 2,048 | |||||||||||||||||||||||||||
| Contributions from noncontrolling interests, nets | - | - | - | - | - | - | - | 10,738 | 10,738 | |||||||||||||||||||||||||||
| Distributions declared | - | - | - | - | - | (22,770 | ) | - | (241 | ) | (23,011 | ) | ||||||||||||||||||||||||
| Series A Preferred Stock distributions declared | - | - | - | - | - | (8,850 | ) | - | - | (8,850 | ) | |||||||||||||||||||||||||
| Series A Preferred Stock accretion | - | - | - | - | - | (479 | ) | - | - | (479 | ) | |||||||||||||||||||||||||
| Series B Preferred Stock distributions declared | - | - | - | - | - | (3,290 | ) | - | - | (3,290 | ) | |||||||||||||||||||||||||
| Series B Preferred Stock accretion | - | - | - | - | - | (1,232 | ) | - | - | (1,232 | ) | |||||||||||||||||||||||||
| Series C Preferred Stock distributions declared | - | - | - | - | - | (3,322 | ) | - | - | (3,322 | ) | |||||||||||||||||||||||||
| Series C Preferred Stock accretion | - | - | - | - | - | (178 | ) | - | - | (178 | ) | |||||||||||||||||||||||||
| Series D Preferred Stock distributions declared | - | - | - | - | - | (3,809 | ) | - | - | (3,809 | ) | |||||||||||||||||||||||||
| Distributions to noncontrolling interests | - | - | - | - | - | - | - | (29,706 | ) | (29,706 | ) | |||||||||||||||||||||||||
| Redemption of operating partnership units | - | - | - | - | (6 | ) | - | - | (13 | ) | (19 | ) | ||||||||||||||||||||||||
| Redemption of Series B Redeemable Preferred Stock | - | - | - | - | 31 | - | - | - | 31 | |||||||||||||||||||||||||||
| Conversion of operating partnership units to Class A Common Stock | 22,367 | - | - | - | 167 | - | - | (167 | ) | - | ||||||||||||||||||||||||||
| Noncontrolling interest related to sale of Fox Hill | - | - | - | - | - | - | - | (136 | ) | (136 | ) | |||||||||||||||||||||||||
| Deconsolidation of MDA Apartments | - | - | - | - | - | - | - | (8,833 | ) | (8,833 | ) | |||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | 21,723 | 18,392 | 40,115 | |||||||||||||||||||||||||||
| Balance, September 30, 2017 | 24,193,109 | $ | 242 | 2,850,602 | $ | 68,705 | $ | 329,219 | $ | (114,737 | ) | $ | 7,899 | $ | 40,867 | $ | 332,195 | |||||||||||||||||||
| Class A Common Stock | Class C Common Stock | Series D Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||
| Number of Shares | Par Value | Number of Shares | Par Value | Number of Shares | Value | Additional Paid- in Capital | Cumulative Distributions | Net loss to Common Stockholders | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||
| Balance, January 1, 2018 | 24,218,359 | $ | 242 | 76,603 | $ | 1 | 2,850,602 | $ | 68,705 | $ | 318,170 | $ | (134,817 | ) | $ | (29,469 | ) | $ | 63,346 | $ | 286,178 | |||||||||||||||||||||||
| Issuance of Class A common stock, net | 665 | - | - | - | - | - | 6 | - | - | - | 6 | |||||||||||||||||||||||||||||||||
| Repurchase of Class A common stock | (530,693 | ) | (5 | ) | - | - | (4,199 | ) | (4,204 | ) | ||||||||||||||||||||||||||||||||||
| Issuance of LTIP Units for director compensation | - | - | - | - | - | - | - | - | - | 190 | 190 | |||||||||||||||||||||||||||||||||
| Issuance of LTIP Units for compensation | - | - | - | - | - | - | - | - | - | 1,240 | 1,240 | |||||||||||||||||||||||||||||||||
| Issuance of Long-Term Incentive Plan ("LTIP") units | - | - | - | - | - | - | - | - | - | 993 | 993 | |||||||||||||||||||||||||||||||||
| Series B warrants | - | - | - | - | - | - | 228 | - | - | - | 228 | |||||||||||||||||||||||||||||||||
| Contributions from noncontrolling interests, nets | - | - | - | - | - | - | - | - | - | 2,951 | 2,951 | |||||||||||||||||||||||||||||||||
| Common stock distribution declared adjustment | - | - | - | - | - | - | - | 79 | - | - | 79 | |||||||||||||||||||||||||||||||||
| Series A Preferred Stock distributions declared | - | - | - | - | - | - | - | (2,950 | ) | - | - | (2,950 | ) | |||||||||||||||||||||||||||||||
| Series A Preferred Stock accretion | - | - | - | - | - | - | - | (138 | ) | - | - | (138 | ) | |||||||||||||||||||||||||||||||
| Series B Preferred Stock distributions declared | - | - | - | - | - | - | - | (2,921 | ) | - | - | (2,921 | ) | |||||||||||||||||||||||||||||||
| Series B Preferred Stock accretion | - | - | - | - | - | - | - | (920 | ) | - | - | (920 | ) | |||||||||||||||||||||||||||||||
| Series C Preferred Stock distributions declared | - | - | - | - | - | - | - | (1,107 | ) | - | - | (1,107 | ) | |||||||||||||||||||||||||||||||
| Series C Preferred Stock accretion | - | - | - | - | - | - | - | (54 | ) | - | - | (54 | ) | |||||||||||||||||||||||||||||||
| Series D Preferred Stock distributions declared | - | - | - | - | - | - | - | (1,270 | ) | - | - | (1,270 | ) | |||||||||||||||||||||||||||||||
| Distributions to operating partnership noncontrolling interests | - | - | - | - | - | - | - | - | - | (175 | ) | (175 | ) | |||||||||||||||||||||||||||||||
| Distributions to partially owned noncontrolling interests | - | - | - | - | - | - | - | - | - | (490 | ) | (490 | ) | |||||||||||||||||||||||||||||||
| Redemption of Series B Preferred Stock and conversion into Class A common stock | 44,965 | - | - | - | - | - | 482 | - | - | - | 482 | |||||||||||||||||||||||||||||||||
| Cash redemption of Series B Preferred Stock | - | - | - | - | - | - | 2 | - | - | - | 2 | |||||||||||||||||||||||||||||||||
| Adjustment for noncontrolling interest ownership in Operating Partnership | - | - | - | - | - | - | 1,144 | - | (1,144 | ) | - | |||||||||||||||||||||||||||||||||
| Net (loss) | - | - | - | - | - | - | - | - | (65 | ) | (2,890 | ) | (2,955 | ) | ||||||||||||||||||||||||||||||
| Balance, March 31, 2018 | 23,733,296 | $ | 237 | 76,603 | $ | 1 | 2,850,602 | $ | 68,705 | $ | 315,833 | $ | (144,098 | ) | $ | (29,534 | ) | $ | 64,021 | $ | 275,165 | |||||||||||||||||||||||
See Notes to Consolidated Financial Statements
| 5 |
BLUEROCK RESIDENTIAL GROWTH REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands, except share and per share amounts)thousands)
| Nine Months Ended | Three Months Ended | |||||||||||||||
| September 30, | March 31, | |||||||||||||||
| 2017 | 2016 | 2018 | 2017 | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Net income (loss) | $ | 40,115 | $ | (3,014 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Net (loss) income | $ | (2,955 | ) | $ | 9,928 | |||||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization | 35,035 | 23,481 | 16,230 | 11,504 | ||||||||||||
| Amortization of fair value adjustments | (227 | ) | (318 | ) | (108 | ) | (58 | ) | ||||||||
| Preferred returns and equity in income of unconsolidated real estate joint ventures | (7,865 | ) | (8,617 | ) | (2,461 | ) | (2,572 | ) | ||||||||
| Gain on sale of real estate investments | (50,040 | ) | (4,947 | ) | — | (16,466 | ) | |||||||||
| Gain on sale of real estate joint venture interest, net | (10,238 | ) | — | |||||||||||||
| Loss on early extinguishment of debt | — | (1,104 | ) | |||||||||||||
| Distributions of income and preferred returns from preferred equity investments and unconsolidated real estate joint ventures | 7,079 | 8,277 | 2,224 | 2,633 | ||||||||||||
| Share-based compensation attributable to directors' stock compensation plan | 109 | 207 | ||||||||||||||
| Share-based compensation to Manager - LTIP Units | 12,154 | 5,898 | ||||||||||||||
| Share-based compensation attributable to stock compensation plan | 1,430 | 104 | ||||||||||||||
| Share-based compensation to former Manager - LTIP Units | 993 | 2,344 | ||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||
| Due (from) to affiliates, net | 170 | 707 | (1,891 | ) | 428 | |||||||||||
| Accounts receivable, prepaid and other assets | (7,247 | ) | (3,570 | ) | (3,975 | ) | 663 | |||||||||
| Accounts payable and other accrued liabilities | 14,216 | 7,260 | (3,385 | ) | 1,215 | |||||||||||
| Net cash provided by operating activities | 33,261 | 24,260 | 6,102 | 9,723 | ||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Acquisitions of real estate investments | (259,105 | ) | (178,382 | ) | (61,659 | ) | (116,610 | ) | ||||||||
| Capital expenditures | (33,525 | ) | (3,992 | ) | (4,160 | ) | (10,238 | ) | ||||||||
| Investment in notes receivable from related parties | (20,395 | ) | — | (20,994 | ) | (20,395 | ) | |||||||||
| Proceeds from sale of real estate investments | 71,945 | 36,675 | — | 28,639 | ||||||||||||
| Proceeds from sale of real estate joint venture interest | 17,603 | — | ||||||||||||||
| Deconsolidation of interest in MDA Apartments | (16 | ) | — | |||||||||||||
| Purchase of interests from noncontrolling interests | (344 | ) | (3,148 | ) | ||||||||||||
| Investment in unconsolidated real estate joint venture interests | (18,448 | ) | (17,135 | ) | (164 | ) | (15,718 | ) | ||||||||
| Decrease (increase) in restricted cash | 12,285 | (13,081 | ) | |||||||||||||
| Net cash used in investing activities | (230,000 | ) | (179,063 | ) | (86,977 | ) | (134,322 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Distributions to common stockholders | (22,235 | ) | (18,223 | ) | (2,348 | ) | (7,130 | ) | ||||||||
| Distributions to noncontrolling interests | (29,948 | ) | (2,844 | ) | (1,146 | ) | (15,740 | ) | ||||||||
| Distributions to preferred stockholders | (18,550 | ) | (5,647 | ) | (8,143 | ) | (5,552 | ) | ||||||||
| Contributions from noncontrolling interests | 10,738 | 4,142 | 2,951 | 91 | ||||||||||||
| Borrowings on mortgages payable | 155,045 | 177,700 | 40,000 | 81,611 | ||||||||||||
| Repayments on mortgages payable | (1,841 | ) | (68,141 | ) | (912 | ) | (664 | ) | ||||||||
| Proceeds from revolving credit facilities | 47,995 | — | ||||||||||||||
| Repayments of revolving credit facilities | (16,500 | ) | — | |||||||||||||
| Payments of deferred financing fees | (3,685 | ) | (2,917 | ) | (1,012 | ) | (719 | ) | ||||||||
| Net proceeds from issuance of common stock | 57,359 | 38 | ||||||||||||||
| Net proceeds from issuance of 8.250% Series A cumulative redeemable preferred stock | (173 | ) | 68,503 | |||||||||||||
| Net proceeds from issuance of Series B Redeemable Preferred Stock | 101,015 | 7,649 | ||||||||||||||
| Net proceeds from issuance of Class A common stock | 6 | 57,338 | ||||||||||||||
| Purchase and retirement of Class A common stock | (4,204 | ) | — | |||||||||||||
| Net proceeds from issuance of 6.0% Series B Redeemable Preferred Stock | 16,288 | 20,535 | ||||||||||||||
| Net proceeds from issuance of Warrants underlying the Series B Redeemable Preferred Stock | 2,048 | 144 | 228 | 355 | ||||||||||||
| Net proceeds from issuance of 7.625% Series C cumulative redeemable preferred stock | (146 | ) | 56,019 | |||||||||||||
| Net proceeds from issuance of 7.125% Series D cumulative redeemable preferred stock | (55 | ) | — | |||||||||||||
| Net issuance costs from issuance of 7.125% Series D Cumulative Redeemable Preferred Stock | — | (50 | ) | |||||||||||||
| Payments to redeem Series B Redeemable Preferred Stock | (229 | ) | — | (33 | ) | — | ||||||||||
| Payments to redeem Operating Partnership Units | (19 | ) | (59 | ) | ||||||||||||
| Net cash provided by financing activities | 249,324 | 216,364 | 73,170 | 130,075 | ||||||||||||
| Net increase in cash and cash equivalents | $ | 52,585 | $ | 61,561 | ||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (7,705 | ) | $ | 5,476 | |||||||||||
| Cash and cash equivalents at beginning of period | $ | 82,047 | $ | 68,960 | ||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | $ | 64,590 | $ | 127,449 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 134,632 | $ | 130,521 | ||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 56,885 | $ | 132,925 | ||||||||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||||||
| Cash paid during the period for interest | $ | 20,474 | $ | 13,006 | $ | 9,655 | $ | 6,548 | ||||||||
| Conversion of preferred equity investment to note receivable | $ | (14,435 | ) | $ | — | $ | — | $ | (14,435 | ) | ||||||
| Distributions payable – declared and unpaid | $ | 8,580 | $ | 5,973 | $ | 11,483 | $ | 8,089 | ||||||||
| Mortgages assumed upon property acquisitions | $ | 146,377 | $ | 39,054 | ||||||||||||
| Mortgages assumed by buyer upon sale of real estate assets | $ | (41,419 | ) | $ | — | $ | — | $ | (41,419 | ) | ||||||
| Reduction of assets from deconsolidation | $ | 53,574 | $ | — | ||||||||||||
| Reduction of mortgages payable from deconsolidation | $ | 36,854 | $ | — | ||||||||||||
| Reduction of other liabilities from deconsolidation | $ | 1,002 | $ | — | ||||||||||||
| Reduction of noncontrolling interests from deconsolidation | $ | 8,833 | $ | — | ||||||||||||
See Notes to Consolidated Financial Statements
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BLUEROCK RESIDENTIAL GROWTH REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Nature of Business
Bluerock Residential Growth REIT, Inc. (the “Company”) was incorporated as a Maryland corporation on July 25, 2008. The Company’s objective is to maximize long-term stockholder value by acquiring and developing well-located institutional-quality apartment properties in demographically attractiveknowledge economy growth markets across the United States. The Company seeks to maximize returns through investments where it believes it can drive substantial growth in its funds from operations and net asset value primarily through one or more of its Core-Plus Value-Add, Opportunistic and Invest-to-Own investment strategies.
As of September 30, 2017,March 31, 2018, the Company's portfolio consisted ofCompany owned interests in thirty-fiveforty real estate properties, (twenty-fivetwenty-nine consolidated operating properties and teneleven through preferred equity and mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, six are under development, properties).four are in leaseup and one property is stabilized. The Company’s thirty-fiveforty properties contain an aggregate of 10,76112,672 units, comprised of 8,1669,872 consolidated operating units and 2,5952,800 units under development.through preferred equity and mezzanine loan investments. As of September 30, 2017, these properties, exclusive of developmentMarch 31, 2018, the Company’s consolidated operating properties were approximately 94% occupied.
The Company has elected to be treated, and currently qualifies, as a real estate investment trust (“REIT”), for federal income tax purposes. As a REIT, the Company generally is not subject to corporate-level income taxes. To maintain its REIT status, the Company is required, among other requirements, to distribute annually at least 90% of its “REIT taxable income,” as defined by the Internal Revenue Code of 1986, as amended (the “Code”), to the Company’s stockholders. If the Company fails to qualify as a REIT in any taxable year, it would be subject to federal income tax on its taxable income at regular corporate tax rates.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The Company operates as an umbrella partnership REIT in which Bluerock Residential Holdings, L.P. (its “Operating Partnership”), or the Operating Partnership’s wholly-owned subsidiaries, owns substantially all of the property interests acquired and investments made on the Company’s behalf. As of September 30, 2017,March 31, 2018, limited partners other than the Company owned approximately 10.29%25.11% of the common units of the Operating Partnership (1.01%(19.60% is held by holders of limited partnership interest in the Operating Partnership (“OP Units”) and 9.28%5.51% is held by holders of the Operating Partnership’s long-term incentive plan units (“LTIP Units”)), of which 3.32% are not vested at March 31, 2018).
Bluerock Real Estate, L.L.C., a Delaware limited liability company,The Company is referred to as Bluerock (“Bluerock”),internally managed and completed the Company’s external manager,internalization of BRG Manager, LLC a Delaware limited liability company, is referred to as its Manager (“(the “former Manager”). Both Bluerock and the Manager are related parties with respect to the Company, but are not within the Company’s control and are not consolidated in the Company’s financial statements. on October 31, 2017.
Because the Company is the sole general partner of its Operating Partnership and has unilateral control over its management and major operating decisions (even if additional limited partners are admitted to the Operating Partnership), the accounts of the Operating Partnership are consolidated in its consolidated financial statements.
The Company also consolidates entities in which it controls more than 50% of the voting equity and in which control does not rest with other investors. Investments in real estate joint ventures over which the Company has the ability to exercise significant influence, but for which it does not have financial or operating control, are accounted for using the equity method of accounting. These entities are reflected on the Company’s consolidated financial statements as “Preferred equity investments and investments in unconsolidated real estate joint ventures.” All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The Company will consider future joint ventures for consolidation in accordance with the provisions required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810: Consolidation.
Certain amounts in prior periods, related to tenant reimbursements for utility expenses amounting to $1.0 million and $2.7 million for the three months and nine months ended September 30, 2016,year financial statement presentation have been reclassified to other property revenues from property operating expenses, to conform to the current period presentation which includes tenant reimbursements for utility expenses amounting to $1.6 million and $4.6 million for the three months and nine months ended September 30, 2017. In addition, property management fees have been reclassified from property operating expenses.presentation.
Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
The Company first analyzes its investments in joint ventures to determine if the joint venture is a variable interest entity (“VIE”) in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has (i) insufficient equity to permit it to finance its activities without additional subordinated financial support or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change in value with changes in the fair value of the VIE’s net assets. The Company continuously re-assesses at each level of the joint venture whether the entity is (i) a VIE, and (ii) if the Company is the primary beneficiary of the VIE. If it was determined an entity in which the Company holds a joint venture interest qualified as a VIE and the Company was the primary beneficiary, the entity would be consolidated.
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If, after consideration of the VIE accounting literature, the Company has determined that an entity is not a VIE, the Company assesses the need for consolidation under all other provisions of ASC 810. These provisions provide for consolidation of majority-owned entities through a majority voting interest held by the Company providing control, or through determination of control by virtue of the Company being the general partner in a limited partnership or the controlling member of a limited liability company.
In assessing whether the Company is in control of and requiring consolidation of the limited liability company and partnership venture structures, the Company evaluates the respective rights and privileges afforded each member or partner (collectively referred to as “member”). The Company’s member would not be deemed to control the entity if any of the other members have either (i) substantive kickout rights providing the ability to dissolve (liquidate) the entity or otherwise remove the managing member or general partner without cause or (ii) has substantive participating rights in the entity. Substantive participating rights (whether granted by contract or law) provide for the ability to effectively participate in significant decisions of the entity that would be expected to be made in the ordinary course of business.
If it has been determined that the Company does not have control, but does have the ability to exercise significant influence over the entity, the Company accounts for these unconsolidated investments under the equity method of accounting. The equity method of accounting requires these investments to be initially recorded at cost and subsequently increased (decreased) for the Company’s share of net income (loss), including eliminations for the Company’s share of intercompany transactions, and increased (decreased) for contributions (distributions). The Company’s proportionate share of the results of operations of these investments is reflected in the Company’s earnings or losses.
Interim Financial Information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and the instructions to Form 10-Q and Article 10-1 of Regulation S-X. Accordingly, the financial statements for interim reporting do not include all of the information and notes or disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for interim periods should not be considered indicative of the operating results for a full year.
The balance sheet at December 31, 20162017 has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer toIt is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in our audited consolidated financial statements for the year ended December 31, 20162017 contained in the Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 22, 2017.March 13, 2018.
Summary of Significant Accounting Policies
Other than the adoption of accounting pronouncements as described below, there have been no significant changes to the Company’s accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-01, "Business Combinations; Clarifying the Definition of a Business" (“ASU 2017-01”). ASU 2017-01 modifies the requirements to meet the definition of a business underAccounting Standards Codification ("ASC")Topic 805, "Business Combinations." The amendments provide a screen to determine when a set of identifiable assets and liabilities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. The impact is expected to result in fewer transactions being accounted for as business combinations. The Company believes that this amendment will result in most of its real estate acquisitions being accounted for as asset acquisitions rather than business combinations. ASU 2017-01 is effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted. The Company adopted this standard effective January 1, 2017. The impact to the Consolidated Financial Statements and related notes as a result of the adoption of this standard is primarily related to the difference in the accounting of acquisition costs. When accounting for these costs as a part of an asset acquisition, the Company is permitted to capitalize the costs. Upon the adoption of ASU 2017-01 the Company evaluates each acquisition of real estate or in-substance real estate to determine if the integrated set of assets and activities acquired meet the definition of a business and need to be accounted as a business combination. All acquisitions of real estate by the Company during 2017 to date do not meet the new definition of a business.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows; Restricted Cash" (“ASU 2016-18”). This update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company will adjustadjusted the consolidated statement of cash flows as required in conjunction with the adoption of ASU 2016-08 in 2018.2016-08. ASU 2016-18 is effective for the Company for annual and interim periods beginning after December 15, 2017 with early adoption permitted.2017. The Company adopted ASU 2016-18 as of January 1, 2018.
In August 2016, the Financial Accounting Standards Board (“FASB”)FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). The ASU provides guidance on the treatment of cash receipts and cash payments for certain types of cash transactions, to eliminate diversity in practice in the presentation of the cash flow statement. For public business entities, the amendments in ASU 2016-15 are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier application was permitted. The Company will adjustuses the nature of distributions approach. The Company adjusted the consolidated statement of cash flows as required in conjunction with the adoption of ASU 2016-15 in 2018.
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In March 2016, the FASB issued ASU No. 2016-07, “Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”), which eliminates the requirement to retroactively adjust an investment, results of operations, and retained earnings when the investment qualifies for the use of the equity method as a result of an increase in the level of ownership interest or degree of influence. The new standard is effective for annual reporting periods beginning after December 15, 2016. ASU 2016-07 did not have a material impact on the Company’s financial statements when adopted.
In June 2016, the FASB updated ASC Topic 326 "Financial Instruments - Credit Losses" with 2016-13 “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-03”). ASU 2016-13 enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better inform credit loss estimates. ASU 2016-13 is effective for annual periods (including interim periods within those periods) beginning after December 15, 2019. The Company is currently evaluating the guidance and has not determined the impact this standard may have on the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company expects that, because of the ASU 2016-02’s emphasis on lessee accounting, ASU 2016-02 will not have a material impact on the Company’s accounting for leases.Company. Consistent with present standards, the Company will continue to account for lease revenue on a straight-line basis. Also, consistent with the Company’s current practice, under ASU 2016-02 only initial direct costs that are incremental to the lessor will be capitalized.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue is generally recognized net of allowances. In August 2015, the FASB issued ASU 2015-14, Revenue“Revenue from Contracts with Customers-Deferral of the Effective DateDate” which defersdeferred the effective date of the new revenue recognition standard until the first quarter of 2018. Therefore, ASU 2014-09 will becomebecame effective for the Company in the first quarter of the fiscal year ending December 31, 2018. Early adoption is permitted, but not earlier than the first quarter of the fiscal year ending December 31, 2017. The ASU allows for either full retrospective or modified retrospective adoption. The Company has selected the modified retrospective approach. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers” (Topic 606): Identifying Performance Obligations and Licensing, which adds guidance on identifying performance obligations within a contract. The majority of the Company’sCompany's revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASU 2016-02, Leases, discussed above. The Company’sCompany's other revenue streams, which are beingwere evaluated under this ASU, include but are not limited to other property revenues and interest income from related parties determined not to be within the scope of ASU 2016-02, and gains and losses from real estate dispositions. The adoption by the Company will continue to assess the impact of the new standard and will adopt itASU 2014-09 as of January 1, 2018 however,did not result in a cumulative adjustment and did not have a material impact on the Company does expect additional disclosures that are required from the adoptionCompany’s consolidated balance sheet, results of this standard.operations, equity or cash flows.
In March 2016, the FASB issued ASU 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (Topic 606)” (“ASU 2016-08”),which updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance (1) require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (2) illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer; (3) clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a specified good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances; and (4) revise existing examples and add two new ones to more clearly depict how the guidance should be applied. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606, Revenue from Contracts with Customers (see ASU 2014-09 above). The majority of the Company’sCompany's revenue is derived from rental income, which is scoped out from this standard and will be accounted for under ASU 2016-02, Leases, discussed above. The Company will continue to assess the impact of the new standard and will adopt itadopted ASU 2016-08 as of January 1, 2018, however, as noted above in Note 2, the Company has reclassified certain tenant reimbursements as other property revenues and does expect additional disclosures from the adoption of this standard.2018.
In February 2017, the FASB issued ASU 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)" ("ASU 2017-05"). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. ASU 2017-05 also defines the term in“in substance nonfinancial asset.asset” and provides guidance on the recognition of gains on sale of real estate investments. It is effective for annual periods beginning after December 15, 2017. TheThere has been no material impact to the Company upon its adoption of this standard is not anticipated to have a material impact on our consolidated financial statements.ASU 2017-05 as of January 1, 2018.
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Note 3 – Sale of Real Estate Asset and Abandonment of Development Project
Sale of Village Green Ann Arbor
On February 22, 2017, the Company closed on the sale of the Village Green Ann Arbor property, located in Ann Arbor, Michigan. The property was sold for approximately $71.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Village Green Ann Arbor property in the amount of $41.4 million and payment of closing costs and fees of $1.3 million, the sale of the property generated net proceeds of approximately $28.6 million and a gain on sale of approximately $16.7 million, of which the Company’s pro rata share of proceeds was approximately $13.6 million and pro rata share of the gain was approximately $7.8 million.
Sale of Lansbrook Village
On April 26, 2017, the Company closed on the sale of Lansbrook Village, located in Palm Harbor, Florida. The 90% owned property was sold for approximately $82.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for assumption of the existing mortgage indebtedness encumbering Lansbrook Village in the amount of $57.2 million and payment of closing costs and fees of $1.2 million, the sale of the property generated net proceeds of approximately $24.1 million and a gain on sale of approximately $22.8 million, of which the Company’s pro rata share of proceeds was approximately $19.1 million and pro rata share of the gain was approximately $16.1 million.
Sale of Fox Hill
On May 24, 2017, the Company closed on the sale of the Fox Hill property, located in Austin, Texas. The property was sold for approximately $46.5 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Fox Hill property in the amount of $26.7 million, the payment of a prepayment penalty on the mortgage of $1.6 million and payment of closing costs and fees of $0.5 million, the sale of the property generated net proceeds of approximately $19.2 million and a gain on sale of approximately $10.7 million, of which the Company’s pro rata share of proceeds was approximately $16.4 million and pro rata share of the gain was approximately $10.3 million.
Sale of MDA Apartments
On June 30, 2017, the Company closed on the sale of its interest in MDA Apartments, located in Chicago, Illinois. The Company’s 35% interest in the property was sold for approximately $18.3 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payment of closing costs and fees of $0.7 million, the sale of the joint venture interest in the property generated net proceeds of approximately $17.6 million and gain on sale of $10.2 million, of which the Company’s pro rata share of proceeds was approximately $11.0 million and pro rata share of the gain was approximately $6.4 million.
Election to Abandon East San Marco Development
On November 24, 2015, the Company entered into a cost-sharing agreement to pursue the acquisition of a tract of real property located in Jacksonville, Florida for the development of a 266-unit, Class A multifamily apartment community with 44,276 square feet of retail space, or the East San Marco Property. In 2017 the Company elected to abandon pursuit of the development of the East San Marco Property due to significant cost escalations arising from scope changes imposed on the project after the start and from both general and market specific labor and material inflation, which negatively impacted the risk and return profile of the project. The Company recognizedhad invested approximately $2.9 million of acquisition and pursuit costs during the nine months ended September 30, 2017 based on its investment in a controlling equity position in the East San Marco Property prior to abandonment.
Note 4 – Investments in Real Estate
As of September 30, 2017,March 31, 2018, the Company was invested in twenty-fivetwenty-nine operating real estate properties and teneleven development properties generally through joint ventures, including convertible preferred equity investments, and mezzanine loans.loan investments. The following tables provide summary information regarding ourthe Company’s consolidated operating properties and developmentpreferred equity and mezzanine loan investments, which are either consolidated or presented onaccounted for under the equity method of accounting.
Consolidated Operating Properties
| Multifamily Community Name/Location | Number of Units | Year Built/Renovated(1) | Ownership Interest | |||||||||
| ARIUM at Palmer Ranch, Sarasota, FL | 320 | 2016 | 95.0 | % | ||||||||
| ARIUM Grandewood, Orlando, FL | 306 | 2005 | 95.0 | % | ||||||||
| ARIUM Gulfshore, Naples, FL | 368 | 2016 | 95.0 | % | ||||||||
| ARIUM Palms, Orlando, FL | 252 | 2008 | 95.0 | % | ||||||||
| ARIUM Pine Lakes, Port St. Lucie, FL | 320 | 2003 | 85.0 | % | ||||||||
| ARIUM Westside, Atlanta, GA | 336 | 2008 | 90.0 | % | ||||||||
| Ashton Reserve, Charlotte, NC | 473 | 2015 | 100.0 | % | ||||||||
| Citrus Tower, Orlando, FL | 336 | 2006 | 96.8 | % | ||||||||
| Enders Place at Baldwin Park, Orlando, FL | 220 | 2003 | 89.5 | % | ||||||||
| James on South First, formerly Legacy at Southpark, Austin, TX | 250 | 2016 | 90.0 | % | ||||||||
| Marquis at Crown Ridge, San Antonio, TX | 352 | 2009 | 90.0 | % | ||||||||
| Marquis at Stone Oak, San Antonio, TX | 335 | 2007 | 90.0 | % | ||||||||
| Marquis at The Cascades, Tyler, TX | 582 | 2009 | 90.0 | % | ||||||||
| Marquis at TPC, San Antonio, TX | 139 | 2008 | 90.0 | % | ||||||||
| Nevadan, Atlanta, GA | 480 | 1990 | 90.0 | % | ||||||||
| Park & Kingston, Charlotte, NC | 168 | 2015 | 96.0 | % | ||||||||
| Preston View, Morrisville, NC | 382 | 2000 | 91.8 | % | ||||||||
| Roswell City Walk, Roswell, GA | 320 | 2015 | 98.0 | % | ||||||||
| Sorrel, Frisco, TX | 352 | 2015 | 95.0 | % | ||||||||
| Sovereign, Fort Worth, TX | 322 | 2015 | 95.0 | % | ||||||||
| The Brodie, Austin, TX | 324 | 2001 | 92.5 | % | ||||||||
| The Preserve at Henderson Beach, Destin, FL | 340 | 2009 | 100.0 | % | ||||||||
| Villages at Cypress Creek, Houston, TX | 384 | 2001 | 80.0 | % | ||||||||
| Wesley Village, Charlotte, NC | 301 | 2010 | 91.8 | % | ||||||||
| Whetstone, Durham, NC | 204 | 2015 | (2) | |||||||||
| Total | 8,166 | |||||||||||
| Multifamily Community Name | Location | Number of Units | Date Built/Renovated (1) | Ownership Interest | ||||||||||
| ARIUM at Palmer Ranch | Sarasota, FL | 320 | 2016 | 95.0 | % | |||||||||
| ARIUM Glenridge | Atlanta, GA | 480 | 1990 | 90.0 | % | |||||||||
| ARIUM Grandewood | Orlando, FL | 306 | 2005 | 100.0 | % | |||||||||
| ARIUM Gulfshore | Naples, FL | 368 | 2016 | 95.0 | % | |||||||||
| ARIUM Hunter’s Creek | Orlando, FL | 532 | 1999 | 100.0 | % | |||||||||
| ARIUM Metrowest | Orlando, FL | 510 | 2001 | 100.0 | % | |||||||||
| ARIUM Palms | Orlando, FL | 252 | 2008 | 95.0 | % | |||||||||
| ARIUM Pine Lakes | Port St. Lucie, FL | 320 | 2003 | 85.0 | % | |||||||||
| ARIUM Westside | Atlanta, GA | 336 | 2008 | 90.0 | % | |||||||||
| Ashton Reserve | Charlotte, NC | 473 | 2015 | 100.0 | % | |||||||||
| Citrus Tower | Orlando, FL | 336 | 2006 | 96.8 | % | |||||||||
| Enders Place at Baldwin Park | Orlando, FL | 220 | 2003 | 92.0 | % | |||||||||
| James at South First | Austin, TX | 250 | 2016 | 90.0 | % | |||||||||
| Marquis at Crown Ridge | San Antonio, TX | 352 | 2009 | 90.0 | % | |||||||||
| Marquis at Stone Oak | San Antonio, TX | 335 | 2007 | 90.0 | % | |||||||||
| Marquis at The Cascades | Tyler, TX | 582 | 2009 | 90.0 | % | |||||||||
| Marquis at TPC | San Antonio, TX | 139 | 2008 | 90.0 | % | |||||||||
| Outlook at Greystone | Birmingham, AL | 300 | 2007 | 100.0 | % | |||||||||
| Park & Kingston | Charlotte, NC | 168 | 2015 | 100.0 | % | |||||||||
| Preston View | Morrisville, NC | 382 | 2000 | 100.0 | % | |||||||||
| Roswell City Walk | Roswell, GA | 320 | 2015 | 98.0 | % | |||||||||
| Sorrel | Frisco, TX | 352 | 2015 | 95.0 | % | |||||||||
| Sovereign | Fort Worth, TX | 322 | 2015 | 95.0 | % | |||||||||
| The Brodie | Austin, TX | 324 | 2001 | 92.5 | % | |||||||||
| The Links at Plum Creek | Castle Rock, CO | 264 | 2000 | 88.0 | % | |||||||||
| The Mills | Greenville, SC | 304 | 2013 | 100.0 | % | |||||||||
| The Preserve at Henderson Beach | Destin, FL | 340 | 2009 | 100.0 | % | |||||||||
| Villages at Cypress Creek | Houston, TX | 384 | 2001 | 80.0 | % | |||||||||
| Wesley Village | Charlotte, NC | 301 | 2010 | 100.0 | % | |||||||||
| Total | 9,872 | |||||||||||||
(1) Represents date of last significant renovation or year built if there were no renovations.
(2) Whetstone is currently a preferred equity investment providing a stated investment return.
| (1) | Represents date of last significant renovation or year built if there were no renovations. |
Depreciation expense was $8.9$12.1 million and $5.9 million, and $24.5 million and $16.7$7.8 million for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
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Intangibles related to the Company’s consolidated investments in real estate consist of the value of in-place leases. In-place leases are amortized over the remaining term of the in-place leases, which is approximately six months. Amortization expense related to the in-place leases was $2.9$3.6 million and $1.3 million, and $8.6 million and $5.8$3.1 million for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
Development PropertiesPreferred Equity and Mezzanine Loan Investments
| Multifamily Community |
| Location | Actual /
|
Estimated Initial Occupancy | Actual / Estimated Construction Completion | |||||||||
| Whetstone | Durham, NC | 204 | 3Q 2014 | 3Q 2015 | ||||||||||
| Alexan CityCentre | Houston, TX | 340 | 2Q 2017 | 4Q 2017 | ||||||||||
| Helios | Atlanta, GA | 282 | 2Q 2017 | 4Q 2017 | ||||||||||
| Alexan Southside Place | Houston, TX | 270 | 4Q 2017 | |||||||||||
| Lake Boone Trail | Raleigh, NC | 245 | 3Q 2017 | |||||||||||
| Vickers Village | Roswell, GA | 79 | 3Q 2018 | 4Q 2018 | ||||||||||
| APOK Townhomes | Boca Raton, FL | 90 | 3Q 2018 | 1Q 2019 | ||||||||||
| Crescent Perimeter | Atlanta, GA | 320 | 4Q 2018 | 2Q 2019 | ||||||||||
| Domain | Garland, TX | 299 | 4Q 2018 | 2Q 2019 | ||||||||||
| West Morehead | Charlotte, NC | 286 | 4Q 2018 | 2Q 2019 | ||||||||||
| Flagler Village | Fort Lauderdale, FL | 385 | 3Q 2019 | 3Q 2020 | ||||||||||
| Total | 2,800 | |||||||||||||
Note 5 – Acquisition of Real Estate
The following describes the Company’s significant acquisition activity during the ninethree months ended September 30, 2017:March 31, 2018:
Acquisition of Bell Preston View
On February 17, 2017, the Company, through subsidiaries of its Operating Partnership, acquired a 91.8% interest in a 382-unit apartment community located in Morrisville, North Carolina, known as Bell Preston View Apartments (“Preston View”) for approximately $59.5 million. The purchase price of $59.5 million was funded, in part, with a $41.1 million senior mortgage loan secured by the Preston View property.
Acquisition of Wesley VillageLinks at Plum Creek
On March 9, 2017, the Company, through subsidiaries of its Operating Partnership, acquired a 91.8% interest in a 301-unit apartment community and adjacent land located in Charlotte, North Carolina, known as Wesley Village Apartments (“Wesley Village”) for approximately $57.2 million. The purchase price for Wesley Village of approximately $57.2 million was funded, in part, with a $40.5 million senior mortgage loan secured by the Wesley Village property.
Acquisition of Texas Portfolio (“Texas Portfolio”)
On June 9, 2017, the Company, through subsidiaries of its Operating Partnership, acquired a 90.0% interest in a portfolio of five apartment community properties containing 1,408-units, located in San Antonio and Tyler, Texas for approximately $188.9 million. The purchase price for the five-property portfolio was funded, in part, with the assumption of five senior mortgage loans of a total of approximately $146.4 million secured individually by each of the portfolio properties. The properties are Marquis at Crown Ridge, Marquis at Stone Oak and Marquis at TPC located in San Antonio, Texas, and Marquis at The Cascades I and II (considered one property subsequent to acquisition) located in Tyler, Texas.
Acquisition at Villages at Cypress Creek
On September 8, 2017,26, 2018, the Company, through subsidiaries of its Operating Partnership, acquired an 80.0%88.0% interest in a 384-unit264-unit apartment community located in Houston, Texas,Castle Rock, Colorado, known as VillagesThe Links at CypressPlum Creek (“Villages at Cypress Creek”) for approximately $40.7$61.1 million. The purchase price for Villages at Cypress Creek of approximately $40.7$61.1 million was funded, in part, with a $26.2$40.0 million senior mortgage loan secured by the VillagesThe Links at CypressPlum Creek property.
Acquisition of Citrus Tower
On September 28, 2017, the Company, through subsidiaries of its Operating Partnership, acquired a 96.8% interest in a 336-unit apartment community located in Orlando, Florida, known as Citrus Tower (“Citrus Tower”) for approximately $55.3 million. The purchase price for Citrus Tower of approximately $55.3 million was funded, in part, with a $41.4 million senior mortgage loan secured by the Citrus Tower property.
Purchase Price Allocations
The acquisitionsacquisition of Wesley Village, Preston View, the Texas Portfolio, VillagesThe Links at CypressPlum Creek and Citrus Tower havehas been accounted for as an asset acquisitions.acquisition. The purchase prices wereprice was allocated to the acquired assets and assumed liabilities based on their estimated fair values at the datesdate of acquisition.
The following table summarizes the assets acquired and liabilities assumed at the acquisition date (amounts in thousands):
| Purchase Price Allocation | Purchase Price Allocation | |||||||
| Land | $ | 40,473 | $ | 2,960 | ||||
| Building | 312,884 | 45,393 | ||||||
| Building improvements | 19,615 | 3,346 | ||||||
| Land improvements | 17,039 | 8,019 | ||||||
| Furniture and fixtures | 7,014 | 1,044 | ||||||
| In-place leases | 8,021 | 897 | ||||||
| Other assets | 666 | |||||||
| Total assets acquired | $ | 405,712 | $ | 61,659 | ||||
| Mortgages assumed | $ | 146,377 | ||||||
| Total liabilities assumed | $ | 146,377 | ||||||
The pro-forma information presented below represents the change in consolidated revenue and earnings as if the Company's acquisitions of Wesley Village, Preston View, the Texas Portfolio, Villages at Cypress Creek, Citrus Tower and 2016 acquisitions, had occurred on January 1, 2016 (amounts in thousands, except per share amounts).
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| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||||
| As Reported | Pro-Forma Adjustments | Pro-Forma | As Reported | Pro-Forma Adjustments | Pro-Forma | |||||||||||||||||||
| Revenues | $ | 86,734 | $ | 17,796 | $ | 104,530 | $ | 57,389 | $ | 52,256 | $ | 109,645 | ||||||||||||
| Net income (loss) | $ | 40,115 | $ | 10,128 | $ | 50,243 | $ | (3,014 | ) | $ | (17,384 | ) | $ | (20,398 | ) | |||||||||
| Net income (loss) attributable to common stockholders | $ | 563 | $ | 9,220 | $ | 9,783 | $ | (11,727 | ) | $ | (15,923 | ) | $ | (27,650 | ) | |||||||||
| Income (loss) per share, basic and diluted(1) | $ | 0.02 | $ | 0.38 | $ | (0.57 | ) | $ | (1.34 | ) | ||||||||||||||
(1) Pro-forma earnings (loss) per share, both basic and diluted, are calculated based on the net earnings (loss) attributable to the Company.
Aggregate property level revenues and net loss for 2017 acquisitions of Wesley Village, Preston View, the Texas Portfolio, Villages at Cypress Creek, and Citrus Tower since the properties’ respective acquisition dates, that are reflected in the Company’s consolidated statement of operations for the nine months ended September 30, 2017 amounted to $12.4 million and $3.9 million, respectively.
Note 6 – Notes and Interest Receivable due from Related Party
Following is a summary of the Notes and interest receivable due from related parties as of September 30, 2017March 31, 2018 and December 31, 20162017 (amounts in thousands):
| Property | September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | ||||||||||||
| APOK Townhomes | $ | 11,360 | $ | — | $ | 11,365 | $ | 11,365 | ||||||||
| Crescent Perimeter | 20,868 | 20,622 | ||||||||||||||
| Domain | 20,528 | — | 20,536 | 20,536 | ||||||||||||
| Flagler Village | 75,314 | 53,668 | ||||||||||||||
| Vickers Village | 9,936 | 9,819 | ||||||||||||||
| West Morehead | 24,883 | 21,267 | 24,893 | 24,893 | ||||||||||||
| Total | $ | 56,771 | $ | 21,267 | $ | 162,912 | $ | 140,903 | ||||||||
TheFollowing is a summary of the interest income from related parties for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 are summarized below (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
| Property | 2017 | 2016 | 2017 | 2016 | March 31, 2018 | March 31, 2017 | ||||||||||||||||||
| APOK Townhomes | $ | 424 | $ | — | $ | 1,232 | $ | — | $ | 415 | $ | 387 | ||||||||||||
| Crescent Perimeter | 762 | — | ||||||||||||||||||||||
| Domain | 767 | — | 1,758 | — | 750 | 233 | ||||||||||||||||||
| Flagler Village | 1,996 | — | ||||||||||||||||||||||
| Vickers Village | 363 | — | ||||||||||||||||||||||
| West Morehead | 929 | — | 2,751 | — | 910 | 903 | ||||||||||||||||||
| Interest income from related parties | $ | 2,120 | $ | — | $ | 5,741 | $ | — | ||||||||||||||||
| Total | $ | 5,196 | $ | 1,523 | ||||||||||||||||||||
West Morehead Mezzanine Financing
On December 29, 2016, the Company, through BRG Morehead NC, LLC, or BRG Morehead NC, an indirect subsidiary, provided a $21.3 million mezzanine loan, or the BRG West Morehead Mezz Loan, to BR Morehead JV Member, LLC, an affiliate of the former Manager, or BR Morehead JV Member. The BRG West Morehead Mezz Loan is secured by BR Morehead JV Member’s approximate 95.0% interest in a multi-tiered joint venture along with Bluerock Special Opportunity + Income Fund II, LLC (“Fund II”), an affiliate of the former Manager, and an affiliate of ArchCo Residential, or the West Morehead JV, which intends to develop an approximately 286-unit Class A apartment community located in Charlotte, North Carolina to be known as West Morehead. On January 5, 2017, the Company increased the amount of the BRG West Morehead Mezz Loan to approximately $24.6 million. The BRG West Morehead Mezz Loan matures on the earlier of January 5, 2020, or the maturity date of the West Morehead Construction Loan, as defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG West Morehead Mezz Loan can be prepaid without penalty. The Company has the right to exercise an option to purchase, at the greater of a 25 basis point discount to fair market value or 15% internal rate of return for Fund II, up to a 100% common membership interest in BR Morehead JV Member (the mezzanine borrower), which is 99.5% owned by Fund II and which currently holds an approximate 95.0% interest in the West Morehead JV and in the West Morehead property, subject to certain promote rights of our unaffiliated development partner.
On January 5, 2017, the Company increased the amount of the BRG West Morehead Mezz Loan to approximately $24.6 million.
In conjunction with the West Morehead development, on December 29, 2016, the West Morehead property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $34.5 million construction loan with an unaffiliated party, or the West Morehead Construction Loan, of which a de minimus amount$10.1 million is outstanding at September 30, 2017,March 31, 2018, and which is secured by the West Morehead property. The West Morehead Construction Loan matures on December 29, 2019, and contains two one-year extension options, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The West Morehead Construction Loan bears interest on a floating basis on the amount drawn based on LIBOR plus 3.75%, subject to a minimum of 4.25%. Regular monthly payments are interest-only until September 2019, with further payments based on twenty-five-year amortization. The West Morehead Construction Loan can be prepaid without penalty.
In addition, on December 29, 2016, the West Morehead property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $7.3 million mezzanine loan with an unaffiliated party, of which $2.8$7.3 million is outstanding at September 30, 2017,March 31, 2018, and which is secured by membership interest in the joint venture developing the West Morehead property. The loan matures on December 29, 2019, and contains two one-year extension options, subject to certain conditions including a debt service coverage, loan to value ratio, extension of the West Morehead Construction Loan and payment of an extension fee. The loan bears interest on a fixed rate of 11.5%. Regular monthly payments are interest-only. The loan can be prepaid prior to maturity provided the lender receives a cumulative return of 30% of its loan amount including all principal and interest paid.
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APOK Townhomes Mezzanine Financing
On January 6, 2017, the Company, through BRG Boca, LLC, or BRG Boca, an indirect subsidiary, provided a $11.2 million mezzanine loan, or the BRG Boca Mezz Loan, to BRG Boca JV Member, LLC, an affiliate of the former Manager, or BR Boca JV Member. The BRG Boca Mezz Loan is secured by BR Boca JV Member’s approximate 90.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of NCC Development Group, or the Boca JV, which intends to develop an approximately 90-unit Class A apartment community located in Boca Raton, Florida to be known as APOK Townhomes. The BRG Boca Mezz Loan matures on the earlier of January 6, 2020, or the maturity of the Boca Construction Loan, defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG Boca Mezz Loan can be prepaid without penalty. The Company has the right to exercise an option to purchase, at the greater of a 25 basis point discount to fair market value or 15% internal rate of return for Fund II, up to a 100% common membership interest in BR Boca JV Member (the mezzanine borrower), which is 99.5% owned by Fund II and which currently holds an approximate 90.0% interest in the Boca JV and in the Boca property, subject to certain promote rights of our unaffiliated development partner.
In conjunction with the APOK Townhomes development, on December 29, 2016, the APOK Townhomes property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $18.7 million construction loan with an unaffiliated party, the Boca Construction Loan, of which $2.7$8.6 million is outstanding at September 30, 2017,March 31, 2018, which is secured by the APOK Townhomes property. The loan matures on June 29, 2019, and contains two one-year extension option, subject to certain conditions including a debt service coverage, stabilized occupancy and payment of an extension fee. The loan requires interest-only payments at prime plus 0.625%, subject to a floor of 4.125%. The loan can be prepaid without penalty.
Domain Mezzanine Financing
On March 3, 2017, the Company, through BRG Domain Phase 1, LLC, or BRG Domain 1, an indirect subsidiary, provided a $20.3 million mezzanine loan, or the BRG Domain 1 Mezz Loan, to BR Member Domain Phase 1, LLC, an affiliate of the former Manager, or BR Domain 1 JV Member. The BRG Domain 1 Mezz Loan is secured by BR Domain 1 JV Member’s approximate 95.0% interest in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of ArchCo Residential, or the Domain Phase 1 JV, which intends to develop an approximately 299-unit Class A apartment community located in Garland, Texas. The BRG Domain Phase 1 Mezz Loan matures on the earlier of March 3, 2020, or the maturity of the Domain 1 Construction Loan, defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG Domain 1 Mezz Loan can be prepaid without penalty. The Company has the right to exercise an option to purchase, at the greater of a 25 basis point discount to fair market value or 15% internal rate of return for Fund II, up to a 100% common membership interest in BR Domain 1 JV Member (the mezzanine borrower), which is 99.5% owned by Fund II and which currently holds an approximate 95.0% interest in the Domain 1 JV and in the Domain 1 property, subject to certain promote rights of our unaffiliated development partner.
In conjunction with the Domain 1 development, on March 3, 2017, the Domain 1 property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $30.3 million construction loan with an unaffiliated party, or the Domain 1 Construction Loan, of which none$5.8 million is outstanding at September 30, 2017,March 31, 2018, and which is secured by the Domain 1 property. The Domain 1 Construction Loan matures on March 3, 2020, and contains two one-year extension options, subject to certain conditions including construction completion, a debt service coverage, loan to value ratio and payment of an extension fee. The Domain 1 Construction Loan bears interest on a floating basis on the amount drawn based on LIBOR plus 3.25%. Regular monthly payments are interest-only until March 2020, with further payments based on thirty-year amortization. The Domain 1 Construction Loan can be prepaid without penalty.
In addition, on March 3, 2017, the Domain 1 property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $6.4 million mezzanine loan with an unaffiliated party, of which $2.5$6.4 million is outstanding at September 30, 2017,March 31, 2018, and which is secured by membership interest in the joint venture developing the Domain 1 property. The loan matures on March 3, 2020, and contains two one-year extension options, subject to certain conditions including a debt service coverage, loan to value ratio, extension of the Domain 1 Construction Loan and payment of an extension fee. The loan bears interest on a fixed rate of 12.5%, with 9.5% paid currently. Regular monthly payments are interest-only. The loan can be prepaid prior to maturity provided the lender receives a minimum profit and 1% exit fee.
Crescent Perimeter Mezzanine Financing
On December 29, 2017, the Company, through BRG Perimeter, LLC, or BRG Perimeter, an indirect subsidiary, provided a $20.6 million mezzanine loan, to BR Perimeter JV Member, LLC, an affiliate of the former Manager, or BR Perimeter JV Member. The BRG Perimeter Mezz Loan is secured by BR Perimeter JV Member’s approximate 60.0% interest in a multi-tiered joint venture along with Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”), an affiliate of the former Manager, and an affiliate of Crescent Communities, or the Crescent Perimeter Venture, which intends to develop an approximately 320-unit Class A apartment community located in Atlanta, Georgia to be known as Crescent Perimeter. The BRG Perimeter JV Mezz Loan matures on the later of December 29, 2021, or the maturity date of the Crescent Perimeter Construction Loan, as defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG Perimeter JV Mezz Loan can be prepaid without penalty.
| 13 |
On December 12, 2016, the Crescent Perimeter property owner, which is owned by an entity in which the Company owns an indirect interest, entered into an approximately $44.7 million construction loan with an unaffiliated party, of which $13.4 million is outstanding at March 31, 2018, and which is secured by the Crescent Perimeter development, or the Crescent Perimeter Construction Loan. The loan matures December 12, 2020, with a one-year extension option subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest at a rate of LIBOR plus 3.00%, with interest only payments until December 12, 2020, with future payments based on 30-year amortization. The loan can be prepaid without penalty.
Vickers Village Mezzanine Financing
On December 29, 2017, the Company, through BRG Vickers Roswell, LLC, or BRG Vickers, an indirect subsidiary, provided a $9.8 million mezzanine loan, to BR Vickers Roswell JV Member, LLC, an affiliate of the former Manager, or BR Vickers JV Member. The BRG Vickers Mezz Loan is secured by BR Vickers JV Member’s approximate 80.0% interest in a multi-tiered joint venture along with Fund III, an affiliate of King Lowry Ventures, or the Vickers Venture, which intends to develop an approximately 79-unit Class A apartment community located in Roswell, Georgia to be known as Vickers Village. The BRG Vickers JV Mezz Loan matures on the latest of December 29, 2020, or the maturity date of the Vickers Construction Loan, as defined below, as extended, and bears interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG Vickers JV Mezz Loan can be prepaid without penalty.
On December 22, 2016, the Vickers Village property owner, which is owned by an entity in which the Company owns an indirect interest, entered into an approximately $18.0 million construction loan with an unaffiliated party, of which $10.6 million is outstanding at March 31, 2018, and which is secured by the Vickers Village development. The loan matures December 1, 2020. The loan bears interest at a rate of LIBOR plus 3.00%, with interest only payments until December 1, 2018, with future payments based on 25-year amortization. The loan can be prepaid without penalty.
Flagler Village Mezzanine Financing
On December 29, 2017, the Company, through BRG Flagler Village, LLC, or BRG Flagler, an indirect subsidiary, provided a $53.6 million mezzanine loan, or the BRG Flagler Mezz Loan, to BR Flagler JV Member, LLC, an affiliate of the former Manager, or BR Flagler JV Member. The BRG Flagler Mezz Loan was secured by BR Flagler JV Member’s 100.0% interest in a multi-tiered joint venture along with Fund II and Fund III, affiliates of the former Manager, and an affiliate of ArchCo Residential, or the Flagler JV, which intends to develop an approximately 385-unit Class A apartment community located in Fort Lauderdale, Florida to be known as Flagler Village. The BRG Flagler Mezz Loan had a maturity date of December 29, 2022 and bore interest at a fixed rate of 15.0%. Regular monthly payments are interest-only during the initial term. The BRG Flagler Mezz Loan can be prepaid without penalty.
On March 28, 2018, in conjunction with the closing of the Flagler Construction Loan, as defined below, the Company, through BRG Flagler, restated the BRG Flagler Mezz Loan and increased the amount to approximately $74.6 million. The restated BRG Flagler Mezz Loan matures on March 28, 2023 and bears interest at a fixed rate of 12.9%. The BRG Flagler Mezz Loan is secured by BR Flagler JV Member’s approximate 97.4% interest in the Flagler JV, subject to certain promote rights of the Company’s unaffiliated development partner, and which is subject to preferred equity of partners holding preferred membership interests in the Flagler Village property. The Company has the right of first offer to purchase the member’s ownership interests in BR Flagler JV Member, or, if applicable, to purchase Flagler Village if BR Flagler JV Member exercises its rights under the Flagler JV to cause the sale of Flagler Village.
On March 28, 2018, the Flagler Village property owner, which is owned by an entity in which the Company owns an indirect interest, entered into an approximately $70.4 million construction loan with an unaffiliated party, of which $1,000 is outstanding at March 31, 2018, and which is secured by the Flagler Village development, or the Flagler Village Construction Loan. The loan matures March 28, 2022, with a one-year extension option subject to certain conditions including a debt service coverage, loan to value ratio, certificate of occupancy and payment of an extension fee. The loan bears interest at the greater of 5.0% or a rate of LIBOR plus 3.85%, with interest only payments until March 28, 2022, with future payments after extension based on 30-year amortization. The loan can be prepaid subject to payment of a make-whole premium and exit fee.
| 14 |
Note 7 – Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
Following is a summary of the Company’s ownership interests in the investments reported under the equity method of accounting. The carrying amount of the Company’s investments in unconsolidated real estate joint ventures as of September 30, 2017March 31, 2018 and December 31, 20162017 is summarized in the table below (amounts in thousands):
| Property | September 30, 2017 | December 31, 2016 | ||||||
| Alexan CityCentre | $ | 9,258 | $ | 7,733 | ||||
| Alexan Southside Place | 19,015 | 17,322 | ||||||
| APOK Townhomes | 7 | 7,569 | ||||||
| Domain | 12 | 5,249 | ||||||
| Flagler Village | 25,384 | 14,035 | ||||||
| Helios | 16,360 | 16,360 | ||||||
| Lake Boone Trail | 11,930 | 9,919 | ||||||
| West Morehead | 14 | 13 | ||||||
| Whetstone | 12,932 | 12,932 | ||||||
| Total | $ | 94,912 | $ | 91,132 | ||||
| Property | March 31, 2018 | December 31, 2017 | ||||||
| Alexan CityCentre | $ | 9,408 | $ | 9,258 | ||||
| Alexan Southside Place | 20,584 | 20,584 | ||||||
| APOK Townhomes | 7 | 7 | ||||||
| Crescent Perimeter | 12 | 12 | ||||||
| Domain | 12 | 12 | ||||||
| Flagler Village | 44 | 30 | ||||||
| Helios | 16,360 | 16,360 | ||||||
| Lake Boone Trail | 11,930 | 11,930 | ||||||
| Vickers Village | 6 | 6 | ||||||
| West Morehead | 14 | 14 | ||||||
| Whetstone | 12,932 | 12,932 | ||||||
| Total | $ | 71,309 | $ | 71,145 | ||||
As of September 30, 2017,March 31, 2018, the Company had outstanding equity investments in nineeleven multi-tiered joint ventures, each of which were created to develop a multifamily property. In each case, a wholly-owned subsidiary of the Operating Partnership made a preferred investment in a joint venture, except APOK Townhomes, Crescent Perimeter, Domain, Flagler Village Domain, West Morehead and APOK Townhomes,Vickers Village, which are common interests, and West Morehead, APOK Townhomes and Domain, which are primarily mezzanine loan investments as discussed in Note 6.interests. The common interests in these joint ventures, as well as preferred interests in some cases, are owned by affiliates of the former Manager. In each case,cases of preferred equity investments, the Company’s preferred equity investment in the joint venture generates a preferred return of 15% on its outstanding capital contributions, unless noted below, and the Company is not allocated any of the income or loss.loss in the joint ventures. The joint venture is the controlling member in an entity whose purpose is to develop a multifamily property. Each joint venture in which the Company owns a preferred interest is required to redeem the Company’s preferred membership interests plus any accrued but unpaid preferred return on the earlier of the date which is six months following the maturity of the related development’s construction loan, or any earlier acceleration or due date.date, unless noted below. Additionally, the Company has the right, in its sole discretion, to convert its preferred membership interest in each joint venture into a common membership interest for a period of six months from the date upon which 70% of the units in the related development have been leased.leased and occupied.
The following provides additional information regarding the Company’s preferred equity investments and investments.
unconsolidated real estate joint ventures as of March 31, 2018. The preferred returns and equity in income of the Company’s unconsolidated real estate joint ventures for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 are summarized below (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| Property | 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | ||||||||||||||||||
| Alexan CityCentre | $ | 385 | $ | 294 | $ | 1,010 | $ | 791 | $ | 383 | $ | 301 | ||||||||||||
| Alexan Southside Place | 740 | 655 | 2,113 | 1,950 | 802 | 641 | ||||||||||||||||||
| APOK Townhomes | — | 205 | — | 205 | ||||||||||||||||||||
| Domain | — | 145 | 141 | 422 | — | 141 | ||||||||||||||||||
| EOS | (3 | ) | 137 | (25 | ) | 409 | — | (22 | ) | |||||||||||||||
| Flagler Village | (1 | ) | (4 | ) | (5 | ) | (4 | ) | — | (1 | ) | |||||||||||||
| Helios | 619 | 619 | 1,835 | 1,842 | 605 | 605 | ||||||||||||||||||
| Lake Boone Trail | 451 | 375 | 1,319 | 1,117 | 441 | 421 | ||||||||||||||||||
| West Morehead | — | 141 | — | 435 | ||||||||||||||||||||
| Whetstone | 497 | 507 | 1,477 | 1,450 | 230 | 486 | ||||||||||||||||||
| Preferred returns and equity in income of unconsolidated joint venture | $ | 2,688 | $ | 3,074 | $ | 7,865 | $ | 8,617 | ||||||||||||||||
| Preferred returns and equity in income of unconsolidated joint ventures | $ | 2,461 | $ | 2,572 | ||||||||||||||||||||
| 15 |
Summary combined financial information for the Company’s investments in unconsolidated real estate joint ventures as of September 30, 2017March 31, 2018 and December 31, 20162017 and for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, is as follows:
| September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
| Balance Sheets: | ||||||||||||||||
| Real estate, net of depreciation | $ | 304,921 | $ | 197,742 | $ | 448,401 | $ | 399,111 | ||||||||
| Other assets | 29,576 | 33,814 | 76,303 | 62,667 | ||||||||||||
| Total assets | $ | 334,497 | $ | 231,556 | $ | 524,704 | $ | 461,778 | ||||||||
| Mortgages payable | $ | 202,308 | $ | 97,598 | $ | 388,227 | $ | 325,702 | ||||||||
| Other liabilities | 20,267 | 13,191 | 23,696 | 25,956 | ||||||||||||
| Total liabilities | $ | 222,575 | $ | 110,789 | $ | 411,923 | $ | 351,658 | ||||||||
| Members’ equity | 111,922 | 120,767 | 112,781 | 110,120 | ||||||||||||
| Total liabilities and members’ equity | $ | 334,497 | $ | 231,556 | $ | 524,704 | $ | 461,778 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
| Operating Statement: | ||||||||||||||||||||||||
| Rental revenues | $ | 1,344 | $ | 1,841 | $ | 2,930 | $ | 4,608 | $ | 3,374 | $ | 819 | ||||||||||||
| Operating expenses | (1,466 | ) | (885 | ) | (2,870 | ) | (2,577 | ) | (2,786 | ) | (498 | ) | ||||||||||||
| (Loss) income before debt service, acquisition costs, and depreciation and amortization | (122 | ) | 956 | 60 | 2,031 | |||||||||||||||||||
| Income before debt service and depreciation and amortization | 588 | 321 | ||||||||||||||||||||||
| Interest expense, net | (2,924 | ) | (344 | ) | (7,395 | ) | (999 | ) | (1,552 | ) | (1,836 | ) | ||||||||||||
| Acquisition costs | — | (3 | ) | — | (3 | ) | ||||||||||||||||||
| Depreciation and amortization | (939 | ) | (771 | ) | (1,922 | ) | (2,296 | ) | (1,936 | ) | (342 | ) | ||||||||||||
| Operating (loss) | (3,985 | ) | (162 | ) | (9,257 | ) | (1,267 | ) | ||||||||||||||||
| Net loss | $ | (3,985 | ) | $ | (162 | ) | $ | (9,257 | ) | $ | (1,267 | ) | $ | (2,900 | ) | $ | (1,857 | ) | ||||||
Alexan CityCentre Interests
On July 1, 2014, through BRG T&C BLVD Houston, LLC, a wholly-owned subsidiary of the Operating Partnership, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Bluerock Growth Fund, LLC (“BGF”), Fund II and Bluerock Special Opportunity + Income Fund III, LLC (“Fund III”), affiliates of the former Manager, and an affiliate of Trammell Crow Residential, to develop a 340-unit Class A apartment community located in Houston, Texas, to be known as Alexan CityCentre. The Company has made a capital commitment of approximately $9.3$9.4 million to acquire 100% of the Class A preferred equity interests in BR T&C BLVD JV Member, LLC all of which has been funded as of September 30, 2017March 31, 2018 (of which $2.8$2.9 million earns a 20% preferred return).
On June 7, 2016, the Alexan CityCentre property owner, (the “Alexan borrower”), which is owned by an entity in which the Company owns an indirect interest, entered into a loan modification agreement to amend the terms of its construction loan financing the construction and development of the Alexan CityCentre property (the “Alexan Development”). The maximum principal amount available to the Alexan borrower under the terms of the modified loan is $55.1 million of which approximately $48.8$55.0 million is outstanding at September 30, 2017.March 31, 2018. The maturity date is January 1, 2020, subject to a single one-year extension exercisable at the option of the Alexan borrower. The interest rate on the loan is a variable per annum rate equal to the prime rate plus 0.5%, or LIBOR plus 3.00%, at the Alexan borrower’s option. The loan requires monthly interest payments until the maturity date, after which $60,000 monthly payments of principal will be required in addition to payment of accrued interest during the maturity extension period. The Alexan borrower was required to initially fund approximately $2.6 million as an interest reserve and approximately $0.6 million as an operating deficit reserve. Certain unaffiliated third parties agreed to guaranty the completion of the development of the Alexan Development and provided partial guaranties of the Alexan borrower’s principal and interest obligations under the loan.
The Alexan borrower is required to complete the Alexan Development by December 31, 2017 (without extension for any reason). To obtain the loan modification, the Alexan borrower was required to contribute additional equity for the Alexan Development in the amount of approximately $2.2 million to be applied to development costs, ofsix-month period during which the Company funded approximately $0.7 millionhas the right to convert its preferred membership interest into a common membership interest commenced on January 21, 2018, the date on which Alexan Development achieved 70% leased and Bluerock Growth Fund II, LLC (“BGF II”), an affiliateoccupied units. As of March 31, 2018, the Manager, funded $1.3 million as Class B preferred interests earningCompany has not elected to convert into a 20% preferred return.common membership interest.
Alexan Southside Place Interests
On January 12, 2015, through BRG Southside, LLC, a wholly-owned subsidiary of its Operating Partnership, the Company made a convertible preferred equity investment in a multi-tiered joint venture, along with Fund II and Fund III, which are affiliates of the former Manager, and an affiliate of Trammell Crow Residential, to develop an approximately 270-unit Class A apartment community located in Houston, Texas, to be known as Alexan Southside Place. Alexan Southside Place will be developed upon a tract of land ground leased from Prokop Industries BH, L.P., a Texas limited partnership, by BR Bellaire BLVD, LLC, as tenant under an 85-year ground lease. The Company has made a capital commitment of $19.0$20.6 million to acquire 100% of the preferred equity interests in BR Southside Member, LLC, all of which has been funded as of September 30, 2017March 31, 2018 (of which $1.7$3.3 million earns a 20% preferred return).
| 16 |
In conjunction with the Alexan Southside development, on April 7, 2015, the Alexan Southside leasehold interest holder, which is owned by an entity in which the Company owns an indirect interest, entered into a $31.8 million construction loan, of which $19.4$27.6 million is outstanding at September 30, 2017,March 31, 2018, which is secured by the leasehold interest in the Alexan Southside Place property. The loan matures on April 7, 2019, and contains a one-year extension option, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on the base rate plus 1.25% or LIBOR plus 2.25%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty-year amortization. The loan can be prepaid without penalty.
APOK Townhomes Interests
On September 1, 2016, through BRG Boca, LLC, or BRG Boca, a wholly-owned subsidiary of its Operating Partnership, the Company made an investment in a multi-tiered joint venture, along with Fund II, an affiliate of the former Manager, and NCC Development Group, or the Boca JV, to develop a 90-unit Class A apartment community located in Boca Raton, Florida to be known as APOK Townhomes. On January 6, 2017, (i) Fund II substantially redeemed the common equity investment held by BRG Boca in BR Boca JV Member for $7.3 million, (ii) BRG Boca maintained a 0.5% common interest in BR Boca JV Member, and (iii) the Company, through BRG Boca, provided a mezzanine loan in the amount of $11.2 million to BR Boca JV Member, or the BRG Boca Mezz Loan. See Note 6 for further details regarding APOK Townhomes and the BRG Boca Mezz Loan.
Domain Phase 1 Interests
On November 20, 2015, through a wholly-owned subsidiary of the Operating Partnership, BRG Domain Phase 1, LLC, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of ArchCo Residential, to develop an approximately 299-unit, Class A, apartment community located in Garland, Texas. The property will be developed upon a tract of approximately 10 acres of land. On March 3, 2017, (i) Fund II substantially redeemed the preferred equity investment held by BRG Domain 1 in BR Domain 1 JV Member for $7.1 million, (ii) BRG Domain 1 maintained a 0.5% common interest in BR Domain 1 JV Member, and (iii) the Company, through BRG Domain 1, provided a mezzanine loan in the amount of $20.3 million to BR Domain 1 JV Member, or the BRG Domain 1 Mezz Loan. See Note 6 for further details regarding Domain Phase 1 and the BRG Domain 1 Mezz Loan.
Flagler Village Interests
On December 18, 2015, through BRG Flagler Village, LLC, a wholly-owned subsidiary of the Operating Partnership, BRG Flagler Village, LLC, the Company made an investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of ArchCo Residential, to develop an approximately 384-unit,385-unit, Class A apartment community located in Fort Lauderdale, Florida. The Company has made a capital commitment of $49.9 million to acquire common interestsOn December 29, 2017, (i) Fund II substantially redeemed the equity investment held by BRG Flagler Village, LLC in BR Flagler JV Member, LLC for $26.3 million, (ii) BRG Flagler Village, LLC maintained a 0.5% common interest in BR Flagler JV Member, and (iii) the Company, through BRG Flagler Village, LLC, provided a mezzanine loan in the amount of which $25.4$53.6 million has been funded at September 30, 2017.to BR Flagler JV Member, LLC, or the BRG Flagler Mezz Loan. See Note 6 for further details regarding Flagler Village and the BRG Flagler Mezz Loan.
Helios Interests
On May 29, 2015, through BRG Cheshire, LLC, a wholly-owned subsidiary of its Operating Partnership, the Company made a convertible preferred equity investment in a multi-tiered joint venture, along with Fund III and an affiliate of Catalyst Development Partners II, to develop a 282-unit Class A apartment community located in Atlanta, Georgia, to be known as Helios Apartments. The Company has made a capital commitment of $16.4 million to acquire 100% of the preferred equity interests in BR Cheshire Member, LLC, all of which has been funded as of September 30, 2017.March 31, 2018.
In conjunction with the Helios development, on December 16, 2015, the Helios property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $38.1 million construction loan which is secured by the fee simple interest in the Helios property, of which approximately $32.8$38.0 million is outstanding at September 30, 2017.March 31, 2018. The loan matures on December 16, 2018, and contains two one-year extension options, subject to certain conditions including a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on one-month LIBOR plus 2.50%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty-year amortization. The loan can be prepaid without penalty.
Lake Boone Trail Interests
On December 18, 2015, through BRG Lake Boone, LLC, a wholly-owned subsidiary of the Operating Partnership, BRG Lake Boone, LLC, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of Tribridge Residential, LLC, to develop an approximately 245-unit, Class A apartment community located in Raleigh, North Carolina (“Lake Boone Trail”). The Company has made a capital commitment of $11.9 million to acquire 100% of the preferred equity interests in BR Lake Boone JV Member, LLC, all of which has been funded at September 30, 2017.March 31, 2018.
| 17 |
In conjunction with the Lake Boone Trail development, on June 23, 2016, the Lake Boone Trail property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a $25.2 million construction loan which is secured by the fee simple interest in the Lake Boone Trail property, of which $10.8$18.6 million is outstanding as of September 30, 2017.March 31, 2018. The loan matures on December 23, 2019, and contains one extension option for one year to five years, subject to certain conditions including construction completion, a debt service coverage, loan to value ratio and payment of an extension fee. The loan bears interest on a floating basis on the amount drawn based on one-month LIBOR plus 2.65%. Regular monthly payments are interest-only during the initial term, with payments during the extension period based on a thirty-year amortization. The loan can be prepaid without penalty.
West Morehead Interests
On January 6, 2016, through BRG Morehead NC, LLC, a wholly-owned subsidiary of the Operating Partnership, BRG Morehead NC, LLC, the Company made a convertible preferred equity investment in a multi-tiered joint venture along with Fund II, an affiliate of the former Manager, and an affiliate of ArchCo Residential, to develop an approximately 286-unit Class A apartment community located in Charlotte, North Carolina to be known as West Morehead. The Company has a 0.5% common equity interest in BR Morehead JV Member, LLC, at September 30, 2017.March 31, 2018. See Note 6 for further details regarding West Morehead and the BRG West Morehead Mezz Loan.
Whetstone Interests
On May 20, 2015, through BRG Whetstone Durham, LLC, a wholly-owned subsidiary of its Operating Partnership, the Company made a convertible preferred equity investment in a multi-tiered joint venture, along with Fund III and an affiliate of TriBridge Residential, LLC, to acquire a 204-unit Class A apartment community located in Durham, North Carolina, to be known as Whetstone Apartments. The Company has made a capital commitment of $12.9 million to acquire 100% of the preferred equity interests in BR Whetstone Member, LLC, all of which has been funded as of September 30, 2017 (of which $0.7 million earns a 20% return).March 31, 2018. On October 2, 2016, the Company entered into an agreement that provided for an extended twelve-month period in which it had a right to convert into common ownership. The Company did not elect to convert into common ownership aton October 2,6, 2017, and therefore its preferred return would decreasedecreased to 6.5%. Effective April 1, 2017, Whetstone ceased paying its preferred return on a current basis. The accrued preferred return of $1.0$1.5 million is shown as a due from affiliates in the consolidated balance sheet. The Company has evaluated the preferred equity investment and accrued preferred return and determined that the investment is not impaired and will beis fully recoverable in the future.recoverable.
On October 6, 2016, the Whetstone property owner, which is owned by an entity in which the Company owns an indirect interest, entered into a mortgage loan of approximately $26.5 million secured by the Whetstone Apartment property.property, of which $26.3 million was outstanding as of March 31, 2018. The loan matures on November 1, 2023. The loan bears interest at a fixed rate of 3.81%. Regular monthly payments are interest-only until November 1, 2017, with monthly payments beginning December 1, 2017 based on thirty-year amortization. The loan may be prepaid with the greater of 1% prepayment fee or yield maintenance until October 31, 2021, and thereafter at par. The loan is nonrecourse to the Company and its joint venture partners with certain standard scope non-recourse carve-outs for certain deeds, acts or failures to act on the part of the Company and the joint venture partners.
KeyBank Land LoanNote 8 – Revolving credit facilities
The KeyBank land loan, which had been reflectedoutstanding balances on the unconsolidated entities financial statements, was paid off during the three months endedrevolving credit facilities as of March 31, 2017.2018 and December 31, 2017, are as follows:
| Revolving credit facilities | March 31, 2018 | December 31, 2017 | ||||||
| Senior Credit Facility | $ | 78,049 | $ | 67,670 | ||||
| Junior Credit Facility | 21,116 | — | ||||||
| Total | $ | 99,165 | $ | 67,670 | ||||
Senior Credit Facility
On October 4, 2017, the Company, through its Operating Partnership, entered into a credit agreement (the “Senior Credit Facility”) with KeyBank National Association (“KeyBank”) and other lenders. The Senior Credit Facility provides for an initial loan commitment amount of $150 million, which commitment contains an accordion feature up to a maximum commitment of up to $250 million.
The Senior Credit Facility matures on October 4, 2020, with a one-year extension option, subject to certain conditions and the payment of an extension fee. Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at LIBOR plus 1.80% to 2.45%, or the base rate plus 0.80% to 1.45%, depending on the Company’s leverage ratio. The weighted average interest rate was 3.97% at March 31, 2018. The Company pays an unused fee at an annual rate of 0.20% to 0.25% of the unused portion of the Senior Credit Facility, depending on the amount of borrowings outstanding. The Senior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum liquidity, minimum debt service coverage ratio, and minimum tangible net worth. The Company has guaranteed the obligations under the Senior Credit Facility and provided certain properties as collateral.
| 18 |
Junior Credit Facility
On March 20, 2018, the Company, through a subsidiary of its Operating Partnership, entered into a credit agreement (the “Junior Credit Facility”) with KeyBank and other lenders. The Junior Credit Facility provides for a maximum loan commitment amount of $50 million.
The Junior Credit Facility matures on March 20, 2019. Borrowings under the Junior Credit Facility bear interest, at the Company’s option, at LIBOR plus 4.0%, or the base rate plus 3.0%. The weighted average interest rate was 5.86% at March 31, 2018. The Company pays an unused fee at an annual rate of 0.35% to 0.40% of the unused portion of the Junior Credit Facility, depending on the amount of borrowings outstanding. The Junior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum liquidity, minimum debt service coverage ratio, minimum tangible net worth and minimum equity raise and collateral values. The Company has guaranteed the obligations under the Junior Credit Facility and has pledged certain assets as collateral.
The remaining availability of borrowings under the revolving credit facilities at March 31, 2018 is based on the value of the collateral and compliance with various ratios related to those assets and was approximately $23.2 million.
| 19 |
Note 89 – Mortgages Payable
The following table summarizes certain information as of September 30, 2017March 31, 2018 and December 31, 2016,2017, with respect to the Company’s senior mortgage indebtedness (amounts in thousands):
| Outstanding Principal | As of September 30, 2017 | |||||||||||||||
| Property | September 30, 2017 | December 31, 2016 | Interest Rate | Fixed/ Floating | Maturity Date | |||||||||||
| ARIUM at Palmer Ranch | $ | 26,925 | $ | 26,925 | 3.40 | % | LIBOR + 2.17%(1) | February 1, 2023 | ||||||||
| ARIUM Grandewood | 34,294 | 34,294 | 3.05 | % | Floating(2) | December 1, 2024 | ||||||||||
| ARIUM Gulfshore | 32,626 | 32,626 | 3.40 | % | LIBOR + 2.17%(1) | February 1, 2023 | ||||||||||
| ARIUM Palms | 24,999 | 24,999 | 3.45 | % | LIBOR + 2.22%(1) | September 1, 2022 | ||||||||||
| ARIUM Pine Lakes | 26,950 | 26,950 | 3.95 | % | Fixed | November 1, 2023 | ||||||||||
| ARIUM Westside | 52,150 | 52,150 | 3.68 | % | Fixed | August 1, 2023 | ||||||||||
| Ashton Reserve I | 31,528 | 31,900 | 4.67 | % | Fixed | December 1, 2025 | ||||||||||
| Ashton Reserve II | 15,270 | 15,270 | 3.85 | % | LIBOR + 2.62%(1) | January 1, 2026 | ||||||||||
| Citrus Tower | 41,438 | — | 4.07 | % | Fixed | October 1, 2024 | ||||||||||
| Crescent Perimeter(3) | 1,920 | — | 4.23 | % | LIBOR + 3.00%(1) | December 12, 2020 | ||||||||||
| Enders Place at Baldwin Park(4) | 24,401 | 24,732 | 4.30 | % | Fixed | November 1, 2022 | ||||||||||
| Fox Hill | — | 26,705 | ||||||||||||||
| James on South First | 26,500 | 26,500 | 4.35 | % | Fixed | January 1, 2024 | ||||||||||
| Lansbrook Village | — | 57,190 | ||||||||||||||
| Marquis at Crown Ridge | 29,362 | — | 2.84 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at Stone Oak | 43,125 | — | 2.84 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at The Cascades I | 33,207 | — | 2.84 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at The Cascades II | 23,175 | — | 2.84 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at TPC | 17,273 | — | 2.84 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| MDA Apartments | — | 37,124 | ||||||||||||||
| Nevadan | 48,431 | 48,431 | 3.71 | % | LIBOR + 2.48%(1) | November 1, 2023 | ||||||||||
| Park & Kingston(5) | 18,432 | 18,432 | 3.41 | % | Fixed | April 1, 2020 | ||||||||||
| Preston View | 41,066 | — | 3.30 | % | LIBOR + 2.07%(1) | March 1, 2024 | ||||||||||
| Roswell City Walk | 51,000 | 51,000 | 3.63 | % | Fixed | December 1, 2026 | ||||||||||
| Sorrel | 38,684 | 38,684 | 3.52 | % | LIBOR + 2.29%(1) | May 1, 2023 | ||||||||||
| Sovereign | 28,880 | 28,880 | 3.46 | % | Fixed | November 10, 2022 | ||||||||||
| The Brodie | 34,825 | 34,825 | 3.71 | % | Fixed | December 1, 2023 | ||||||||||
| The Preserve at Henderson Beach | 36,484 | 36,989 | 4.65 | % | Fixed | January 5, 2023 | ||||||||||
| Vickers Village(6) | 3,875 | — | 4.23 | % | LIBOR + 3.00%(6) | December 1, 2020 | ||||||||||
| Village Green of Ann Arbor | — | 41,547 | ||||||||||||||
| Villages at Cypress Creek | 26,200 | — | 3.23 | % | Fixed | October 1, 2022 | ||||||||||
| Wesley Village | 40,545 | — | 4.25 | % | Fixed | April 1, 2024 | ||||||||||
| Total | 853,565 | 716,153 | ||||||||||||||
| Fair value adjustments | 2,055 | 1,364 | ||||||||||||||
| Deferred financing costs, net | (8,458 | ) | (6,942 | ) | ||||||||||||
| Total | $ | 847,162 | $ | 710,575 | ||||||||||||
| Outstanding Principal | As of March 31, 2018 | |||||||||||||||
| Property | March 31, 2018 | December 31, 2017 | Interest Rate | Fixed/ Floating | Maturity Date | |||||||||||
| ARIUM at Palmer Ranch | $ | 26,925 | $ | 26,925 | 3.84 | % | LIBOR + 2.17%(1) | February 1, 2023 | ||||||||
| ARIUM Glenridge | 48,431 | 48,431 | 4.15 | % | LIBOR + 2.18%(1) | November 1, 2023 | ||||||||||
| ARIUM Grandewood | 34,294 | 34,294 | 3.49 | % | Floating(2) | December 1, 2024 | ||||||||||
| ARIUM Gulfshore | 32,626 | 32,626 | 3.84 | % | LIBOR + 2.17%(1) | February 1, 2023 | ||||||||||
| ARIUM Hunter’s Creek | 72,294 | 72,294 | 3.65 | % | Fixed | November 1, 2024 | ||||||||||
| ARIUM Palms | 24,999 | 24,999 | 3.89 | % | LIBOR + 2.22%(1) | September 1, 2022 | ||||||||||
| ARIUM Pine Lakes | 26,950 | 26,950 | 3.95 | % | Fixed | November 1, 2023 | ||||||||||
| ARIUM Westside | 52,150 | 52,150 | 3.68 | % | Fixed | August 1, 2023 | ||||||||||
| Ashton Reserve I | 31,272 | 31,401 | 4.67 | % | Fixed | December 1, 2025 | ||||||||||
| Ashton Reserve II | 15,270 | 15,270 | 4.29 | % | LIBOR + 2.62%(1) | January 1, 2026 | ||||||||||
| Citrus Tower | 41,438 | 41,438 | 4.07 | % | Fixed | October 1,2 2024 | ||||||||||
| Enders Place at Baldwin Park(3) | 24,169 | 24,287 | 4.30 | % | Fixed | November 1, 2022 | ||||||||||
| James on South First | 26,500 | 26,500 | 4.35 | % | Fixed | January 1, 2024 | ||||||||||
| Marquis at Crown Ridge | 29,071 | 29,217 | 3.28 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at Stone Oak | 43,125 | 43,125 | 3.28 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at The Cascades I | 33,207 | 33,207 | 3.28 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at The Cascades II | 23,175 | 23,175 | 3.28 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Marquis at TPC | 17,094 | 17,184 | 3.28 | % | LIBOR + 1.61%(1) | June 1, 2024 | ||||||||||
| Park & Kingston(4) | 18,432 | 18,432 | 3.41 | % | Fixed | April 1, 2020 | ||||||||||
| Preston View | 41,066 | 41,066 | 3.74 | % | LIBOR + 2.07%(1) | March 1, 2024 | ||||||||||
| Roswell City Walk | 51,000 | 51,000 | 3.63 | % | Fixed | December 1, 2026 | ||||||||||
| Sorrel | 38,684 | 38,684 | 3.96 | % | LIBOR + 2.29%(1) | May 1, 2023 | ||||||||||
| Sovereign | 28,650 | 28,788 | 3.46 | % | Fixed | November 10, 2022 | ||||||||||
| The Brodie | 34,825 | 34,825 | 3.71 | % | Fixed | December 1, 2023 | ||||||||||
| The Links at Plum Creek | 40,000 | — | 4.31 | % | Fixed | October 1, 2025 | ||||||||||
| The Mills | 26,659 | 26,777 | 4.21 | % | Fixed | January 1, 2025 | ||||||||||
| The Preserve at Henderson Beach | 36,138 | 36,311 | 4.65 | % | Fixed | January 5, 2023 | ||||||||||
| Villages at Cypress Creek | 26,200 | 26,200 | 3.23 | % | Fixed | October 1, 2022 | ||||||||||
| Wesley Village | 40,545 | 40,545 | 4.25 | % | Fixed | April 1, 2024 | ||||||||||
| Total | 985,189 | 946,101 | ||||||||||||||
| Fair value adjustments | 2,530 | 2,638 | ||||||||||||||
| Deferred financing costs, net | (9,246 | ) | (9,245 | ) | ||||||||||||
| Total | $ | 978,473 | $ | 939,494 | ||||||||||||
(1) In March 2018, one month LIBOR in effect was 1.67%. One month LIBOR as of September 30, 2017at March 31, 2018 was 1.23%1.88%.
(2) ARIUM GrandewoodThe principal balance includes the initial advance of $29.44 million at a floating rate of 1.67% plus one month LIBOR and a $4.85 million supplemental loan at a floating rate of 2.74% plus one month LIBOR. At September 30, 2017,March 31, 2018, the interest rates on the initial advance and supplemental loan were 2.90%3.34% and 3.97%4.41%, respectively.
(3) Construction loan of up to $44.7 million, with interest at a floating rate of 3.00% plus one month LIBOR. The loan has a one-year extension option subject to certain conditions.
(4) The Enders Place at Baldwin Park principal balance includes a $16.6$16.5 million loan at a fixed rate of 3.97% and a $7.8$7.7 million supplemental loan at a fixed rate of 5.01%.
(5)(4) The Park & Kingston principal balance includes a $15.3 million loan at a fixed rate of 3.21% and a $3.2 million supplemental loan at a fixed rate of 4.34%.
(6) Construction loan of up to $18.0 million, with interest at a floating rate of 3.00% plus one month LIBOR.
Deferred financing costs
Costs incurred in obtaining long-term financing, reflected as a reduction of Mortgages Payable in the accompanying Consolidated Balance Sheets, are amortized on a straight-line basis, which approximates the effective interest method, over the terms of the related debt agreements, as applicable.
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Preston View
The Links at Plum Creek Mortgage Payable
On February 17, 2017,March 26, 2018, the Company, through an indirect subsidiary, entered into an approximately $41.1a $40.0 million loan secured by Preston View.The Links at Plum Creek. The loan matures MarchOctober 1, 20242025 and bears interest onat a floating basis based on LIBOR plus 2.07%fixed rate of 4.31%, with interest only payments until March 2019,April 2020, and then monthly payments based on 30-year amortization. After March 31, 2018, the loan may be prepaid with a 1% prepayment fee through December 31, 2023, and thereafter at par.
Wesley Village Mortgage Payable
On March 9, 2017, the Company, through an indirect subsidiary, entered into an approximately $40.5 million loan secured by Wesley Village. The loan matures April 1, 2024 and bears interest at a fixed rate of 4.25%, with interest only payments until April 2019, and then fixed monthly payments based on 30-year amortization. After January 1, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Marquis at Crown Ridge Mortgage Payable
On June 9, 2017, the Company, through an indirect subsidiary, assumed a loan with a principal balance of approximately $29.5 million secured by Marquis at Crown Ridge. The loan matures June 1, 2024, unless the maturity date is extended in connection with an election to convert to a fixed interest rate loan. The loan bears interest at a floating basis based on LIBOR plus 1.61%, with fixed monthly payments based on 30-year amortization. After February 29, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Marquis at Stone Oak Mortgage Payable
On June 9, 2017, the Company, through an indirect subsidiary, assumed a loan with a principal balance of approximately $43.1 million secured by Marquis at Stone Oak. The loan matures June 1, 2024, unless the maturity date is extended in connection with an election to convert to a fixed interest rate loan. The loan bears interest at a floating basis based on LIBOR plus 1.61%, with interest only payments until June 2018, and then fixed monthly payments based on 30-year amortization. After February 29, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Marquis at The Cascades I Mortgage Payable
On June 9, 2017, the Company, through an indirect subsidiary, assumed a loan with a principal balance of approximately $33.2 million secured by Marquis at The Cascades I. The loan matures June 1, 2024, unless the maturity date is extended in connection with an election to convert to a fixed interest rate loan. The loan bears interest at a floating basis based on LIBOR plus 1.61%, with interest only payments until June 2018, and then fixed monthly payments based on 30-year amortization. After February 29, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Marquis at The Cascades II Mortgage Payable
On June 9, 2017, the Company, through an indirect subsidiary, assumed a loan with a principal balance of approximately $23.2 million secured by Marquis at The Cascades II. The loan matures June 1, 2024, unless the maturity date is extended in connection with an election to convert to a fixed interest rate loan. The loan bears interest at a floating basis based on LIBOR plus 1.61%, with interest only payments until June 2018, and then fixed monthly payments based on 30-year amortization. After February 29, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Marquis at TPC Mortgage Payable
On June 9, 2017, the Company, through an indirect subsidiary, assumed a loan with a principal balance of approximately $17.4 million secured by Marquis at TPC. The loan matures June 1, 2024, unless the maturity date is extended in connection with an election to convert to a fixed interest rate loan. The loan bears interest at a floating basis based on LIBOR plus 1.61%, with fixed monthly payments based on 30-year amortization. After February 29, 2024, the loan may be prepaid without prepayment fee or yield maintenance.
Villages at Cypress Creek
On September 8, 2017, the Company, through an indirect subsidiary, entered into an approximately $26.2 million loan secured by Villages at Cypress Creek. The loan matures October 1, 2022, with two-one year extensions subject to certain conditions, and bears interest at a fixed rate of 3.23%, with interest only payments until October l, 2020, and then fixed monthly payments based on 30-year amortization. After July 1, 2022, the loan may be prepaid without prepayment fee or yield maintenance.
Citrus Tower
On September 28, 2017, the Company, through an indirect subsidiary, entered into an approximately $41.4 million loan secured by Citrus Tower. The loan matures October 1, 2024, and bears interest at a fixed rate of 4.07%, with interest only payments until October l, 2019, and then fixed monthly payments based on 30-year amortization. After July 1, 2024,30, 2025, the loan may be prepaid without prepayment fee or yield maintenance.
Debt maturities
As of September 30, 2017,March 31, 2018, contractual principal payments for the five subsequent years and thereafter are as follows (amounts in thousands):
| Year | Total | Total | ||||||
| 2017 (October 1-December 31) | $ | 738 | ||||||
| 2018 | 4,086 | |||||||
| 2018 (April 1-December 31) | $ | 3,668 | ||||||
| 2019 | 7,652 | 8,017 | ||||||
| 2020 | 35,227 | 31,072 | ||||||
| 2021 | 12,173 | 14,050 | ||||||
| 2022 | 112,085 | |||||||
| Thereafter | 793,689 | 816,297 | ||||||
| $ | 853,565 | $ | 985,189 | |||||
| Add: Unamortized fair value debt adjustment | 2,055 | 2,530 | ||||||
| Subtract: Deferred financing costs, net | (8,458 | ) | (9,246 | ) | ||||
| Total | $ | 847,162 | $ | 978,473 | ||||
The net book value of real estate assets providing collateral for these above borrowings, including the revolving credit facilities, were $1,194.2$1,450.3 million and $987.1$1,397.4 million at September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
The mortgage loans encumbering the Company’s properties are generally nonrecourse, subject to certain exceptions for which the Company would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan but generally include fraud or a material misrepresentation, misstatement or omission by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly and certain environmental liabilities. In addition, upon the occurrence of certain events, such as fraud or filing of a bankruptcy petition by the borrower, the Company or our joint ventures would be liable for the entire outstanding balance of the loan, all interest accrued thereon and certain other costs, including penalties and expenses.
Note 910 – Fair Value of Financial Instruments
As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company believes the carrying value of cash and cash equivalents, accounts receivable, due to and from affiliates, accounts payable, accrued liabilities, and distributions payable approximate their fair value based on their highly-liquid nature and/or short-term maturities. Based on the discounted amount of future cash flows currently available to the Company for similar liabilities, the fair value of the Company’s mortgages payable is estimated at $856.0$975.9 million and $714.8$940.7 million as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, compared to the carrying amounts, before adjustments for deferred financing costs, net, of $855.6$987.7 million and $717.5$948.7 million, respectively. The fair value of mortgages payable is estimated based on the Company’s current interest rates (Level 3 inputs, as defined in ASC Topic 820, “Fair Value Measurement”) for similar types of borrowing arrangements.
Note 1011 – Related Party Transactions
Former Management Agreement
The Company entered into a management agreement (the “Management Agreement”), with the former Manager, at its Initial Public Offering (“IPO”) on April 2, 2014. The terms and conditionsOn October 31, 2017, upon the Company’s acquisition of a newly-formed entity owning the assets used by the former Manager in its performance of the management functions then provided to the Company pursuant to the Management Agreement, whichor the Internalization, the Company became effective asinternally managed. The current management and investment teams, who were previously employed by an affiliate of April 2, 2014, are described below.the former Manager, became employed by the Company’s indirect subsidiary, and the Company become an internally managed real estate investment trust.
TheWhile the Company was externally managed, the Management Agreement requiresrequired the former Manager to manage the Company’s business affairs in conformity with the investment guidelines and other policies that arewere approved and monitored by the Company’s board of directors. The Manager acts underCompany paid the supervision and direction of the Board. Specifically, the Manager is responsible for (1) the selection, purchase and sale of the Company’s investment portfolio, (2) the Company’s financing activities, and (3) providing the Company with advisory and management services. The Manager provides the Company with a management team, including a chief executive officer, president, chief accounting officer and chief operating officer, along with appropriate support personnel. None of the officers or employees of the Manager are dedicated exclusively to the Company. The Company is dependent on its Manager to provide these services that are essential to the Company. In the event that the Manager or its affiliates are unable to provide the respective services, the Company will be required to obtain such services from other sources.
The Company pays theformer Manager a base management fee in an amount equal to the sum of: (A) 0.25% ofbased on the Company’s stockholders’ existing and contributed equity prior to the IPO and in connection with our contribution transactions, per annum, calculated quarterly based onequity raised subsequent to the Company’s stockholders’ existing and contributed equity for the most recently completed calendar quarter and payable in quarterly installments in arrears, and (B) 1.5% of the equity per annum of the Company’s stockholders who purchase shares of the Company’s stock, calculated quarterly based on their equity for the most recently completed calendar quarter and payable in quarterly installments in arrears.IPO. The base management fee iswas payable independent of the performance of the Company’s investments. The Company amended the Management Agreement to provideprovided that the base management fee cancould be payable in cash or LTIP Units, at the election of the Board.board. The number of LTIP Units issued for the base management fee or incentive fee will bewas based on the fees earned divided by the 5-day trailing average Class A common stock price prior to issuance. Base management fees of $7.8 million and $4.3 million were expensed during the nine months ended September 30, 2017 and 2016, respectively.
Base management fees of $2.6$2.3 million were expensed during the three months ended June 30,March 31, 2017 and were paid through the issuance of 221,481 LTIP Units on August 9, 2017. The base management fees of $2.8 million for the three months ended September 30, 2017 will be paid through the issuance of approximately 253,300 LTIP Units assuming the $11.06 closing share price for the Company’s Class A common stock on September 29, 2017. The actual number of LTIP Units to be issued in payment of the base management fees for the three months ended September 30, 2017 is subject to change based on the average closing share price of the Company’s Class A common stock on the five business days prior to the date of issuance.183,150 Units.
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The Company also payspaid the former Manager an incentive fee with respect to each calendar quarter in arrears.based on performance. The incentive fee is equal to the difference between (1) the product of (x) 20% and (y) the difference between (i) the Company’s adjusted funds from operations (“AFFO”), for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price of equity securities issued in the IPO and in future offerings and transactions, multiplied by the weighted average number of all shares of the Company’s Class A common stock outstanding on a fully-diluted basis (including any restricted stock units, any restricted shares of Class A common stock, LTIP Units, and other shares of common stock underlying awards granted under the Incentive Plans and OP Units) in the previous 12-month period, exclusive of equity securities issued prior to the IPO or in the contribution transactions, and (B) 8%, and (2) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive fee is payable with respect to any calendar quarter unless AFFO is greater than zero for the four most recently completed calendar quarters. One half of each quarterly installment of the incentive fee will be payable in LTIP Units, calculated pursuant to the formula above. The remainder of the incentive fee willcould be payable in cash or in LTIP Units, at the election of the Board, in each case calculated pursuant to the formula above.Board. Incentive fees of $4.0 million and $0.2$0.4 million were expensed during the nine months ended September 30, 2017 and 2016, respectively. Incentive fees for the three months ended June 30,March 31, 2017 and were paid through the issuance of 299,04534,803 LTIP Units on August 9, 2017. There was no incentive fee during the three months ended September 30, 2017.Units.
On July 2,In 2015 and 2016, the Company issued a grantgrants of LTIP Units under the Amended 2014 Incentive Plans to the former Manager. The equity grant consisted of 283,390 LTIP Units (the “2015 LTIP Units”). The 2015 LTIP Units vestvested ratably over a three-year period, that began in July 2015, subject to certain terms and conditions, including early vesting upon an internalization of our external management functions. On August 3, 2016, the Company issued a grant of LTIP Units under the Amended 2014 Incentive Plans to the Manager. The equity grant consisted of 176,610 LTIP Units (the “2016 LTIP Units”). The 2016 LTIP Units vest ratably over a three-year period that began in August 2016, subject to certain terms and conditions, including early vesting upon an internalization of our external management functions.conditions. These LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock.
LTIP amortizationexpense of $0.1 million and $0.5 million, and $1.2 million and $2.0$0.3 million for the three and nine months ended September 30,March 31, 2017, and 2016, respectively, was recorded as part of general and administrative expenses, related to the 2015 LTIP Units and the 2016 LTIP Units.expenses. The expense recognized during 2017 and 2016 was based on the Class A common stock closing price at the vesting date or the end of the period, as applicable.
The Company iswas also required to reimburse the former Manager for certain expenses and paypaid all operating expenses, except those specifically required to be borne by the former Manager under the Management Agreement. Reimbursements of $0.4 million and $0.2 million, and $1.4 million and $0.5$0.6 million were expensed during the three and nine months ended September 30,March 31, 2017, and 2016, respectively, and of which $0.3 million and $1.1 million for the three and nine months ended September 30, 2017 arewere recorded as part of general and administrative expenses. In addition, the former Manager was reimbursed for offering costs in conjunction with the January 2017 Common Stock Offering of $0.03 million during the ninethree months ended September 30,March 31, 2017.
The initial term of the Management Agreement expired on April 2, 2017 (the third anniversary of the closing of the IPO), and automatically renewed for a one-year term expiring on April 2, 2018. The Management Agreement will automatically renew for a one-year term on each anniversary date thereafter unless previously terminated in accordance with the terms of the Management Agreement.
The Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds of the Company’s independent directors, based upon (1) unsatisfactory performance that is materially detrimental to the Company, or (2) the Company’s determination that the fees payable to theformer Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of the fees agreed to by at least two-thirds of the Company’s independent directors. The Company must provide 180 days’ prior notice of any such termination. Unless terminated for cause, as further described in the Management Agreement, the Manager will be paid a termination fee equal to three times the sum of the base management fee and incentive fee earned, in each case, by the Manager during the 12-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. The Company may also terminate the Management Agreement at any time, including during the initial term, without the payment of any termination fee, for cause with 30 days’ prior written notice from the Board.
On August 4, 2017, we announced that we, our Manager and the Contributors had entered into definitive agreements, as amended, (the “Contribution Agreement”) providing for the acquisition (the “Internalization”) by the Company of a newly-formed entity that will own the assets that our Manager uses to operate the business of the Company. The consideration to be paid to the Contributors in connection with the Internalization is based on a formula agreed to at the time the parties originally entered into the Management Agreement in April 2014, in connection with the Company’s initial public offering, and is equal to three (3) times the sum of the base management fee and incentive fee, in each case earned by the Manager under the current Management Agreement between the Manager, the Company and the Operating Partnership (the “Management Agreement”) during the 12-month period ending on the last day of the month of the most recently completed fiscal quarter prior to closing, which was the three months ended September 30, 2017 (the “Consideration”).
The Consideration is to be paid in a combination of OP Units, shares of the Company’s common stock, newly reclassified as Class C common stock (“Class C Common Stock”), and a de minimis amount of cash, and otherwise on terms consistent with the Contribution Agreement. The number of shares of Class C Common Stock and the number of OP Units to be issued in the Internalization is based on a per share and per OP Unit price, which is based on the volume-weighted average price on the NYSE MKT of our Class A common stock for the twenty (20) trading days beginning on and including September 11, 2017 through and including October 6, 2017, per an amendment dated August 9, 2017 to the definitive agreement, which the Company determined to be $10.64.
Upon closing of the Internalization, the Company will become a self-managed real estate investment trust. The following key executives and officers of our Manager will assume the following titles and duties with the Company: Mr. R. Ramin Kamfar will serve as our Chairman and Chief Executive Officer; Mr. James G, Babb, III, will serve as our Chief Investment Officer; Mr. Ryan S. MacDonald will serve as our Chief Acquisitions Officer; Mr. Jordan B. Ruddy will serve as our Chief Operating Officer and President; Mr. Christopher J. Vohs will serve as our Chief Financial Officer and Treasurer; and Mr. Michael L. Konig will serve as our Chief Legal Officer and Secretary. Messrs. Kamfar, Babb, MacDonald, Ruddy and Vohs have entered into employment agreements with an indirect subsidiary of the Company, and Mr. Konig has likewise entered into a services agreement with that subsidiary through his wholly-owned law firm, Konig & Associates, LLC on substantially the same terms as the employment agreements. Each such agreement will become effective upon Closing, and will have an initial term through and including December 31, 2020. As such, following the Internalization, our senior management team will continue to oversee, manage and operate the Company, and we will no longer be externally managed by the Manager. As an internally managed company, we will no longer pay the Manager any fees or expense reimbursements arising from the Management Agreement.
A special committee comprised entirely of independent and disinterested members of our board of directors (the “Special Committee”), which retained, independent legal and financial advisors, unanimously determined that the entry into the Contribution Agreement and the completion of the Internalization are in the best interests of the Company. Our board of directors, by unanimous vote, made a similar determination. The Internalization closed in the fourth quarter of 2017. See Note 13, Subsequent Events.
The Manager may retain, at its sole cost and expense, the services of such persons and firms as the former Manager deemsdeemed necessary in connection with ourthe Company’s management and operations (including accountants, legal counsel and other professional service providers), provided that such expenses are in amounts no greater than those that would be payable to third-party professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. The Company incurred $0.5 million for legal costs reimbursed
All of the Company’s executive officers, and some of its directors, were also executive officers, managers and/or holders of a direct or indirect controlling interest in the former Manager and other Bluerock-affiliated entities. As a result, they owed fiduciary duties to each of these entities, their members, limited partners and investors, which fiduciary duties may have from time to time conflicted with the fiduciary duties that they owed to the Manager in conjunctionCompany and its stockholders.
Administrative Services Agreement
In connection with acquisition, disposition, financingthe closing of the Internalization, the Company entered into an Administrative Services Agreement with Bluerock Real Estate, LLC and its affiliate, Bluerock Real Estate Holdings, LLC (together “BRE”) (the “Administrative Services Agreement”). Pursuant to the Administrative Services Agreement, BRE will provide the Company with certain human resources, investor relations, marketing, legal and other transactionsadministrative services (the “Services”) to facilitate a smooth transition in the nineCompany’s management of its operations and enable the Company to benefit from operational efficiencies created by access to such services following closing, to give the Company time to develop such services in-house or to hire other third-party service providers for such services. The Services will be provided on an at-cost basis, generally allocated based on the use of such Services for the benefit of the Company’s business, and shall be invoiced on a quarterly basis. In addition, the Administrative Services Agreement will permit, from time to time, certain employees of the Company to provide or cause to be provided services to BRE, on an at-cost basis, generally allocated based on the use of such services for the benefit of the business of BRE and invoiced on a quarterly basis, and otherwise subject to the terms of the Services to be provided by BRE to the Company under the Administrative Services Agreement. Payment by the Company of invoices and other amounts payable under the Administrative Services Agreement will be made in cash or, in the sole discretion of the Company’s board of directors, in the form of fully-vested LTIP Units.
The initial term of the Administrative Services Agreement is one year from the date of execution, subject to the Company’s right to renew it for successive one-year terms upon sixty (60) days written notice prior to expiration. The Administrative Services Agreement will automatically terminate (i) upon termination by the Company of all Services, or (ii) in the event of non-renewal by the Company. Any Company Party will also be able to terminate the Administrative Services Agreement with respect to any individual Service upon written notice to the applicable BRE entity, in which case the specified Service will discontinue as of the date stated in such notice, which date must be at least ninety (90) days from the date of such notice. Further, either BRE entity may terminate the Administrative Services Agreement at any time upon the occurrence of a “Change of Control Event” (as defined therein) upon at least one hundred eighty (180) days prior written notice to the Company.
Pursuant to the Administrative Services Agreement, BRE will be responsible for the payment of all employee benefits and any other direct and indirect compensation for the employees of BRE (or their affiliates or permitted subcontractors) assigned to perform the Services, as well as such employees’ worker’s compensation insurance, employment taxes, and other applicable employer liabilities relating to such employees.
Recorded as part of general and administrative expenses, reimbursements of $0.1 million and $0.4 million related to payroll and operating expenses, respectively, were expensed during the three months ended September 30, 2017.March 31, 2018.
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Pursuant to the terms of the Management Agreement, summarized below are the related party amounts payable to our former Manager, as well as to BRE, as of March 31, 2018 and December 31, 2017 (in thousands):
| March 31, 2018 | December 31, 2017 | |||||||
| Amounts Payable to the former Manager under the Management Agreement | ||||||||
| Base management fee | $ | - | $ | 993 | ||||
| Total amounts payable to former Manager | $ | - | $ | 993 | ||||
| Amounts Payable to BRE under the Administrative Services Agreement | ||||||||
| Operating expense reimbursements and direct expense reimbursements | $ | 523 | $ | 508 | ||||
| Offering expense reimbursements | 177 | 74 | ||||||
| Total amounts payable to BRE | $ | 700 | $ | 582 | ||||
| Total | $ | 700 | $ | 1,575 | ||||
As of March 31, 2018 and December 31, 2017, the Company had $2.2 million and $2.0 million, respectively, in receivables due from related parties other than from BRE or the former Manager, primarily for accrued preferred returns on unconsolidated real estate investments for the most recent month.
Selling Commissions and Dealer Manager Fees
In conjunction with the offering of the Series B Preferred Stock, the Company engaged a related party, as dealer manager, and pays up to 10% of the gross offering proceeds from the offering as selling commissions and dealer manager fees. The dealer manager may re-allow the selling commissions and dealer manager fees to participating broker-dealers, and is expected to incur costs in excess of the 10%, which costs will be borne by the dealer manager. For the ninethree months ended September 30, 2017,March 31, 2018, the Company has incurred approximately $8.2$1.3 million and $3.5$0.6 million, in selling commissions and dealer manager fees, respectively. In addition, the former Manager was reimbursed for offering costs in conjunction with the Series B Preferred Offering of $0.6$0.3 million during the ninethree months ended September 30, 2017,March 31, 2018, which were recorded as a reduction to the proceeds of the offering.
All of the Company’s executive officers, and some of its directors, are also executive officers, managers and/or holders of a direct or indirect controlling interest in the Manager and other Bluerock-affiliated entities. As a result, they owe fiduciary duties to each of these entities, their members, limited partners and investors, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to the Company and its stockholders.
Some of the material conflicts that the Manager or its affiliates face are: 1) the determination of whether an investment opportunity should be recommended to us or another Bluerock-sponsored program or Bluerock-advised investor; 2) the allocation of the time of key executive officers, directors, and other real estate professionals among the Company, other Bluerock-sponsored programs and Bluerock-advised investors, and the activities in which they are involved; and 3) the fees received by the Manager and its affiliates.
Pursuant to the terms of the Management Agreement, summarized below are the related party amounts payable to our Manager, as of September 30, 2017 and December 31, 2016 (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Amounts Payable to the Manager under the Management Agreement | ||||||||
| Base management fee | $ | 2,802 | $ | 2,015 | ||||
| Operating expense reimbursements and direct expense reimbursements | 393 | 274 | ||||||
| Offering expense reimbursements | 74 | 120 | ||||||
| Total amounts payable to Manager | $ | 3,269 | $ | 2,409 | ||||
As of September 30, 2017 and December 31, 2016, the Company had $1.8 million and $0.9 million, respectively, in receivables due from related parties other than the Manager, primarily for accrued preferred returns on unconsolidated real estate investments for the most recent month.
Notes and Interest Receivable due from Related Party; Preferred Equity Investments and Investments in Unconsolidated Real Estate Joint Ventures
The Company invests with related parties in various joint ventures in which the Company owns either preferred or common interests,interests. Please refer to Note 7 for further information.
Notes and makesinterest receivable from related party
The Company provides mezzanine loans to entities that are primarily owned by related parties.parties in conjunction with the developments of multifamily communities. Please refer to NotesNote 6 and 7 for further information.
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Note 1112 – Stockholders’ Equity
Net Income (Loss)Loss Per Common Share
Basic net income (loss)loss per common share is computed by dividing net income (loss)loss attributable to common stockholders, less dividends on restricted stockLTIP Units expected to vest plus gains on redemptions on common stock, by the weighted average number of common shares outstanding for the period. Diluted net income (loss)loss per common share is computed by dividing net income (loss)loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding and any potential dilutive shares for the period. Net income (loss)loss attributable to common stockholders is computed by adjusting net income (loss)loss for the non-forfeitable dividends paid on non-vested restricted stock.LTIP Units.
The Company considers the requirements of the two-class method when preparing earnings per share. The Company has two classes of common stock outstanding, Class A common stock, $0.01 par value per share, and Class C common stock, $0.01 par value per share. The Class C common stock was issued in connection with the Company’s Internalization and is entitled to participate in the Company’s dividends on a one-for-one basis with the Class A common stock. Earnings per share is not affected by the two-class method because the Company’s Class A and B-3C common stock and LTIP Units participate in dividends on a one-for-one basis.
The following table reconciles the components of basic and diluted net loss per common share (amounts in thousands, except share and per share amounts):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) income attributable to common stockholders | $ | (12,017 | ) | $ | (2,551 | ) | 563 | $ | (11,727 | ) | ||||||
| Dividends on restricted stock expected to vest | — | — | — | (4 | ) | |||||||||||
| Basic net (loss) income attributable to common stockholders | $ | (12,017 | ) | $ | (2,551 | ) | $ | 563 | $ | (11,731 | ) | |||||
| Weighted average common shares outstanding(1) | 26,474,093 | 20,908,543 | 25,851,536 | 20,706,338 | ||||||||||||
| Potential dilutive shares(2) | — | — | 523 | — | ||||||||||||
| Weighted average common shares outstanding and potential dilutive shares(1) | 26,474,093 | 20,908,543 | 25,852,059 | 20,706,338 | ||||||||||||
| Net (loss) income per common share, basic | $ | (0.45 | ) | $ | (0.12 | ) | $ | 0.02 | $ | (0.57 | ) | |||||
| Net (loss) income per common share, diluted | $ | (0.45 | ) | $ | (0.12 | ) | $ | 0.02 | $ | (0.57 | ) | |||||
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss attributable to common stockholders | $ | (9,425 | ) | $ | (4,990 | ) | ||
| Dividends on LTIP Units expected to vest | (172 | ) | - | |||||
| Basic net loss attributable to common stockholders | $ | (9,597 | ) | $ | (4,990 | ) | ||
| Weighted average common shares outstanding(1) | 24,143,382 | 24,989,621 | ||||||
| Potential dilutive shares(2) | — | — | ||||||
| Weighted average common shares outstanding and potential dilutive shares(1) | 24,143,382 | 24,989,621 | ||||||
| Net loss per common share, basic | $ | (0.40 | ) | $ | (0.20 | ) | ||
| Net loss per common share, diluted | $ | (0.40 | ) | $ | (0.20 | ) | ||
The effect of the conversion of OP Units and LTIP Units is not reflected in the computation of basic and diluted earnings per share, as they are exchangeable for Class A common stock on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share.
| (1) | For |
| (2) | Excludes |
Follow-On Equity Offerings
On January 17, 2017, the Company completed an underwritten offering (the “January 2017 Class A Common Stock Offering”) of 4,000,000 shares of its Class A common stock, par value $0.01 per share. The offer and sale of the shares were registered with the SEC pursuant to the January 2016 Shelf Registration Statement. The public offering price of $13.15 per share was announced on January 11, 2017. Net proceeds of the January 2017 Class A Common Stock Offering were approximately $49.8 million after deducting underwriting discounts and commissions and estimated offering costs. On January 24, 2017, the Company closed on the sale of 600,000 shares of Class A common stock for proceeds of approximately $7.5 million pursuant to the underwriters’ full exercise of the overallotment option.
Series B Preferred Stock Offering
The Company issued 116,48618,531 shares of Series B Preferred Stock under a continuous registered offering with net proceeds of approximately $104.8$16.7 million after commissions and dealer manager fees during the ninethree months ended September 30, 2017.March 31, 2018. As of September 30, 2017,March 31, 2018, the Company has sold 137,968203,217 shares of Series B Preferred Stock and 137,968203,217 Warrants to purchase 2,759,3604,064,340 shares of Class A common stock for net proceeds of approximately $124.2$182.9 million after commissions and fees.
At-the-Market Offerings
On During the three months ended March 29, 2016, the Company, its Operating Partnership and its Manager entered into an At Market Issuance Sales Agreement (the “Series A Sales Agreement”) with FBR Capital Markets & Co. (“FBR”), and MLV & Co. LLC (“MLV”). Pursuant to the31, 2018, 482 Series A Sales Agreement, FBR and MLV will act as distribution agents with respect to the offering and sale of up to $100,000,000 inB Preferred shares of Series A Preferred Stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on orwere redeemed through the NYSE MKT, or on any other existing trading marketissuance of 44,965 Class A common shares and 35 Series B Preferred shares were redeemed for Series A Preferred Stock or through a market maker (the “Series A ATM Offering”). Since March 31, 2016, the Company has sold 146,460 shares of Series A Preferred Stock for net proceeds of approximately $3.6 million after commissions$32,550 in the ATM Offering. On April 8, 2016, the Company delivered notice to each of FBR and MLV, pursuant to the terms of the Series A Sales Agreement, to suspend all sales under the Series A ATM Offering. The Company terminated the Series A ATM Offering effective September 30, 2017.cash.
| 24 |
At-the-Market Offerings
On August 8, 2016, the Company, its Operating Partnership and its former Manager entered into an At Market Issuance Sales Agreement (the “Class A Sales Agreement”) with FBR.FBR Capital Markets & Co. (“FBR”). Pursuant to the Class A Sales Agreement, FBR will act as distribution agent with respect to the offering and sale of up to $100,000,000 in shares of Class A common stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on or through the NYSE MKT,American, or on any other existing trading market for Class A common stock or through a market maker (the “Class A Common Stock ATM Offering”). The Company has not commenced any sales through the Class A Common Stock ATM Offering.
On September 14, 2016,Class A common stock repurchase program
In February 2018, the Company its Operating Partnership and its Manager entered into an At Market Issuance Sales Agreement (the “Series C Sales Agreement”) with FBR. Pursuantauthorized a stock repurchase plan to the Series C Sales Agreement, FBR will act as distribution agent with respect to the offering and sale ofpurchase up to $36,000,000 in$25 million of the Company’s outstanding shares of Series C Preferred Stock in “at the market offerings” as defined in Rule 415 under the Securities Act, including without limitation sales made directly on or through the NYSE MKT, or onClass A common stock. The repurchase plan has a term of one year and may be discontinued at any other existing trading market for Series C Preferred Stock or through a market maker (the “Series C ATM Offering”). Since September 14, 2016,time. The extent to which the Company has sold 23,750repurchases shares of Series C Preferred Stockits Class A common stock, and the timing of any such purchases, will depend on a variety of factors including general business and market conditions and other corporate considerations. The Company purchased 530,693 shares of Class A common stock during the three months ended March 31, 2018 for net proceedsa total purchase price of approximately $0.6 million after commissions in the Series C ATM Offering. On September 27, 2016, the Company delivered notice to FBR, pursuant to the terms$4.2 million.
The following table is a summary of the Series C Sales Agreement, to suspend all sales under the Series C ATM Offering. The Company terminated the Series C ATM Offering effective September 30, 2017.Class A common stock repurchase activity as of March 31, 2018:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of the Publicly Announced Plan | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan | ||||||||||||
| January 1, 2018 through January 31, 2018 | - | $ | - | - | $ | - | ||||||||||
| February 1, 2018 through February 28, 2018 | 331,090 | 7.84 | 331,090 | 22,398,638 | ||||||||||||
| March 1, 2018 through March 31, 2018 | 199,603 | 8.01 | 199,603 | 20,795,897 | ||||||||||||
| Total | 530,693 | $ | 7.92 | 530,693 | ||||||||||||
Operating Partnership and Long-Term Incentive Plan Units
As of September 30, 2017,March 31, 2018, limited partners other than the Company owned approximately 10.29%25.11% of the Operating Partnership (273,688(6,230,757 OP Units, or 1.01%19.60%, is held by OP Unit holders, and 2,502,3891,750,606 LTIP Units, or 9.28%5.51%, is held by LTIP Unit holders.)holders, of which 3.32% are not vested at March 31, 2018). Subject to certain restrictions set forth in the Operating Partnership’s Limited Partnership Agreement, OP Units are exchangeable for Class A common stock on a one-for-one basis. Duringbasis, or, at the nine months ended September 30, 2017, 22,367 OP Units were converted into Class A common stock.Company’s election, redeemable for cash.
Equity Incentive Plans – LTIP Grants
On March 24,Prior to the Internalization, in 2015 and 2016, the Company grantedissued grants of LTIP Units under the Amended 2014 Incentive Plans to the former Manager. The LTIP Units vested ratably over a totalthree-year period, subject to certain terms and conditions. LTIP expense of 7,500 shares$0.3 million for the three months ended March 31, 2017, was recorded as part of general and administrative expenses. The expense recognized during 2017 was based on the Class A common stock to its independent directors underclosing price at the Amended 2014 Individuals Plan. The fair valuevesting date or the end of the grants was approximately $0.1 million andperiod, as applicable. In conjunction with the sharesInternalization, 212,203 outstanding LTIP Units issued as incentive equity to our former Manager became vested immediately. in accordance with their original terms.
On February 14, 2017, the Company granted a total of 7,500 LTIP Units to its independent directors under the Amended 2014 Individuals Plan. The fair value of the grants was approximately $0.1 million and the LTIP Units vested immediately.
A summaryOn October 26, 2017, the Company’s stockholders approved the amendment and restatement of the statusAmended 2014 Individuals Plan, (the “Second Amended 2014 Individuals Plan”), and the Amended 2014 Entities Plan, (the “Second Amended 2014 Entities Plan”), and together with the Second Amended 2014 Individuals Plan, the “Second Amended 2014 Incentive Plans”. The Second Amended 2014 Incentive Plans allow for the issuance of up to an additional 1,075,000 shares of Class A common stock. The Second Amended 2014 Incentive Plans provide for the grant of options to purchase shares of the Company’s non-vested shares as of September 30, 2017 is as follows (amounts in thousands, except share amounts):common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards.
| Non-Vested shares | Shares | Weighted average grant-date fair value | ||||||
| Balance at January 1, 2017 | 659 | $ | 22.75 | |||||
| Granted | — | — | ||||||
| Vested | (659 | ) | 22.75 | |||||
| Forfeited | — | — | ||||||
| Balance at September 30, 2017 | — | $ | — | |||||
On January 1, 2018, the Company granted certain equity grants of LTIPS of the Company’s operating partnership to various executive officers under the Second Amended 2014 Incentive Plans. These awards, amounting to 1,056,211 LTIPs, were issued pursuant to the executive officers’ employment and service agreements as time-based LTIPs and performance-based LTIPs. All of these LTIP grants require continuous employment for vesting. Due to a limitation on the number of LTIP Units available for issuance under the Second Amended 2014 Incentive Plans, the long-term performance awards were, in aggregate, approximately 81,000 LTIP Units lower than those which the recipients were entitled pursuant to the terms of their respective employments agreements, with the Company planning to issue the remaining LTIP Units at such time as such LTIP Units become available under the Equity Incentive Plans. Time-based LTIPs were issued amounting to 770,854 LTIPs that vest over approximately five years and 160,192 LTIPs that vest over approximately three years. The Company recognizes compensation expense based on the fair value at the date of grant, ratably over the requisite service periods for the time-based LTIPs, thus, the Company recognized approximately $1.1 million during the three months ended March 31, 2018. Performance-based LTIPs were issued amounting to 125,165 LTIPs, are subject to a three-year performance period, and will vest immediately upon successful achievement of performance based conditions. Performance criteria are primarily based on a mixture of objective internal achievement goals and relative performance against its industry peers, with a minimum, threshold, and maximum performance standard for performance criteria. After the determination of the achievement of the performance criteria, any performance-based LTIP Units that were awarded but do not vest will be canceled. The Company recognizes compensation expense based on the fair value at the date of grant and the probability of achievement of performance criteria over the performance period for the performance-based LTIPs, thus, the Company recognized approximately $0.1 million during the three months ended March 31, 2018.
| 25 |
In addition, on January 1, 2018, the Company granted 6,263 LTIP Units under the Second Amended 2014 Incentive Plans to each independent member of the board of directors in payment of the equity portion of their respective annual retainers. The LTIP Units were fully vested upon issuance and thus, the Company recognized expense of approximately $0.2 million immediately based on the fair value at the date of grant.
At September 30, 2017,March 31, 2018, there was no$9.4 million of total unrecognized compensation cost related to unvested restricted stockLTIPs granted under the independent director compensation plan.
Equity Incentive Plans - LTIP Grants
On July 2, 2015, the Company issued a grant of LTIP Units under theSecond Amended 2014 Incentive PlansPlans. The remaining cost is expected to the Manager. The equity grant consisted of 283,390 LTIP Units (the “2015 LTIP Units”). The 2015 LTIP Units vest ratablybe recognized over a three-year period that began in July 2015, subject to certain terms and conditions, including early vesting upon an internalization of our external management functions. On August 3, 2016, the Company issued a grant of LTIP Units under the Amended 2014 Incentive Plans to the Manager. The equity grant consisted of 176,610 LTIP Units (the “2016 LTIP Units”). The 2016 LTIP Units vest ratably over a three-year period that began in August 2016, subject to certain terms and conditions, including early vesting upon an internalization of our external management functions. These 4.1 years.
LTIP Units may be convertible into OP Units under certain conditions and then may be settled in shares of the Company’s Class A common stock.
LTIP amortization of $0.1 million and $0.5 million, and $1.2 million and $2.0 million, for the three and nine months ended September 30, 2017 and 2016, respectively, was recorded as part of general and administrative expenses, related to the 2015 LTIP Units and the 2016 LTIP Units. The expense recognized during 2017 and 2016 was based on the Class A common stock, closing priceor, at the vesting date or the end of the period, as applicable.Company’s election, cash.
Distributions
| Declaration Date | Payable to stockholders of record as of | Amount | Date Paid | |||||
| Class A common stock | ||||||||
| October 4, 2016 | December 23, 2016 | $ | 0.096667 | January 5, 2017 | ||||
| January 6, 2017 | January 25, 2017 | $ | 0.096666 | February 3, 2017 | ||||
| January 6, 2017 | February 24, 2017 | $ | 0.096667 | March 3, 2017 | ||||
| January 6, 2017 | March 24, 2017 | $ | 0.096667 | April 5, 2017 | ||||
| April 7, 2017 | April 25, 2017 | $ | 0.096666 | May 5, 2017 | ||||
| April 7, 2017 | May 25, 2017 | $ | 0.096667 | June 5, 2017 | ||||
| April 7, 2017 | June 23, 2017 | $ | 0.096667 | July 5, 2017 | ||||
| July 10, 2017 | July 25, 2017 | $ | 0.096666 | August 4, 2017 | ||||
| August 9, 2017 | August 25, 2017 | $ | 0.096667 | September 5, 2017 | ||||
| August 9, 2017 | September 25, 2017 | $ | 0.096667 | October 5, 2017 | ||||
| Series A Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.515625 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.515625 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.515625 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.515625 | October 5, 2017 | ||||
| Series B Preferred Stock | ||||||||
| October 4, 2016 | December 23, 2016 | $ | 5.00 | January 5, 2017 | ||||
| January 6, 2017 | January 25, 2017 | $ | 5.00 | February 3, 2017 | ||||
| January 6, 2017 | February 24, 2017 | $ | 5.00 | March 3, 2017 | ||||
| January 6, 2017 | March 24, 2017 | $ | 5.00 | April 5, 2017 | ||||
| April 7, 2017 | April 25, 2017 | $ | 5.00 | May 5, 2017 | ||||
| April 7, 2017 | May 25, 2017 | $ | 5.00 | June 5, 2017 | ||||
| April 7, 2017 | June 23, 2017 | $ | 5.00 | July 5, 2017 | ||||
| July 10, 2017 | July 25, 2017 | $ | 5.00 | August 4, 2017 | ||||
| July 10, 2017 | August 25, 2017 | $ | 5.00 | September 5, 2017 | ||||
| July 10, 2017 | September 25, 2017 | $ | 5.00 | October 5, 2017 | ||||
| Series C Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.4765625 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.4765625 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.4765625 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.4765625 | October 5, 2017 | ||||
| Series D Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.3859 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.4453125 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.4453125 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.4453125 | October 5, 2017 | ||||
| Declaration Date | Payable to stockholders of record as of | Amount | Date Paid | |||||||
| Class A Common Stock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 0.096667 | January 5, 2018 | ||||||
| December 20, 2017 | March 23, 2018 | $ | 0.162500 | April 5, 2018 | ||||||
| Class C Common Stock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 0.096667 | January 5, 2018 | ||||||
| December 20, 2017 | March 23, 2018 | $ | 0.162500 | April 5, 2018 | ||||||
| Series A Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.515625 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.515625 | April 5, 2018 | ||||||
| Series B Preferred Stock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 5.00 | January 5, 2018 | ||||||
| January 12, 2018 | January 25, 2018 | $ | 5.00 | February 5, 2018 | ||||||
| January 12, 2018 | February 23, 2018 | $ | 5.00 | March 5, 2018 | ||||||
| January 12, 2018 | March 23, 2018 | $ | 5.00 | April 5, 2018 | ||||||
| Series C Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.4765625 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.4765625 | April 5, 2018 | ||||||
| Series D Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.4453125 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.4453125 | April 5, 2018 | ||||||
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate.
Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.
The Company has a dividend reinvestment plan that allows for participating stockholders to have their dividend distributions automatically invested in additional Class A common shares based on the average price of the shares on the investment date. The Company plans to issue Class A common shares to cover shares required for investment.
Announcement of Review of Class A Common Stock Dividend Policy
On August 4, 2017, the board of directors announced that it initiated, in conjunction with a financial advisor, a comprehensive review of the appropriate dividend policy for the Company's Class A Common Stock. The board's evaluation will consider factors including, but not limited to, achieving a sustainable dividend covered by current recurring AFFO (vs. pro forma AFFO), multifamily and small cap peer dividend rates, multifamily and small cap peer payout ratios, providing financial flexibility for the Company, and achieving an appropriate balance between the retention of capital to invest and grow net asset value, and the importance of current distributions. The board is expected to complete its review of the dividend policy for the Company's Class A Common Stock in the fourth quarter of 2017.
Distributions declared and paid for the ninethree months ended September 30, 2017March 31, 2018 were as follows (amounts in thousands):
| Distributions | Distributions | |||||||||||||||
| 2017 | Declared | Paid | ||||||||||||||
| 2018 | Declared | Paid | ||||||||||||||
| First Quarter | ||||||||||||||||
| Class A Common Stock | $ | 7,014 | $ | 6,566 | $ | (79 | ) | $ | 2,341 | |||||||
| Class C Common Stock | — | 7 | ||||||||||||||
| Series A Preferred Stock | 2,950 | 2,950 | 2,950 | 2,950 | ||||||||||||
| Series B Preferred Stock | 525 | 395 | 2,921 | 2,816 | ||||||||||||
| Series C Preferred Stock | 1,107 | 1,107 | 1,107 | 1,107 | ||||||||||||
| Series D Preferred Stock | 1,269 | 1,100 | 1,270 | 1,270 | ||||||||||||
| OP Units | 82 | 84 | — | 602 | ||||||||||||
| LTIP Units | 496 | 480 | 175 | 53 | ||||||||||||
| Total first quarter 2017 | $ | 13,443 | $ | 12,682 | ||||||||||||
| Second Quarter | ||||||||||||||||
| Class A Common Stock | $ | 7,016 | $ | 7,015 | ||||||||||||
| Series A Preferred Stock | 2,950 | 2,950 | ||||||||||||||
| Series B Preferred Stock | 1,054 | 837 | ||||||||||||||
| Series C Preferred Stock | 1,108 | 1,107 | ||||||||||||||
| Series D Preferred Stock | 1,270 | 1,270 | ||||||||||||||
| OP Units | 80 | 80 | ||||||||||||||
| LTIP Units | 551 | 533 | ||||||||||||||
| Total second quarter 2017 | $ | 14,029 | $ | 13,792 | ||||||||||||
| Third Quarter | ||||||||||||||||
| Class A Common Stock | 7,017 | 7,016 | ||||||||||||||
| Series A Preferred Stock | 2,950 | 2,950 | ||||||||||||||
| Series B Preferred Stock | 1,711 | 1,508 | ||||||||||||||
| Series C Preferred Stock | 1,107 | 1,107 | ||||||||||||||
| Series D Preferred Stock | 1,270 | 1,269 | ||||||||||||||
| OP Units | 79 | 80 | ||||||||||||||
| LTIP Units | 676 | 625 | ||||||||||||||
| Total third quarter 2017 | $ | 14,810 | $ | 14,555 | ||||||||||||
| Total | $ | 42,282 | $ | 41,029 | ||||||||||||
| Total first quarter 2018 | $ | 8,344 | $ | 11,146 | ||||||||||||
(1) On December 20, 2017, the Company’s board of directors authorized, and the Company declared a quarterly dividend for the first quarter of 2018 equal to a quarterly rate of $0.1625 per share on the Class A and Class C common stock, payable to the stockholders of record as of March 23, 2018, which was paid in cash on April 5, 2018. Holders of OP and LTIP Units are entitled to receive “distribution equivalents” at the same time as dividends are paid to holders of the Class A common stock. The Company recorded an estimated accrued distribution at December 31, 2017 based on the Class A common stock outstanding. Due to the impact of the Class A common stock repurchase program that was initiated in February 2018, the distribution required based on the outstanding Class A common stock at the March 23, 2018 record date was lower than the accrued distribution recorded at December 31, 2017 and therefore, a negative declared distribution is reflected.
| 26 |
Note 1213 – Commitments and Contingencies
The Company is subject to various legal actions and claims arising in the ordinary course of business. Although the outcome of any legal matter cannot be predicted with certainty, management does not believe that any of these legal proceedings or matters will have a material adverse effect on the consolidated financial position or results of operations or liquidity of the Company.
Note 1314 – Subsequent Events
Declaration of Dividends
| Declaration Date | Payable to stockholders of record as of | Amount | Payable Date | |||||
| Class A common stock | ||||||||
| October 13, 2017 | October 25, 2017 | $ | 0.096666 | November 3, 2017 | ||||
| October 13, 2017 | November 24, 2017 | $ | 0.096667 | December 5, 2017 | ||||
| October 13, 2017 | December 22, 2017 | $ | 0.096667 | January 5, 2018 | ||||
| Series B Preferred Stock | ||||||||
| October 13, 2017 | October 25, 2017 | $ | 5.00 | November 3, 2017 | ||||
| October 13, 2017 | November 24, 2017 | $ | 5.00 | December 5, 2017 | ||||
| October 13, 2017 | December 22, 2017 | $ | 5.00 | January 5, 2018 | ||||
| Declaration Date | Payable to stockholders of record as of | Amount | Payable Date | |||||||
| Series B Preferred Stock | ||||||||||
| April 13, 2018 | April 25, 2018 | $ | 5.00 | May 4, 2018 | ||||||
| April 13, 2018 | May 25, 2018 | $ | 5.00 | June 5, 2018 | ||||||
| April 13, 2018 | June 25, 2015 | $ | 5.00 | July 5, 2018 | ||||||
Holders of OP and LTIP Units are entitled to receive "distribution equivalents" at the same time as dividends are paid to holders of the Company's Class A common stock.
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate.
Distributions Paid
The following distributions were paid to the Company's stockholders, as well as holders of OP and LTIP Units subsequent to September 30, 2017March 31, 2018 (amounts in thousands):
| Shares | Declaration Date | Record Date | Date Paid | Distributions per Share | Total Distribution | Declaration Date | Record Date | Date Paid | Distributions per Share | Total Distribution | ||||||||||||||||||
| Class A Common Stock | August 9, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.096667 | $ | 2,339 | December 20, 2017 | March 23, 2018 | April 5, 2018 | $ | 0.162500 | $ | 3,857 | ||||||||||||||
| Class C Common Stock | December 20, 2017 | March 23, 2018 | April 5, 2018 | $ | 0.162500 | $ | 12 | |||||||||||||||||||||
| Series A Preferred Stock | September 8, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.515625 | $ | 2,950 | March 9, 2018 | March 23, 2018 | April 5, 2018 | $ | 0.515625 | $ | 2,950 | ||||||||||||||
| Series B Preferred Stock | July 10, 2017 | September 25, 2017 | October 5, 2017 | $ | 5.000000 | $ | 646 | January 12, 2018 | March 23, 2018 | April 5, 2018 | $ | 5.000000 | $ | 1,011 | ||||||||||||||
| Series C Preferred Stock | September 8, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.4765625 | $ | 1,107 | March 9, 2018 | March 23, 2018 | April 5, 2018 | $ | 0.4765625 | $ | 1,107 | ||||||||||||||
| Series D Preferred Stock | September 8, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.4453125 | $ | 1,269 | March 9, 2018 | March 23, 2018 | April 5, 2018 | $ | 0.4453125 | $ | 1,269 | ||||||||||||||
| OP Units | August 9, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.096667 | $ | 26 | December 20, 2017 | March 23, 2018 | April 5, 2018 | $ | 0.162500 | $ | 1,012 | ||||||||||||||
| LTIP Units | August 9, 2017 | September 25, 2017 | October 5, 2017 | $ | 0.096667 | $ | 242 | December 20, 2017 | March 23, 2018 | April 5, 2018 | $ | 0.162500 | $ | 266 | ||||||||||||||
| Class A Common Stock | October 13, 2017 | October 25, 2017 | November 3, 2017 | $ | 0.096666 | $ | 2,340 | |||||||||||||||||||||
| Series B Preferred Stock | October 13, 2017 | October 25, 2017 | November 3, 2017 | $ | 5.000000 | $ | 718 | April 13, 2018 | April 25, 2018 | May 4, 2018 | $ | 5.000000 | $ | 1,040 | ||||||||||||||
| OP Units | October 13, 2017 | October 25, 2017 | November 3, 2017 | $ | 0.096666 | $ | 240 | |||||||||||||||||||||
| LTIP Units | October 13, 2017 | October 25, 2017 | November 3, 2017 | $ | 0.096666 | $ | 29 | |||||||||||||||||||||
| Total | $ | 11,906 | $ | 12,524 | ||||||||||||||||||||||||
Management InternalizationAcquisition of Sands Parc
On October 26, 2017, at the annual meeting of stockholders, the Company’s stockholders approved the issuance, pursuant to the Contribution Agreement, of (i) OP Units, and shares of the Company’s Class A Common Stock that may be issued in the Company’s discretion upon redemption of such OP Units in certain circumstances, and (ii) shares of the Company’s Class C Common Stock, and shares of the Company’s Class A Common Stock that may be issued upon conversion of such shares of Class C Common Stock in certain circumstances; in each case, to the applicable contributor and its affiliates and related persons (each, a “Contributor”) in connection with the Internalization.
The Internalization transaction closed on October 31, 2017, and the following table shows the Internalization Consideration paid in aggregate to the Contributors based on the trailing twelve-month base management and incentive fees of $13,748,029.
| Total Internalization Consideration | $ | 41,244,086 | ||
| Allocation of Internalization Consideration: | ||||
| Internalization expense reimbursement | $ | 450,000 | ||
| Internalization Consideration paid in cash | $ | 40,794 | ||
| Internalization Consideration paid in OP Units | $ | 39,938,226 | ||
| Internalization Consideration paid in Class C common stock | $ | 815,066 | ||
| Volume-Weighted Average Price (“VWAP”) | $ | 10.64 | ||
| Number of OP Units Issued | 3,753,593 | |||
| Number of shares of Class C Common Stock Issued | 76,603 |
Upon closing of the Internalization, the Company became a self-managed real estate investment trust. The following key executives and officers of the Manager assumed the following titles and duties with the Company: Mr. R. Ramin Kamfar serves as Chairman and Chief Executive Officer; Mr. James G, Babb, III, serves as Chief Investment Officer; Mr. Ryan S. MacDonald serves as Chief Acquisitions Officer; Mr. Jordan B. Ruddy serves as Chief Operating Officer and President; Mr. Christopher J. Vohs serves as Chief Financial Officer and Treasurer; and Mr. Michael L. Konig serves as Chief Legal Officer and Secretary. Messrs. Kamfar, Babb, MacDonald, Ruddy and Vohs have entered into employment agreements with an indirect subsidiary of the Company, and Mr. Konig has likewise entered into a services agreement with that subsidiary through his wholly-owned law firm, Konig & Associates, LLC on substantially the same terms as the employment agreements. Each such agreement became effective upon Closing, and has an initial term through and including December 31, 2020. As such, following the Internalization, the Company’s senior management team continues to oversee, manage and operate the Company, and the Company is no longer externally managed by the Manager. As an internally managed company, the Company no longer pays our Manager any fees or expense reimbursements arising from the Management Agreement.
A special committee comprised entirely of independent and disinterested members of the Company’s board of directors (the “Special Committee”), which retained independent legal and financial advisors, unanimously determined that the entry into the Contribution Agreement and the completion of the Internalization are in the best interests of the Company. The Company’s board of directors, by unanimous vote, made a similar determination.
In conjunction with the Internalization, 212,203 outstanding LTIP Units issued as incentive equity to our Manager became vested in accordance with their original terms.
Second Amended 2014 Incentive Plans
On October 26, 2017, at the annual meeting of stockholders, the Company’s stockholders approved the Second Amended 2014 Incentive Plans which provides for an aggregate of 1,550,000 shares of Class A Common Stock available for grant, an increase of 1,075,000 shares.
Conversion of LTIP Units to OP Units
On OctoberMay 1, 2017, holders of 2,206,033 LTIP Units converted their interests into OP Units.
Entry into Senior secured revolving credit facility with KeyBank National Association
On October 4, 2017, the Company, through its Operating Partnership, entered into a credit agreement (the “Senior Credit Facility”) with KeyBank National Association (“KeyBank”) and other lenders. The Senior Credit Facility provides for an initial loan commitment amount of $150 million, which commitment contains an accordion feature up to a maximum commitment of up to $250 million. The availability of borrowings will be based on the value of a pool of collateral properties and compliance with various ratios related to those assets.
The Senior Credit Facility matures on October 4, 2020, with a one-year extension option, subject to certain conditions and the payment of an extension fee. Borrowings under the Senior Credit Facility bear interest, at the Company’s option, at LIBOR plus 1.80% to 2.45%, or the base rate plus 0.80% to 1.45%, depending on the Company’s leverage ratio. The Company will pay an unused fee at an annual rate of 0.20% to 0.25% of the unused portion of the Senior Credit Facility, depending on the amount of borrowings outstanding. The Senior Credit Facility contains certain financial and operating covenants, including a maximum leverage ratio, minimum liquidity, minimum debt service coverage ratio, and minimum tangible net worth. The Company has guaranteed the obligations under the Senior Credit Facility.
Acquisition of Outlook at Greystone
On October 19, 2017,2018, the Company, through subsidiaries of its Operating Partnership, acquired a 100.0% interest in a 300-unit264-unit apartment community located in Birmingham, Alabama,Daytona, Florida, known as Outlook at GreystoneSands Parc (“Outlook at Greystone”Sands Parc”) for approximately $36.3$46.2 million. The purchase price for Outlook at Greystone of approximately $36.3$46.2 million was funded, in part, with the Company’s SecuredSenior Credit Facility secured by a mortgage by the Outlook at GreystoneSands Parc property.
Acquisition of ARIUM Hunter’s Creek and ARIUM MetrowestEntry into Master Credit Facility with Fannie Mae
On OctoberApril 30, 2017,2018, the Company, through subsidiaries of its Operating Partnership, acquiredcaused BR Metrowest, LLC, a 100.0% interest in two apartment communitiesDelaware limited liability company and subsidiary of the Operating Partnership, together with certain other subsidiaries of the Operating Partnership, to enter into a Master Credit Facility Agreement (the “Fannie Facility”) with Walker & Dunlop, LLC (“Walker & Dunlop”) as the original lender. The Fannie Facility was issued through Fannie Mae’s Multifamily Delegated Underwriting and Servicing Program and was assigned by Walker & Dunlop to Fannie Mae. The Fannie Facility includes certain restrictive covenants, including indebtedness, liens, investments, mergers and asset sales, and distributions. The Fannie Facility also contains events of default, including payment defaults, covenant defaults, bankruptcy events, and change of control events. The Company has guaranteed the obligations under the Fannie Facility.
On April 30, 2018, the Fannie Facility provided for an initial $64.6 million fixed rate advance (the “Initial Advance”), which was used to refinance a loan secured by the multifamily residential property commonly known as ARIUM Metrowest Apartments located in Orlando, Florida. The properties areInitial Advance has a 532-unit apartment community, known as ARIUM Hunter’s Creek,term of eighty-four (84) months and a 510-unit apartment community known as ARIUM Metrowest.
will mature on May 1, 2025. The purchase price for ARIUM Hunter’s Creek of approximately $96.9 million was funded, in part, with a $72.3 million senior mortgage loan secured by the ARIUM Hunter’s Creek property and improvements (the “ARIUM Hunter’s Creek Loan”). The ARIUM Hunter’s Creek Loan matures November 1, 2024 and bearsInitial Advance will bear interest at a fixed rate of 3.65%. Regular monthly payments are interest-only until November4.43% per annum.
On May 3, 2018, the Fannie Facility provided for a $22.1 million fixed rate advance (the “Second Advance”), which was used to refinance a loan secured by the multifamily residential property commonly known as Outlook at Greystone Apartments located in Birmingham, Alabama. The Second Advance has a term of eighty-four (84) months and will mature on June 1, 2019, with payments based on thirty-year amortization thereafter.2025. The Second Advance will bear interest at a fixed rate of 4.30% per annum. The Company provided standard scope non-recourse carveout guarantees in conjunction with the ARIUM Hunter’s Creek Loan.
The purchase price for ARIUM Metrowest of approximately $86.0 million was funded, in part, through borrowingsmay request future fixed rate advances or variable rate advances under the Company’s Senior Credit Facility.Fannie Facility either by borrowing against the value of the mortgaged properties (based on the valuation methodology established in the Fannie Facility) or adding eligible properties to the collateral pool, subject to customary conditions, including satisfaction of minimum debt service coverage and maximum loan-to-value tests. The proceeds of any future advances made under the Fannie Facility may be used, among other things, for the acquisition and refinancing of additional properties to be identified in the future.
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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 consolidated financial statements of Bluerock Residential Growth REIT, Inc., and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Bluerock Residential Growth REIT, Inc., a Maryland corporation, and, as required by context, Bluerock Residential Holdings, L.P., a Delaware limited partnership, which we refer to as our “Operating Partnership,” and to their subsidiaries. We refer to Bluerock Real Estate, L.L.C., a Delaware limited liability company, as “Bluerock”, and we refer to our former external manager, BRG Manager, LLC, a Delaware limited liability company, as our “Manager.“former Manager.” Both Bluerock and our former Manager are affiliated with the Company.
Forward-Looking Statements
Statements included in this Quarterly Report on Form 10-Q 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 the Private Securities Litigation Reform Act of 1995. 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. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
| the factors included in this Quarterly Report on Form 10-Q, including those set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; |
| use of proceeds of the Company’s securities offerings; |
| • | the competitive environment in which we operate; |
| • | real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets; |
| • | risks associated with geographic concentration of our investments; |
| • | decreased rental rates or increasing vacancy rates; |
| • | our ability to lease units in newly acquired or newly constructed apartment properties; |
| • | potential defaults on or non-renewal of leases by tenants; |
| • | creditworthiness of tenants; |
| our ability to obtain financing for and complete acquisitions under contract at the contemplated terms, or at all; |
| • | development and acquisition risks, including rising and unanticipated costs and failure of such acquisitions and developments to perform in accordance with projections; |
| the timing of acquisitions and dispositions; |
| • | the performance of our |
| • | potential natural disasters such as hurricanes, tornadoes and floods; |
| • | national, international, regional and local economic conditions; |
| • | board determination as to timing and payment of dividends, and our ability to pay future distributions at the dividend rates we have paid historically; |
| 29 |
| • | the general level of interest rates; |
| • | potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates; |
| • | financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all; |
| • | lack of or insufficient amounts of insurance; |
| • | our ability to maintain our qualification as a REIT; |
| • | litigation, including costs associated with prosecuting or defending claims and any adverse outcomes; |
| • | possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us. | |
| • | The possibility that the anticipated benefits from the Internalization of our former external Manager, or the Internalization, may not be realized or may take longer to realize than expected, or that unexpected costs or unexpected liabilities may arise from the Internalization; | |
| • | our ability to manage the Internalization effectively or efficiently; and | |
| • | the outcome of any legal proceedings that may be instituted against us or others following the announcement of the Internalization. |
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 report. All forward-looking statements are made as of the date of this report and the risk that actual results will differ materially from the expectations expressed in this 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 report, whether as a result of new information, future events, changed circumstances or any other reason. The forward-looking statements should be read in light of the risk factors set forth in Item 1A of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 22, 2017,March 13, 2018, and subsequent filings by us with the SEC, or (“Risk Factors”).
Overview
We were incorporated as a Maryland corporation on July 25, 2008. Our objective is to maximize long-term stockholder value by acquiring and developing well-located institutional-quality apartment properties in demographically attractive growth markets across the United States. We seek to maximize returns through investments where we believe we can drive substantial growth in our funds from operations adjusted funds from operations and net asset value primarily through one or more of our Core-Plus Value-Add, Opportunistic and Invest-to-Own investment strategies.
We conduct our operations through Bluerock Residential Holdings, L.P., our operating partnership (the “Operating Partnership”), of which we are the sole general partner. The consolidated financial statements include our accounts and those of the Operating Partnership and its subsidiaries.
As of September 30, 2017,March 31, 2018, our portfolio consisted of interests in thirty-fiveforty properties, (twenty-fivetwenty-nine operating properties and teneleven through preferred equity and mezzanine loan investments. Of the property interests held through preferred equity and mezzanine loan investments, six are under development, properties).four are in leaseup and one property is stabilized. The thirty-fiveforty properties contain an aggregate of 10,76112,672 units, comprised of 8,1669,872 consolidated operating units and 2,5952,800 units under development.through preferred equity and mezzanine loan investments. As of September 30, 2017,March 31, 2018, these properties, exclusive of our development properties, were approximately 94% occupied.
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and have qualified as a REIT commencing with our taxable year ended December 31, 2010. In order to continue to qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our taxable income (excluding net capital gains). If we qualify as a REIT for federal income tax purposes, we generally will not be subject to federal income tax on income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify as a REIT for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income and results of operations. We intend to continue to organize and operate in such a manner as to remain qualified as a REIT.
Management Internalization
On October 26, 2017, at the annual meeting of stockholders, our stockholders approved the issuance, pursuant to the Contribution Agreement, of (i) OP Units, and shares of the our Class A Common Stock that may be issued in the our discretion upon redemption of such OP Units in certain circumstances, and (ii) shares of the our Class C Common Stock, and shares of the our Class A Common Stock that may be issued upon conversion of such shares of Class C Common Stock in certain circumstances; in each case, to the applicable contributor and its affiliates and related persons (each, a “Contributor”) in connection with the Internalization.
The Internalization transaction closed on October 31, 2017, and the following table shows the Internalization Consideration paid in aggregate to the Contributors based on the trailing twelve-month base management and incentive fees of $13,748,029.
| Total Internalization Consideration | $ | 41,244,086 | ||
| Allocation of Internalization Consideration: | ||||
| Internalization expense reimbursement | $ | 450,000 | ||
| Internalization Consideration paid in cash | $ | 40,794 | ||
| Internalization Consideration paid in OP Units | $ | 39,938,226 | ||
| Internalization Consideration paid in Class C common stock | $ | 815,066 | ||
| Volume-Weighted Average Price (“VWAP”) | $ | 10.64 | ||
| Number of OP Units Issued | 3,753,593 | |||
| Number of shares of Class C Common Stock Issued | 76,603 |
Upon closing of the Internalization, we became a self-managed real estate investment trust. The following key executives and officers of our Manager assumed the following titles and duties with the Company: Mr. R. Ramin Kamfar serves as our Chairman and Chief Executive Officer; Mr. James G, Babb, III, serves as our Chief Investment Officer; Mr. Ryan S. MacDonald serves as our Chief Acquisitions Officer; Mr. Jordan B. Ruddy serves as our Chief Operating Officer and President; Mr. Christopher J. Vohs serves as our Chief Financial Officer and Treasurer; and Mr. Michael L. Konig serves as our Chief Legal Officer and Secretary. Messrs. Kamfar, Babb, MacDonald, Ruddy and Vohs have entered into employment agreements with an indirect subsidiary of the Company, and Mr. Konig has likewise entered into a services agreement with that subsidiary through his wholly-owned law firm, Konig & Associates, LLC on substantially the same terms as the employment agreements. Each such agreement became effective upon Closing, and has an initial term through and including December 31, 2020. As such, following the Internalization, our senior management team continues to oversee, manage and operate the Company, and we are no longer externally managed by the Manager. As an internally managed company, we no longer pay the Manager any fees or expense reimbursements arising from the Management Agreement.
A special committee comprised entirely of independent and disinterested members of our board of directors (the “Special Committee”), which retained independent legal and financial advisors, unanimously determined that the entry into the Contribution Agreement and the completion of the Internalization are in the best interests of the Company. Our board of directors, by unanimous vote, made a similar determination.
In conjunction with the Internalization, 212,203 outstanding LTIP Units issued as incentive equity to our Manager became vested in accordance with their original terms.
The following table reflects the impact of various LTIP Unit to OP Unit conversions and payment of Internalization Consideration subsequent to September 30 2017:
Shares and units outstanding September 30, 2017 | LTIP Unit Conversion to OP Units(1) | Internalization Consideration in shares and units(2) | Post Internalization shares and units outstanding November 1, 2017(3) | |||||||||||||
| Class A Common Stock | 24,193,109 | 24,193,109 | ||||||||||||||
| Class C Common Stock | - | 76,603 | 76,603 | |||||||||||||
| LTIP Units | 2,502,389 | (2,206,033 | ) | 296,356 | ||||||||||||
| Total share equivalents | 26,695,498 | (2,206,033 | ) | 76,603 | 24,566,068 | |||||||||||
| OP Units | 273,688 | 2,206,033 | 3,753,593 | 6,233,314 | ||||||||||||
| Total shares and OP Units | 26,969,186 | - | 3,830,196 | 30,799,382 | ||||||||||||
(1)Reflects the impact of LTIP Unit conversions to OP Units which occurred on October 1, 2017.
(2)Reflects the impact of the Internalization Consideration which was issued on October 31, 2017
(3)Does not include any share activity not noted above and LTIP Units does not include the issuance of LTIPs for the base management fee for the three months ended September 30, 2017 which was estimated at 253,300 at September 30, 2017 based on the $11.06
Second Amended 2014 Incentive Plans
On October 26, 2017, at the annual meeting of stockholders, our stockholders approved the Second Amended 2014 Incentive Plans which provides for an aggregate of 1,550,000 shares of Class A Common Stock available for grant, an increase of 1,075,000 shares.
Recent Developments
During the ninethree months ended September 30, 2017,March 31, 2018, we acquired eightone stabilized properties, disposed of four properties,property and converted two preferred equity investments intoincreased the mezzanine financing arrangementsloan in Flagler Village as discussed below.
Acquisition of Bell Preston ViewThe Links at Plum Creek
On February 17, 2017,March 26, 2018, we, through subsidiaries of our Operating Partnership, acquired a 91.8%88.0% interest in a 382-unit264-unit apartment community located in Morrisville, North Carolina,Castle Rock, Colorado, known as Bell Preston View ApartmentsThe Links at Plum Creek (“Preston View”Plum Creek”) for approximately $59.5$61.1 million. The purchase price of $59.5$61.1 million was funded, in part, with a $41.1 million senior mortgage loan secured by Preston View.
Acquisition of Wesley Village
On March 9, 2017, we, through subsidiaries of its Operating Partnership, acquired a 91.8% interest in a 301-unit apartment community and adjacent land located in Charlotte, North Carolina, known as Wesley Village Apartments (“Wesley Village”) for approximately $57.2 million. The purchase price for Wesley Village of approximately $57.2 million was funded, in part, with a $40.5 million senior mortgage loan secured by Wesley Village.
Acquisition of Texas Portfolio
On June 9, 2017, we, through subsidiaries of its Operating Partnership, acquired a 90.0% interest in a portfolio of five apartment community properties containing 1,408-units, located in San Antonio and Tyler, Texas for approximately $188.9 million. The purchase price for the five-property portfolio was funded, in part, with the assumption of five senior mortgage loans of a total of approximately $146.4 million secured individually by each of the portfolio properties. The properties are Marquis at Crown Ridge, Marquis at Stone Oak and Marquis at TPC located in San Antonio, Texas, and Marquis at The Cascades I and II (considered one property subsequent to acquisition) located in Tyler, Texas.
Acquisition of Villages at Cypress Creek
On September 8, 2017, we, through subsidiaries of its Operating Partnership, acquired an 80.0% interest in a 384-unit apartment community located in Houston, Texas, known as Villages at Cypress Creek (“Villages at Cypress Creek”) for approximately $40.7 million. The purchase price for Villages at Cypress Creek of approximately $40.7 million was funded, in part, with a $26.2$40.0 million senior mortgage loan secured by the Villages at CypressPlum Creek property.
Acquisition of Citrus Tower
On September 28, 2017, we, through subsidiaries of its Operating Partnership, acquired a 96.8% interest in a 336-unit apartment community located in Orlando, Florida, known as Citrus Tower (“Citrus Tower”) for approximately $55.3 million. The purchase price for Citrus Tower of approximately $55.3 million was funded, in part, with a $41.4 million senior mortgage loan secured by the Citrus Tower property.
Sale of Village Green Ann Arbor
On February 22, 2017, we closed on the sale of the Village Green Ann Arbor property (“Village Green Ann Arbor”), located in Ann Arbor, Michigan. The property was sold for approximately $71.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Village Green Ann Arbor property in the amount of $41.4 million and payment of closing costs and fees of $1.3 million, the sale of the property generated net proceeds of approximately $28.6 million and a gain on sale of approximately $16.7 million, of which our pro rata share of proceeds was approximately $13.6 million and pro rata share of the gain was approximately $7.8 million.
Sale of Lansbrook Village
On April 26, 2017, we closed on the sale of Lansbrook Village, located in Palm Harbor, Florida. The 90% owned property was sold for approximately $82.4 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for assumption of the existing mortgage indebtedness encumbering Lansbrook Village in the amount of $57.2 million and payment of closing costs and fees of $1.2 million, the sale of the property generated net proceeds of approximately $24.1 million and a gain on sale of approximately $22.8 million, of which our pro rata share of proceeds was approximately $19.1 million and pro rata share of the gain was approximately $16.1 million.
Sale of Fox Hill
On May 24, 2017, we closed on the sale of the Fox Hill property, located in Austin, Texas. The property was sold for approximately $46.5 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payoff of the existing mortgage indebtedness encumbering the Fox Hill property in the amount of $26.7 million, the payment of a prepayment penalty on the mortgage of $1.6 million and payment of closing costs and fees of $0.5 million, the sale of the property generated net proceeds of approximately $19.2 million and a gain on sale of approximately $10.7 million, of which our pro rata share of proceeds was approximately $16.4 million and pro rata share of the gain was approximately $10.3 million.
Sale of MDA Apartments
On June 30, 2017, we closed on the sale of our interest in MDA Apartments, located in Chicago, Illinois. Our 35% interest in the property was sold for approximately $18.3 million, subject to certain prorations and adjustments typical in such real estate transactions. After deduction for the payment of closing costs and fees of $0.7 million, the sale of the joint venture interest in the property generated net proceeds of approximately $17.6 million and gain on sale of $10.2 million, of which our pro rata share of proceeds was approximately $11.0 million and pro rata share of the gain was approximately $6.4 million.
Notes and accrued interest receivable from related parties
During the ninethree months ended September 30, 2017, Bluerock Special Opportunity + Income Fund II, (“Fund II”) redeemed our preferred equity interests in APOKMarch 31, 2018, we restated and Domain, we obtained 0.5% common interests in APOK and Domain, and we provided mezzanine loans to APOK of approximately $11.2 million and to Domain of approximately $20.3 million. In addition, we increased the mezzanine loan to West MoreheadFlagler JV by $3.3$21.0 million, to approximately $24.6$74.6 million. See Notes 6 and 7 to the interim Consolidated Financial Statements for additional information.
Recent Stock Offerings
During the ninethree months ended September 30, 2017March 31, 2018 we continued to raise capital to finance our investment activities.
January 2017 Offering of Class A Common Stock
On January 17, 2017, we completed an underwritten offering (the “January 2017 Common Stock Offering”) of 4,000,000 shares of its Class A common stock, par value $0.01 per share. The offer and sale of the shares were registered with the SEC pursuant to the January 2016 Shelf Registration Statement. The public offering price of $13.15 per share was announced on January 11, 2017. Net proceeds of the January 2017 Common Stock Offering were approximately $49.8 million after deducting underwriting discounts and commissions and estimated offering costs. On January 24, 2017, we closed on the sale of 600,000 shares of Class A common stock for proceeds of approximately $7.5 million pursuant to the underwriters’ full exercise of the overallotment option.
Series B Preferred Stock
We issued 116,48618,531 shares of Series B Preferred Stock under a continuous registered offering with net proceeds of approximately $104.8$16.7 million after commissions and dealer manager fees of approximately $1.9 million during the ninethree months ended September 30, 2017. As of September 30, 2017, the Company has sold 137,968 shares of Series B Preferred Stock and 137,968 Warrants to purchase 2,759,360 shares of Class A common stock for net proceeds of approximately $124.2 million after commissions and fees.March 31, 2018.
Our total stockholders’ equity increased $49.6decreased $11.7 million from $241.7$222.8 million as of December 31, 20162017 to $291.3$211.1 million as of September 30, 2017.March 31, 2018. The increasedecrease in our total stockholders’ equity is primarily attributable to our January 2017 Common Stock Offering of $57.3 million, our net income of $21.7 million, and equity compensation of $12.2 million, offset by dividends declared of $42.0$8.3 million, repurchase of Class A common stock of $4.2 million and our net loss of $0.1 million, during the ninethree months ended September 30, 2017.
Election to Abandon East San Marco Development
On November 24, 2015, we entered into a cost-sharing agreement to pursue the acquisition of a tract of real property located in Jacksonville, Florida for the development of a 266-unit, Class A multifamily apartment community with 44,276 square feet of retail space, or the East San Marco Property. In 2017 we elected to abandon pursuit of the development of the East San Marco Property due to significant cost escalations arising from scope changes imposed on the project after the start and from both general and market specific labor and material inflation, which negatively impacted the risk and return profile of the project. The Company recognized approximately $2.9 million of acquisition and pursuit costs during the nine months ended September 30, 2017 based on its investment in a controlling equity position in the East San Marco Property prior to abandonment.March 31, 2018.
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Results of Operations
The following is a summary of our stabilized consolidated operating real estate investments as of September 30, 2017:March 31, 2018:
| Multifamily Community Name/Location | Number of Units | Year Built/Renovated(1) | Ownership Interest | Average Rent(2) | % Occupied(3) | |||||||||||||||
| ARIUM at Palmer Ranch, Sarasota, FL | 320 | 2016 | 95.0 | % | $ | 1,201 | 97 | % | ||||||||||||
| ARIUM Grandewood, Orlando, FL | 306 | 2005 | 95.0 | % | 1,231 | 94 | % | |||||||||||||
| ARIUM Gulfshore, Naples, FL | 368 | 2016 | 95.0 | % | 1,235 | 92 | % | |||||||||||||
| ARIUM Palms, Orlando, FL | 252 | 2008 | 95.0 | % | 1,257 | 96 | % | |||||||||||||
| ARIUM Pine Lakes, Port St. Lucie, FL | 320 | 2003 | 85.0 | % | 1,152 | 98 | % | |||||||||||||
| ARIUM Westside, Atlanta, GA | 336 | 2008 | 90.0 | % | 1,466 | 97 | % | |||||||||||||
| Ashton Reserve, Charlotte, NC | 473 | 2015 | 100.0 | % | 1,066 | 93 | % | |||||||||||||
| Citrus Tower, Orlando, FL | 336 | 2006 | 96.8 | % | 1,227 | 92 | % | |||||||||||||
| Enders Place at Baldwin Park, Orlando, FL | 220 | 2003 | 89.5 | % | 1,675 | 91 | % | |||||||||||||
| James on South First, formerly Legacy at Southpark, Austin, TX | 250 | 2016 | 90.0 | % | 1,151 | 94 | % | |||||||||||||
| Marquis at Crown Ridge, San Antonio, TX | 352 | 2009 | 90.0 | % | 960 | 94 | % | |||||||||||||
| Marquis at Stone Oak, San Antonio, TX | 335 | 2007 | 90.0 | % | 1,387 | 92 | % | |||||||||||||
| Marquis at The Cascades, Tyler, TX | 582 | 2009 | 90.0 | % | 1,105 | 92 | % | |||||||||||||
| Marquis at TPC, San Antonio, TX | 139 | 2008 | 90.0 | % | 1,413 | 92 | % | |||||||||||||
| Nevadan, Atlanta, GA | 480 | 1990 | 90.0 | % | 1,104 | 95 | % | |||||||||||||
| Park & Kingston, Charlotte, NC | 168 | 2015 | 96.0 | % | 1,227 | 96 | % | |||||||||||||
| Preston View, Morrisville, NC | 382 | 2000 | 91.8 | % | 1,005 | 96 | % | |||||||||||||
| Roswell City Walk, Roswell, GA | 320 | 2015 | 98.0 | % | 1,496 | 97 | % | |||||||||||||
| Sorrel, Frisco, TX | 352 | 2015 | 95.0 | % | 1,209 | 94 | % | |||||||||||||
| Sovereign, Fort Worth, TX | 322 | 2015 | 95.0 | % | 1,243 | 95 | % | |||||||||||||
| The Brodie, Austin, TX | 324 | 2001 | 92.5 | % | 1,111 | 95 | % | |||||||||||||
| The Preserve at Henderson Beach, Destin, FL | 340 | 2009 | 100.0 | % | 1,359 | 94 | % | |||||||||||||
| Villages at Cypress Creek, Houston, TX | 384 | 2001 | 80.0 | % | 1,046 | 93 | % | |||||||||||||
| Wesley Village, Charlotte, NC | 301 | 2010 | 91.8 | % | 1,290 | 93 | % | |||||||||||||
| Whetstone, Durham, NC(4) | 204 | 2015 | — | 1,117 | 95 | % | ||||||||||||||
| Total/Average | 8,166 | $ | 1,214 | 94 | % | |||||||||||||||
| Multifamily Community Name | Location | Number of Units | Date Built/Renovated(1) | Ownership Interest | Average Rent(2) | % Occupied(3) | ||||||||||||||||
| ARIUM at Palmer Ranch | Sarasota, FL | 320 | 2016 | 95.0 | % | $ | 1,269 | 97 | % | |||||||||||||
| ARIUM Glenridge | Atlanta, GA | 480 | 1990 | 90.0 | % | 1,122 | 96 | % | ||||||||||||||
| ARIUM Grandewood | Orlando, FL | 306 | 2005 | 100.0 | % | 1,323 | 97 | % | ||||||||||||||
| ARIUM Gulfshore | Naples, FL | 368 | 2016 | 95.0 | % | 1,288 | 95 | % | ||||||||||||||
| ARIUM Hunter’s Creek | Orlando, FL | 532 | 1999 | 100.0 | % | 1,330 | 97 | % | ||||||||||||||
| ARIUM Metrowest | Orlando, FL | 510 | 2001 | 100.0 | % | 1,294 | 96 | % | ||||||||||||||
| ARIUM Palms | Orlando, FL | 252 | 2008 | 95.0 | % | 1,309 | 97 | % | ||||||||||||||
| ARIUM Pine Lakes | Port St. Lucie, FL | 320 | 2003 | 85.0 | % | 1,208 | 99 | % | ||||||||||||||
| ARIUM Westside | Atlanta, GA | 336 | 2008 | 90.0 | % | 1,492 | 93 | % | ||||||||||||||
| Ashton Reserve | Charlotte, NC | 473 | 2015 | 100.0 | % | 1,061 | 92 | % | ||||||||||||||
| Citrus Towers | Orlando, FL | 336 | 2006 | 96.8 | % | 1,234 | 97 | % | ||||||||||||||
| Enders Place at Baldwin Park | Orlando, FL | 220 | 2003 | 92.0 | % | 1,712 | 96 | % | ||||||||||||||
| James on South First | Austin, TX | 250 | 2016 | 90.0 | % | 1,264 | 94 | % | ||||||||||||||
| Marquis at Crown Ridge | San Antonio, TX | 352 | 2009 | 90.0 | % | 926 | 94 | % | ||||||||||||||
| Marquis at Stone Oak | San Antonio, TX | 335 | 2007 | 90.0 | % | 1,407 | 91 | % | ||||||||||||||
| Marquis at The Cascades | Tyler, TX | 582 | 2009 | 90.0 | % | 1,076 | 91 | % | ||||||||||||||
| Marquis at TPC | San Antonio, TX | 139 | 2008 | 90.0 | % | 1,413 | 96 | % | ||||||||||||||
| Outlook at Greystone | Birmingham, AL | 300 | 2007 | 100.0 | % | 929 | 89 | % | ||||||||||||||
| Park & Kingston | Charlotte, NC | 168 | 2015 | 100.0 | % | 1,251 | 92 | % | ||||||||||||||
| Preston View | Morrisville, NC | 382 | 2000 | 100.0 | % | 1,065 | 96 | % | ||||||||||||||
| Roswell City Walk | Roswell, GA | 320 | 2015 | 98.0 | % | 1,486 | 95 | % | ||||||||||||||
| Sorrel | Frisco, TX | 352 | 2015 | 95.0 | % | 1,235 | 91 | % | ||||||||||||||
| Sovereign | Fort Worth, TX | 322 | 2015 | 95.0 | % | 1,321 | 92 | % | ||||||||||||||
| The Brodie | Austin, TX | 324 | 2001 | 92.5 | % | 1,176 | 96 | % | ||||||||||||||
| The Links at Plum Creek | Castle Rock, CO | 264 | 2000 | 88.0 | % | 1,271 | 94 | % | ||||||||||||||
| The Mills | Greenville, SC | 304 | 2013 | 100.0 | % | 973 | 90 | % | ||||||||||||||
| The Preserve at Henderson Beach | Destin, FL | 340 | 2009 | 100.0 | % | 1,320 | 94 | % | ||||||||||||||
| Villages at Cypress Creek | Houston, TX | 384 | 2001 | 80.0 | % | 1,056 | 95 | % | ||||||||||||||
| Wesley Village | Charlotte, NC | 301 | 2010 | 100.0 | % | 1,223 | 93 | % | ||||||||||||||
| Total/Average | 9,872 | $ | 1,227 | 94 | % | |||||||||||||||||
(1) Represents date of last significant renovation or year built if there were no renovations.
(2) Represents the average effective monthly rent per occupied unit for all occupied units for the three months ended September 30, 2017.March 31, 2018. Total concessions for the three months ended September 30, 2017March 31, 2018 amounted to approximately $1.1$0.9 million.
(3) Percent occupied is calculated as (i) the number of units occupied as of September 30, 2017,March 31, 2018, divided by (ii) total number of units, expressed as a percentage.
(4) Whetstone is currently a preferred equity investment providing a stated investment return.
The following is a summary of our development propertiespreferred equity and mezzanine loan investments as of September 30, 2017:March 31, 2018:
| Multifamily Community Name, Location | Number of Units | Total Estimated Construction Cost (in millions) | Cost to Date (in millions) | Estimated Construction Cost Per Unit | Actual/ Anticipated Initial Occupancy | Anticipated Construction Completion | Pro Forma Average Rent (1) | |||||||||||||||||
| Alexan CityCentre, Houston, TX | 340 | $ | 83.0 | $ | 79.9 | $ | 244,118 | 2Q17 | 4Q17 | $ | 2,144 | |||||||||||||
| Helios, Atlanta, GA | 282 | $ | 50.9 | $ | 46.4 | $ | 180,496 | 2Q17 | 4Q17 | $ | 1,486 | |||||||||||||
| Alexan Southside Place, Houston, TX | 270 | $ | 49.0 | $ | 40.6 | $ | 181,481 | 4Q17 | 2Q18 | $ | 2,012 | |||||||||||||
| Lake Boone Trail, Raleigh, NC | 245 | $ | 40.2 | $ | 28.0 | $ | 164,082 | 3Q17 | 3Q18 | $ | 1,271 | |||||||||||||
| Vickers Village, Roswell, GA | 79 | $ | 30.6 | $ | 18.2 | $ | 387,342 | 3Q18 | 4Q18 | $ | 3,176 | |||||||||||||
| APOK Townhomes, Boca Raton, FL | 90 | $ | 28.9 | $ | 12.5 | $ | 321,111 | 3Q18 | 1Q19 | $ | 2,549 | |||||||||||||
| Crescent Perimeter, Atlanta, GA | 320 | $ | 70.0 | $ | 29.0 | $ | 218,750 | 4Q18 | 2Q19 | $ | 1,749 | |||||||||||||
| Domain, Garland, TX | 299 | $ | 52.6 | $ | 13.9 | $ | 175,920 | 4Q18 | 2Q19 | $ | 1,469 | |||||||||||||
| West Morehead, Charlotte, NC | 286 | $ | 60.0 | $ | 22.1 | $ | 209,790 | 4Q18 | 2Q19 | $ | 1,507 | |||||||||||||
| Flagler Village, Fort Lauderdale, FL | 384 | $ | 137.3 | $ | 28.6 | $ | 357,552 | 3Q19 | 3Q20 | $ | 2,358 | |||||||||||||
| Total | 2,595 | $ | 1,858 | |||||||||||||||||||||
| Multifamily Community Name | Location | Actual/ Planned Number | Total Actual/ Estimated Construction Cost (in millions) | Cost to Date (in millions) | Actual/ Estimated | Actual/ Estimated Initial Occupancy | Actual/ Estimated Construction Completion | Pro Forma Average Rent(1) | ||||||||||||||||||
| Whetstone(2) | Durham, NC | 204 | $ | 37.0 | $ | 37.0 | $ | 181,373 | 3Q14 | 3Q15 | $ | 1,233 | ||||||||||||||
| Alexan CityCentre | Houston, TX | 340 | 83.2 | 80.5 | 244,706 | 2Q17 | 4Q17 | 2,144 | ||||||||||||||||||
| Helios | Atlanta, GA | 282 | 51.4 | 50.4 | 182,270 | 2Q17 | 4Q17 | 1,486 | ||||||||||||||||||
| Alexan Southside Place | Houston, TX | 270 | 49.0 | 46.7 | 181,481 | 4Q17 | 1Q18 | 2,012 | ||||||||||||||||||
| Lake Boone Trail | Raleigh, NC | 245 | 40.2 | 34.4 | 164,082 | 3Q17 | 4Q18 | 1,271 | ||||||||||||||||||
| Vickers Village | Roswell, GA | 79 | 30.7 | 24.3 | 388,608 | 3Q18 | 4Q18 | 3,176 | ||||||||||||||||||
| APOK Townhomes | Boca Raton, FL | 90 | 28.9 | 20.2 | 321,111 | 3Q18 | 1Q19 | 2,549 | ||||||||||||||||||
| Crescent Perimeter | Atlanta, GA | 320 | 70.0 | 44.0 | 218,750 | 4Q18 | 2Q19 | 1,749 | ||||||||||||||||||
| Domain | Garland, TX | 299 | 52.6 | 30.0 | 175,920 | 4Q18 | 2Q19 | 1,469 | ||||||||||||||||||
| West Morehead | Charlotte, NC | 286 | 60.0 | 38.6 | 209,790 | 4Q18 | 2Q19 | 1,507 | ||||||||||||||||||
| Flagler Village | Fort Lauderdale, FL | 385 | 135.4 | 37.0 | 351,688 | 3Q19 | 3Q20 | 2,352 | ||||||||||||||||||
| Total/Average | 2,800 | $ | 1,813 | |||||||||||||||||||||||
(1) Represents the average pro forma effective monthly rent per occupied unit for all expected occupied units upon stabilization.
(2) Represents the average effective monthly rent per occupied unit for the three months ended March 31, 2018.
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Three Months Ended September 30, 2017March 31, 2018 Compared to Three Months Ended September 30, 2016March 31, 2017
Revenue
Net rental incomeincreased $6.3$8.8 million, or 34%37%, to $24.9$32.7 million for the three months ended September 30, 2017March 31, 2018 as compared to $18.6$23.9 million for the same prior year period. TheNet rental income increased $14.3 million from the acquisition of various interestsone property in fifteen2018 and the full year impact of ten properties subsequent to September 30, 2016 increasedacquired in 2017, offset by a $5.4 million decrease in net rental income driven by $12.8 million while the sales of fivefour properties including Lansbrook Village, MDA Apartments, Fox Hill, Springhouse at Newport News, and Village Green Ann Arbor decreased net rental income by $6.6 million.in 2017.
Other property revenueincreased $1.1 million, or 55%39%, to $3.1$3.9 million for the three months ended September 30, 2017March 31, 2018 as compared to $2.0$2.8 million for the same prior year period. This increase was primarily due toOther property revenues increased $1.8 million from the acquisition of interestsone property in 2018 and the full year impact of ten properties noted above of $1.5acquired in 2017, offset by a $0.6 million offsetdecrease in other property revenues driven by the sales noted above of $0.7 million.four properties in 2017.
Interest income from related parties increased by $2.1$3.7 million, or 247%, to $5.2 million for the three months ended March 31, 2018 as compared to $1.5 million for the same prior year period due to interest earned onincreases in the average balance of mezzanine loans made during the last three quarters.outstanding.
Expenses
Property operating expensesincreased $4.1$5.1 million, or 52%48%, to $12.0$15.7 million for the three months ended September 30, 2017March 31, 2018 as compared to $7.9$10.6 million for the same prior year period. This increase was primarily due toProperty operating expenses increased $7.4 million from the acquisition of interestsone property in 2018 and the full year impact of ten properties noted above of $3.9 million,acquired in 2017, offset by salesa $2.3 million decrease in property operating expenses driven by the sales noted above of $2.0 million.four properties in 2017. Property NOI margins decreased to 57.2%57.3% of total revenues for the three months ended September 30, 2017March 31, 2018 from 61.6%60.2% in the prior year quarter. Property margins have been impacted by the sales of stabilized properties owned for longer time periods which were efficiently operated withand the recent purchase of assets purchased more recently that hadhave not yet achieved the same level of operational efficiency. Property NOI margins are computed as total property revenues less property operating expenses, divided by total property revenues.
Property management fees expensesexpenseincreased $0.2$0.3 million, or 33%43%, to $0.8$1.0 million for the three months ended September 30, 2017March 31, 2018 as compared to $0.6$0.7 million in the same prior year period. This increase was primarily due toProperty management fees increased $0.4 million from the acquisition of interestsone property in 2018 and the full year impact of ten properties noted above,acquired in 2017, offset by the impact ofa $0.2 million decrease in property management fees driven by the sales of properties.
four properties in 2017.
General and administrative expensesdecreasedamounted to $1.1$4.7 million for the three months ended September 30, 2017March 31, 2018 as compared to $1.2$1.4 million for the same prior year period. Excluding non-cash equity compensation expense of $0.1$1.8 million and $0.6$0.4 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, general and administrative expenses were $1.0$2.9 million, or 3.2%6.9% of revenues for the three months ended September 30, 2017March 31, 2018 as compared to $0.6$1.0 million, or 3.0%3.6% of revenues, for the same prior year period. This increase can be primarily attributed to the impact of the Internalization as we are now incurring expenses that were previously covered by the management fees payable to our former Manager, described below.
Management feesincreased to $2.8 million forwere eliminated in conjunction with the three months ended September 30, 2017 as compared to $1.9 million for the same prior year period.Internalization. Base management fees of $2.8 million and $1.7$2.3 million were incurredexpensed in the three months ended September 30, 2017 and 2016, respectively.March 31, 2017. Incentive management fees of $0.2$0.4 million were incurredexpensed in the three months ended September 30, 2016. Base management fees increased primarily due to an increase in equity as a result of the Follow-On Offerings.March 31, 2017. Management fees of $2.8 million for the quarter ended September 30,March 31, 2017 will bewere paid in LTIP Units in lieu of cash.
Acquisition and pursuit costswere minimal$.04 million for the three months ended September 30, 2017March 31, 2018 as compared to $0.7$3.2 million for the same prior year period. The Company adopted ASU 2017-01 which resulted in the capitalization of costs incurred in asset acquisitions purchased after the effective date of January 1, 2017.
Weather-related lossesof $0.7 million were incurred in the three months ended September 30, 2017 related to Hurricane Irma at six properties in Florida and three properties in Georgia.
Depreciation and amortization expenseswere $11.8 million for the three months ended September 30, 2017 as compared to $7.2 million for the same prior year period. The increase is related to additional depreciation and amortization expense on the acquisition of the properties mentioned above of $7.4 million, offset by a decrease due to the sale of the five properties of $1.9 million.
Other Income and Expense
Other income and expensesamounted to expense of $4.7 million for the three months ended September 30, 2017 compared to income of $0.4 million for the same prior year period. This was primarily due to the gain on the sale of Springhouse at Newport News of $4.9 million and the loss on early extinguishment of debt of $2.4 million in the prior year quarter, offset by an increase in interest expense, net, of $2.1 million, as the result of the increase in mortgages payable resulting from the acquisition of interests in the properties mentioned above.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenue
Net rental incomeincreased $20.4 million, or 39%, to $72.4 million for the nine months ended September 30, 2017 as compared to $52.0 million for the same prior year period. The acquisition of various interests in fifteen properties subsequent to September 30, 2016 increased net rental income by $28.2 million while the sales of five properties including Lansbrook Village, MDA Apartments, Fox Hill, Springhouse at Newport News, and Village Green Ann Arbor decreased net rental income by $12.7 million.
Other property revenueincreased $3.2 million, or 59%, to $8.6 million for the nine months ended September 30, 2017 as compared to $5.4 million for the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above of $3.5 million offset by the sales noted above of $1.2 million.
Interest income from related parties increased by $5.7 million due to interest earned on the mezzanine loans made during the last three quarters.
Expenses
Property operating expensesincreased $11.3 million, or 50%, to $33.9 million for the nine months ended September 30, 2017 as compared to $22.6 million for the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above of $8.9 million, offset by sales the sales noted above of $3.6 million. Property NOI margins decreased to 58.1% of total revenues for the nine months ended September 30, 2017 from 60.6% in the prior year quarter. Property margins have been impacted by the sales of properties owned for longer time periods which were efficiently operated with assets purchased more recently that had not yet achieved the same level of operational efficiency. Property NOI margins are computed as total property revenues less property operating expenses, divided by total property revenues.
Property management fees expenses increased $0.6 million, or 35%, to $2.3 million for the nine months ended September 30, 2017 as compared to $1.7 million in the same prior year period. This increase was primarily due to the acquisition of interests in the properties noted above, offset by the impact of the sales of properties.
General and administrative expenseswere flat at $4.2 million for the nine months ended September 30, 2017 versus the same amount for 2016. Excluding non-cash equity compensation expense of $1.3 million and $2.2 million for the nine months ended September 30, 2017 and 2016, respectively, general and administrative expenses were $2.9 million, or 3.4% of revenues for the nine months ended September 30, 2017 as compared to $2.0 million, or 3.4% of revenues, for the same prior year period.
Management feesincreased to $11.7 million for the nine months ended September 30, 2017 as compared to $4.5 million for the same prior year period. Base management fees of $7.8 million and $4.3 million were incurred in the nine months ended September 30, 2017 and 2016, respectively. Incentive management fees of $4.0 million and $0.2 million were incurred in the nine months ended September 30, 2017 and 2016, respectively, primarily due to the realized gains on asset sales. Base management fees increased primarily due to an increase in equity as a result of the Follow-On Offerings. Management fees of $2.8 million for the quarter ended September 30, 2017 will be paid in LTIP Units in lieu of cash while base management fees of $8.9 million for the six months ended June 30, 2017 were paid through the issuance of 738,479 LTIP Units.
Acquisition and pursuit costswere $3.2 million for the nine months ended September 30, 2017 as compared to $2.1 million for the same prior year period. The Company adopted ASU 2017-01 which resulted in the capitalization of costs incurred in asset acquisitions purchased after the effective date of January 1, 2017. Substantially all the expenses for the ninethree months ended September 30,March 31, 2017 were due to the Company’s decision to abandon the proposed East San Marco Property development and write off the pre-acquisition costs that had been incurred. Abandoned pursuit costs can vary greatly, and the costs incurred in any given period may be significantly different in future periods. The costs during the prior year quarter were primarily due to the acquisition of ARIUM Gulfshore, ARIUM at Palmer Ranch, ARIUM Westside, and The Preserve at Henderson Beach.
Weather-related lossesof $0.7 million were incurred in the nine months ended September 30, 2017 related to Hurricane Irma at six properties in Florida and three properties in Georgia.
Depreciation and amortization expenseswere $33.1$15.6 million for the ninethree months ended September 30, 2017March 31, 2018 as compared to $22.5$10.9 million for the same prior year period. The increase is related to additionalDepreciation and amortization expense increased $6.1 million from the acquisition of one property in 2018 and the full year impact of ten properties acquired in 2017, offset by a $1.4 million decrease in depreciation and amortization expense ondriven by the acquisitionsales of thefour properties mentioned above of $18.0 million, offset by a decrease due to the sale of the five properties of $4.3 million.in 2017.
Other Income and Expense
Other income and expensesamounted to incomeexpense of $44.2$7.7 million for the ninethree months ended September 30, 2017March 31, 2018 compared to expenseincome of $2.9$11.9 million for the same prior year period. ThisInterest expense increased $3.0 million, or 42%, to $10.1 million for the three months ended March 31, 2018 as compared to $7.1 million for the same prior year period due to the increased amount of properties. The balance of the difference was primarily due to the gain on the sale of Village Green of Ann Arbor Fox Hill and Lansbrook Village of $50.0$16.5 million andduring the sale of the real estate joint venture interest of MDA Apartments of $10.2 million occurring in 2017, offset by the sale of the real estate joint venture interest of Springhouse of Newport News of $4.9 million in the prior year period, offset by an increase in interest expense, net, of $8.2 million, as the result of the increase in mortgages payable resulting from the acquisition of interests in the properties mentioned above.three months ended March 31, 2017.
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Property Operations
We define “same store” properties as those that we owned and operated for the entirety of both periods being compared, except for properties that are in the construction or lease-up phases, or properties that are undergoing development or significant redevelopment. We move properties previously excluded from our same store portfolio for these reasons into the same store designation once they have stabilized or the development or redevelopment is complete and such status has been reflected fully in all quarters during the applicable periods of comparison. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized upon attainment of 90% physical occupancy, subject to loss-to-lease, bad debt and rent concessions.
For comparison of our three months ended September 30,March 31, 2018 and 2017, and 2016, the same store properties included properties owned at JulyJanuary 1, 2016.2017. Our same store properties for the period were Enders Place at Baldwin Park, ARIUM Grandewood, Park & Kingston, Ashton Reserve, ARIUM Palms, Sorrel, Sovereign, ARIUM Gulfshore, ARIUM at Palmer Ranch, and The Preserve at Henderson Beach. For comparison of our nine months ended September 30, 2017Beach, ARIUM Westside, ARIUM Pine Lakes, James on South First, ARIUM Glenridge, Roswell City Walk and 2016, the same store properties included properties owned at January 1, 2016.The Brodie. Our samenon-same store properties for the same period were Enders PlaceVillage Green of Ann Arbor, MDA Apartments, Lansbrook Village, Fox Hill, Preston View, Wesley Village, the Marquis portfolio properties, Cypress Creek, Citrus Tower, ARIUM Hunter’s Creek, ARIUM Metrowest, Outlook at Baldwin Park, ARIUM Grandewood, Park & Kingston, Ashton Reserve, ARIUM Palms, Sovereign, ARIUM Gulfshore,Greystone, The Mills, Links at Plum Creek, Vickers Village and ARIUM at Palmer Ranch.
Because of the limited number of same store properties as compared to the number of properties in our portfolio in 2017 and 2016, respectively, our same store performance measures may be of limited usefulness.Crescent Perimeter.
The following table presents the same store and non-same store results from operations for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (dollars in thousands):
| Three Months Ended September 30, | Change | |||||||||||||||
| 2017 | 2016 | $ | % | |||||||||||||
| Property Revenues | ||||||||||||||||
| Same Store | $ | 11,956 | $ | 11,851 | $ | 105 | 0.9 | % | ||||||||
| Non-Same Store | 15,987 | 8,726 | 7,261 | 83.2 | % | |||||||||||
| Total property revenues | 27,943 | 20,577 | 7,366 | 35.8 | % | |||||||||||
| Property Expenses | ||||||||||||||||
| Same Store | 4,755 | 4,605 | 150 | 3.3 | % | |||||||||||
| Non-Same Store | 7,214 | 3,291 | 3,923 | 119.2 | % | |||||||||||
| Total property expenses | 11,969 | 7,896 | 4,073 | 51.6 | % | |||||||||||
| Same Store NOI | 7,201 | 7,246 | (45 | ) | (0.6 | )% | ||||||||||
| Non-Same Store NOI | 8,773 | 5,435 | 3,338 | 61.4 | % | |||||||||||
| Total NOI(1) | $ | 15,974 | $ | 12,681 | $ | 3,293 | 26.0 | % | ||||||||
| Nine Months Ended September 30, | Change | Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||
| 2017 | 2016 | $ | % | 2018 | 2017 | $ | % | |||||||||||||||||||||||||
| Property Revenues | ||||||||||||||||||||||||||||||||
| Same Store | $ | 27,824 | $ | 26,845 | $ | 979 | 3.6 | % | $ | 20,781 | $ | 19,725 | $ | 1,056 | 5.4 | % | ||||||||||||||||
| Non-Same Store | 53,169 | 30,544 | 22,625 | 74.1 | % | 15,894 | 6,935 | 8,959 | 129.2 | % | ||||||||||||||||||||||
| Total property revenues | 80,993 | 57,389 | 23,604 | 41.1 | % | 36,675 | 26,660 | 10,015 | 37.6 | % | ||||||||||||||||||||||
| Property Expenses | ||||||||||||||||||||||||||||||||
| Same Store | 10,952 | 10,664 | 288 | 2.7 | % | 8,594 | 7,946 | 648 | 8.2 | % | ||||||||||||||||||||||
| Non-Same Store | 22,983 | 11,928 | 11,055 | 92.7 | % | 7,064 | 2,673 | 4,391 | 164.3 | % | ||||||||||||||||||||||
| Total property expenses | 33,935 | 22,592 | 11,343 | 50.2 | % | 15,658 | 10,619 | 5,039 | 47.5 | % | ||||||||||||||||||||||
| Same Store NOI | 16,872 | 16,181 | 691 | 4.3 | % | 12,187 | 11,779 | 408 | 3.5 | % | ||||||||||||||||||||||
| Non-Same Store NOI | 30,186 | 18,616 | 11,570 | 62.2 | % | 8,830 | 4,262 | 4,568 | 107.2 | % | ||||||||||||||||||||||
| Total NOI(1) | $ | 47,058 | $ | 34,797 | $ | 12,261 | 35.2 | % | $ | 21,017 | $ | 16,041 | $ | 4,976 | 31.0 | % | ||||||||||||||||
(1)See “Net Operating Income” below for a reconciliation of Same Store NOI, Non-Same Store NOI and Total NOI to net income (loss) and a discussion of how management uses this non-GAAP financial measure.
Three Months Ended September 30, 2017March 31, 2018 Compared to Three Months Ended September 30, 2016March 31, 2017
Same store NOI for the three months ended September 30, 2017 decreased 0.6%March 31, 2018 increased 3.5% or $0.05$0.41 million, compared to the 20162017 period. There was a 0.9%5.4% increase in same store property revenues as compared to the 2016 period,2017 period. The increase was primarily attributable to a 1.6%4.8% increase in average rental ratesrates; all our sixteen same store properties recognized rental rate increases during the period. The remaining increase was due to a $0.25 million increase in resident fees derived from implementing trash valet at nine same store properties and a general increase in resident fees, such as early termination, pet, and garage fees. This was partially offset by a 66average occupancy decreasing 20 basis point decrease in average occupancy.points to 93.8%. Same store expenses for the three months ended September 30,March 31, 2018 increased 8.2% or $0.65 million, compared to the 2017 increased 3.3%period, primarily due to $4.8a 14.8% increase, or $0.40 million, from $4.6 million for the 2016 period. The same store results were disproportionately impactedin real estate taxes due to higher valuations by performance from two assetsmunicipalities and lower tax expense in the Dallas Fort Worth MSA, particularly our Frisco asset which continues2017 period relating to remain challenged fromfavorable tax true-ups. The remaining increase is attributable to an increase in trash expense related to the new supply.valet service and the timing of seasonal maintenance.
Property revenues and property expenses for our non-same store properties increased significantly due to the properties acquired during 20162017 and 2017;2018; the 20172018 non-same store property count was 1413 compared to 85 properties for the 20162017 period. The results of operations for theseacquired properties have been included in our consolidated statements of operations from the date of acquisition.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Same store NOI foracquisition and the nine months ended September 30, 2017 increased by 4.3% to $16.9 million from $16.2 million for the 2016 period. There was a 3.6% increase in same store property revenues as compared to the 2016 period, primarily attributable to a 3.6% increase in average rental rates, offset by a 41 basis point decrease in average occupancy. Same store expenses for the nine months ended September 30, 2017 increased 2.7% to $11.0 million from $10.7 million for the 2016 period.
Property revenues and property expenses for our non-same store properties increased significantly due to the properties acquired during 2016 and 2017; the 2017 non-same store property count was 16 compared to 7 properties for the 2016 period. The results of operations for thesedisposed properties have been included in ourexcluded from the consolidated statementsstatement of operations fromsince the date of acquisition.disposition.
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Net Operating Income
We believe that net operating income (“NOI”), is a useful measure of our operating performance. We define NOI as total property revenues less total property operating expenses, excluding depreciation and amortization and interest. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs. NOI also is a computation made by analysts and investors to measure a real estate company's operating performance.
We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. We use NOI to evaluate our performance on a same store and non-same store basis because NOI allows us to evaluate the operating performance of our properties because it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance and captures trends in rental housing and property operating expenses.
| 35 |
However, NOI should only be used as an alternative measure of our financial performance. The following table reflects net income (loss)loss attributable to common stockholders together with a reconciliation to NOI and to same store and non-same store contributions to consolidated NOI, as computed in accordance with GAAP for the periods presented (amounts in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) income attributable to common stockholders | $ | (12,017 | ) | $ | (2,551 | ) | $ | 563 | $ | (11,727 | ) | |||||
| Add pro-rata share: | ||||||||||||||||
| Depreciation and amortization | 10,771 | 6,197 | 29,900 | 19,436 | ||||||||||||
| Amortization of non-cash interest expense | 245 | 472 | 1,491 | 620 | ||||||||||||
| Property management fees | 773 | 587 | 2,227 | 1,635 | ||||||||||||
| Management fees | 2,773 | 1,839 | 11,609 | 4,430 | ||||||||||||
| Acquisition and pursuit costs | 15 | 619 | 3,039 | 1,993 | ||||||||||||
| Loss on early extinguishment of debt | - | 2,269 | 1,534 | 2,269 | ||||||||||||
| Corporate operating expenses | 1,091 | 1,169 | 4,203 | 4,101 | ||||||||||||
| Management internalization process expense | 818 | - | 1,629 | - | ||||||||||||
| Weather-related losses, net | 635 | - | 635 | - | ||||||||||||
| Preferred dividends | 6,966 | 3,883 | 19,066 | 8,268 | ||||||||||||
| Preferred stock accretion | 896 | 271 | 1,870 | 560 | ||||||||||||
| Less pro-rata share: | ||||||||||||||||
| Other income | - | 26 | 16 | 26 | ||||||||||||
| Preferred returns and equity in income of unconsolidated real estate joint ventures | 2,663 | 3,030 | 7,783 | 8,491 | ||||||||||||
| Interest income from related parties | 2,099 | - | 5,680 | - | ||||||||||||
| Gain on sale of real estate joint venture interest, net | - | - | 6,332 | - | ||||||||||||
| Gain on sale of real estate investments | - | 4,876 | 33,945 | 4,876 | ||||||||||||
| Pro-rata share of properties' income | 8,204 | 6,823 | 24,010 | 18,192 | ||||||||||||
| Add: | ||||||||||||||||
| Noncontrolling interest pro-rata share of property income | 555 | 1,128 | 2,673 | 3,224 | ||||||||||||
| Total property income | 8,759 | 7,951 | 26,683 | 21,416 | ||||||||||||
| Add: | ||||||||||||||||
| Interest expense, net | 7,215 | 4,730 | 20,375 | 13,381 | ||||||||||||
| Net operating income | 15,974 | 12,681 | 47,058 | 34,797 | ||||||||||||
| Less: | ||||||||||||||||
| Non-same store net operating income | 8,773 | 5,435 | 30,186 | 18,616 | ||||||||||||
| Same store net operating income | $ | 7,201 | $ | 7,246 | $ | 16,872 | $ | 16,181 | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss attributable to common shares | $ | (9,425 | ) | $ | (4,990 | ) | ||
| Add back: Net loss attributable to operating partnership units | (2,675 | ) | (56 | ) | ||||
| Net loss attributable to common shares and units | (12,100 | ) | (5,046 | ) | ||||
| Add common stockholders and operating partnership units pro-rata share of: | ||||||||
| Depreciation and amortization | 14,831 | 9,914 | ||||||
| Non-real estate depreciation and amortization | 64 | - | ||||||
| Amortization of non-cash interest expense | 461 | 478 | ||||||
| Property management fees | 939 | 649 | ||||||
| Management fees | - | 2,768 | ||||||
| Acquisition and pursuit costs | 43 | 3,040 | ||||||
| Corporate operating expenses | 4,669 | 1,449 | ||||||
| Management internalization | - | 481 | ||||||
| Weather-related losses, net | 165 | - | ||||||
| Preferred dividends | 8,248 | 5,851 | ||||||
| Preferred stock accretion | 1,112 | 338 | ||||||
| Less common stockholders and operating partnership units pro-rata share of: | ||||||||
| Preferred returns and equity in income of unconsolidated real estate joint ventures | 2,461 | 2,572 | ||||||
| Interest income from related parties | 5,196 | 1,523 | ||||||
| Gain on sale of real estate investments | - | 7,481 | ||||||
| Pro-rata share of properties' income | 10,775 | 8,346 | ||||||
| Add: | ||||||||
| Noncontrolling interest pro-rata share of partially owned property income | 607 | 1,086 | ||||||
| Total property income | 11,382 | 9,432 | ||||||
| Add: | ||||||||
| Interest expense | 9,635 | 6,609 | ||||||
| Net operating income | 21,017 | 16,041 | ||||||
| Less: | ||||||||
| Non-same store net operating income | 8,830 | 4,262 | ||||||
| Same store net operating income | $ | 12,187 | $ | 11,779 | ||||
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements. Our primary short-term liquidity requirements relate to (a) our operating expenses and other general business needs, (b) distributions to our stockholders, (c) committed investments and capital requirements to fund development and renovations at existing properties, and (d) ongoing commitments to repay borrowings, including our maturing short-term debt.debt, and (e) Class A common stock repurchases under our stock repurchase program.
We believe the properties underlying itsour real estate investments are performing well. We had a portfolio-wide debt service coverage ratio of 1.98x1.99x and occupancy of 94%, exclusive of our development properties, at September 30, 2017.
Subsequent to September 30, 2017, the Company, through its Operating Partnership, entered into a credit agreement (the “Senior Credit Facility”) with KeyBank National Association (“KeyBank”) and other lenders. The Senior Credit Facility provides for an initial loan commitment amount of $150 million, which commitment contains an accordion feature up to a maximum commitment of up to $250 million. The availability of borrowings will be based on the value of a pool of collateral properties and compliance with various ratios related to those assets. In addition, we have begun negotiating an additional bank credit facility pursuant to a non-binding term sheet, and we believe this facility will enable us to deploy our capital more efficiently and provide capital structure flexibility as we continue raising capital through our Series B continuous offering. No definitive agreements have been entered into and we provide no assurances that we will enter into this credit facility.March 31, 2018.
In general, we believe our available cash balances, the proceeds from theour continuous offering of Series B preferred stock continuous offering,Preferred Stock, the Senior Credit Facility, the Junior Credit Facility, other financing arrangements and cash flows from operations will be sufficient to fund our liquidity requirements with respect to our existing portfolio for the next 12 months. We expect that properties added to our portfolio with the proceeds from the Follow-On Offerings,continuous offering of Series B Preferred Stock and the properties we expect to acquire with the proceeds from our Series B preferred stock continuous offering and from our recent property sales,credit facilities, will have a significant positive impact on our future results of operations. In general, we expect that our results related to our portfolio will improve in future periods as a result of anticipated future investments in and acquisitions of real estate, including our investments in development projects.
We believe we will be able to meet our primary liquidity requirements going forward through:
| 36 |
| $ |
| cash generated from operating activities; and |
| • | proceeds from future borrowings and potential offerings, including potential offerings of common and preferred stock through underwritten offerings, our continuous Series B Preferred Stock Offering, |
Our primary long-term liquidity requirements relate to (a) costs for additional apartment community investments; (b) repayment of long-term debt;debt and our credit facilities; (c) capital expenditures; and (d) cash redemption requirements related to our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.Stock, and (e) Class A common stock repurchases under our stock repurchase program.
In February 2018, we announced a stock repurchase program to purchase up to $25 million of our outstanding shares of Class A common stock over a period of one year. We purchased 530,693 shares of Class A common stock during the three months ended March 31, 2018 for a total purchase price of $4.2 million.
We intend to finance our long-term liquidity requirements with net proceeds of additional issuances of common and preferred stock, including our Series B Preferred Stock, the Senior Credit Facility,our credit facilities, as well as future borrowings. We entered into the Senior Credit Facility on October 4, 2017, and we believe this facility will enable us to deploy our capital more efficiently and provide capital structure flexibility as we grow our asset base. Our success in meeting these requirements will therefore depend upon our ability to access capital. Further, our ability to access equity capital is dependent upon, among other things, general market conditions for REITs and the capital markets generally, market perceptions about us and our asset class, and current trading prices of our securities.
We may also selectively sell assets at appropriate times, which would be expected to generate cash sources for both our short-term and long-term liquidity needs.
We may also meet our long-term liquidity needs through borrowings from a number of sources, either at the corporate or project level. We entered into the Senior Credit Facility on October 4, 2017, and the Junior Credit Facility on March 20, 2018, and we believe these facilities will enable us to deploy our capital more efficiently and provide capital structure flexibility as we grow our asset base. Additionally, we instituted the Fannie Facility, under which we closed our first property on April 30, 2018. We expect the combination of these facilities to provide us flexibility by allowing us, among other things, to use borrowing under our Senior Credit Facility and Junior Credit Facility to acquire properties pending placement of permanent mortgage indebtedness, including under the Fannie Facility. We will continue to monitor the debt markets, including Fannie Mae and Freddie Mac, and as market conditions permit, access borrowings that are advantageous to us.
We intend to continue to use prudent amounts of leverage in making our investments, which we define as having total indebtedness of approximately 65% of the fair market value of the properties in which we have invested as determined by our Manager.invested. For purposes of calculating our leverage, we assume full consolidation of all our real estate investments, whether or not they would be consolidated under GAAP, include assets we have classified as held for sale, and include any joint venture level indebtedness in our total indebtedness. However, we are not subject to any limitations on the amount of leverage we may use, and accordingly, the amount of leverage we use may be significantly less or greater than we currently anticipate. We expect our leverage to decline commensurately as we execute our business plan to grow our net asset value.
If we are unable to obtain financing on favorable terms or at all, we would likely need to curtail our investment activities, including acquisitions and improvements to and developments of, real properties, which could limit our growth prospects. This, in turn, could reduce cash available for distribution to our stockholders and may hinder our ability to raise capital by issuing more securities or borrowing more money. We also may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and Investment Company Act exemption.
We expect to maintain a distribution paid to our Series A Preferred Stock, our Series B Preferred Stock, our Series C Preferred Stock and our Series D Preferred Stock in accordance with the terms of those securities which require monthly or quarterly dividends depending on the series. On August 4,December 20, 2017, thewe announced that our board of directors announced that it initiated, in conjunction with a financial advisor, a comprehensive review ofrevised the appropriate dividend policy for the Company's Class A Common Stock.Stock and set an annual dividend rate of $0.65 per share. The board'sboard’s evaluation will considerconsidered a number of factors including, but not limited to, achieving a sustainable dividend covered by current recurring AFFO (vs. pro forma AFFO), multifamily and small cap peer dividend rates multifamily and small cap peer payout ratios, providing financial flexibility for the Company, and achieving an appropriate balance between the retention of capital to invest and grow net asset value and the importance of current distributions. The board is expected to complete its review of the dividend policy for the Company's Class A Common Stock in the fourth quarter of 2017. Currently, the Company maintains a distribution paid on a monthly basis to all of our Class A common stockholders at a quarterly rate of $0.29 per share. In August 2017, we announced that our Board is undertaking a review of our dividend policy, and that the 2018 annual dividend range for our Class A Common Stock would likely be between $0.65 and $0.75 per Class A common share. While our policy is generally to pay distributions from cash flow from operations, our distributions through September 30, 2017March 31, 2018 have been paid from cash flow from operations, proceeds from our continuous registered public offering, proceeds from the IPO and Follow-On Offerings, and sales of assets and may in the future be paid from additional sources, such as from borrowings.
Since June 30, 2015, we have paid our base management fees and incentive fees in LTIPs in lieu of cash. In conjunction with the internalization,Internalization, we will no longer be responsible for paying the base management fee or incentive fee, to the extent that we will be paying additional general and administrative expenses in replacement thereof, they will be paid in cash.cash or LTIP Units.
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Off-Balance Sheet Arrangements
As of September 30, 2017,March 31, 2018, we did not have any off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. As of September 30, 2017,March 31, 2018, we own interests in nineeleven joint ventures that are accounted for under the equity method as we exercise significant influence over, but do not control, the investee.
Cash Flows from Operating Activities
As of September 30, 2017,March 31, 2018, we owned indirect equity interests in thirty-fiveforty real estate properties, (twenty-fivetwenty-nine consolidated operating properties and ten development properties), twenty-six of which are consolidated for reporting purposes.eleven through preferred equity and mezzanine loan investments. During the ninethree months ended September 30, 2017,March 31, 2018, net cash provided by operating activities was $33.3$6.1 million. After the net incomeloss of $40.1$3.0 million was reducedadjusted for $21.1$16.1 million of non-cash items, net cash provided by operating activities consisted of the following:
Cash Flows from Investing Activities
During the ninethree months ended September 30, 2017,March 31, 2018, net cash used in investing activities was $230.0$87.0 million, primarily due to the following:
| $ |
| • | $ |
| • | $ |
Cash Flows from Financing Activities
During the ninethree months ended September 30, 2017,March 31, 2018, net cash provided by financing activities was $249.3$73.2 million, primarily due to the following:
| net borrowings of |
net proceeds of $48.0 million from revolving credit facilities;
| net proceeds of |
| • | $ |
| partially offset by |
| • | $ | |
| • | $2.3 million paid in cash distributions paid to common stockholders; |
| • | $ |
| • | $ |
| • | $ |
| • | $ |
| 38 |
Capital Expenditures
The following table summarizes our total capital expenditures for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 (amounts in thousands):
| For the nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| New development | $ | 21,019 | $ | — | ||||
| Redevelopment/renovations | 10,178 | 2,540 | ||||||
| Routine capital expenditures | 2,328 | 1,452 | ||||||
| Total capital expenditures | $ | 33,525 | $ | 3,992 | ||||
| For the three months ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| New development | $ | 72 | $ | 5,702 | ||||
| Redevelopment/renovations | 3,056 | 3,910 | ||||||
| Routine capital expenditures | 1,032 | 626 | ||||||
| Total capital expenditures | $ | 4,160 | $ | 10,238 | ||||
We define redevelopment and renovation costs as non-recurring capital expenditures for significant projects that upgrade units or common areas and projects that are revenue enhancing for the ninethree months ended September 30, 2017.March 31, 2018. We define routine capital expenditures as capital expenditures that are incurred at every property and exclude development, investment, revenue enhancing and non-recurring capital expenditures.
Funds from Operations and Adjusted Funds from Operations Attributable to Common Stockholders
Funds from operations attributable to common stockholdersshares and units (“FFO”), is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We consider FFO to be an appropriate supplemental measure of our operating performance as it is based on a net income analysis of property portfolio performance that excludes non-cash items such as depreciation. 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. Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT, using historical accounting for depreciation, could be less informative. We define FFO, consistent with the National Association of Real Estate Investment Trusts, or NAREIT's,“NAREIT's”, definition, as net income, computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization of real estate assets, plus impairment write-downs of depreciable real estate, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect FFO on the same basis.
In addition to FFO, we use adjusted funds from operations attributable to common stockholdersshares and units (“AFFO”). AFFO is a computation made by analysts and investors to measure a real estate company's operating performance by removing the effect of items that do not reflect ongoing property operations. In computing AFFO, we further adjust FFO by adding back certain items that are not added to net income in NAREIT's definition of FFO, such as acquisition and pursuit costs, equity based compensation expenses, and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of our properties, and subtracting recurring capital expenditures (and when calculating the quarterly incentive fee payable to our former Manager only, we further adjust FFO to include any realized gains or losses on our real estate investments).
During the nine months ended September 30, 2017, we incurred $3.2 million of acquisition and pursuit expense and $3.7 million of disposition expense, of which $2.5 million and $3.1 million, respectively, was our pro rata share of the expense. We incurred $2.1 million of acquisition and pursuit expense and $0.4 million of disposition expense during the nine months ended September 30, 2016, of which $2.5 million was our pro-rata share of expense. The Company adopted ASU 2017-01 which resulted in the capitalization of costs incurred in asset acquisitions purchased after the effective date of January 1, 2017.
Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance after adjustment for certain non-cash items, such as depreciation and amortization expenses, and acquisition and pursuit costs that are required by GAAP to be expensed but may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our stockholders with an additional useful measure to compare our financial performance to certain other REITs. We also use AFFO for purposes of determining the quarterly incentive fee, if any, payable to our former Manager.
Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
We have acquired interests in thirteeneleven additional operating properties and three development investments, and sold fivethree properties subsequent to September 30, 2016.March 31, 2017. The results presented in the table below are not directly comparable and should not be considered an indication of our future operating performance.
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The table below presents our calculation of FFO and AFFO for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net (loss) income attributable to common stockholders | $ | (12,017 | ) | $ | (2,551 | ) | $ | 563 | $ | (11,727 | ) | |||||
| Common stockholders pro-rata share of: | ||||||||||||||||
| Real estate depreciation and amortization(1) | 10,771 | 6,197 | 29,900 | 19,436 | ||||||||||||
| Gain on sale of real estate investments | — | (4,876 | ) | (33,945 | ) | (4,876 | ) | |||||||||
| Gain on sale of real estate joint venture interests, net | — | — | (6,332 | ) | — | |||||||||||
| FFO Attributable to Common Stockholders | $ | (1,246 | ) | $ | (1,230 | ) | $ | (9,814 | ) | $ | 2,833 | |||||
| Common stockholders pro-rata share of: | ||||||||||||||||
| Amortization of non-cash interest expense | 245 | 472 | 1,491 | 620 | ||||||||||||
| Acquisition and pursuit costs | 15 | 619 | 3,039 | 1,993 | ||||||||||||
| Management internalization process expense | 818 | — | 1,629 | — | ||||||||||||
| Loss on early extinguishment of debt | — | 2,269 | 1,534 | 2,269 | ||||||||||||
| Weather-related losses, net | 635 | — | 635 | — | ||||||||||||
| Non-recurring income | — | — | (16 | ) | — | |||||||||||
| Non-cash preferred returns and equity in income of unconsolidated real estate joint ventures | (493 | ) | — | (980 | ) | — | ||||||||||
| Normally recurring capital expenditures(2) | (387 | ) | (239 | ) | (1,011 | ) | (656 | ) | ||||||||
| Preferred stock accretion | 896 | 271 | 1,870 | 560 | ||||||||||||
| Non-cash equity compensation | 2,900 | 2,382 | 12,912 | 6,600 | ||||||||||||
| Non-recurring equity in income of unconsolidated joint ventures | — | (231 | ) | — | (231 | ) | ||||||||||
| AFFO Attributable to Common Stockholders | $ | 3,383 | $ | 4,313 | $ | 11,289 | $ | 13,988 | ||||||||
| FFO Attributable to Common Stockholders per share | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.38 | ) | $ | 0.14 | |||||
| AFFO Attributable to Common Stockholders per share | $ | 0.13 | $ | 0.21 | $ | 0.44 | $ | 0.68 | ||||||||
| Weighted average common shares outstanding | 26,474,344 | 20,909,727 | 25,852,059 | 20,711,836 | ||||||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss attributable to common shares | $ | (9,425 | ) | $ | (4,990 | ) | ||
Add back: Net loss attributable to operating partnership units | (2,675 | ) | (56 | ) | ||||
Net loss attributable to common shares and units | (12,100 | ) | (5,046 | ) | ||||
Common stockholders and operating partnership units pro-rata share of: | ||||||||
| Real estate depreciation and amortization | 14,831 | 9,914 | ||||||
| Gain on sale of real estate investments | — | (7,481 | ) | |||||
FFO Attributable to Common Shares and Units | 2,731 | (2,613 | ) | |||||
| Common stockholders and noncontrolling interests – operating partnership units pro-rata share of: | ||||||||
| Amortization of non-cash interest expense | 461 | 478 | ||||||
| Acquisition and pursuit costs | 43 | 3,040 | ||||||
| Management internalization | — | 481 | ||||||
| Non-real estate depreciation and amortization(1) | 64 | — | ||||||
| Weather-related losses, net | 165 | — | ||||||
| Non-cash preferred returns and equity in income of unconsolidated real estate joint ventures | (231 | ) | — | |||||
| Normally recurring capital expenditures(2) | (517 | ) | (294 | ) | ||||
| Preferred stock accretion | 1,112 | 338 | ||||||
| Non-cash equity compensation | 1,780 | 3,201 | ||||||
AFFO Attributable to Common Shares and Units | $ | 5,608 | $ | 4,631 | ||||
FFO Attributable toCommon Shares and Units - diluted | $ | 0.09 | $ | (0.10 | ) | |||
AFFO Attributable toCommon Shares and Units - diluted | $ | 0.18 | $ | 0.18 | ||||
Weighted average common shares and units outstanding - diluted | 30,995,775 | 25,273,480 | ||||||
(1) The real estate depreciation and amortization amount includes our share of consolidated real estate-related depreciation and amortization of intangibles, less amounts attributable to noncontrolling interests for partially owned properties, and our similar estimated share of unconsolidated depreciation and amortization, which is included in earnings of our unconsolidated real estate joint venture investments.
(2) Normally recurring capital expenditures exclude development, investment, revenue enhancing and non-recurring capital expenditures.
Subsequent to issuing our Form 10-K for the year ended December 31, 2017, we revised our presentation of AFFO attributable to common stockholders to reflect AFFO attributable to common shares and units. The weighted average diluted shares and units outstanding used to calculate AFFO per share now includes noncontrolling interests – operating partnership units. As our presentation now includes the impact of AFFO attributable to operating partnership units, and as shares and units are treated on a one-for-one basis, there is no change to AFFO per share. We have modified our presentation of FFO and AFFO for the three months ended March 31, 2017 to conform to the revised presentation.
Operating cash flow, FFO and AFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and AFFO, such as tenant improvements, building improvements and deferred leasing costs.
Presentation of this information is intended to assist the reader in comparing the sustainability of the operating performance of different REITs, although it should be noted that not all REITs calculate FFO or AFFO the same way, so comparisons with other REITs may not be meaningful. FFO or AFFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to make distributions. Both FFO and AFFO should be reviewed in connection with other GAAP measurements.
| 40 |
Contractual Obligations
The following table summarizes our contractual obligations as of September 30, 2017March 31, 2018 (in thousands) which consisted of mortgage notes secured by our properties.properties and revolving credit facilities. At September 30, 2017,March 31, 2018, our estimated future required payments on these obligations were:
| Remainder of | Remainder of | |||||||||||||||||||||||||||||||||||||||
| Total | 2017 | 2018-2019 | 2020-2021 | Thereafter | Total | 2018 | 2019-2020 | 2021-2022 | Thereafter | |||||||||||||||||||||||||||||||
| Mortgages Payable (Principal) | $ | 853,565 | $ | 738 | $ | 11,738 | $ | 47,400 | $ | 793,689 | $ | 985,189 | $ | 3,668 | $ | 39,089 | $ | 126,135 | $ | 816,297 | ||||||||||||||||||||
| Revolving Credit Facilities | 99,165 | - | 99,165 | - | - | |||||||||||||||||||||||||||||||||||
| Estimated Interest Payments on Mortgage Notes Payable, Unsecured Term Loans and Senior Unsecured Notes | 191,481 | 7,560 | 62,061 | 59,506 | 62,354 | 232,163 | 31,947 | 81,023 | 71,762 | 47,431 | ||||||||||||||||||||||||||||||
| Total | $ | 1,045,046 | $ | 8,298 | $ | 73,799 | $ | 106,906 | $ | 856,043 | $ | 1,316,517 | $ | 35,615 | $ | 219,277 | $ | 197,897 | $ | 863,728 | ||||||||||||||||||||
Estimated interest payments are based on the stated rates for mortgage notes payable assuming the interest rate in effect for the most recent quarter remains in effect through the respective maturity dates.
Distributions
Declaration Date | Payable to stockholders of record as of |
Amount |
Date Paid | |||||
| Class A common stock | ||||||||
| October 4, 2016 | December 23, 2016 | $ | 0.096667 | January 5, 2017 | ||||
| January 6, 2017 | January 25, 2017 | $ | 0.096666 | February 3, 2017 | ||||
| January 6, 2017 | February 24, 2017 | $ | 0.096667 | March 3, 2017 | ||||
| January 6, 2017 | March 24, 2017 | $ | 0.096667 | April 5, 2017 | ||||
| April 7, 2017 | April 25, 2017 | $ | 0.096666 | May 5, 2017 | ||||
| April 7, 2017 | May 25, 2017 | $ | 0.096667 | June 5, 2017 | ||||
| April 7, 2017 | June 23, 2017 | $ | 0.096667 | July 5, 2017 | ||||
| July 10, 2017 | July 25, 2017 | $ | 0.096666 | August 4, 2017 | ||||
| August 9, 2017 | August 24, 2017 | $ | 0.096667 | September 5, 2017 | ||||
| August 9, 2017 | September 25, 2017 | $ | 0.096667 | October 5, 2017 | ||||
| Series A Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.515625 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.515625 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.515625 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.515625 | October 5, 2017 | ||||
| Series B Preferred Stock | ||||||||
| October 4, 2016 | December 23, 2016 | $ | 5.00 | January 5, 2017 | ||||
| January 6, 2017 | January 25, 2017 | $ | 5.00 | February 3, 2017 | ||||
| January 6, 2017 | February 24, 2017 | $ | 5.00 | March 3, 2017 | ||||
| January 6, 2017 | March 24, 2017 | $ | 5.00 | April 5, 2017 | ||||
| April 7, 2017 | April 25, 2017 | $ | 5.00 | May 5, 2017 | ||||
| April 7, 2017 | May 25, 2017 | $ | 5.00 | June 5, 2017 | ||||
| April 7, 2017 | June 23, 2017 | $ | 5.00 | July 5, 2017 | ||||
| July 10, 2017 | July 25, 2017 | $ | 5.00 | August 4, 2017 | ||||
| July 10, 2017 | August 24, 2017 | $ | 5.00 | September 5, 2017 | ||||
| July 10, 2017 | September 25, 2017 | $ | 5.00 | October 5, 2017 | ||||
| Series C Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.4765625 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.4765625 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.4765625 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.4765625 | October 5, 2017 | ||||
| Series D Preferred Stock | ||||||||
| December 9, 2016 | December 23, 2016 | $ | 0.3859 | January 5, 2017 | ||||
| March 10, 2017 | March 24, 2017 | $ | 0.4453125 | April 5, 2017 | ||||
| June 9, 2017 | June 23, 2017 | $ | 0.4453125 | July 5, 2017 | ||||
| September 8, 2017 | September 25, 2017 | $ | 0.4453125 | October 5, 2017 | ||||
| Declaration Date | Payable to stockholders of record as of | Amount | Date Paid | |||||||
| Class A Common Sock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 0.096667 | January 5, 2018 | ||||||
| December 20, 2017 | March 23, 2018 | $ | 0.162500 | April 5, 2018 | ||||||
| Class C Common Stock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 0.096667 | January 5, 2018 | ||||||
| December 20, 2017 | March 23, 2018 | $ | 0.162500 | April 5, 2018 | ||||||
| Series A Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.515625 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.515625 | April 5, 2018 | ||||||
| Series B Preferred Stock | ||||||||||
| October 13, 2017 | December 22, 2017 | $ | 5.00 | January 5, 2018 | ||||||
| January 12, 2018 | January 25, 2018 | $ | 5.00 | February 5, 2018 | ||||||
| January 12, 2018 | February 23, 2018 | $ | 5.00 | March 5, 2018 | ||||||
| January 12, 2018 | March 23, 2018 | $ | 5.00 | April 5, 2018 | ||||||
| Series C Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.4765625 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.4765625 | April 5, 2018 | ||||||
| Series D Preferred Stock | ||||||||||
| December 8, 2017 | December 22, 2017 | $ | 0.4453125 | January 5, 2018 | ||||||
| March 9, 2018 | March 23, 2018 | $ | 0.4453125 | April 5, 2018 | ||||||
A portion of each dividend may constitute a return of capital for tax purposes. There is no assurance that the Company will continue to declare dividends or at this rate.
Our Board will determine the amount of dividends to be paid to our stockholders. The Board’s determination will be based on a number of factors, including funds available from operations, our capital expenditure requirements and the annual distribution requirements necessary to maintain our REIT status under the Internal Revenue Code. 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. Especially during the early stages of our operations, we may declare distributions in excess of funds from operations.
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Distributions paid for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively, were funded from cash provided by operating activities except with respect to $9.6$5.5 million and $4.0 million for the ninethree months ended September 30,March 31, 2018 and 2017, respectively, which was funded from sales of real estate, borrowings, and/or proceeds from our equity offerings.
| Nine Months Ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| (In thousands) | ||||||||
| Cash provided by operating activities | $ | 33,261 | $ | 24,260 | ||||
| Cash distributions to preferred shareholders | $ | (18,550 | ) | $ | (5,647 | ) | ||
| Cash distributions to common shareholders | (22,235 | ) | (18,223 | ) | ||||
| Cash distributions to noncontrolling interests, excluding $27.9 million from sale of real estate investments | (2,031 | ) | (2,844 | ) | ||||
| Total distributions | (42,816 | ) | (26,714 | ) | ||||
| (Shortfall) excess | $ | (9,555 | ) | $ | (2,454 | ) | ||
| Proceeds from sale of joint venture interests | $ | 17,603 | $ | — | ||||
| Proceeds from sale of real estate assets | — | $ | 36,675 | |||||
| Proceeds from sale of real estate investments, net of noncontrolling distribution of $27.9 million | $ | 44,028 | $ | — | ||||
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| (In thousands) | ||||||||
| Cash provided by operating activities | $ | 6,102 | $ | 9,723 | ||||
| Cash distributions to preferred shareholders | $ | (8,143 | ) | $ | (5,552 | ) | ||
| Cash distributions to common shareholders | (2,348 | ) | (7,130 | ) | ||||
| Cash distributions to noncontrolling interests, excluding $14.7 million from sale of real estate investments in 2017 | (1,146 | ) | (1,017 | ) | ||||
| Total distributions | (11,637 | ) | (13,699 | ) | ||||
| Shortfall | $ | (5,535 | ) | $ | (3,976 | ) | ||
| Proceeds from sale of real estate investments, net of noncontrolling distribution of $14.7 million in 2017 | $ | - | $ | 13,916 | ||||
Significant Accounting Policies and Critical Accounting Estimates
Our significant accounting policies and critical accounting estimates are disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162017 and Note 2 “Basis of Presentation and Summary of Significant Accounting Policies” to the interim Consolidated Financial Statements.
Subsequent Events
Other than the items disclosed in Note 13,14, “Subsequent Events” to our interim Consolidated Financial Statements for the period ended September 30, 2017,March 31, 2018, no material events have occurred that required recognition or disclosure in these financial statements. See Note 1314 to our interim Consolidated Financial Statements for discussion.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate risk primarily through borrowing activities. There is inherent roll-over risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. We are not subject to foreign exchange rates or commodity price risk, and all of our financial instruments were entered into for other than trading purposes.
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal payments and the weighted average interest rates on outstanding debt, by year of expected maturity, to evaluate the expected cash flows and sensitivity to interest rate changes.
($ in thousands)
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
| Mortgage Notes Payable | $ | 738 | $ | 4,086 | $ | 7,652 | $ | 35,227 | $ | 12,173 | $ | 793,689 | $ | 853,565 | ||||||||||||||
| Average Interest Rate | 3.87 | % | 3.62 | % | 3.61 | % | 3.62 | % | 3.65 | % | 3.61 | % | 3.61 | % | ||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | ||||||||||||||||||||||
| Mortgage Notes Payable | $ | 3,668 | $ | 8,017 | $ | 31,072 | $ | 14,050 | $ | 112,085 | $ | 816,297 | $ | 985,189 | ||||||||||||||
| Average Interest Rate | 3.83 | % | 3.84 | % | 3.59 | % | 3.85 | % | 3.72 | % | 3.86 | % | 3.84 | % | ||||||||||||||
| Revolving Credit Facilities | - | $ | 21,116 | $ | 78,049 | - | - | - | $ | 99,165 | ||||||||||||||||||
| Average Interest Rate | - | 5.86 | % | 3.97 | % | - | - | - | 4.37 | % | ||||||||||||||||||
The fair value (in thousands) is estimated at $856.0$975.9 million for mortgages payable as of September 30, 2017.March 31, 2018.
The table above incorporates those exposures that exist as of September 30, 2017;March 31, 2018; it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during the period and interest rates.
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As of September 30, 2017,March 31, 2018, a 100 basis point increase or decrease in interest rates on the portion of our debt bearing interest at variable rates would result in an increase or decrease in interest expense of approximately $1.0 million$1,250,000 or decrease by $1,268,000, respectively, for the quarter ended September 30, 2017.March 31, 2018.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer and Chief AccountingFinancial Officer, evaluated, as of September 30, 2017,March 31, 2018, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our Chief Executive Officer and Chief AccountingFinancial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017,March 31, 2018, to provide reasonable assurance that information required to be disclosed by us in this report filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the Chief Executive Officer and Chief AccountingFinancial Officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the three months ended September 30, 2017March 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| 43 |
None.
Other than the following, there have been no material changes to our potential risks and uncertainties presented in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the twelve months ended December 31, 20162017 filed with the SEC on February 22, 2017.March 13, 2018.
Your interests could be diluted by the incurrence of additional debt, the issuance of additional shares of preferred stock, including additional shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock (together the “Preferred Stock”) and by other transactions.
As of September 30, 2017,March 31, 2018, our total long-term indebtedness was approximately $853.6$1,084 million, and we may incur significant additional debt in the future. The Preferred Stock is subordinate to all of our existing and future debt and liabilities and those of our subsidiaries. Our future debt may include restrictions on our ability to pay dividends to preferred stockholders in the event of a default under the debt facilities or under other circumstances. Our charter currently authorizes the issuance of up to 250,000,000 shares of preferred stock in one or more classes or series, and as of the date of this filing, we have issued 5,721,460 shares of Series A Preferred Stock, (146,460 of which have been issued in the Series A ATM Offering), 151,610203,217 shares of Series B Preferred Stock, 2,323,750 shares of Series C Preferred Stock and 2,850,602 shares of Series D Preferred Stock. The issuance of additional preferred stock on parity with or senior to the Preferred Stock would dilute the interests of the holders of shares of Preferred Stock, and any issuance of preferred stock senior to the Preferred Stock or of additional indebtedness could affect our ability to pay dividends on, redeem or pay the liquidation preference on the Preferred Stock. We may issue preferred stock on parity with the Preferred Stock without the consent of the holders of the Preferred Stock. Other than the Asset Coverage Ratio, our letter agreement with Cetera Financial Group, Inc. pertaining to our Series B Preferred Stock that requires us to maintain a preferred dividend coverage ratio and the right of holders to cause us to redeem the Series A Preferred Stock and Series C Preferred Stock upon a Change of Control/Delisting, none of the provisions relating to the Preferred Stock relate to or limit our indebtedness or afford the holders of shares of Preferred Stock protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets or business, that might adversely affect the holders of shares of Preferred Stock.
Risks Relating to the Internalization Transaction
The Issuances of shares of our Class C Common Stock in connection with the Internalization, and the Issuances of shares of our Class A Common Stock upon redemption of OP Units and/or conversion of shares of our Class C Common Stock issued in connection with the Internalization, will have a dilutive effect and will reduce the voting power and relative percentage interests of current holders of our Class A Common Stockholders in our earnings and market value.
The issuance of 76,603 shares of our Class C Common Stock in connection with the Internalization will have a dilutive effect and will reduce the voting power and relative percentage interests of current Class A Common Stockholders in our earnings and market value.
Additionally, part of the Internalization Consideration consists of 3,753,593 OP Units, which may have a dilutive effect on the voting power and percentage interests of our current Class A Common Stockholders. Commencing on the one-year anniversary of the Closing, each OP Unit may be tendered for redemption, at the holder’s option and subject to the terms and conditions set forth in the limited partnership agreement of our Operating Partnership, for cash equal to the average closing price of Class A Common Stock for the ten (10) consecutive trading days immediately preceding the date we receive a notice of redemption, or, at our sole option, for shares of Class A Common Stock on a one-for-one basis, in lieu of cash. If the recipients of OP Units in the Internalization exercise their redemption rights and part or all of their outstanding OP Units are redeemed for shares of our Class A Common Stock, such redemption will have a dilutive effect on our common stock and reduce the relative percentage interests of existing common stockholders in our earnings, voting power and market value.
Future sales of our Class A Common Stock by the Contributors may adversely affect the market price of our Class A Common Stock. These sales also might make it more difficult for us to sell equity securities in the future at a time and price we deem appropriate. Upon consummation of the Internalization, our Operating Partnership will issue a number of OP Units to the Contributors as Internalization Consideration, which OP Units may be redeemed in shares of our Class A Common Stock rather than cash, at the Company’s option. In addition, shares of Class C Common Stock will be convertible, at the holder’s option (at any time and from time to time), into one (1) fully-paid and non-assessable share of our Class A Common Stock, and upon the occurrence of certain transfers of OP Units or shares of Class C Common Stock and similar events, will convert automatically into one (1) fully-paid and non-assessable share of our Class A Common Stock. Sales of a substantial number of shares of our Class A Common Stock by the Contributors, the perception or expectation that such sales may occur, or sales of shares of our Class A Common Stock to cover tax obligations (some of which may occur shortly after the closing of the Internalization), could have a material adverse effect on our business, financial condition, results of operations and the prevailing market price for shares of our Class A Common Stock.
The Internalization was negotiated between the Special Committee, which is comprised solely of independent and disinterested members of our board of directors, the Manager, which is affiliated with certain of our officers and directors, and the Contributors, including R. Ramin Kamfar, our Chairman, President and Chief Executive Officer, Gary Kachadurian, one of our directors, and certain other officers.
The Internalization was negotiated with the Manager, which is affiliated with certain of our officers and directors, and the Contributors, including Messrs. Kamfar and Kachadurian, Michael L. Konig, our General Counsel and Secretary, and Christopher A. Vohs, our Chief Accounting Officer and Treasurer. As a result, those officers and directors may have different interests than the Company as a whole. This potential conflict would not exist in the case of a transaction negotiated with unaffiliated third parties. Moreover, if the Manager or any Contributor breaches any of the representations, warranties or covenants made by it in the Contribution Agreement, we may choose not to enforce, or to enforce less vigorously, our rights because of our desire to maintain our ongoing relationship with the Manager, the Contributors and the interests of certain of our directors and officers. Moreover, the representations, warranties, covenants and indemnities in the Contribution Agreement are subject to limitations and qualifiers, which may also limit our ability to enforce any remedy under the Contribution Agreement.
Certain of our directors and executive officers have interests in the Internalization that are different from, and may potentially conflict with, the interests of us and our stockholders.
Certain of our directors and executive officers have interests in the Internalization that may be different from, or in addition to, the interests of our stockholders generally and that may create potential conflicts of interest, including (i) the payment of Internalization Consideration in connection with the Internalization directly or indirectly to certain of these individuals, including Messrs. Kamfar, Kachadurian, and Konig, and the entry by the applicable individuals into arrangements relating to the payment of that consideration, and (ii) the entry by Bluerock REIT Operator, LLC, a wholly owned subsidiary of our Manager (“Manager Sub”), in its post-Closing capacity as an indirect subsidiary of the Company, into employment agreements with Messrs. Kamfar and Vohs as well as James Babb, Jordan Ruddy and Ryan MacDonald, who are executive officers and principals of our Manager, and into a services agreement with Mr. Konig through Konig & Associates, all of which will become effective upon consummation of the Internalization.
In addition, Mr. Kamfar owns a controlling interest in Bluerock Real Estate, L.L.C. (“BRRE”), the sole managing member of our Manager; Messrs. Babb, MacDonald, Ruddy, Vohs and Konig are also executive officers or principals of our Manager; and Mr. Kachadurian is Vice Chairman of the Manager. The respective roles of these individuals in the Manager may create additional conflicts of interest in respect of the Internalization and the related transactions.
Following the Internalization, Mr. Kamfar will control a significant number of votes in any matter presented to our Class A Common Stockholders for approval, including the election of directors.
Although, the 76,603 shares of Class C Common Stock issued in connection with the Internalization is not designed to provide for disproportionate voting rights, the issuance of the Class C Common Stock resulted in Mr. Kamfar controlling significant voting power in matters submitted to a vote of our Class A Common Stockholders as a result of his beneficial ownership of Class C Common Stock (which gives him voting power equal to the economic interest in the Company issued to BRRE in the form of OP Units as if all of those OP Units were redeemed for shares of Class A Common Stock), including the election of directors. Mr. Kamfar may have interests that differ from our other stockholders, including by reason of his direct or indirect interest in our Operating Partnership, and may accordingly vote in ways that may not be consistent with the interests of those other stockholders.
Our net income, FFO and AFFO may decrease in the near term as a result of the Internalization.
We will expense all cash and non-cash costs involved in the Internalization. As a result, our statement of operations and FFO will be negatively impacted, driven predominately by the non-cash charges related to the issuance of OP Units and shares of Class C Common Stock as Internalization Consideration and, to a lesser extent, other transaction-related costs. In addition, while we will no longer effectively bear the costs of the various fees and expense reimbursements previously paid to the Manager after we became internally managed pursuant to the Internalization, our expenses will include the compensation and benefits of our executive officers and the employees of Manager Sub, which will then be our indirect subsidiary, as well as overhead previously paid by the Manager or its affiliates in managing our business and operations. Furthermore, these employees and consultants of Manager Sub will be providing us services historically provided by the Manager. There are no assurances that, following the Internalization, these employees and consultants will be able or incentivized to provide services at the same level or for the same costs as were previously provided to us by the Manager, and there may be other unforeseen costs, expenses and difficulties associated with operating as an internally managed company. If the expenses we assume as a result of the Internalization are higher than the fees that we currently pay the Manager or otherwise higher than we anticipate, we may not realize the anticipated cost savings and other benefits from the Internalization and our net income, FFO and AFFO could decrease further, which could have a material adverse effect on our business, financial condition and results of operations.
The Internalization may not be accretive to our stockholders.
The Internalization may not be accretive to our stockholders. While it is intended that the Internalization be accretive to our net income, earnings and AFFO, there can be no assurance that this will be the case, as, among other things, the expenses we assume as a result of the Internalization may be higher than we anticipate and we may not achieve our anticipated cost savings from the Internalization. The failure of the Internalization to be accretive to our stockholders could have a material adverse effect on our business, financial condition and results of operations.
We may not manage the Internalization effectively or realize its anticipated benefits.
We may not manage the Internalization effectively. The Internalization could be a time-consuming and costly process and we may encounter potential difficulties in the integration process including, among other things:
For all these reasons, you should be aware that it is possible that the Internalization process could result in the distraction of our management, the disruption of our ongoing business or inconsistencies in our operations, services, standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with employees or third-parties to achieve the anticipated benefits of the Internalization, or could otherwise adversely affect our business and financial results. Therefore, the failure to plan and manage the Internalization effectively could have a material adverse effect on our business, financial condition and results of operations.
We depend on our key executives and other employees of an affiliate of the Manager. There is no guarantee that such key executives and employees will remain employed or engaged by us for any specified period of time, and will not engage in competitive activities if they cease to be employed with or engaged by us.
We depend on the key executives and employees of an affiliate of the Manager. It is expected that, following the consummation of the Internalization, we will continue to substantially depend on the services of Messrs. Kamfar, Babb, MacDonald, Ruddy and Vohs, who have each entered into employment agreements with Manager Sub, which will then be an indirect subsidiary of the Company, and Mr. Konig, who has entered into a services agreement with Manager Sub through Konig & Associates on substantially the same terms as the employment agreements. Each such agreement will become effective upon Closing, and will have an initial term through and including December 31, 2020. These agreements have been structured to incentivize our executives to stay through the end of their initial terms and, subject to the Company’s approval, to extend the terms of service for successive one-year terms. Nevertheless, as is presently the case under the Management Agreement with the Manager, the departure or the loss of the services of any of these individuals, or other senior management personnel or employees, following the Internalization could have a material adverse effect on our business, financial condition, results of operations and ability to effectively operate our business.
Further, the employment and services agreements entered into by Manager Sub with each of Messrs. Kamfar, Babb, MacDonald, Ruddy, Vohs and Konig contain certain restrictions on these executives, including a restriction on engaging in activities that are deemed competitive to our business. Although we believe these covenants to be enforceable under current law in the states in which we do business, there can be no guarantee that if our executives were to breach these covenants and engage in competitive activities, a court of law would fully enforce these restrictions. If these executives were to terminate their employment or service relationship (as applicable) with Manager Sub and engage in competitive activities, such activities could have a material adverse effect on our business, financial condition and results of operations.
Mr. Kamfar and certain other executive officers and members of our senior management team will have competing demands on their time and attention.
Mr. Kamfar, who continues to serve as our Chief Executive Officer and as Chairman of our board of directors following the Internalization, and Messrs. Babb, Ruddy, MacDonald and Konig, will continue to have competing demands on their respective time and attention following the Internalization, principally with respect to the provision of services to certain outside entities affiliated with BRRE. Such competing demands are not expected to be different from those that presently exist, but there is no assurance those demands will not increase and may result in these individuals devoting time to such outside entities in a manner that could adversely affect our business. Under their respective employment or services agreements (as applicable), Mr. Kamfar and our other executive officers are permitted to devote time to certain outside activities, so long as those duties and activities do not unreasonably interfere with the performance of their respective duties to us.
We may be exposed to risks to which we have not historically been exposed, including liabilities with respect to the assets acquired from the Manager.
The Internalization will expose us to risks to which we have not historically been exposed. Pursuant to the Contribution Agreement, we will incur liabilities with respect to the assets acquired from the Manager and certain of its affiliates. In addition, our overhead will increase as a result of our becoming internally managed, as the responsibility for overhead relating to management of our business currently is borne by the Manager, and will become our responsibility following the Internalization. In addition, in our formerly externally-advised structure, we did not directly employ any employees. As a result of the Internalization, we indirectly, through Manager Sub, employ persons who are currently associated with the Manager or its affiliates. As their employer, we will indirectly, through Manager Sub, be subject to those potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of employee benefit plans, if established. Furthermore, these employees will be providing us services historically provided by the Manager, which will be provided with the support of the Administrative Services Agreement. There are no assurances that, following the Internalization, these employees of Manager Sub will be able to provide us with the same level of services as were previously provided to us by the Manager, and there may be other unforeseen costs, expenses and difficulties associated with operating as an internally managed company.
The representations, warranties, covenants and indemnities in the Contribution Agreement and related agreements are subject to limitations and qualifiers, which may limit our ability to enforce any remedy under these agreements.
The representations, warranties, covenants and indemnities in the Contribution Agreement, the related Administrative Services Agreement and other agreements related to the Internalization are subject to limitations and qualifiers, which may limit our ability to enforce any remedy under these agreements. These include, without limitation, limitations on liability and materiality qualifiers on certain representations and covenants.
Conflicts of interest may exist or could arise in the future with our Operating Partnership and its limited partners, which may impede business decisions that could benefit our stockholders.
Following the implementation of our Company’s structure as a result of the Internalization, conflicts of interest may exist or could arise as a result of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any member thereof, on the other. Our directors and officers have duties to our Company and our stockholders under applicable Maryland law in connection with their management of our Company. At the same time, we, as general partner of our Operating Partnership, have fiduciary duties to our Operating Partnership and to its limited partners under Delaware law in connection with the management of our Operating Partnership. Our duties to our Operating Partnership and its limited partners as the general partner may come into conflict with the duties of our directors and officers to our Company and our stockholders. These conflicts may be resolved in a manner that is not in the best interest of our stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
| 44 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BLUEROCK RESIDENTIAL GROWTH REIT, INC. | |||
| DATE: | /s/ R. Ramin Kamfar | ||
| R. Ramin Kamfar | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| DATE: | /s/ Christopher J. Vohs | ||
| Christopher J. Vohs | |||
| Chief Financial Officer and Treasurer | |||
| (Principal Financial Officer, Principal Accounting Officer) |
| 45 |