(1) | Interest rate is included in lossbased on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. The Federal Home Loan Mortgage Corporation (“Freddie Mac”), who was the lender on the existing mortgage debt and the $300 Million Credit Facility, also originated the 22 new first mortgages (the “Freddie Refinance”). In accordance with FASB ASC 470-50, Debt – Modifications and Extinguishments, the Company accounted for the refinancing as a modification of a debt instrument. As such, the existing $4.9 million of net deferred financing costs related to the prior mortgage debt and credit facility debt is included with the approximately $2.9 million of deferred financing costs incurred in connection with the modification. Such costs are recorded as a reduction from mortgages payable on the accompanying consolidated balance sheetTerm SOFR plus an applicable margin. Term SOFR as of September 30, 2017 and are amortized over the terms of the new mortgage debt. Additionally, the Company incurred approximately $2.0 million of costs in connection with the Freddie Refinance that were not capitalized as deferred financing costs. Such costs are recorded in loss on extinguishment of debt and modification costs on the accompanying consolidated statements of operations and comprehensive income. The Company used approximately $16.3 million of proceeds from the Freddie Refinance to fund a portion of the purchase of joint venture interests in the Portfolio held by noncontrolling interests (the “BH Buyout”) (see Note 10). The following nine properties had existing mortgage debt that2022 was refinanced: The Summit at Sabal Park, Courtney Cove, The Preserve at Terrell Mill, The Ashlar, Heatherstone, Versailles, Seasons 704 Apartments, Madera Point and The Pointe at the Foothills. The following twelve properties, which were refinanced as described above, were previously cross-collateralized as security for the $300 Million Credit Facility: Arbors on Forest Ridge, Cutter’s Point, Eagle Crest, Silverbrook, Timberglen, Edgewater at Sandy Springs, Beechwood Terrace, Willow Grove, Woodbridge, Venue at 8651, Old Farm and Stone Creek at Old Farm. The Colonnade, which obtained a first mortgage as described above, was not previously encumbered by mortgage debt or credit facility debt.
During the nine months ended September 30, 2017, the Company sold nine properties and repaid the related mortgage loans that encumbered eight of the properties, as detailed in the table below (in thousands):
Property Name | | Date of Sale | | Type | | Outstanding Principal (1) | | The Miramar Apartments | | April 3, 2017 | | Floating | | $ | 8,400 | | The Grove at Alban | | April 3, 2017 | | Floating | | | 18,374 | | Twelve 6 Ten at the Park | | April 27, 2017 | | Floating | | | 15,711 | | Regatta Bay | | July 14, 2017 | | Floating | | | 14,000 | | The Arbors, The Crossings, The Crossings at Holcomb Bridge and The Knolls | (2) | September 29, 2017 | | Floating | | | 50,177 | | | | | | | | $ | 106,662 | |
| (1)
| Represents the outstanding principal balance when the loan was repaid.3.04%.
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| (2)
| Properties were sold as a portfolio.
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The ninth property the Company sold, Toscana, was released from the collateral pool of the $300 Million Credit Facility upon its sale on April 3, 2017. The Company incurred prepayment penalties of approximately $0.9 million in connection with the payoff of these mortgage loans and $0.1 million of fees in connection with the release of Toscana, both of which are included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income.
The weighted average interest rate of the Company’s mortgage indebtedness was 3.04% as of September 30, 2017 and 2.95% as of December 31, 2016. The increase between the periods is primarily related to increases in LIBOR, partially offset by a weighted average reduction of 57 basis points in the borrowing spread related to the Freddie Refinance. As of September 30, 2017, the adjusted weighted average interest rate of the Company’s mortgage indebtedness was 3.14%. For purposes of calculating the adjusted weighted average interest rate of the outstanding mortgage indebtedness, the Company has included the weighted average fixed rate of 1.3388% on its combined $650.0 million notional amount of interest rate swap agreements, which effectively fix the interest rate on $650.0 million of the Company’s floating rate mortgage indebtedness (see Note 7). The interest rate cap agreements the Company has entered into effectively cap one-month LIBOR on $293.2 million of the Company’s floating rate mortgage indebtedness at a weighted average rate of 4.20% (see Note 7).
Each of the Company’s mortgages is a non-recourse obligation subject to customary provisions. The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of September 30, 2017, the Company believes it is in compliance with all provisions.
Freddie Mac Multifamily Green Advantage. In order to obtain more favorable pricing on the Company’s mortgage debt financing with Freddie Mac, the Company has decided to participate in Freddie Mac’s new Multifamily Green Advantage program. The Company has escrowed approximately $4.2 million to finance smarter, greener property improvements at 20 of its properties, which will be completed by the summer of 2019. The Company plans to reduce water/sewer costs at each property by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. By participating in this program, the Company was able to lower the interest rate on the properties it refinanced in the Freddie Refinance by 10 basis points.
Credit and Bridge Facilities
The following table contains summary information concerning the Company’s credit and bridge facilities as of September 30, 2017 (dollars in thousands):
| | Type | | Term (months) | | | Amortization (months) | | | Outstanding Principal | | | Interest Rate (1) | | | Maturity Date | $30 Million Credit Facility | | Floating | | | 24 | | | | 360 | | | $ | 30,000 | | | | 5.23% | | | 12/29/2018 | Deferred financing costs, net of accumulated amortization of $115 | | | | | | | | | | | | | (197 | ) | | | | | | | | | | | | | | | | | | | $ | 29,803 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 Bridge Facility | | Floating | | | 4 | | | | 360 | | | $ | 54,597 | | | | 4.98% | | | 10/31/2017 | Deferred financing costs, net of accumulated amortization of $198 | | | | | | | | | | | | | (66 | ) | | | | | | | | | | | | | | | | | | | $ | 54,531 | | | | | | | |
(1)
On March 25, 2022, the Company entered into a loan modification agreement by and among the Company, the OP, Truist Bank and the Lenders party thereto, which modified the Company’s existing credit facility, dated as of June 30, 2021 (as modified, amended and supplemented, the “Corporate Credit Facility”). As of September 30, 2022, there was $350.0 million available for borrowing under the Corporate Credit Facility. Subject to conditions provided in the Corporate Credit Facility, the commitments under Corporate Credit Facility may be increased up to an additional $150.0 million if the lenders agree to increase their commitments or if the lenders agree for the increase to be funded by any additional lender proposed by the Company, through the OP. The Corporate Credit Facility will mature on June 30, 2024 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. As of September 30, 2022, there was $335.0 million in aggregate principal outstanding under the Corporate Credit Facility. Advances under the Corporate Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either Term SOFR plus a margin of 1.90% to 2.40%, depending on the Company’s total leverage ratio and a benchmark replacement adjustment of 0.1%, or a base rate determined according to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, (c) Term SOFR plus 1.0% or (d) 0.0% plus a margin of 0.90% to 1.40%, depending on the Company’s total leverage ratio. An unused commitment fee at a rate of 0.15% or 0.25%, depending on the outstanding aggregate revolving commitments, applies to unutilized borrowing capacity under the Corporate Credit Facility. Amounts owing under the Corporate Credit Facility may be prepaid at any time without premium or penalty. The Corporate Credit Facility is guaranteed by the Company and the obligations under the Corporate Credit Facility are, subject to some exceptions, secured by a continuing security interest in substantially all of the assets of the Company. The Company is in compliance with all of the covenants required in its Corporate Credit Facility. | Interest rate is based on one-month LIBOR plus an applicable margin. One-month LIBOR as of September 30, 2017 was 1.2322%.
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$30 Million Credit Facility. On December 29, 2016, the Company, through the OP, entered into a $30.0 million credit facility (the “$30 Million Credit Facility”) and immediately drew $15.0 million to fund a portion of the purchase price of Old Farm and Stone Creek at Old Farm. On February 1, 2017, the Company drew $14.0 million and used $12.0 million to fund a portion of the purchase price of Hollister Place and $2.0 million to fund value-add renovations at the Company’s properties. In April 2017, the Company used cash on hand plus its share of the proceeds, net of distributions to noncontrolling interests, from four properties it sold to pay down $10.0 million on the $30 Million Credit Facility. On June 30, 2017, the Company drew $11.0 million to fund a portion of the BH Buyout. The $30 Million Credit Facility is a full-term, interest-only facility, has one 12-month extension option and is guaranteed by the OP.
2017 Bridge Facility. On June 30, 2017, the Company, through the OP, entered into a $65.9 million bridge facility (the “2017 Bridge Facility”) with KeyBank. The Company drew $44.5 million to fund a portion of the purchase price of Rockledge Apartments and $21.4 million to fund a portion of the BH Buyout. In July 2017, the Company used proceeds from the sale of Regatta Bay to pay down $11.3 million on the 2017 Bridge Facility. The 2017 Bridge Facility is a full-term, interest-only facility with an initial four-month term (see below) and is guaranteed by the Company. Interest accrues on the 2017 Bridge Facility at an interest rate of one-month LIBOR plus 3.75%. In October 2017, the Company used proceeds from the sale of the NAVA Portfolio to pay down approximately $46.0 million on the 2017 Bridge Facility, bringing the outstanding balance to approximately $8.6 million, and also extended the maturity date to March 31, 2018 (see Note 13). The Company intends on paying the outstanding principal balance of the 2017 Bridge Facility with proceeds from the sales of properties classified as held for sale as of September 30, 2017 or cash on hand.
The credit and bridge facilities agreements contain customary provisions with respect to events of default, covenants and borrowing conditions. Certain prepayments may be required upon a breach of covenants or borrowing conditions. As of September 30, 2017, the Company believes it is in compliance with all provisions of the agreements.
$300 Million Credit Facility. On June 6, 2016, the Company, through certain of its subsidiaries, entered into a $200.0 million credit facility, which was expanded to $300.0 million (the “$300 Million Credit Facility”) during the fourth quarter of 2016 to acquire three properties. The $300 Million Credit Facility was cross-collateralized by the following 12 properties: Arbors on Forest Ridge, Cutter’s Point, Eagle Crest, Silverbrook, Timberglen, Edgewater at Sandy Springs, Beechwood Terrace, Willow Grove, Woodbridge, Venue at 8651, Old Farm and Stone Creek at Old Farm.
On June 30, 2017, in connection with the Freddie Refinance, the Company repaid and retired the $300 Million Credit Facility. The refinancing of this existing credit facility debt did not incur prepayment penalties.
2016 Bridge Facility. On December 29, 2016, the Company, through the OP, entered into a $30.0 million bridge facility (the “2016 Bridge Facility”) with KeyBank and drew $30.0 million to fund a portion of the purchase price of Old Farm and Stone Creek at Old Farm. In April 2017, the Company paid down the entire $30.0 million of principal on the 2016 Bridge Facility, which was funded with its share of the proceeds, net of distributions to noncontrolling interests, from properties the Company sold in April 2017. The 2016 Bridge Facility was retired on April 28, 2017.
Deferred Financing Costs The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheets. For the three months ended September 30, 2022 and 2021, amortization of deferred financing costs of approximately $0.7 million and $0.5 million, respectively, is included in interest expense on the consolidated statements of operations and comprehensive income (loss). For the nine months ended September 30, 2022 and 2021, amortization of deferred financing costs of approximately $2.0 million and $1.6 million, respectively, is included in interest expense on the consolidated statements of operations and comprehensive income (loss). Loss on Extinguishment of Debt and Modification Costs Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs incurred on the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement, any unamortized costs are charged to loss on extinguishment of debt and modification costs (see “Loss on Extinguishment of Debt and Modification Costs” below).costs. For the threenine months ended September 30, 20172022 and 2016,2021, the Company wrote-off deferred financing costs of $0.6approximately $0.0 million and $0.4$0.3 million, respectively, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2017 and 2016, the Company wrote-off deferred financing costs of $1.0 million and $0.7 million, respectively, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. Amortization of deferred financing costs of $0.6 million and $0.4 million is included in interest expense on the consolidated statements of operations and comprehensive income for the three months ended September 30, 2017 and 2016, respectively. Amortization of deferred financing costs of $1.5 million and $1.1 million is included in interest expense on the consolidated statements of operations and comprehensive income for the nine months ended September 30, 2017 and 2016, respectively.(loss). Loss on Extinguishment of Debt and Modification Costs
Upon repayment of or in conjunction with a material change (i.e. a 10% or greater difference in the cash flows between instruments) in the terms of an underlying debt agreement, the Company writes off any unamortized deferred financing costs related to the original debt. Loss on extinguishment of debt and modification costs also includes prepayment penalties incurred on the early repayment of debt and costs incurred in a debt modification that are not capitalized as deferred financing costs.
Schedule of Debt Maturities The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to September 30, 20172022 are as follows (in thousands): | | Operating Properties & Other Secured Debt | | | Held For Sale Properties | | | Total | | 2017 | | $ | 54,993 | | | $ | — | | | $ | 54,993 | | 2018 | | | 43,352 | | | | 276 | | | | 43,628 | | 2019 | | | 2,448 | | | | 309 | | | | 2,757 | | 2020 | | | 2,483 | | | | 316 | | | | 2,799 | | 2021 | | | 2,531 | | | | 326 | | | | 2,857 | | Thereafter | | | 681,264 | | | | 29,599 | | | | 710,863 | | Total | | $ | 787,071 | | | $ | 30,826 | | | $ | 817,897 | |
| | Operating Properties | | | Held For Sale Properties | | | Credit Facility | | | Total | | 2022 | | $ | 313 | | | $ | — | | | $ | — | | | $ | 313 | | 2023 | | | 20,925 | | | | — | | | | — | | | | 20,925 | | 2024 | | | 326,697 | | | | 68,160 | | | | 335,000 | | | | 729,857 | | 2025 | | | 191,105 | | | | 14,811 | | | | — | | | | 205,916 | | 2026 | | | 423,149 | | | | — | | | | — | | | | 423,149 | | Thereafter | | | 313,183 | | | | — | | | | — | | | | 313,183 | | Total | | $ | 1,275,372 | | | $ | 82,971 | | | $ | 335,000 | | | $ | 1,693,343 | |
7. Fair Value of Derivatives and Financial Instruments Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, FASB ASC 820Fair Value Measurement and Disclosures, establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy): Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
| • | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.
| • | Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. |
Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
| • | Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. |
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date. Derivative Financial Instruments and Hedging Activities The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings. In order to minimize counterparty credit risk, the Company enters into and expects to enter into hedging arrangements only with major financial institutions that have high credit ratings. The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of September 30, 20172022 and December 31, 20162021 were classified as Level 2 of the fair value hierarchy.
The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The interest rate swaps have terms ranging from four to five years. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The interest rate caps have terms ranging from three to four years. During the nine months ended September 30, 20172022 and 2016, such2021, interest rate cap derivatives were used to hedge the variable cash flows associated with a majorityportion of the Company’s floating rate debt. The interest rate cap agreements the Company has entered into effectively cap one-month LIBOR on $293.2$537.1 million of the Company’s floating rate mortgage indebtedness at a weighted average rate of 4.20%. The effective portion of changes in the fair value of derivative financial instruments that are designated4.67% as cash flow hedges is recorded in other comprehensive income (loss) (“OCI”) and is subsequently reclassified into net income (loss) in the period that the hedged forecasted transaction affects earnings. Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s floating rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in net income (loss) as interest expense. During the three months ended September 30, 2017 and 2016, the Company recorded less than $0.1 million and $0.6 million, respectively, of gain related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges, which is recorded as a reduction to interest expense on the accompanying consolidated statements of operations and comprehensive income. During the nine months ended September 30, 2017 and 2016, the Company recorded approximately $0.1 million and $0.6 million, respectively, of gain related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges. As of September 30, 2016, the Company had four interest rate swap derivatives, with a notional amount of $400.0 million, designated as cash flow hedges.2022.
In order to fix a portion of, and mitigate the risk associated with, the Company’s floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), the Company, through the OP, has entered into sevennine interest rate swap transactions with KeyBank (the “Counterparty”National Association (“KeyBank”) and four with Truist Bank with a combined notional amount of $650.0 million.$1.2 billion. The interest rate swaps the Company has entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3388%1.0682%. The Company has designated these interest rate swaps as cash flow hedges of interest rate risk. As of September 30, 2017,2022, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk (dollars in thousands): Effective Date | | Termination Date | | Notional | | | Fixed Rate | | | Floating Rate Option (1) | July 1, 2016 | | June 1, 2021 | | $ | 100,000 | | | | 1.1055 | % | | One-month LIBOR | July 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 1.0210 | % | | One-month LIBOR | July 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 0.9000 | % | | One-month LIBOR | September 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 0.9560 | % | | One-month LIBOR | April 1, 2017 | | April 1, 2022 | | | 100,000 | | | | 1.9570 | % | | One-month LIBOR | May 1, 2017 | | April 1, 2022 | | | 50,000 | | | | 1.9610 | % | | One-month LIBOR | July 1, 2017 | | July 1, 2022 | | | 100,000 | | | | 1.7820 | % | | One-month LIBOR | | | | | $ | 650,000 | | | | 1.3388 | % | (2) | |
Effective Date | | Termination Date | | Counterparty | | Notional Amount | | | Fixed Rate (1) | | | June 1, 2019 | | June 1, 2024 | | KeyBank | | | 50,000 | | | | 2.0020 | % | | June 1, 2019 | | June 1, 2024 | | Truist | | | 50,000 | | | | 2.0020 | % | | September 1, 2019 | | September 1, 2026 | | KeyBank | | | 100,000 | | | | 1.4620 | % | | September 1, 2019 | | September 1, 2026 | | KeyBank | | | 125,000 | | | | 1.3020 | % | | January 3, 2020 | | September 1, 2026 | | KeyBank | | | 92,500 | | | | 1.6090 | % | | March 4, 2020 | | June 1, 2026 | | Truist | | | 100,000 | | | | 0.8200 | % | | June 1, 2021 | | September 1, 2026 | | KeyBank | | | 200,000 | | | | 0.8450 | % | | June 1, 2021 | | September 1, 2026 | | KeyBank | | | 200,000 | | | | 0.9530 | % | | March 1, 2022 | | March 1, 2025 | | Truist | | | 145,000 | | | | 0.5730 | % | | March 1, 2022 | | March 1, 2025 | | Truist | | | 105,000 | | | | 0.6140 | % | | | | | | | | | 1,167,500 | | | | 1.0682 | % | (2) |
(1) | The floating rate option for the interest rate swaps is one-month LIBOR. As of September 30, 2017,2022, one-month LIBOR was 1.2322%3.14%. |
(2) | Represents the weighted average fixed rate of the interest rate swaps. |
As of September 30, 2022, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands): Effective Date | | Termination Date | | Counterparty | | Notional Amount | | | Fixed Rate (1) | | | September 1, 2026 | | January 1, 2027 | | KeyBank | | $ | 92,500 | | | | 1.7980 | % | |
(1) | The floating rate option for the interest rate swaps is one-month LIBOR. As of September 30, 2022, one-month LIBOR was 3.14%. |
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but either do not meet the strict requirements to apply hedge accounting in accordance with FASB ASC 815, Derivatives and Hedging, or the Company has elected not to designate such derivatives.derivatives as hedges. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net income (loss) as interest expense. As of September 30, 2016, the Company had 36 interest rate cap derivatives, with a notional amount of $578.3 million, which were not designated as hedges in qualifying hedging relationships. As of September 30, 2017,2022 and 2021, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands): Product | | Number of Instruments | | | Notional | | Interest rate caps | | | 17 | | | $ | 293,184 | |
As of September 30, | | Number of Instruments | | | Notional Amount | | 2022 | | | 17 | | | $ | 537,118 | | 2021 | | | 14 | | | $ | 412,221 | |
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 20172022 and December 31, 20162021 (in thousands): | | | | Asset Derivatives | | | Liability Derivatives | | | | | Asset Derivatives | | | Liability Derivatives | | | | Balance Sheet Location | | September 30, 2017 | | | December 31, 2016 | | | September 30, 2017 | | | December 31, 2016 | | | Balance Sheet Location | | September 30, 2022 | | | December 31, 2021 | | | September 30, 2022 | | | December 31, 2021 | | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | Fair market value of interest rate swaps | | $ | 11,759 | | | $ | 12,413 | | | $ | 713 | | (1) | $ | — | | | Fair market value of interest rate swaps | | $ | 110,399 | | | $ | 11,045 | | | $ | — | | | $ | 7,519 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate caps | | Prepaid and other assets | | | — | | | | 5 | | | | — | | | | — | | | Prepaid and other assets | | | 4,774 | | | | 263 | | | | — | | | | — | | Total | | | | $ | 11,759 | | | $ | 12,418 | | | $ | 713 | | | $ | — | | | | | $ | 115,173 | | | $ | 11,308 | | | $ | — | | | $ | 7,519 | |
(1)
| Included in accounts payable and other accrued liabilities on the consolidated balance sheet.
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The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 20172022 and 20162021 (in thousands): | Amount of gain (loss) recognized in OCI on derivative (effective portion) | | | Location of gain (loss) reclassified from accumulated OCI into income | | Amount of gain (loss) reclassified from accumulated OCI into income (effective portion) | | | Location of gain (loss) recognized in income on derivative | | Amount of gain (loss) recognized in income on derivative (ineffective portion)* | | | 2017 | | | 2016 | | | (effective portion) | | 2017 | | | 2016 | | | (ineffective portion)* | | 2017 | | | 2016 | | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate products | | (241 | ) | | | (1,576 | ) | | Interest expense | | | (360 | ) | | | (479 | ) | | Interest expense | | | (63 | ) | (1) | | 599 | | For the nine months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate products | | (2,162 | ) | | | (1,619 | ) | | Interest expense | | | (1,142 | ) | | | (491 | ) | | Interest expense | | | (88 | ) | (2) | | 599 | |
*
| Includes amounts excluded from effectiveness testing.
|
(1)
| Includes approximately $90,000 of loss reclassified from OCI for missed forecasted transactions due to hedged forecasted transactions being no longer probable.
|
(2)
| Includes approximately $185,000 of loss reclassified from OCI for missed forecasted transactions due to hedged forecasted transactions being no longer probable.
|
| | Amount of gain (loss) recognized in OCI | | | Location of gain (loss) reclassified from accumulated | | Amount of gain (loss) reclassified from OCI into income | | | | 2022 | | | 2021 | | | OCI into income | | 2022 | | | 2021 | | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | | | | | | | | | | | | | | | | | | Interest rate products | | $ | 38,406 | | | $ | 801 | | | Interest expense | | $ | 3,468 | | | $ | (3,744 | ) | For the nine months ended September 30, | | | | | | | | | | | | | | | | | | | Interest rate products | | $ | 105,714 | | | $ | 19,929 | | | Interest expense | | $ | (1,160 | ) | | $ | (11,153 | ) |
| | | | | Location of gain (loss) | | Amount of gain (loss) recognized in income on derivative | | | | | | | Location of gain (loss) | | Amount of gain (loss) recognized in income | | | | | | | recognized in income | | 2017 | | | 2016 | | | | | | | recognized in income | | 2022 | | | 2021 | | Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the three months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate products | | | | | Interest expense | | | — | | | | (2 | ) | | | | | | Interest expense | | $ | 2,161 | | | $ | 52 | | For the nine months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate products | | | | | Interest expense | | | (5 | ) | | | (8 | ) | | | | | | Interest expense | | $ | 3,525 | | | $ | 96 | |
Other Financial Instruments Carried at Fair Value Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 10). The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value. Financial Instruments Not Carried at Fair Value At September 30, 20172022 and December 31, 2016,2021, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid and other assets, excluding interest rate caps, accounts payable and other accrued liabilities, accrued real estate taxes payable, accrued interest payable, security deposits and prepaid rent approximated their carrying values because of the short termshort-term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs. The table below presents the carrying value and estimated fair value of our debt at September 30, 2022 and December 31, 2021 (in thousands): | | September 30, 2022 | | | December 31, 2021 | | | | Carrying Value | | | Estimated Fair Value | | | Carrying Value | | | Estimated Fair Value | | Fixed rate debt | | $ | 68,677 | | | $ | 64,486 | | | $ | 69,285 | | | $ | 71,141 | | Floating rate debt (1) | | $ | 1,624,666 | | | $ | 1,512,805 | | | $ | 1,491,861 | | | $ | 1,525,298 | |
(1) | Includes balances outstanding under our Corporate Credit Facility. |
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. There can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate asset. For the nine months ended September 30, 2017 and 2016,2022, the Company did not record any impairment charges related to real estate assets. 8. Stockholders’ Equity Common Stock The Company began operations on March 31, 2015 as a result of the Spin-Off. During the three and nine months ended September 30, 2017,2022, the Company issued 110,257164,851 shares of common stock pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below) and retired 308,31352,091 shares pursuant to its at-the-market offering (see “At-the-Market Offering” below).
As of September 30, 2022, the Company had 25,549,036 shares of common stock, it had repurchased pursuant to its share repurchase program (see “Share Repurchase Program” and “Long Term Incentive Plan” below). As of September 30, 2017, the Company had 21,095,769 shares of common stock, $0.01 par value $0.01 per share, issued and outstanding. Share Repurchase Program On June 15, 2016, the Board authorized the repurchase by the Company ofto repurchase up to $30.0 million of its common stock, $0.01 par value $0.01 per share. This authorization expiresshare, during a two-year period that was set to expire on June 15, 2018.2018 (the “Share Repurchase Program”). On April 30, 2018, the Board increased the Share Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board further increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. The Company may utilize various methods to effectaffect the repurchases, and the timing and extent of the repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether the Company’s common stock is trading at a significant discount to net asset value per share. Repurchases under this program may be discontinued at any time. During the nine months ended September 30, 2017,2022, the Company repurchased 58,157168,473 shares of its common stock $0.01 par value per share, at a total cost of
for approximately $1,354,000,$11.1 million, or $23.27$66.04 per share. As ofDuring the nine months ended September 30, 2017,2021, the Company did not repurchase any shares of its common stock. Since the inception of the Share Repurchase Program through September 30, 2022, the Company has repurchased 308,3132,550,628 shares of its common stock, $0.01 par value $0.01 per share, at a total cost of approximately $5,941,000,$72.4 million, or $19.27$28.37 per share. Treasury StockShares From time to time, in accordance with the Company’s share repurchase program,Share Repurchase Program, the Company may repurchase shares of its common stock in the open market. Until any such shares are retired, the cost of the shares is included in common stock held in treasury at cost on the consolidated balance sheet. The number of shares of common stock classified as treasury shares reduces the number of shares of the Company’s common stock outstanding and, accordingly, are considered in the weighted average number of shares outstanding during the period. During the nine months ended September 30, 2017,2022 and 2021, the Company retired 308,313168,473 and zero shares of its common stock held in treasury. As of September 30, 2017 and December 31, 2016,2022, the Company had 0did not have any shares and 250,156 shares, respectively, of common stock held in treasury. Long Term Incentive Plan On June 15, 2016, the Company’s stockholders approved a long-term incentive plan (the “2016 LTIP”) and the Company filed a registration statement on Form S-8 registering 2,100,000 shares of common stock, $0.01 par value $0.01 per share, thatwhich the Company may issue pursuant to the 2016 LTIP. The 2016 LTIP authorizes the compensation committee of the Board to provide equity-based compensation in
the form of stock options, appreciation rights, restricted shares, restricted stock units, performance shares, performance units and certain other awards denominated or payable in, or otherwise based on, the Company’s common stock or factors that may influence the value of the Company’s common stock, plus cash incentive awards, for the purpose of providing the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries), the Company’s non-employee directors, and potentially certain non-employees who perform employee-type functions, incentives and rewards for performance. Restricted Stock Units. Under the 2016 LTIP, restricted stock units may be granted to the Company’s directors, officers and other key employees (andthose of the Adviser and the Company’s subsidiaries) and typically vest over a three to four yearfive-year period for officers, employees and certain key employees of the Adviser and annually for directors. Beginning on the date of grant, restricted stock units earn dividends that are payable in cash on the vesting date. On August 11, 2016,February 21, 2019, pursuant to the 2016 LTIP, the Company granted 209,797186,662 restricted stock unitsto its directors, officers, employees and officers.certain key employees of the Adviser. On March 16, 2017,February 20, 2020, pursuant to the 2016 LTIP, the Company granted 219,802168,183 restricted stock units to its directors, officers, employees and officers.certain key employees of the Adviser. On May 11, 2020, pursuant to the 2016 LTIP, the Company granted 116,852 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 18, 2021, pursuant to the 2016 LTIP, the Company granted 204,663 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. On February 17, 2022, pursuant to the 2016 LTIP, the Company granted 142,159 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of September 30, 2017:2022: | | 2017 | | | 2022 | | | | Number of Units | | | Weighted Average Grant Date Fair Value | | | Number of Units | | | Weighted Average Grant Date Fair Value | | Outstanding January 1, | | | 209,797 | | | $ | 19.20 | | | | 589,283 | | | $ | 39.17 | | Granted | | | 219,802 | | | | 22.57 | | | | 142,159 | | | | 83.88 | | Forfeited | | | | (589 | ) | | | 33.99 | | Vested | | | (110,257 | ) | | | 19.20 | | | | (202,519 | ) | (1) | | 35.34 | | Forfeited | | | — | | | | — | | | Outstanding September 30, | | | 319,342 | | (1) | $ | 21.52 | | | | 528,334 | | | $ | 52.68 | |
(1) | 49,768 restricted stock units vestCertain key employees of the Adviser elected to net the taxes owed upon vesting against the shares issued resulting in August 2018 and 49,772 restricted stock units vest in August 2019. 80,742 restricted stock units vest in March 2018 and 69,530 restricted stock units vest in each164,851 shares being issued as shown on the Consolidated Statement of March 2019 and March 2020.Stockholders’ Equity.
|
The following table contains information regarding the vesting of restricted stock units under the 2016 LTIP for the next five calendar years subsequent to September 30, 2022: | | Shares Vesting | | | | | | | | February | | | May | | | October | | | Total | | 2022 | | | — | | | | — | | | | 408 | | | | 408 | | 2023 | | | 138,964 | | | | 21,879 | | | | — | | | | 160,843 | | 2024 | | | 132,568 | | | | 21,877 | | | | — | | | | 154,445 | | 2025 | | | 97,680 | | | | 21,877 | | | | — | | | | 119,557 | | 2026 | | | 65,984 | | | | — | | | | — | | | | 65,984 | | 2027 | | | 27,097 | | | | — | | | | — | | | | 27,097 | | Total | | | 462,293 | | | | 65,633 | | | | 408 | | | | 528,334 | |
As of September 30, 2017,2022, the Company hashad issued 110,257857,107 shares of common stock under the 2016 LTIP. For the three months ended September 30, 20172022 and 2016,2021, the Company recognized approximately $0.8$2.0 million and $0.3$1.8 million, respectively, of equity-based compensation expense related to grants of restricted stock units, which is included in corporate general and administrative expenses on the consolidated statements of operations and comprehensive income.units. For the nine months ended September 30, 20172022 and 2016,2021, the Company recognized approximately $2.4$5.9 million and $0.3$5.2 million, respectively, of equity-based compensation expense related to grants of restricted stock units. As of September 30, 2017,2022, the Company hashad recognized a liability of approximately $0.3$1.5 million related to dividends earned on restricted stock units that are payable in cash upon vesting.
At-the-Market Offering On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”), KeyBanc Capital Markets Inc. (“KeyBanc”) and Truist Securities (f/k/a SunTrust Robinson Humphrey, Inc., “SunTrust,” and together with Jefferies, Raymond James and KeyBanc, the “ATM Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the nine months ended September 30, 2022, the Company issued 52,091 shares of common stock at an average price of $83.16 per share for gross proceeds of $4.3 million under the 2020 ATM Program. The Company paid approximately $0.1 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.3 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. The following table contains summary information of the 2020 ATM Program since its inception: Gross proceeds | | $ | 62,310,967 | | Common shares issued | | | 1,120,910 | | Gross average sale price per share | | $ | 55.59 | | | | | | | Sales commissions | | $ | 934,665 | | Offering costs | | | 1,329,524 | | Net proceeds | | | 60,046,778 | | Average price per share, net | | $ | 53.57 | |
9. Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s common stock outstanding, which is adjusted for shares classified as treasury shares during the period and excludes any unvested restricted stock units issued pursuant to the 2016 LTIP. Diluted earnings (loss) per share is computed by adjusting basic earnings (loss) per share for the dilutive effect of the assumed vesting of restricted stock units. During
periods of net loss, the assumed vesting of restricted stock units is anti-dilutive and is not included in the calculation of earnings (loss) per share. The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted earnings (loss) per share, as they are exchangeable for common stock on a one-for-one basis. The income (loss) allocable to such units is allocated on this same basis and reflected as net income (loss) attributable to redeemable noncontrolling interests in the Operating PartnershipOP in the accompanying consolidated statements of operations and comprehensive income.income (loss). As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings (loss) per share. See Note 10 for additional information.
The following table sets forth the computation of basic and diluted earningsloss per share for the periods presented (in thousands, except per share amounts): | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | Numerator for earnings per share: | | | | | | | | | | | | | | | | | Net income | | $ | 54,076 | | | $ | 8,825 | | | $ | 60,702 | | | $ | 25,712 | | Net income attributable to noncontrolling interests | | | — | | | | 1,735 | | | | 2,836 | | | | 4,047 | | Net income attributable to redeemable noncontrolling interests in the Operating Partnership | | | 162 | | | | — | | | | 162 | | | | — | | Net income attributable to common stockholders | | $ | 53,914 | | | $ | 7,090 | | | $ | 57,704 | | | $ | 21,665 | | | | | | | | | | | | | | | | | | | Denominator for earnings per share: | | | | | | | | | | | | | | | | | Weighted average common shares outstanding | | | 21,085 | | | | 21,260 | | | | 21,057 | | | | 21,282 | | Denominator for basic earnings per share | | | 21,085 | | | | 21,260 | | | | 21,057 | | | | 21,282 | | Unvested restricted stock units | | | 368 | | | | 116 | | | | 350 | | | | 40 | | Denominator for diluted earnings per share | | | 21,453 | | | | 21,376 | | | | 21,407 | | | | 21,322 | | | | | | | | | | | | | | | | | | | Earnings per weighted average common share: | | | | | | | | | | | | | | | | | Basic | | $ | 2.56 | | | $ | 0.33 | | | $ | 2.74 | | | $ | 1.02 | | Diluted | | $ | 2.51 | | | $ | 0.33 | | | $ | 2.70 | | | $ | 1.02 | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Numerator for loss per share: | | | | | | | | | | | | | | | | | Net loss | | $ | (599 | ) | | $ | (5,407 | ) | | $ | (13,093 | ) | | $ | (15,725 | ) | Net loss attributable to redeemable noncontrolling interests in the Operating Partnership | | | (2 | ) | | | (16 | ) | | | (46 | ) | | | (47 | ) | Net loss attributable to common stockholders | | $ | (597 | ) | | $ | (5,391 | ) | | $ | (13,047 | ) | | $ | (15,678 | ) | | | | | | | | | | | | | | | | | | Denominator for loss per share: | | | | | | | | | | | | | | | | | Weighted average common shares outstanding | | | 25,598 | | | | 25,175 | | | | 25,630 | | | | 25,128 | | Denominator for basic loss per share | | | 25,598 | | | | 25,175 | | | | 25,630 | | | | 25,128 | | Weighted average unvested restricted stock units | | | 529 | | | | 613 | | | | 547 | | | | 596 | | Denominator for diluted earnings per share | (1) | | 25,598 | | | | 25,175 | | | | 25,630 | | | | 25,128 | | | | | | | | | | | | | | | | | | | Loss per weighted average common share: | | | | | | | | | | | | | | | | | Basic | | $ | (0.02 | ) | | $ | (0.21 | ) | | $ | (0.51 | ) | | $ | (0.62 | ) | Diluted | | $ | (0.02 | ) | | $ | (0.21 | ) | | $ | (0.51 | ) | | $ | (0.62 | ) |
(1) | If the Company sustains a net loss for the period presented, unvested restricted stock units are not included in the diluted earnings per share calculation. |
10. Noncontrolling Interests Redeemable Noncontrolling Interests in the OP Interests in the OP held by limited partners are represented by OP Units. Net income (loss) is allocated to holders of OP Units based upon net income (loss) attributable to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company, outside limited partners of the OP receive their pro-rata share of the distribution.Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP. On June 30, 2017,April 1, 2022, the Company acquired The Adair and Estates on Maryland, from investors in a Delaware Statutory Trust managed by an entity affiliated with the OP entered into a contribution agreement (the “Contribution Agreement”) with BH Equities, LLC and its affiliates (collectively, “BH Equity”), whereby the Company purchased 100% of the joint venture interests in the Portfolio owned by BH Equity, representing approximately 8.4% ownership in the Portfolio (the “BH Buyout”),Adviser, for total consideration of approximately $51.7$143.4 million (the “Purchase Amount”Price”). The Purchase AmountPrice consisted of approximately $49.7 million in cash that was paid on June 30, 2017 and 73,23326,558 OP Units (initially valued(valued at $2.0$2.6 million) that were issued on AugustApril 1, 2017.2022 and approximately $71.1 million in cash. The number of OP Units issued was calculated by dividing $2.0 million by the midpoint of the range of the Company’s net assetfair value as publicly disclosed in connection with the Company’s release of its second quarter of 2017 earnings results, which was $27.31 per share. The Company financed the cash portion of the Purchase Amount with $21.4 million of proceeds from the 2017 Bridge Facility, $16.3 million of proceeds from the Freddie Refinance, $11.0 million of proceeds from the $30 Million Credit Facility and $1.0 million of cash on hand. In connection with the issuance of OP Units to BH Equity on August 1, 2017, the Company and the OP amended the partnership agreement of the OP (the “Amendment”). Pursuant toUnits was determined based on the Amendment, limited partners holding OP Units have the right to causeApril 1, 2022 share price of NXRT as the OP to redeem their units at a redemption price equalare convertible to and in the form of the Cash Amount (as defined in the partnership agreement
of the OP), provided that such OP Units have been outstanding for at least one year. The Company, through the OP GP, as the general partner of the OP may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (one share of common stock of the Company for each OP Unit), as defined in the partnership agreement of the OP. Notwithstanding the foregoing,on a limited partner will not be entitledone to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be "integrated" with any other distribution of the Company’s common stock for purposes of complying with the Securities Act of 1933, as amended. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.one basis.
The following table sets forth the redeemable noncontrolling interests in the OP for the nine months ended September 30, 20172022 (in thousands): Redeemable noncontrolling interests in the OP, December 31, 2016 | | $ | — | | Issuance of redeemable noncontrolling interests in the OP | | | 2,000 | | Net income attributable to redeemable noncontrolling interests in the OP | | | 162 | | Other comprehensive income attributable to redeemable noncontrolling interests in the OP | | | 1 | | Distributions to redeemable noncontrolling interests in the OP | | | (53 | ) | Redeemable noncontrolling interests in the OP, September 30, 2017 | | $ | 2,110 | |
Redeemable noncontrolling interests in the OP, December 31, 2021 | | $ | 6,139 | | Net loss attributable to redeemable noncontrolling interests in the OP | | | (46 | ) | Other comprehensive income attributable to redeemable noncontrolling interests in the OP | | | 365 | | Contributions from redeemable noncontrolling interests in the OP | | | (562 | ) | Distributions to redeemable noncontrolling interests in the OP | | | 85 | | Issuance of operating partnership units for purchase of noncontrolling interests | | | 2,444 | | Adjustment to reflect redemption value of redeemable noncontrolling interests in the OP | | | (2,597 | ) | Redeemable noncontrolling interests in the OP, September 30, 2022 | | $ | 5,828 | |
Noncontrolling Interests Noncontrolling interests have in the past and may in the future be comprised of joint venture partners’ interests in joint ventures the Company consolidates. When applicable, the Company reports its joint venture partners’ interests in its consolidated joint ventures and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investment’s net income or loss, equity contributions, return of capital, and distributions. The adjustment to reflect redemption value of redeemable noncontrolling interests in the OP records the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price
at each balance sheet date. Generally, these noncontrolling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on its economic ownership percentage. During the period ended June 30, 2017, prior to the BH Buyout, the Company purchased 100% of the noncontrolling interests in three of its joint ventures for approximately $2.0 million. On June 30, 2017, in connection with the BH Buyout, the Company purchased 100% of the outstanding noncontrolling interests in its remaining joint ventures for approximately $51.7 million. On June 30, 2017, prior to the BH Buyout, the carrying value of such noncontrolling interests was approximately $20.5 million. On June 30, 2017, the Company eliminated the carrying value of such noncontrolling interests on its consolidated balance sheet. The remaining $31.2 million of the Purchase Amount resulted in a reduction to additional paid-in capital on the Company’s consolidated balance sheet.
In connection with the Contribution Agreement, the Company fully indemnified BH Equity on all non-recourse carve out guarantees it had previously provided for mortgage indebtedness secured by certain properties in the Portfolio. In consideration of the guarantees previously provided by BH Equity, it was entitled to an additional profit interest in each entity (the “Total Promote”) such that distributions were to be made to the members of the entity pro rata in proportion to their relative percentage interests until the members received an internal rate of return equal to 13%. Then, the proportion of distributions changed to a predetermined allocation according to the agreements between each entity and BH Equity. The Total Promote due by the Company to BH Equity was relinquished in connection with the BH Buyout.
11. Related Party Transactions
Fees and Reimbursements to BH and its Affiliates The Company has entered into management agreements with BH Management Services, LLC (“BH”), the Company’s property manager and an independently owned third party, who manages the Company’s properties and supervises the implementation of the Company’s value-add program. BH is an affiliate of BH Equity, who was a noncontrolling interest member of the Company’s joint ventures prior to the BH Buyout on June 30, 2017. Through BH Equity’s noncontrolling interests in such joint ventures, BH Equity was deemed to be a related party. With the completion of the BH Buyout, BH Equity is no longer deemed to be a related party. BH Equity became a noncontrolling limited partner of the OP upon execution of the Amendment. BH and its affiliates do not have common ownership in any joint venture with the Company’s Adviser; there is also no common ownership between BH and its affiliates and the Company’s Adviser. The property management fee paid to BH is approximately 3% of the monthly gross income from each property managed. Currently, BH manages all of the Company’s properties. Additionally, the Company may pay BH certain other fees, including: (1) a fee of $15.00$15-25 per unit for the one-time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, (3) acquisition fees and due diligence costs reimbursements, and (4) other owner approved fees at $55 per hour. BH also acts as a paymaster for the properties and is reimbursed at cost for various operating expenses it pays on behalf of the properties. The following is a summary of fees that the properties incurred to BH and its affiliates, as well as reimbursements paid to BH from the properties for various operating expenses, for the three and nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | Fees incurred | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Property management fees | (1) | $ | 1,110 | | | $ | 989 | | | $ | 3,280 | | | $ | 3,007 | | (1) | $ | 1,953 | | | $ | 1,632 | | | $ | 5,607 | | | $ | 4,621 | | | Construction supervision fees | (2) | | 213 | | | | 247 | | | | 651 | | | | 624 | | (2) | | 606 | | | | 276 | | | | 1,371 | | | | 832 | | | Design fees | | (2) | | 96 | | | | 6 | | | | 142 | | | | 84 | | | Acquisition fees | (3) | | — | | | | 139 | | | | 505 | | | | 139 | | (3) | | — | | | | 183 | | | | 231 | | | | 458 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reimbursements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payroll and benefits | (4) | | 4,131 | | | | 4,140 | | | | 11,855 | | | | 12,212 | | (4) | | 5,250 | | | | 4,581 | | | | 16,053 | | | | 13,638 | | | Other reimbursements | (5) | | 432 | | | | 460 | | | | 1,457 | | | | 1,465 | | (5) | | 1,265 | | | | 865 | | | | 3,426 | | | | 2,547 | | |
(1) | Included in property management fees on the consolidated statements of operations and comprehensive income.income (loss). |
(2) | Capitalized on the consolidated balance sheets and reflected in buildings and improvements. |
(3) | Includes due diligence costs. Acquisition fees incurred prior to October 1, 2016 are included in acquisition costs on the consolidated statements of operations and comprehensive income. Acquisition fees incurred for the period beginning on October 1, 2016 are capitalized to operating real estate assets on the consolidated balance sheets. |
(4) | Included in property operating expenses on the consolidated statements of operations and comprehensive income.income (loss). |
(5) | Includes property operating expenses such as repairs and maintenance costs and certain property general and administrative expenses, which are included on the consolidated statements of operations and comprehensive income.income (loss). |
Asset Management Fee
Until the BH Buyout on June 30, 2017, in accordance with the operating agreement of each entity that owns the properties, the Company earned an asset management fee for services provided in connection with monitoring the operations of the properties. The asset management fee was equal to 0.5% per annum of the aggregate effective gross income of the properties, as defined in each of the operating agreements. For the three and six months ended June 30, 2017, the properties incurred asset management fees to the Company of approximately $0.2 million and $0.4 million, respectively. For the three and nine months ended September 30, 2016, the properties incurred asset management fees to the Company of approximately $0.2 million and $0.5 million, respectively. Since the fees were paid to the Company (and not the Adviser) by consolidated properties, they have been eliminated in consolidation. However, because the Company’s previous joint venture partners owned a portion of each of a majority of the properties in the Portfolio, prior to the Company’s purchase of 100% of their joint venture interests, they absorbed their pro rata share of the asset management fee. This amount is reflected on the consolidated statements of operations and comprehensive income in the net income attributable to noncontrolling interests. 11. Related Party Transactions
Advisory and Administrative Fee In accordance with the Advisory Agreement, the Company pays the Adviser an advisory fee equal to 1.00% of the Average Real Estate Assets (as defined below). The duties performed by the Company’s Adviser under the terms of the Advisory Agreement
include, but are not limited to: providing daily management for the Company, selecting and working with third party service providers, managing the Company’s properties or overseeing the third party property manager, formulating an investment strategy for the Company and selecting suitable properties and investments, managing the Company’s outstanding debt and its interest rate exposure through derivative instruments, determining when to sell assets, and managing the value-add program or overseeing a third party vendor that implements the value-add program. “Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (1) for which any fee under the Advisory Agreement is calculated or (2) during the year for which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for capital expenditures (the value-add program). The advisory fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the advisory fee in shares of common stock, subject to certain limitations. In accordance with the Advisory Agreement, the Company also pays the Adviser an administrative fee equal to 0.20% of the Average Real Estate Assets. The administrative fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the administrative fee in shares of common stock, subject to certain limitations.
The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined below)in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million (the “Contributed Assets Cap”) (see “Expense Cap” below). Pursuant to the terms of the Advisory Agreement, the Company will reimburse the Adviser for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. “Operating Expenses” include legal, accounting, financial and due diligence services performed by the Adviser that outside professionals or outside consultants would otherwise perform, the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Adviser required for the Company’s operations, and compensation expenses under the 2016 LTIP. Operating Expenses do not include expenses for the advisory and administrative services described in the Advisory Agreement. Certain Operating Expenses, such as the Company’s ratable share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses incurred by the Adviser or its affiliates that relate to the operations of the Company, may be billed monthly to the Company under a shared services agreement. “Offering Expenses” include all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses. For the three and nine months ended September 30, 20172022 and 2016,2021, the Adviser did not bill any Operating Expenses or Offering Expenses to the Company and any such expenses the Adviser incurred during the periods are considered to be permanently waived. Expense Cap Pursuant to the terms of the Advisory Agreement, expenses paid or incurred by the Company for operating expenses and advisory and administrative fees payable to the Adviser and Operating Expenses will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect (the “Expense Cap”)). The Expense Cap does not limit the reimbursement of expenses related to Offering Expenses. The Expense Cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisitions or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Also, advisory and administrative fees are further limited on Contributed Assets to approximately $5.4 million in any calendar year. Contributed Assets refers to all Real Estate Assets contributed to the Company as part of the Spin-Off.its spin-off. The Contributed Assets Cap is not reduced for dispositions of such assets subsequent to the Spin-Off.its spin-off. Advisory and administrative fees on New Assets are not subject to the above limitation and are based on an annual rate of 1.2% on Average Real Estate Assets, but are subject to the Expense Cap. New Assets are all Real Estate Assets that are not Contributed Assets. For the three months ended September 30, 20172022 and 2016,2021, the Company incurred advisory and administrative fees of $1.9 million and $1.7$1.9 million, respectively. The amount paid forFor the three months ended September 30, 20172022 and 2016 represents the maximum fee allowed on Contributed Assets (as defined in the Advisory Agreement) under the Advisory Agreement plus approximately $0.5 million and $0.3 million, respectively, of advisory and administrative fees incurred on New Assets (as defined in the Advisory Agreement). For the nine months ended September 30, 2017 and 2016, the Company incurred advisory and administrative fees of $5.5 million and $4.9 million, respectively. The amount paid for the nine months ended September 30, 2017 and 2016 represents the maximum fee allowed on Contributed Assets (as defined in the Advisory Agreement) under the Advisory Agreement plus approximately $1.5 million and $0.9 million, respectively, of advisory and administrative fees incurred on New Assets (as defined in the Advisory Agreement). These fees are reflected on the consolidated statements of operations and comprehensive income in advisory and administrative fees.
The increase in advisory and administrative fees on New Assets between both the periods was due to the acquisition of additional properties classified as New Assets after the Spin-Off, for which the Adviser has elected to receive fees on, and the timing of the acquisitions (the Company acquired one property in July 2016 and one property in October 2016 that the Adviser elected to receive advisory and administrative fees on). For the three and nine months ended September 30, 2017,2021, the Adviser elected to voluntarily waive the advisory and administrative fees of approximately $5.5 million and $4.5 million, respectively. For the nine months ended September 30, 2022 and 2021, the Company incurred onadvisory and administrative fees of $5.6 million and $5.7 million, respectively. For the two properties acquired in December 2016,nine months ended September 30, 2022 and 2021, the property acquired in February 2017Adviser elected to voluntarily waive the advisory and administrative fees of $15.5 million and $12.6 million, respectively. The advisory and administrative fees waived by the property acquired in June 2017, whichAdviser are considered to be permanently waived for the periods. The Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion.
Other Related Party Transactions The Company has in the past, and may in the future, utilize the services of affiliated parties. For the nine months ended September 30, 20172022 and 2016,2021, the Company paid approximately $1.2$0.1 million and $0.6$0.0 million, respectively, to NexBank Title, Inc. (“NexBank Title”). NexBank Title is an affiliate of the Adviser through common beneficial ownership. NexBank Title provides title insurance and work related to providing title insurance on properties related to acquisitions, dispositions and refinancing transactions. These amounts are either capitalized as real estate assets or deferred financing costs, expensed as loss on extinguishment of debt and modification costs, or expensed as selling costs when determining gain (loss) on sales of real estate, depending on the appropriate accounting as determined for each specific transaction. The Company holds multiple operating accounts at NexBank Capital, Inc. (“NexBank”), an affiliate of the Adviser through common beneficial ownership. On July 30, 2021, three of our property-owning subsidiaries entered into agreements with NLMF Holdco, LLC, an entity under common control with our Adviser and in which we own a 10% equity interest. As of September 30, 2022, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the nine months ended September 30, 2022, the Company incurred expenses of $0.1 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive loss. Additionally, on July 30, 2021, we entered into agreements with NLMF Leaseco, LLC, which is controlled by Matt McGraner, one of our officers. We expect that these actions will provide faster, more reliable and lower cost internet to our residents.
On April 1, 2022, the Company acquired The Adair and Estates on Maryland, from investors in a Delaware Statutory Trust managed by an entity affiliated with the Adviser, for total consideration of $143.4 million (the “Purchase Price”). The Purchase Price consisted of 26,558 OP Units (valued at $2.6 million) that were issued on April 1, 2022 and approximately $71.1 million in cash. The fair value of the OP Units was determined based on the April 1, 2022 share price of NXRT as the OP units are convertible to common stock on a one to one basis. 12. Commitments and Contingencies Commitments In the normal course of business, the Company enters into various rehabilitation construction related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. As of September 30, 2017,2022, management does not anticipate any material deviations from schedule or budget related to rehabilitation projects currently in process. The Company’s agreement with NLMF Holdco, LLC may result in additional funding requirements to cover future project costs. The maximum exposure of potential commitments is expected to be no more than $4.0 million. As of September 30, 2022, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. Contingencies In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive income (loss) of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries. The Company is not aware of any environmental liability with respect to the properties thatEnvironmental liabilities could have a material adverse effect on the Company’s business, assets, cash flows or results of operations. However, thereAs of September 30, 2022, the Company was not aware of any environmental liabilities. There can be no assurance that such a material environmental liabilityliabilities do not exist.
Self-Insurance Program On March 1, 2021, the Adviser entered into a self-insurance policy resulting in an aggregate amount of $2,468,750 (the “2021 Aggregate Amount”) which is allocated across properties managed by the Adviser with approximately $1.6 million being allocated to the Company. As of December 31, 2021, all of the $1.6 million of the 2021 Aggregate Amount allocated to the Company has been prepaid. Under ASC 450-20 “Loss Contingencies”, the Company does not exist. The existencereserve for the 2021 Aggregate Amount or any portion thereof until a claim is made and the amount of any such material environmental liability could have an adverse effectthe claim and the timing of payment on the Company’s resultsclaim can be reasonably estimated. For the period from March 1, 2021 to February 28, 2022, the Company incurred claims related to its entire allocated 2021 Aggregate Amount at Old Farm and Silverbrook. On March 1, 2022, the Adviser entered into a new policy resulting in a new aggregate amount of operations$2,497,500 (the “2022 Aggregate Amount”) which is allocated across properties managed by the Adviser with approximately $1.8 million being allocated to the Company. Under ASC 450-20 “Loss Contingencies”, the Company does not reserve for the 2021 Aggregate Amount or any portion thereof until a claim is made and cash flows.the amount of the claim and the timing of payment on the claim can be reasonably estimated. For the period from March 1, 2022 to September 30, 2022, the Company incurred claims at Six Forks Station, Parc500, Hollister Place, Versailles and Arbors of Brentwood totaling approximately $1.5 million.
13. Subsequent Events Acquisition of Multifamily Property
Subsequent to September 30, 2017, the Company acquired the following property through a 1031 Exchange with the NAVA Portfolio and a reverse 1031 Exchange with Timberglen (anticipated to close in the first quarter of 2018) (dollars in thousands) (unaudited):Dividends Declared
Property Name | | Location | | Date of Acquisition | | Purchase Price | | | Debt | | | # Units | | | Ownership | | Atera | | Dallas, Texas | | October 25, 2017 | | $ | 59,200 | | (1) | $ | 29,500 | | (2) | | 380 | | | | 100 | % |
(1)
| The Company used approximately $14.1 million of proceeds from the sale of the NAVA Portfolio to fund part of the equity portion of the purchase price.
|
(2)
| The Company placed a first mortgage on the property with a floating interest rate at 1.48% over one-month LIBOR and an 84-month term that is full-term, interest-only.
|
2017 Bridge Facility
On October 19, 2017, the Company used proceeds from the sale of the NAVA Portfolio to pay down approximately $46.0 million on the 2017 Bridge Facility. On October 26, 2017, the Company, through the OP, amended the 2017 Bridge Facility (the “Extension”) to extend the maturity date on the remaining balance of approximately $8.6 million to March 31, 2018. The Company paid an amendment fee of approximately $34,000 in connection with the Extension.
Dividends Declared
On October 30, 2017,24, 2022, the Company’s board of directors increased the Company’s quarterly dividend 13.6%, or by $0.03 per share, declaringBoard approved a quarterly dividend of $0.25$0.42 per share, payable on December 29, 201730, 2022 to stockholders of record on December 15, 2017.2022.
Credit Facility Extension On October 24, 2022, the Company exercised its option to extend the Corporate Credit Facility with respect to the revolving commitments for a single one-year term resulting in a maturity date of June 30, 2025. Share Repurchase Program On October 25, 2022, the Company announced that the Board has increased its share repurchase program authorization to a total of $100.0 million. The Board also extended the term of the share repurchase authorization to October 24, 2024. 19-Property Refinance On October 4, 2022, the Company entered into an agreement with KeyBank as a Freddie Mac servicer to refinance $790.5 million of its first mortgage debt relating to 19 properties that had original loan maturities ranging from July 1, 2024 to July 1, 2028. The new loan is expected to have a 10-year term and bear interest at an annual rate of 30-day average SOFR plus 155 basis points. The loan will begin amortizing after the first 5 years. The loan is expected to close on or before November 30, 2022.
Item 2. Management’s Discussion and Analysis ofof Financial Condition and Results of Operations The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes.notesincluded herein and with our annual report on Form 10-K for the year ended December 31, 2021 (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on February 18, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2017.Annual Report. Overview As of September 30, 2017,2022, our portfolioPortfolio consisted of 3241 multifamily properties (the “Portfolio”) primarily located in the Southeastern and Southwestern United States encompassing 11,39515,387 units of apartment space that was approximately 94.0%94.1% leased with a weighted average monthly effective rent per occupied apartment unit of $932.$1,446. Substantially all of our business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”), our operating partnership.the OP. We own the Portfolio through the OP and our wholly owned taxable REIT subsidiary (“TRS”).TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. Our wholly owned subsidiary, NexPoint Residential Trust Operating PartnershipThe OP GP LLC (the “OP GP”), is the sole general partner of the OP. As of September 30, 2017,2022, there were 21,116,902 common units in the26,050,945 OP (“OP Units”)Units outstanding, of which 21,043,669,25,951,154, or 99.7%99.6%, were owned by us, and 73,233,99,791, or 0.3%0.4%, were owned by an unaffiliated limited partnerpartners (see Note 10 to our consolidated financial statements). We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the net operating income (“NOI”) at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”)the Adviser through an agreement dated March 16, 2015, as amended (the “Advisory Agreement”),the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed on March 13, 2017February 14, 2022 for a one-year term set to expire on March 16, 2018.term. The Adviser is wholly owned by NexPoint Advisors, L.P. On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”), KeyBanc Capital Markets Inc. (“KeyBanc”) and Truist Securities (f/k/a SunTrust Robinson Humphrey, Inc., “SunTrust,” and together with Jefferies, Raymond James and KeyBanc, the “ATM Sales Agents”), pursuant to which is an affiliate of Highland Capital Management, L.P. (the “Sponsor” or “Highland”). We began operations on March 31, 2015 as a resultthe Company may issue and sell from time to time shares of the transfer and contribution by NexPoint Credit Strategies Fund (“NHF”)Company’s common stock, par value $0.01 per share, having an aggregate sales price of all but oneup to $225,000,000 (the “2020 ATM Program”). Sales of the multifamily properties owned by NHF through its wholly owned subsidiary NexPoint Real Estate Opportunities, LLC (fka Freedom REIT, LLC) (“NREO”) in exchange for 100% of its outstanding common stock. We use the term “predecessor” to mean the carve-out business of NREO, which owned all or a majority interest in the multifamily properties transferred or contributed to us by NHF through NREO. On March 31, 2015, NHF distributed all of the outstanding shares of our common stock, held by NHF to holders of NHF common shares. We refer to the distribution of our common stock by NHF as the “Spin-Off.” Substantially all of our operations were conducted by our predecessor prior to March 31, 2015. With the exception of a nominal amount of initial cash funded at inception, we did not ownif any, assets prior to March 31, 2015. Our predecessor included all of the propertiesmay be made in our Portfoliotransactions that were held indirectly by NREO prior to the Spin-Off. Our predecessor was determined in accordance with the rules and regulations of the SEC. References throughout this report to the “Company,” “we,” or “our,” include the activity of the predecessor defined above.
On June 30, 2017, we and our OP entered into a contribution agreement (the “Contribution Agreement”) with BH Equities, LLC and its affiliates (collectively, “BH Equity”), whereby we purchased 100% of the joint venture interests in the Portfolio owned by BH Equity, representing approximately 8.4% ownership in the Portfolio (the “BH Buyout”), for total consideration of approximately $51.7 million (the “Purchase Amount”). The Purchase Amount consisted of approximately $49.7 million in cash that was paid on June 30, 2017 and 73,233 OP Units (initially valued at $2.0 million) that were issued on August 1, 2017. The number of OP Units issued was calculated by dividing $2.0 million by the midpoint of the range of our net asset value as publicly disclosed in connection with the release of our second quarter of 2017 earnings results, which was $27.31 per share. We financed the cash portion of the Purchase Amount with $21.4 million of proceeds from a bridge facility, $16.3 million of proceeds from refinancing 22 properties, $11.0 million of proceeds from a credit facility and $1.0 million of cash on hand. See Notes 6 and 10 to our consolidated financial statements for additional information.
In connection with the issuance of OP Units to BH Equity on August 1, 2017, we and our OP amended the partnership agreement of the OP (the “Amendment”). Pursuant to the Amendment, limited partners holding OP Units have the right to cause the OP to redeem their units for cash or, at our election, shares of our common stock on a one-for-one basis, subject to adjustment, as provided in the Amendment, provided that the units have been outstanding for at least one year. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of our common stock to the redeeming limited partner would (1) be prohibited, as determined in our sole discretion, under our charter or (2) cause the acquisition of common
stock by such redeeming limited partnerare deemed to be "integrated" with any other distribution of our common stock for purposes of complying with“at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of 1933, as amended. Accordingly, we recordordinary brokers’ transactions on the OP Units held by noncontrolling limited partners outside of permanent equity and report the OP UnitsNew York Stock Exchange, to or through a market maker at market prices prevailing at the greatertime of their carrying valuesale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their redemption value using our stock price at each balance sheet date. See Note 10 to our consolidated financial statements for additional information.
On June 30, 2017, we entered into 22 first mortgages, with a combined principal amount of $502.1 million, on certain of our properties, replacingrespective affiliates, through the $168.4 million of existing mortgage debt outstanding on nine properties and the $300.0 million outstanding under a credit facility (the “$300 Million Credit Facility”), which retired the $300 Million Credit Facility. The refinancing of the existing mortgage debt incurred approximately $1.7 million of prepayment penalties, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. The Federal Home Loan Mortgage Corporation (“Freddie Mac”), who was the lender on the existing mortgage debt and the $300 Million Credit Facility, also originated the 22 new first mortgages (the “Freddie Refinance”). The additional proceeds from the Freddie Refinance were used to fund a portion of the BH Buyout. The Freddie Refinance effectively lowered the borrowing spread on $468.4 million of our floating rate debt by approximately 57 basis points, or $2.7 million on an annualized basis. See Note 6 to our consolidated financial statements for additional information.
2020 ATM Program. During the nine months ended September 30, 2017, we, through our OP, entered into three interest rate swap transactions2022, the Company issued 52,091 shares of common stock at an average price of $83.16 per share for gross proceeds of $4.3 million under the 2020 ATM Program. The Company paid approximately $0.1 million in fees to the ATM Sales Agents with a combined notional amountrespect to such sales and incurred other issuance costs of $250.0 million. Asapproximately $0.3 million, both of September 30, 2017, we have entered into seven interest rate swap transactions with a combined notional amount of $650.0 million at a weighted average fixed rate of 1.3388%, effectively fixingwhich were netted against the interest rate on approximately 96% of our $673.7 million of floating rate mortgage debt outstanding as of September 30, 2017. As of September 30, 2017, the adjusted weighted average interest rate of our total indebtedness was 3.34% (see Item 3, “Quantitativegross proceeds and Qualitative Disclosures About Market Risk” below, and Notes 6 and 7 to our consolidated financial statements). On October 25, 2017, we purchased anrecorded in additional multifamily property, Atera, locatedpaid in Dallas, Texas, which encompasses 380 units of apartment spacecapital (see Note 138 to our consolidated financial statements).
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the nine months ended September 30, 20172022 and 2016.2021. Hurricanes Harvey and Irma
In August and September 2017, parts of Texas and Florida were hitOn October 15, 2021, a lawsuit was filed by two hurricanes, causing severe property damagea trust set up in connection with the Highland bankruptcy in the affected areas. AsUnited States Bankruptcy Court for the Northern District of September 30, 2017, we owned three properties inTexas. The lawsuit makes claims against a number of entities, including our Sponsor and James Dondero. The lawsuit does not include claims related to our business or our assets or operations. Our Sponsor and Mr. Dondero have informed us they believe the Houston area, two properties inlawsuit has no merit and they intend to vigorously defend against the Miami area, two properties inclaims. We do not expect the Tampa Bay area, and two properties in the Orlando area. Our properties in these areas suffered minimal damage, which we estimate to be approximately $40,000.lawsuit will have a material effect on our business, results of operations or financial condition.
Components of Our Revenues and Expenses Revenues Rental income. Our earnings are primarily attributable to the rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less.less on average. Also included are utility reimbursements, late fees, pet fees, and other rental fees charged to tenants. Other income. Other income includes ancillary income earned from tenants such as applicationnon-refundable fees, lateapplication fees, laundry fees, utility reimbursements,cable TV income, and other rental relatedmiscellaneous fees charged to tenants. Expenses Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs.
Acquisition costs. Acquisition costs include the costs to acquire additional properties. On October 1, 2016, we early adopted ASU 2017-01, which requires an entity to capitalize acquisition costs associated with an acquisition that is determined to be an acquisition of an asset as opposed to an acquisition of a business. Prior to our adoption of ASU 2017-01, acquisition costs were expensed as incurred. We believe most future acquisition costs will be capitalized in accordance with ASU 2017-01 (see Note 2 to our consolidated financial statements).
Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property. Property management fees. Property management fees include fees paid to BH, Management Services, LLC (“BH”), our property manager, or other third party management companies for managing each property (see Note 1110 to our consolidated financial statements). Advisory and administrative fees. Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 11 to our consolidated financial statements). Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, payments of reimbursements to the Adviser for operating expenses, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, and investor relations costs.costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser (including advisory and administrative fees on properties defined in the Advisory Agreement as New Assets) will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap. The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by theour Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due. If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future. Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property. Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases. Other Income and Expense Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs and the related impact of interest rate derivatives used to manage our interest rate risk. Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early retirementrepayment of debt, and costs incurred in a debt modification that are not capitalized as deferred financing costs.costs and other costs incurred in a debt extinguishment. Casualty losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other abnormal expenses arising from the related event. Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.
Gain on sales of real estate. Gain on sales of real estate includes the gain recognized upon sales of properties. Gain on sales of real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices of the properties.
Results of Operations for the Three and Nine Months Ended September 30, 20172022 and 20162021 The three months ended September 30, 20172022 as compared to the three months ended September 30, 20162021 The following table sets forth a summary of our operating results for the three months ended September 30, 20172022 and 20162021 (in thousands): | | For the Three Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | Total revenues | | $ | 37,097 | | | $ | 33,079 | | | $ | 4,018 | | Total expenses | | | (32,340 | ) | | | (28,137 | ) | | | (4,203 | ) | Operating income | | | 4,757 | | | | 4,942 | | | | (185 | ) | Interest expense | | | (8,257 | ) | | | (4,791 | ) | | | (3,466 | ) | Loss on extinguishment of debt and modification costs | | | (914 | ) | | | (888 | ) | | | (26 | ) | Gain on sales of real estate | | | 58,490 | | | | 9,562 | | | | 48,928 | | Net income | | | 54,076 | | | | 8,825 | | | | 45,251 | | Net income attributable to noncontrolling interests | | | — | | | | 1,735 | | | | (1,735 | ) | Net income attributable to redeemable noncontrolling interests in the Operating Partnership | | | 162 | | | | — | | | | 162 | | Net income attributable to common stockholders | | $ | 53,914 | | | $ | 7,090 | | | $ | 46,824 | |
| | For the Three Months Ended September 30, | | | | | | | | 2022 | | | 2021 | | | $ Change | | Total revenues | | $ | 68,051 | | | $ | 56,384 | | | $ | 11,667 | | Total expenses | | | (57,082 | ) | | | (50,825 | ) | | | (6,257 | ) | Operating income | | | 10,969 | | | | 5,559 | | | | 5,410 | | Interest expense | | | (11,766 | ) | | | (11,531 | ) | | | (235 | ) | Miscellaneous income | | | 198 | | | | 565 | | | | (367 | ) | Net loss | | | (599 | ) | | | (5,407 | ) | | | 4,808 | | Net loss attributable to redeemable noncontrolling interests in the Operating Partnership | | | (2 | ) | | | (16 | ) | | | 14 | | Net loss attributable to common stockholders | | $ | (597 | ) | | $ | (5,391 | ) | | $ | 4,794 | |
The change in our net incomeloss for the three months ended September 30, 20172022 as compared to theour net incomeloss for the three months ended September 30, 20162021 primarily relates to increasesan increase in gain on sales of real estate and same store operating results, and wastotal revenues, partially offset by increasesan increase in depreciation and amortization expense and interest expense. The change in our net income between the periods was also due to our acquisition and disposition activity in 2016 and 2017 and the timing of the transactions (we acquired one property in the third quarter of 2016, three properties in the fourth quarter of 2016, one property in the first quarter of 2017 and one property in the second quarter of 2017; we sold three properties in the second quarter of 2016, four properties in the third quarter of 2016, four properties in the second quarter of 2017 and five properties in the third quarter of 2017).total operating expenses. Revenues Rental income. Rental income was $32.1$66.5 million for the three months ended September 30, 20172022 compared to $28.6$54.9 million for the three months ended September 30, 2016,2021, which was an increase of approximately $3.5$11.6 million. The increase between the periods was primarily due to a 9.9%20.1% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $932$1,446 as of September 30, 2022 from $1,204 as of September 30, 2017 from $848 as of September 30, 2016,2021. The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located. The increase between the periods was also due to an increase in the occupancy rate of the Portfolio of 0.4% to 94.0% as of September 30, 2017 from 93.6% as of September 30, 2016.rents. Other income. Other income was $4.9$1.6 million for the three months ended September 30, 20172022 compared to $4.4$1.5 million for the three months ended September 30, 2016,2021, which was an increase of approximately $0.5$0.1 million. The increase between the periods was primarily due to a $0.3 million, or 15.0%,an increase in utility reimbursements.application fees of approximately $0.1 million. Expenses Property operating expenses. Property operating expenses were $10.1was $12.4 million for the three months ended September 30, 20172022 compared to $9.9$12.8 million for the three months ended September 30, 2016,2021, which was a decrease of approximately $0.4 million. The decrease between periods was primarily due to a $2.7 million decrease in casualty losses and an increase of approximately $2.3 million in all other property operating expenses. Real estate taxes and insurance. Real estate taxes and insurance costs were $9.4 million for the three months ended September 30, 2022 compared to $7.6 million for the three months ended September 30, 2021, which was an increase of approximately $0.2$1.8 million. The increase between the periods was primarily due to a $0.6 million, or 5.9%, increaseour acquisition activity in total repairs2022 and maintenance, labor2021 and utility costs, partially offset by a $0.4 million increase in casualty recoveries. Acquisition costs. No acquisition costs were expensed for the three months ended September 30, 2017 compared to $0.4 million fortiming of the three months ended September 30, 2016. During the three months ended September 30, 2017, we did not acquire any properties. During the three months ended September 30, 2016, we acquired one property. For additional information on our accounting policy related to acquisition costs, see Note 2 to our consolidated financial statements. Acquisition costs depend on the specific circumstances of each closing and are one-time costs associated with each acquisition. We believe most future acquisition costs will be capitalized.
Real estate taxes and insurance. Real estate taxes and insurance costs were $4.9 million for the three months ended September 30, 2017 compared to $4.0 million for the three months ended September 30, 2016, which was an increase of approximately $0.9 million.transactions. The increase between the periods was primarilyalso due to a $0.8$1.5 million, or 22.2%24%, increase in property taxes and a $0.1$0.2 million, or 21.5%21.8%, increase in property liability insurance. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the costs of real estate taxes.
Property management fees. Property management fees were $1.1$2.0 million for the three months ended September 30, 20172022 compared to $1.0$1.6 million for the three months ended September 30, 2016,2021 which was an increase of approximately $0.1$0.4 million. The increase between the periods was primarily due to increases in rental income and other income, which the fee isProperty management fees are primarily based on.on total revenues.
Advisory and administrative fees. Advisory and administrative fees were $1.9 million for the three months ended September 30, 20172022 compared to $1.7$1.9 million for the three months ended September 30, 2016, which was an increase of approximately $0.2 million. The amount incurred during the three months ended September 30, 2017 and 2016 represents the maximum fee allowed on properties defined as Contributed Assets under the Advisory Agreement plus approximately $0.5 million and $0.3 million, respectively, of advisory and administrative fees incurred on certain properties defined as New Assets. The increase in advisory and administrative fees on New Assets between the periods was due to the acquisition of additional properties classified as New Assets after the Spin-Off, for which our Adviser has elected to receive fees on, and the timing of the acquisitions (we acquired one property in July 2016 and one property in October 2016 that our Adviser elected to receive advisory and administrative fees on).2021. For the three months ended September 30, 2017,2022 and 2021, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the two properties we acquired in December 2016, the property we acquired in February 2017of approximately $5.5 million and the property we acquired in June 2017, which are considered to be permanently waived for the period. The$4.5 million. Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets. Corporate general and administrative expenses. Corporate general and administrative expenses were $1.6$3.8 million for the three months ended September 30, 20172022 compared to $1.0$3.2 million for the three months ended September 30, 2016,2021, which was an increase of approximately $0.6 million. The increase between the periods was primarily relatesdue to $0.8increases of $0.2 million of equity-basedin stock compensation expense recognized during the three months ended September 30, 2017 related to the grants of restricted stock units to our directors and officers pursuant to our 2016 LTIP, compared to $0.3a $0.2 million of equity-based compensation expense recognized during the three months ended September 30, 2016 (see Note 8 to our consolidated financial statements). Subject to the Expense Cap, corporate general and administrative expenses may increase in future periods as we acquire additional properties.other professional fees. Property general and administrative expenses. Property general and administrative expenses were $1.6$2.4 million for the three months ended September 30, 20172022 compared to $1.5$2.1 million for the three months ended September 30, 2016,2021, which was an increase of approximately $0.1 million. Depreciation and amortization. Depreciation and amortization costs were $11.2 million for the three months ended September 30, 2017 compared to $8.7 million for the three months ended September 30, 2016, which was an increase of approximately $2.5$0.3 million. The increase between the periods was primarily due to thea $0.1 million increase in professional fees and a $0.1 million increase in other entity expense.
Depreciation and amortization. Depreciation and amortization of intangible lease assets of $1.2costs were $25.2 million related to two properties for the three months ended September 30, 20172022 compared to $0.2$21.6 million related to one property for the three months ended September 30, 2016,2021, which was an increase of approximately $1.0$3.6 million. The increase between the periods was primarily due to an increase of $0.1 million as well asin amortization of intangible lease assets and an increase in depreciation expense of approximately $3.5 million, which was primarily due to our acquisition activity in 2022 and 2021 and the acquisitiontiming of five properties subsequent to September 30, 2016.the transactions. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property. The increase between the periods was partially offset by a reduction in depreciation expense related to the disposition of nine properties subsequent to September 30, 2016.
Other Income and Expense Interest expense. Interest expense was $8.3$11.8 million for the three months ended September 30, 20172022 compared to $4.8$11.5 million for the three months ended September 30, 2016, which2021. There was an increase of approximately $3.5 million. The increase between the periods was primarily due to an increase in interest on debt of approximately $9.4 million as a result of increased interest rates and a reductiondecreases in gain recognized related to the ineffective portion of changes in fair value of our interest rate swap derivatives designated as cash flow hedges (see “Debt, Derivativesexpense and Hedging Activity – Interest Rate Swap Agreements” below), as shown in the table below.interest rate caps expense of approximately $7.2 million and $2.2 million, respectively. The following table details the various costs included in interest expense for the three months ended September 30, 20172022 and 20162021 (in thousands): | | For the Three Months Ended September 30, | | | | | | | For the Three Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | | 2022 | | | 2021 | | | $ Change | | Interest on debt | | $ | 7,262 | | | $ | 4,524 | | | $ | 2,738 | | | $ | 16,661 | | | $ | 7,239 | | | $ | 9,422 | | Amortization of deferred financing costs | | | 572 | | | | 385 | | | | 187 | | | | 734 | | | | 525 | | | | 209 | | Interest rate swaps - effective portion | | | 263 | | | | 472 | | | | (209 | ) | | Interest rate swaps - ineffective portion | | | (32 | ) | | | (599 | ) | | | 567 | | | Interest rate swap expense | | | | (3,468 | ) | | | 3,744 | | | | (7,212 | ) | Interest rate caps expense | | | 192 | | | | 9 | | | | 183 | | | | (2,161 | ) | | | 23 | | | | (2,184 | ) | Total | | $ | 8,257 | | | $ | 4,791 | | | $ | 3,466 | | | $ | 11,766 | | | $ | 11,531 | | | $ | 235 | |
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs remained flat at $0.9 million for the three months ended September 30, 2017 compared to $0.9 million for the three months ended September 30, 2016. The following table details the various costs included in loss on extinguishment of debt and modification costs for the three months ended September 30, 2017 and 2016 (in thousands):
| | For the Three Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | Prepayment penalties | | $ | 502 | | | $ | 474 | | | $ | 28 | | Write-off of deferred financing costs | | | 622 | | | | 414 | | | | 208 | | Debt modification costs (reimbursements) | | | (210 | ) | | | — | | | | (210 | ) | Total | | $ | 914 | | | $ | 888 | | | $ | 26 | |
Gain on sales of real estate. Gain on sales of real estate was $58.5 million for the three months ended September 30, 2017 compared to $9.6 million for the three months ended September 30, 2016, which was an increase of approximately $48.9 million. During the three months ended September 30, 2017, we sold five properties; during the three months ended September 30, 2016, we sold four properties.
The nine months ended September 30, 20172022 as compared to the nine months ended September 30, 20162021 The following table sets forth a summary of our operating results for the nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Nine Months Ended September 30, | | | | | | | For the Nine Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | | 2022 | | | 2021 | | | $ Change | | Total revenues | | $ | 109,322 | | | $ | 100,247 | | | $ | 9,075 | | | $ | 194,603 | | | $ | 160,743 | | | $ | 33,860 | | Total expenses | | | (98,810 | ) | | | (83,095 | ) | | | (15,715 | ) | | | (173,775 | ) | | | (147,194 | ) | | | (26,581 | ) | Operating income | | | 10,512 | | | | 17,152 | | | | (6,640 | ) | | | 20,828 | | | | 13,549 | | | | 7,279 | | Interest expense | | | (22,479 | ) | | | (15,650 | ) | | | (6,829 | ) | | | (34,804 | ) | | | (32,830 | ) | | | (1,974 | ) | Casualty gains | | | | 357 | | | | 2,379 | | | | (2,022 | ) | Miscellaneous income | | | | 526 | | | | 1,505 | | | | (979 | ) | Loss on extinguishment of debt and modification costs | | | (5,717 | ) | | | (1,722 | ) | | | (3,995 | ) | | | — | | | | (328 | ) | | | 328 | | Gain on sales of real estate | | | 78,386 | | | | 25,932 | | | | 52,454 | | | Net income | | | 60,702 | | | | 25,712 | | | | 34,990 | | | Net income attributable to noncontrolling interests | | | 2,836 | | | | 4,047 | | | | (1,211 | ) | | Net income attributable to redeemable noncontrolling interests in the Operating Partnership | | | 162 | | | | — | | | | 162 | | | Net income attributable to common stockholders | | $ | 57,704 | | | $ | 21,665 | | | $ | 36,039 | | | Net loss | | | | (13,093 | ) | | | (15,725 | ) | | | 2,632 | | Net loss attributable to redeemable noncontrolling interests in the Operating Partnership | | | | (46 | ) | | | (47 | ) | | | 1 | | Net loss attributable to common stockholders | | | $ | (13,047 | ) | | $ | (15,678 | ) | | $ | 2,631 | |
The change in our net incomeloss for the nine months ended September 30, 20172022 as compared to the net incomeloss for the nine months ended September 30, 20162021 primarily relates to a decrease in casualty gains and increases in gain on sales of real estateoperating expenses and same store operating results, and wasinterest expense, partially offset by increasesan increase in depreciation and amortization expense, interest expense and loss on extinguishment of debt and modification costs. The change in our net income between the periods was also due to our acquisition and disposition activity in 2016 and 2017 and the timing of the transactions (we acquired one property in the third quarter of 2016, three properties in the fourth quarter of 2016, one property in the first quarter of 2017 and one property in the second quarter of 2017; we sold three properties in the second quarter of 2016, four properties in the third quarter of 2016, four properties in the second quarter of 2017 and five properties in the third quarter of 2017).total revenues. Revenues Rental income. Rental income was $94.6$189.9 million for the nine months ended September 30, 20172022 compared to $87.4$156.3 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $7.2$33.6 million. The increase between the periods was primarily due to an 9.9%a 20.1% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $932$1,446 as of September 30, 2022 from $1,204 as of September 30, 2017 from $848 as of September 30, 2016,2021. The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located. The increase between the periods was also due to an increase in the occupancy rate of the Portfolio of 0.4% to 94.0% as of September 30, 2017 from 93.6% as of September 30, 2016. Other income. Other income was $14.8$4.7 million for the nine months ended September 30, 20172022 compared to $12.8$4.4 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $2.0$0.3 million. The increase between the periods was primarily due to a $1.1$0.3 million or 16.3%, increase in utility reimbursements.non-refundable fees. Expenses Property operating expenses. Property operating expenses were $29.6$42.7 million for the nine months ended September 30, 20172022 compared to $28.9$35.1 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $0.7$7.6 million. The increase between the periods was primarily due to our acquisition activity in 2022 and 2021 and the timing of the transactions. The increase between the periods was also due to a $0.9 million increase in casualty losses, $0.8 million increase in water and sewer, $0.4 million increase in bonuses for leasing and renewal, and approximately $5.5 million increase in all other property operating expenses combined. Real estate taxes and insurance. Real estate taxes and insurance costs were $27.7 million for the nine months ended September 30, 2022 compared to $24.9 million for the nine months ended September 30, 2021, which was an increase of approximately $2.8 million. The increase between the periods was primarily due to a $1.1$2.2 million, or 3.8%, increase in total repairs and maintenance, labor and utility costs, partially offset by a $0.4 million increase in casualty recoveries. Acquisition costs. No acquisition costs were expensed for the nine months ended September 30, 2017 compared to $0.4 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we acquired two properties. During the nine months ended September 30, 2016, we acquired one property. For additional information on our accounting policy related to acquisition costs, see Note 2 to our consolidated financial statements. Acquisition costs depend on the specific circumstances of each closing and are one-time costs associated with each acquisition. We believe most future acquisition costs will be capitalized.
Real estate taxes and insurance. Real estate taxes and insurance costs were $14.9 million for the nine months ended September 30, 2017 compared to $12.3 million for the nine months ended September 30, 2016, which was an increase of approximately $2.6 million. The increase between the periods was primarily due to a $2.4 million, or 22.9%10.4%, increase in property taxes and a $0.2$0.6 million, or 10.7%22.6%, increase in property liability insurance. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the costscost of real estate taxes.
Property management fees. Property management fees were $3.3$5.6 million for the nine months ended September 30, 2017 compared to $3.02022 and $4.6 million for the nine months ended September 30, 2016, which was an increase of approximately $0.3 million. The increase between the periods was primarily due to increases in rental income and other income, which the fee is2021. Property management fees are primarily based on.on total revenues. Advisory and administrative fees. Advisory and administrative fees were $5.5$5.6 million for the nine months ended September 30, 2017 compared to $4.92022 and $5.7 million for the nine months ended September 30, 2016,2021 which was an increasea decrease of approximately $0.6$0.1 million. The amount incurred during the nine months ended September 30, 2017 and 2016 represents the maximum fee allowed on properties defined as Contributed Assets under the Advisory Agreement plus approximately $1.5 million and $0.9 million, respectively, of advisory and administrative fees incurred on certain properties defined as New Assets. The increase in advisory and administrative fees on New Assets between the periods was due to the acquisition of additional properties classified as New Assets after the Spin-Off, for which our Adviser has elected to receive fees on, and the timing of the acquisitions (we acquired one property in July 2016 and one property in October 2016 that our Adviser elected to receive advisory and administrative fees on). For the nine months ended September 30, 2017,2022 and 2021, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the two properties we acquired in December 2016, the property we acquired in February 2017of approximately $15.5 million and the property we acquired in June 2017, which are considered to be permanently waived for the period. The$12.6 million. Our Adviser is not contractually obligated to waive fees on New Assets in the
future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets. Corporate general and administrative expenses. Corporate general and administrative expenses were $4.8$11.1 million for the nine months ended September 30, 20172022 compared to $2.6$9.1 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $2.2$2.0 million. The increase between periodswas primarily relatesdue to $2.4increases in other professional fees of $0.9 million of equity-basedand stock compensation expense recognized during the nine months ended September 30, 2017 related to the grants of restricted stock units to our directors and officers pursuant to our 2016 LTIP, compared to $0.3 million of equity-based compensation expense recognized during the nine months ended September 30, 2016 (see Note 8 to our consolidated financial statements). Subject to the Expense Cap, corporate general and administrative expenses may increase in future periods as we acquire additional properties.$0.7 million. Property general and administrative expenses. Property general and administrative expenses were $4.8$6.6 million for the nine months ended September 30, 20172022 compared to $4.5$5.5 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $1.3 million. The increase was primarily due to an increase in centralized services, other entity expenses, and professional fees of $0.3 million, $0.2 million, and $0.1 million, respectively. Depreciation and amortization. Depreciation and amortization costs were $74.5 million for the nine months ended September 30, 2022 compared to $62.3 million for the nine months ended September 30, 2021, which was an increase of approximately $12.2 million. The increase between the periods was primarily due to a $0.2 million, or 15.9%,an increase in advertising and promotional costs. Depreciation and amortization. Depreciation and amortization costs were $35.9 million for the nine months ended September 30, 2017 compared to $26.4 million for the nine months ended September 30, 2016, which was an increase of approximately $9.5 million. The increase between the periods was primarily due to the amortization of intangible lease assets of $6.4$1.8 million related to six properties for the nine months ended September 30, 2017 compared to $0.9 million related to four properties for the nine months ended September 30, 2016, which wasand an increase of approximately $5.5$10.3 million as well asin depreciation expense, which was primarily due to our acquisition activity in 2022 and 2021 and the acquisitiontiming of five properties subsequent to September 30, 2016.the transactions. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property. The increase between the periods was partially offset by a reduction in depreciation expense related to the disposition of nine properties subsequent to September 30, 2016.
Other Income and Expense Interest expense. Interest expense was $22.5$34.8 million for the nine months ended September 30, 20172022 compared to $15.7$32.8 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $6.8$2.0 million. The increase between the periods was primarily due to an increase in interest on debt andof $15.1 million as a reductionresult of increased interest rates, partially offset by decreases in gain recognized related to the ineffective portion of changes in fair value of our interest rate swap derivatives designated as cash flow hedges (see “Debt, Derivatives and Hedging Activity – Interest Rate Swap Agreements” below), as shown in the table below.interest rate caps expenses of approximately $10.0 million and $3.6 million. The following table details the various costs included in interest expense for the nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Nine Months Ended September 30, | | | | | | | For the Nine Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | | 2022 | | | 2021 | | | $ Change | | Interest on debt | | $ | 19,696 | | | $ | 14,666 | | | $ | 5,030 | | | $ | 35,136 | | | $ | 20,030 | | | $ | 15,106 | | Amortization of deferred financing costs | | | 1,548 | | | | 1,084 | | | | 464 | | | | 2,033 | | | | 1,581 | | | | 452 | | Interest rate swaps - effective portion | | | 939 | | | | 472 | | | | 467 | | | Interest rate swaps - ineffective portion | | | (97 | ) | | | (599 | ) | | | 502 | | | Interest rate swap expense | | | | 1,160 | | | | 11,153 | | | | (9,993 | ) | Interest rate caps expense | | | 393 | | | | 27 | | | | 366 | | | | (3,525 | ) | | | 66 | | | | (3,591 | ) | Total | | $ | 22,479 | | | $ | 15,650 | | | $ | 6,829 | | | $ | 34,804 | | | $ | 32,830 | | | $ | 1,974 | |
Loss on extinguishment of debt and modification costs. Loss There were no loss on extinguishment of debt and modification costs was $5.7 million for the nine months ended September 30, 20172022 compared to $1.7a $0.3 million loss for the nine months ended September 30, 2016,2021, which was an increasea decrease of approximately $4.0$0.3 million. The increasedecrease between the periods was primarily due to increasesa decrease in prepayment penaltieswrite-off of deferred financing costs of approximately $1.9 million and debt modification expenses of approximately $1.8$0.3 million. During the nine months ended September 30, 2017 and 2016, we sold nine properties and seven properties, respectively. The following table details the various costs included in loss on extinguishment of debt and modification costs for the nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Nine Months Ended September 30, | | | | | | | For the Nine Months Ended September 30, | | | | | | | | 2017 | | | 2016 | | | $ Change | | | 2022 | | | 2021 | | | $ Change | | Prepayment penalties | | $ | 2,701 | | | $ | 827 | | | $ | 1,874 | | | Prepayment penalties and defeasance costs | | | $ | — | | | $ | — | | | $ | — | | Write-off of deferred financing costs | | | 1,003 | | | | 698 | | | | 305 | | | | — | | | | 328 | | | | (328 | ) | Debt modification costs | | | 2,013 | | | | 197 | | | | 1,816 | | | Debt modification and other extinguishment costs | | | | — | | | | — | | | | — | | Total | | $ | 5,717 | | | $ | 1,722 | | | $ | 3,995 | | | $ | — | | | $ | 328 | | | $ | (328 | ) |
Gain on sales of real estate. Gain on sales of real estate was $78.4 million for the nine months ended September 30, 2017 compared to $25.9 million for the nine months ended September 30, 2016, which was an increase of approximately $52.5 million. During the nine months ended September 30, 2017, we sold nine properties; during the nine months ended September 30, 2016, we sold seven properties.
Non-GAAP Measurements Net Operating Income and Same Store Net Operating Income NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties to other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is not affectedcalculated by adjusting net income (loss) to add back (1) the cost of funds,interest expense (2) acquisition costs, (3) advisory and administrative fees, (4)(3) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (5)(4) corporate general and administrative expenses, (6)(5) other gains and losses that are specific to us (7)including loss on extinguishment of debt and modification costs, (6) casualty-related expenses/(recoveries) and casualty gains (losses), (7) pandemic expense and (8) property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on behalf of the Company at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees. The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Acquisition costsCorporate general and administrative expenses, pandemic expense, and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Casualty-related expenses and recoveries, casualty gains and losses, and losses of extinguished debt and modification costs are excluded because they do not reflect continuing operating costs of the property owner. Entity level general and administrative expenses incurred at the properties and pandemic expenses are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these items from net income is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, loss on extinguishment of debt and modification costs, acquisition costs, certain fees to affiliates such as advisory and administrative fees, depreciation and amortization expense and gains or losses from the sale of properties, pandemic expenses, and other gains and losses as determined under GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do. We define Same“Same Store NOINOI” as NOI for our properties that are comparable between periods. We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods. Net Operating Income for the Three Months Ended September 30, 2017 and 2016
The following table reflects the revenues, property operating expenses and NOI for the three months ended September 30, 2017 and 2016 for our Same Store and Non-Same Store properties (dollars in thousands):
| | For the Three Months Ended September 30, | | | | | | | | | | | | 2017 | | | 2016 | | | $ Change | | | % Change | | Revenues | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Rental income | | $ | 22,191 | | | $ | 20,841 | | | $ | 1,350 | | | | 6.5 | % | Other income | | | 3,591 | | | | 3,227 | | | | 364 | | | | 11.3 | % | Same Store revenues | | | 25,782 | | | | 24,068 | | | | 1,714 | | | | 7.1 | % | Non-Same Store | | | | | | | | | | | | | | | | | Rental income | | | 9,957 | | | | 7,791 | | | | 2,166 | | | | 27.8 | % | Other income | | | 1,358 | | | | 1,220 | | | | 138 | | | | 11.3 | % | Non-Same Store revenues | | | 11,315 | | | | 9,011 | | | | 2,304 | | | | 25.6 | % | Total revenues | | | 37,097 | | | | 33,079 | | | | 4,018 | | | | 12.1 | % | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Property operating expenses (1) | | | 7,208 | | | | 6,983 | | | | 225 | | | | 3.2 | % | Real estate taxes and insurance | | | 3,201 | | | | 2,920 | | | | 281 | | | | 9.6 | % | Property management fees (2) | | | 775 | | | | 721 | | | | 54 | | | | 7.5 | % | Property general and administrative expenses (3) | | | 840 | | | | 857 | | | | (17 | ) | | | -2.0 | % | Same Store operating expenses | | | 12,024 | | | | 11,481 | | | | 543 | | | | 4.7 | % | Non-Same Store | | | | | | | | | | | | | | | | | Property operating expenses (4) | | | 3,248 | | | | 2,888 | | | | 360 | | | | 12.5 | % | Real estate taxes and insurance | | | 1,652 | | | | 1,053 | | | | 599 | | | | 56.9 | % | Property management fees (2) | | | 335 | | | | 268 | | | | 67 | | | | 25.0 | % | Property general and administrative expenses (5) | | | 327 | | | | 324 | | | | 3 | | | | 0.9 | % | Non-Same Store operating expenses | | | 5,562 | | | | 4,533 | | | | 1,029 | | | | 22.7 | % | Total operating expenses | | | 17,586 | | | | 16,014 | | | | 1,572 | | | | 9.8 | % | | | | | | | | | | | | | | | | | | NOI | | | | | | | | | | | | | | | | | Same Store | | | 13,758 | | | | 12,587 | | | | 1,171 | | | | 9.3 | % | Non-Same Store | | | 5,753 | | | | 4,478 | | | | 1,275 | | | | 28.5 | % | Total NOI | | $ | 19,511 | | | $ | 17,065 | | | $ | 2,446 | | | | 14.3 | % |
(1)
| For the three months ended September 30, 2017 and 2016, excludes approximately $(410,000) and $3,000, respectively, of casualty-related expenses/(recoveries).
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(2)
| Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.
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(3)
| For the three months ended September 30, 2017 and 2016, excludes approximately $316,000 and $220,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.
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(4)
| For the three months ended September 30, 2017 and 2016, excludes approximately $29,000 and $0, respectively, of casualty-related expenses/(recoveries).
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(5)
| For the three months ended September 30, 2017 and 2016, excludes approximately $111,000 and $126,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.
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See reconciliation of net income to NOI below under “NOI and Same Store NOI for the Three and Nine Months Ended September 30, 2017 and 2016.”
Same Store Results of Operations for the Three Months Ended September 30, 2017 and 2016
There are 26 properties encompassing 8,871 units of apartment space in our same store pool for the three months ended September 30, 2017 (our “Same Store” properties). As of September 30, 2017, our Same Store properties were approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of $893. As of September 30, 2016, our Same Store properties were approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of $846. For our Same Store properties, we recorded the following operating results for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016:
Revenues
Rental income. Rental income was $22.2 million for the three months ended September 30, 2017 compared to $20.8 million for the three months ended September 30, 2016, which was an increase of approximately $1.4 million, or 6.5%. The majority of the increase is primarily related to a 5.5% increase in the weighted average monthly effective rent per occupied apartment unit to $893 as of September 30, 2017 from $846 as of September 30, 2016.
Other income. Other income was $3.6 million for the three months ended September 30, 2017 compared to $3.2 million for the three months ended September 30, 2016, which was an increase of approximately $0.4 million, or 11.3%. The majority of the increase is related to a $0.2 million, or 10.4%, increase in utility reimbursements and a $0.1 million, or 7.4%, increase in administrative and application fees.
Expenses
Property operating expenses. Property operating expenses were $7.2 million for the three months ended September 30, 2017 compared to $7.0 million for the three months ended September 30, 2016, which was an increase of approximately $0.2 million, or 3.2%. The majority of the increase is related to a $0.2 million, or 10.6%, increase in repairs and maintenance costs.
Real estate taxes and insurance. Real estate taxes and insurance costs were $3.2 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016, which was an increase of approximately $0.3 million, or 9.6%. The majority of the increase is related to a $0.2 million, or 9.6%, increase in property taxes and a less than $0.1 million, or 9.8%, increase in property liability insurance.
Property management fees. Property management fees were $0.8 million for the three months ended September 30, 2017 compared to $0.7 million for the three months ended September 30, 2016, which was an increase of approximately $0.1 million, or 7.5%. The majority of the increase is related to a $1.4 million, or 6.5%, increase in rental income, and a $0.4 million, or 11.3%, increase in other income, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $0.8 million for the three months ended September 30, 2017 compared to $0.9 million for the three months ended September 30, 2016, which was a decrease of approximately $0.1 million, or 2.0%.
Net Operating Income for the Nine Months Ended September 30, 2017 and 2016
The following table reflects the revenues, property operating expenses and NOI for the nine months ended September 30, 2017 and 2016 for our Same Store and Non-Same Store properties (dollars in thousands):
| | For the Nine Months Ended September 30, | | | | | | | | | | | | 2017 | | | 2016 | | | $ Change | | | % Change | | Revenues | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Rental income | | $ | 65,311 | | | $ | 61,525 | | | $ | 3,786 | | | | 6.2 | % | Other income | | | 10,421 | | | | 9,178 | | | | 1,243 | | | | 13.5 | % | Same Store revenues | | | 75,732 | | | | 70,703 | | | | 5,029 | | | | 7.1 | % | Non-Same Store | | | | | | | | | | | | | | | | | Rental income | | | 29,253 | | | | 25,881 | | | | 3,372 | | | | 13.0 | % | Other income | | | 4,337 | | | | 3,663 | | | | 674 | | | | 18.4 | % | Non-Same Store revenues | | | 33,590 | | | | 29,544 | | | | 4,046 | | | | 13.7 | % | Total revenues | | | 109,322 | | | | 100,247 | | | | 9,075 | | | | 9.1 | % | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Property operating expenses (1) | | | 20,625 | | | | 19,723 | | | | 902 | | | | 4.6 | % | Real estate taxes and insurance | | | 9,632 | | | | 8,704 | | | | 928 | | | | 10.7 | % | Property management fees (2) | | | 2,274 | | | | 2,122 | | | | 152 | | | | 7.2 | % | Property general and administrative expenses (3) | | | 2,698 | | | | 2,620 | | | | 78 | | | | 3.0 | % | Same Store operating expenses | | | 35,229 | | | | 33,169 | | | | 2,060 | | | | 6.2 | % | Non-Same Store | | | | | | | | | | | | | | | | | Property operating expenses (4) | | | 9,337 | | | | 9,133 | | | | 204 | | | | 2.2 | % | Real estate taxes and insurance | | | 5,279 | | | | 3,622 | | | | 1,657 | | | | 45.7 | % | Property management fees (2) | | | 1,006 | | | | 885 | | | | 121 | | | | 13.7 | % | Property general and administrative expenses (5) | | | 1,154 | | | | 1,226 | | | | (72 | ) | | | -5.9 | % | Non-Same Store operating expenses | | | 16,776 | | | | 14,866 | | | | 1,910 | | | | 12.8 | % | Total operating expenses | | | 52,005 | | | | 48,035 | | | | 3,970 | | | | 8.3 | % | | | | | | | | | | | | | | | | | | NOI | | | | | | | | | | | | | | | | | Same Store | | | 40,503 | | | | 37,534 | | | | 2,969 | | | | 7.9 | % | Non-Same Store | | | 16,814 | | | | 14,678 | | | | 2,136 | | | | 14.6 | % | Total NOI | | $ | 57,317 | | | $ | 52,212 | | | $ | 5,105 | | | | 9.8 | % |
(1)
| For the nine months ended September 30, 2017 and 2016, excludes approximately $(380,000) and $9,000, respectively, of casualty-related expenses/(recoveries).
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(2)
| Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.
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(3)
| For the nine months ended September 30, 2017 and 2016, excludes approximately $622,000 and $460,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.
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(4)
| For the nine months ended September 30, 2017 and 2016, excludes approximately $29,000 and $82,000, respectively, of casualty-related expenses/(recoveries).
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(5)
| For the nine months ended September 30, 2017 and 2016, excludes approximately $282,000 and $167,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.
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See reconciliation of net income to NOI below under “NOI and Same Store NOI for the Three and Nine Months Ended September 30, 2017 and 2016.”
Same Store Results of Operations for the Nine Months Ended September 30, 2017 and 2016
There are 26 properties encompassing 8,871 units of apartment space in our same store pool for the nine months ended September 30, 2017 (our “Same Store” properties). As of September 30, 2017, our Same Store properties were approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of $893. As of September 30, 2016, our Same
Store properties were approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of $846. For our Same Store properties, we recorded the following operating results for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016:
Revenues
Rental income. Rental income was $65.3 million for the nine months ended September 30, 2017 compared to $61.5 million for the nine months ended September 30, 2016, which was an increase of approximately $3.8 million, or 6.2%. The majority of the increase is primarily related to a 5.5% increase in the weighted average monthly effective rent per occupied apartment unit to $893 as of September 30, 2017 from $846 as of September 30, 2016.
Other income. Other income was $10.4 million for the nine months ended September 30, 2017 compared to $9.2 million for the nine months ended September 30, 2016, which was an increase of approximately $1.2 million, or 13.5%. The majority of the increase is related to a $0.6 million, or 11.9%, increase in utility reimbursements and a $0.3 million, or 9.8%, increase in administrative and application fees.
Expenses
Property operating expenses. Property operating expenses were $20.6 million for the nine months ended September 30, 2017 compared to $19.7 million for the nine months ended September 30, 2016, which was an increase of approximately $0.9 million, or 4.6%. The majority of the increase is related to a $0.8 million, or 14.2%, increase in repairs and maintenance costs.
Real estate taxes and insurance. Real estate taxes and insurance costs were $9.6 million for the nine months ended September 30, 2017 compared to $8.7 million for the nine months ended September 30, 2016, which was an increase of approximately $0.9 million, or 10.7%. The majority of the increase is related to a $0.9 million, or 12.1%, increase in property taxes.
Property management fees. Property management fees were $2.3 million for the nine months ended September 30, 2017 compared to $2.1 million for the nine months ended September 30, 2016, which was an increase of approximately $0.2 million, or 7.2%. The majority of the increase is related to a $3.8 million, or 6.2%, increase in rental income, and a $1.2 million, or 13.5%, increase in other income, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $2.7 million for the nine months ended September 30, 2017 compared to $2.6 million for the nine months ended September 30, 2016, which was an increase of approximately $0.1 million, or 3.0%. The majority of the increase primarily related to a $0.2 million, or 21.6%, increase in advertising and promotional costs, partially offset by a $0.1 million, or 2.4%, decrease in other administrative costs.
NOI and Same Store NOI for the Three and Nine Months Ended September 30, 20172022 and 20162021 The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our Same Store NOI for the three and nine months ended September 30, 20172022 and 20162021 to net income,loss, the most directly comparable GAAP financial measure (in thousands): | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Net income | | $ | 54,076 | | | $ | 8,825 | | | $ | 60,702 | | | $ | 25,712 | | | Adjustments to reconcile net income to NOI: | | | | | | | | | | | | | | | | | | Net loss | | | $ | (599 | ) | | $ | (5,407 | ) | | $ | (13,093 | ) | | $ | (15,725 | ) | Adjustments to reconcile net loss to NOI: | | | | | | | | | | | | | | | | | | Advisory and administrative fees | | | 1,870 | | | | 1,698 | | | | 5,544 | | | | 4,944 | | | | 1,904 | | | | 1,938 | | | | 5,615 | | | | 5,706 | | Corporate general and administrative expenses | | | 1,623 | | | | 1,023 | | | | 4,842 | | | | 2,649 | | | | 3,818 | | | | 3,152 | | | | 11,116 | | | | 9,070 | | Casualty-related expenses/(recoveries) | (1) | | (381 | ) | | | 3 | | | | (351 | ) | | | 91 | | (1) | | (2,976 | ) | | | 120 | | | | 666 | | | | (272 | ) | Casualty gain | | | | — | | | | — | | | | (357 | ) | | | (2,379 | ) | Pandemic expense | | | | — | | | | 11 | | | | — | | | | 46 | | Property general and administrative expenses | (2) | | 427 | | | | 346 | | | | 904 | | | | 627 | | (2) | | 728 | | | | 712 | | | | 2,035 | | | | 1,660 | | Depreciation and amortization | | | 11,215 | | | | 8,667 | | | | 35,866 | | | | 26,363 | | | | 25,224 | | | | 21,591 | | | | 74,490 | | | | 62,335 | | Interest expense | | | 8,257 | | | | 4,791 | | | | 22,479 | | | | 15,650 | | | | 11,766 | | | | 11,531 | | | | 34,804 | | | | 32,830 | | Loss on extinguishment of debt and modification costs | | | 914 | | | | 888 | | | | 5,717 | | | | 1,722 | | | | — | | | | — | | | | — | | | | 328 | | Gain on sales of real estate | | | (58,490 | ) | | | (9,562 | ) | | | (78,386 | ) | | | (25,932 | ) | | Acquisition costs | | | — | | | | 386 | | | | — | | | | 386 | | | NOI | | $ | 19,511 | | | $ | 17,065 | | | $ | 57,317 | | | $ | 52,212 | | | $ | 39,865 | | | $ | 33,648 | | | $ | 115,276 | | | $ | 93,599 | | Less Non-Same Store | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenues | | | (11,315 | ) | | | (9,011 | ) | | | (33,590 | ) | | | (29,544 | ) | | | (6,155 | ) | | | (2,570 | ) | | | (21,647 | ) | | | (8,467 | ) | Operating expenses | | | 5,562 | | | | 4,533 | | | | 16,776 | | | | 14,866 | | | | 2,361 | | | | 1,033 | | | | 7,882 | | | | 3,412 | | Operating income | | | | (16 | ) | | | (226 | ) | | | (30 | ) | | | (872 | ) | Same Store NOI | | $ | 13,758 | | | $ | 12,587 | | | $ | 40,503 | | | $ | 37,534 | | | $ | 36,055 | | | $ | 31,885 | | | $ | 101,481 | | | $ | 87,672 | |
(1) | Adjustment to net incomeloss to exclude certain property operating expenses that are casualty-related expenses/(recoveries). |
(2) | Adjustment to net incomeloss to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees. |
Net Operating Income for Our Q3 Same Store and Non-Same Store Properties for the Three Months Ended September 30, 2022 and 2021 There are 36 properties encompassing 13,930 units of apartment space in our same store pool for the three months ended September 30, 2022 and 2021 (our “Q3 Same Store” properties). Our Q3 Same Store properties exclude the following five properties in our Portfolio as of September 30, 2022: Cutter’s Point, Six Forks Station, High House at Cary, The Adair and Estates on Maryland as well as the 74 units that are currently down (see Note 5). The following table reflects the revenues, property operating expenses and NOI for the three months ended September 30, 2022 and 2021 for our Q3 Same Store and Non-Same Store properties (dollars in thousands): | | For the Three Months Ended September 30, | | | | | | | | | | | | 2022 | | | 2021 | | | $ Change | | | % Change | | Revenues | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Rental income | | $ | 60,407 | | | $ | 52,441 | | | $ | 7,966 | | | | 15.2 | % | Other income | | | 1,489 | | | | 1,373 | | | | 116 | | | | 8.4 | % | Same Store revenues | | | 61,896 | | | | 53,814 | | | | 8,082 | | | | 15.0 | % | Non-Same Store | | | | | | | | | | | | | | | | | Rental income | | | 6,093 | | | | 2,477 | | | | 3,616 | | | N/M | | Other income | | | 62 | | | | 93 | | | | (31 | ) | | | -33.3 | % | Non-Same Store revenues | | | 6,155 | | | | 2,570 | | | | 3,585 | | | N/M | | Total revenues | | | 68,051 | | | | 56,384 | | | | 11,667 | | | | 20.7 | % | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Property operating expenses (1) | | | 14,037 | | | | 11,982 | | | | 2,055 | | | | 17.2 | % | Real estate taxes and insurance | | | 8,682 | | | | 7,433 | | | | 1,249 | | | | 16.8 | % | Property management fees (2) | | | 1,783 | | | | 1,561 | | | | 222 | | | | 14.2 | % | Property general and administrative expenses (3) | | | 1,521 | | | | 1,292 | | | | 229 | | | | 17.7 | % | Same Store operating expenses | | | 26,023 | | | | 22,268 | | | | 3,755 | | | | 16.9 | % | Non-Same Store | | | | | | | | | | | | | | | | | Property operating expenses (4) | | | 1,309 | | | | 670 | | | | 639 | | | N/M | | Real estate taxes and insurance | | | 737 | | | | 213 | | | | 524 | | | N/M | | Property management fees (2) | | | 177 | | | | 78 | | | | 99 | | | N/M | | Property general and administrative expenses (5) | | | 138 | | | | 72 | | | | 66 | | | N/M | | Non-Same Store operating expenses | | | 2,361 | | | | 1,033 | | | | 1,328 | | | N/M | | Total operating expenses | | | 28,384 | | | | 23,301 | | | | 5,083 | | | | 21.8 | % | | | | | | | | | | | | | | | | | | Operating income | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Miscellaneous income | | | 182 | | | | 339 | | | | (157 | ) | | | -46.3 | % | Non-Same Store | | | | | | | | | | | | | | | | | Miscellaneous income | | | 16 | | | | 226 | | | | (210 | ) | | N/M | | Total operating income | | | 198 | | | | 565 | | | | (367 | ) | | | -65.0 | % | | | | | | | | | | | | | | | | | | NOI | | | | | | | | | | | | | | | | | Same Store | | | 36,055 | | | | 31,885 | | | | 4,170 | | | | 13.1 | % | Non-Same Store | | | 3,810 | | | | 1,763 | | | | 2,047 | | | | 116.1 | % | Total NOI | | $ | 39,865 | | | $ | 33,648 | | | $ | 6,217 | | | | 18.5 | % |
(1) | For the three months ended September 30, 2022 and 2021, excludes approximately $(1,822,000) and $136,000, respectively, of casualty-related expenses/(recoveries). |
(2) | Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP. |
(3) | For the three months ended September 30, 2022 and 2021, excludes approximately $634,000 and $599,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees. |
(4) | For the three months ended September 30, 2022 and 2021, excludes approximately $1,154,000 and $5,000, respectively, of casualty-related recoveries. |
(5) | For the three months ended September 30, 2022 and 2021, excludes approximately $94,000 and $113,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees. |
See reconciliation of net loss to NOI above under “NOI and Same Store NOI for the Three and Nine Months Ended September 30, 2022 and 2021.” Q3 Same Store Results of Operations for the Three Months Ended September 30, 2022 and 2021 As of September 30, 2022, our Q3 Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of $1,445. As of September 30, 2021, our Q3 Same Store properties were approximately 95.3% leased with a weighted average monthly effective rent per occupied apartment unit of $1,210. For our Q3 Same Store properties, we recorded the following operating results for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021: Revenues Rental income. Rental income was $60.4 million for the three months ended September 30, 2022 compared to $52.4 million for the three months ended September 30, 2021, which was an increase of approximately $8.0 million, or 15.2%. The majority of the increase is related to a 19.4% increase in the weighted average monthly effective rent per occupied apartment unit to $1,445 as of September 30, 2022 from $1,210 as of September 30, 2021, partially offset by a 1.3% decrease in occupancy. Other income. Other income was $1.5 million for the three months ended September 30, 2022, compared to $1.4 million for the three months ended September 30, 2021. Expenses Property operating expenses. Property operating expenses were $14.0 million for the three months ended September 30, 2022 compared to $12.0 million for the three months ended September 30, 2021, which was an increase of $2.0 million, or 17.2%. The majority of the increase is related to a $2.4 million, or 19.3% increase in repair and maintenance costs. Real estate taxes and insurance. Real estate taxes and insurance costs were $8.7 million for the three months ended September 30, 2022 compared to $7.4 million for the three months ended September 30, 2021, which was an increase of approximately $1.3 million, or 16.8%. The increase is primarily related to a $0.6 million, or 2.9%, increase in property taxes and a $0.4 million, or 11.9% increase in insurance expense. Property management fees. Property management fees were $1.8 million for the three months ended September 30, 2022 compared to $1.6 million for the three months ended September 30, 2021, which was an increase of approximately $0.2 million. The increase between the periods was primarily due to an increase in revenues, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were $1.5 million for the three months ended September 30, 2022 compared to $1.3 million for the three months ended September 30, 2021, which was an increase of approximately $0.2 million. The majority of the increase was related to increases in professional fees, licenses fees, and locator fees.
Net Operating Income for Our Same Store and Non-Same Store Properties for the Nine Months Ended September 30, 2022 and 2021 There are 34 properties encompassing 13,426 units of apartment space in our same store pool for the nine months ended September 30, 2022 and 2021 (our “Same Store” properties). Our Same Store properties exclude the following seven properties in our Portfolio as of September 30, 2022: Cutter’s Point, The Verandas at Lake Norman, Creekside at Matthews, Six Forks Station, High House at Cary, The Adair and Estates on Maryland as well as the 74 units that are currently down (see Note 5). The following table reflects the revenues, property operating expenses and NOI for the nine months ended September 30, 2022 and 2021 for our Same Store and Non-Same Store properties (dollars in thousands): | | For the Nine Months Ended September 30, | | | | | | | | | | | | 2022 | | | 2021 | | | $ Change | | | % Change | | Revenues | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Rental income | | $ | 168,628 | | | $ | 148,005 | | | $ | 20,623 | | | | 13.9 | % | Other income | | | 4,328 | | | | 4,271 | | | | 57 | | | | 1.3 | % | Same Store revenues | | | 172,956 | | | | 152,276 | | | | 20,680 | | | | 13.6 | % | Non-Same Store | | | | | | | | | | | | | | | | | Rental income | | | 21,321 | | | | 8,300 | | | | 13,021 | | | N/M | | Other income | | | 326 | | | | 167 | | | | 159 | | | N/M | | Non-Same Store revenues | | | 21,647 | | | | 8,467 | | | | 13,180 | | | N/M | | Total revenues | | | 194,603 | | | | 160,743 | | | | 33,860 | | | | 21.1 | % | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Property operating expenses (1) | | | 37,783 | | | | 33,180 | | | | 4,603 | | | | 13.9 | % | Real estate taxes and insurance | | | 25,152 | | | | 24,129 | | | | 1,023 | | | | 4.2 | % | Property management fees (2) | | | 5,011 | | | | 4,382 | | | | 629 | | | | 14.4 | % | Property general and administrative expenses (3) | | | 4,025 | | | | 3,546 | | | | 479 | | | | 13.5 | % | Same Store operating expenses | | | 71,971 | | | | 65,237 | | | | 6,734 | | | | 10.3 | % | Non-Same Store | | | | | | | | | | | | | | | | | Property operating expenses (4) | | | 4,220 | | | | 2,162 | | | | 2,058 | | | N/M | | Real estate taxes and insurance | | | 2,518 | | | | 747 | | | | 1,771 | | | N/M | | Property management fees (2) | | | 618 | | | | 258 | | | | 360 | | | N/M | | Property general and administrative expenses (5) | | | 526 | | | | 245 | | | | 281 | | | N/M | | Non-Same Store operating expenses | | | 7,882 | | | | 3,412 | | | | 4,470 | | | N/M | | Total operating expenses | | | 79,853 | | | | 68,649 | | | | 11,204 | | | | 16.3 | % | | | | | | | | | | | | | | | | | | Operating income | | | | | | | | | | | | | | | | | Same Store | | | | | | | | | | | | | | | | | Miscellaneous income | | | 496 | | | | 633 | | | | (137 | ) | | | -21.6 | % | Non-Same Store | | | | | | | | | | | | | | | | | Miscellaneous income | | | 30 | | | | 872 | | | | (842 | ) | | N/M | | Total operating income | | | 526 | | | | 1,505 | | | | (979 | ) | | | -65.0 | % | | | | | | | | | | | | | | | | | | NOI | | | | | | | | | | | | | | | | | Same Store | | | 101,481 | | | | 87,672 | | | | 13,809 | | | | 15.8 | % | Non-Same Store | | | 13,795 | | | | 5,927 | | | | 7,868 | | | N/M | | Total NOI | | $ | 115,276 | | | $ | 93,599 | | | $ | 21,677 | | | | 23.2 | % |
(1) | For the nine months ended September 30, 2022 and 2021, excludes approximately $3,137,000 and $232,000, respectively, of casualty-related recoveries. |
(2) | Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP. |
(3) | For the nine months ended September 30, 2022 and 2021, excludes approximately $1,811,000 and $1,399,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees. |
(4) | For the nine months ended September 30, 2022 and 2021, excludes approximately $(66,000) and $6,000, respectively, of casualty-related recoveries. |
(5) | For the nine months ended September 30, 2022 and 2021, excludes approximately $224,000 and $261,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional, centralized leasing service and franchise tax fees. |
See reconciliation of net loss to NOI above under “NOI and Same Store NOI for the Three and Nine Months Ended September 30, 2022 and 2021.” Same Store Results of Operations for the Nine Months Ended September 30, 2022 and 2021 As of September 30, 2022, our Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of $1,448. As of September 30, 2021, our Same Store properties were approximately 95.4% leased with a weighted average monthly effective rent per occupied apartment unit of $1,208. For our Same Store properties, we recorded the following operating results for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021: Revenues Rental income. Rental income was $168.6 million for the nine months ended September 30, 2022 compared to $148.0 million for the nine months ended September 30, 2021, which was an increase of approximately $20.6 million, or 13.9%. The majority of the increase is related to a 19.9% increase in the weighted average monthly effective rent per occupied apartment unit to $1,448 as of September 30, 2022 from $1,208 as of September 30, 2021, partially offset by a 1.4% decrease in occupancy. Other income. Other income was $4.3 million for the nine months ended September 30, 2022 compared to $4.3 million for the nine months ended September 30, 2021. Expenses Property operating expenses. Property operating expenses were $37.8 million for the nine months ended September 30, 2022 compared to $33.2 million for the nine months ended September 30, 2021, which was an increase of approximately $4.6 million, or 13.9%. The majority of the increase is related to a $2.4 million, or 19.3%, increase in repairs and maintenance and a $1.2 million, or 9.0%, increase in payroll. Real estate taxes and insurance. Real estate taxes and insurance costs were $25.2 million for the nine months ended September 30, 2022 compared to $24.1 million for the nine months ended September 30, 2021, which was an increase of approximately $1.1 million, or 4.2%. The majority of the increase is related to a $0.6 million, or 2.9%, increase in property tax. Additionally, insurance expense increased by $0.4 million, or 11.9%. Property management fees. Property management fees were $5.0 million for the nine months ended September 30, 2022 compared to $4.4 million for the nine months ended September 30, 2021, which was an increase of approximately $0.6 million, or 14.4%. The majority of the increase is related to a $20.6 million, or 13.9%, increase in rental income, which the fee is primarily based on. Property general and administrative expenses. Property general and administrative expenses were $4.0 million for the nine months ended September 30, 2022 compared to $3.5 million for the nine months ended September 30, 2021, which was an increase of approximately $0.5 million. The majority of the increase was related to increases in professional fees, licenses fees, and locator fees of approximately $0.1 million, $0.1 million, and $0.1 million, respectively.
FFO, Core FFO and AFFO We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations or FFO,(“FFO”), as defined by the National Association of Real Estate Investment Trusts or NAREIT,(“NAREIT”), core funds from operations or (“Core FFO,FFO”) and adjusted funds from operations or AFFO,(“AFFO”) are important non-GAAP supplemental measures of operating performance for a REIT. Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges.amortization. We compute FFO attributable to common stockholders in accordance with NAREIT’s definition. Our presentation differs slightly in that we begin with net income (loss) before adjusting for amounts attributable to (1) noncontrolling interests in consolidated joint ventures and (2) redeemable noncontrolling interests in the OP; we show the combined amounts attributable to such noncontrolling interests as an adjustment to arrive at FFO attributable to common stockholders. Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the ongoing operating performance of our portfolio. Core FFO adjusts FFO to remove items such as acquisition expenses, losses on extinguishment of debt and modification costs (includes(including prepayment penalties and defeasance costs incurred andon the early repayment of debt, the write-off of unamortized deferred loanfinancing costs and fair market value adjustments of assumed debt related to the early retirementrepayment of debt, and costs incurred in connection with a debt modification that are expensed)not capitalized as deferred financing costs and other costs incurred in a debt extinguishment), casualty-related expenses and recoveries and gains or losses, pandemic expenses, the amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, the ineffective portion of fair value adjustments on our interest rate derivatives designated as cash flow hedges, and the noncontrolling interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.
AFFO makes certain adjustments to Core FFO in order to arrive at a more refined measure of the operating performance of our portfolio.Portfolio. There is no industry standard definition of AFFO and practice is divergent across the industry. AFFO adjusts Core FFO to remove items such as equity-based compensation expense and the amortization of deferred financing costs incurred in connection with obtaining long-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities. The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO per share, as they are exchangeable for common stock on a one-for-one basis. The FFO, Core FFO and AFFO allocable to such units is allocated on this same basis and reflected in the adjustments for noncontrolling interests in the table below. As such, the assumed conversion of these units would have no net impact on the determination of diluted FFO, Core FFO and AFFO per share. See Note 910 to our consolidated financial statements for additional information. We believe that the use of FFO, Core FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. While FFO, Core FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance. FFO, Core FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO, Core FFO and AFFO may not be comparable to FFO, Core FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define Core FFO or AFFO differently than we do.
The following table reconciles our calculations of FFO, Core FFO and AFFO to net income,loss, the most directly comparable GAAP financial measure, for the three and nine months ended September 30, 20172022 and 20162021 (in thousands, except per share amounts): | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | | | | | | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | % Change (1) | | | Net income | | $ | 54,076 | | | $ | 8,825 | | | $ | 60,702 | | | $ | 25,712 | | | Net loss | | | $ | (599 | ) | | $ | (5,407 | ) | | $ | (13,093 | ) | | $ | (15,725 | ) | | | -16.7 | % | | Depreciation and amortization | | | 11,215 | | | | 8,667 | | | | 35,866 | | | | 26,363 | | | | 25,224 | | | | 21,591 | | | | 74,490 | | | | 62,335 | | | | 19.5 | % | | Gain on sales of real estate | | | (58,490 | ) | | | (9,562 | ) | | | (78,386 | ) | | | (25,932 | ) | | Adjustment for noncontrolling interests | | | (21 | ) | | | (1,021 | ) | | | (1,670 | ) | | | (3,401 | ) | | | (99 | ) | | | (49 | ) | | | (228 | ) | | | (140 | ) | | N/M | | | FFO attributable to common stockholders | | | 6,780 | | | | 6,909 | | | | 16,512 | | | | 22,742 | | | | 24,526 | | | | 16,135 | | | | 61,169 | | | | 46,470 | | | | 31.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FFO per share - basic | | $ | 0.32 | | | $ | 0.32 | | | $ | 0.78 | | | $ | 1.07 | | | $ | 0.96 | | | $ | 0.64 | | | $ | 2.39 | | | $ | 1.85 | | | | 29.2 | % | | FFO per share - diluted | | $ | 0.32 | | | $ | 0.32 | | | $ | 0.77 | | | $ | 1.07 | | | $ | 0.96 | | | $ | 0.64 | | | $ | 2.39 | | | $ | 1.85 | | | | 29.2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisition costs | | | — | | | | 386 | | | | — | | | | 386 | | | Loss on extinguishment of debt and modification costs | | | 914 | | | | 888 | | | | 5,717 | | | | 1,722 | | | | — | | | | — | | | | — | | | | 328 | | | N/M | | | Change in fair value on derivative instruments - ineffective portion | | | (32 | ) | | | (599 | ) | | | (97 | ) | | | (599 | ) | | Casualty-related expenses/(recoveries) | | | | (2,976 | ) | | | 120 | | | | 666 | | | | (272 | ) | | N/M | | | Casualty gains | | | | — | | | | — | | | | (357 | ) | | | (2,379 | ) | | N/M | | | Pandemic expense | | | | — | | | | 11 | | | | — | | | | 46 | | | N/M | | | Amortization of deferred financing costs - acquisition term notes | | | 197 | | | | — | | | | 323 | | | | — | | | | 281 | | | | 150 | | | | 786 | | | | 499 | | | N/M | | | Adjustment for noncontrolling interests | | | (4 | ) | | | (104 | ) | | | (430 | ) | | | (188 | ) | | | 11 | | | | — | | | | (3 | ) | | | 6 | | | N/M | | | Core FFO attributable to common stockholders | | | 7,855 | | | | 7,480 | | | | 22,025 | | | | 24,063 | | | | 21,842 | | | | 16,416 | | | | 62,261 | | | | 44,698 | | | | 39.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Core FFO per share - basic | | $ | 0.37 | | | $ | 0.35 | | | $ | 1.05 | | | $ | 1.13 | | | $ | 0.85 | | | $ | 0.65 | | | $ | 2.43 | | | $ | 1.78 | | | | 36.5 | % | | Core FFO per share - diluted | | $ | 0.37 | | | $ | 0.35 | | | $ | 1.03 | | | $ | 1.13 | | | $ | 0.85 | | | $ | 0.65 | | | $ | 2.43 | | | $ | 1.78 | | | | 36.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortization of deferred financing costs - long term debt | | | 375 | | | | 385 | | | | 1,225 | | | | 1,084 | | | | 453 | | | | 375 | | | | 1,247 | | | | 1,082 | | | | 15.2 | % | | Equity-based compensation expense | | | 822 | | | | 296 | | | | 2,414 | | | | 296 | | | | 2,025 | | | | 1,807 | | | | 5,906 | | | | 5,211 | | | | 13.3 | % | | Adjustment for noncontrolling interests | | | (3 | ) | | | (38 | ) | | | (72 | ) | | | (93 | ) | | | (10 | ) | | | (7 | ) | | | (27 | ) | | | (19 | ) | | | 42.1 | % | | AFFO attributable to common stockholders | | | 9,049 | | | | 8,123 | | | | 25,592 | | | | 25,350 | | | | 24,310 | | | | 18,591 | | | | 69,387 | | | | 50,972 | | | | 36.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | AFFO per share - basic | | $ | 0.43 | | | $ | 0.38 | | | $ | 1.22 | | | $ | 1.19 | | | $ | 0.95 | | | $ | 0.74 | | | $ | 2.71 | | | $ | 2.03 | | | | 33.5 | % | | AFFO per share - diluted | | $ | 0.42 | | | $ | 0.38 | | | $ | 1.20 | | | $ | 1.19 | | | $ | 0.95 | | | $ | 0.74 | | | $ | 2.71 | | | $ | 2.03 | | | | 33.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted average common shares outstanding - basic | | | 21,085 | | | | 21,260 | | | | 21,057 | | | | 21,282 | | | Weighted average common shares outstanding - diluted | | | 21,453 | | | | 21,376 | | | | 21,407 | | | | 21,322 | | | Weighted average common stock outstanding - basic | | | | 25,598 | | | | 25,175 | | | | 25,630 | | | | 25,128 | | | | 2.0 | % | | Weighted average common stock outstanding - diluted | | | | 25,598 | | | | 25,175 | | | | 25,630 | | | | 25,128 | | | | 2.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Dividends declared per common share | | $ | 0.220 | | | $ | 0.206 | | | $ | 0.660 | | | $ | 0.618 | | | $ | 0.38 | | | $ | 0.34 | | | $ | 1.14 | | | $ | 1.02 | | | | 11.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FFO Coverage - diluted | | 1.44x | | | 1.57x | | | 1.17x | | | 1.73x | | (2) | 2.52x | | | 1.88x | | | 2.10x | | | 1.81x | | | | 16.02 | % | | Core FFO Coverage - diluted | | 1.66x | | | 1.7x | | | 1.56x | | | 1.83x | | (2) | 2.25x | | | 1.91x | | | 2.13x | | | 1.74x | | | | 22.60 | % | | AFFO Coverage - diluted | | 1.92x | | | 1.84x | | | 1.81x | | | 1.92x | | (2) | 2.50x | | | 2.16x | | | 2.38x | | | 1.98x | | | | 19.88 | % | |
(1) | Represents the percentage change for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. |
(2) | Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during the period. |
The three months ended September 30, 20172022 as compared to the three months ended September 30, 20162021 FFO was $6.8$24.5 million for the three months ended September 30, 20172022 compared to $6.9$16.1 million for the three months ended September 30, 2016,2021, which was a decreasean increase of approximately $0.1$8.4 million. The change in our FFO between the periods primarily relates to increases in total property operating expenses of approximately $0.9 million, interest expense of approximately $3.5 million and corporate general and administrative expenses of approximately $0.6 million, and was partially offset by an increase in total revenues of approximately $4.0$11.7 million, and adjustments for amounts attributable to noncontrolling interests.partially offset by increases in operating expenses. Core FFO was $7.9$21.8 million for the three months ended September 30, 20172022 compared to $7.5$16.4 million for the three months ended September 30, 2016,2021, which was an increase of approximately $0.4$5.4 million. The change in our Core FFO between the periods primarily
relates to a decreasean increase in gain recognized related to the ineffective portion of changes in fair value of our interest rate swap derivatives designated as cash flow hedges of approximately $0.6 million,FFO, partially offset by decreasesan increase in acquisition costscasualty-related recoveries gains of approximately $0.4 million and FFO.$3.0 million. AFFO was $9.0$24.3 million for the three months ended September 30, 20172022 compared to $8.1$18.6 million for the three months ended September 30, 2016,2021, which was an increase of approximately $0.9$5.7 million. The change in our AFFO between the periods primarily relates to increasesan increase in Core FFO and an increase in equity-based compensation expense of approximately $0.5 million and Core FFO.$0.2 million. The nine months ended September 30, 20172022 as compared to the nine months ended September 30, 20162021 FFO was $16.5$61.2 million for the nine months ended September 30, 20172022 compared to $22.7$46.5 million for the nine months ended September 30, 2016,2021, which was a decreasean increase of approximately $6.2$14.7 million. The change in our FFO between the periods primarily relates to increasesan increase in total property operating expensesrevenues of approximately $3.4$33.9 million, interest expense of approximately $6.8 million, loss on extinguishment of debt and modification costs of approximately $4.0 million and corporate general and administrative expenses of approximately $2.2 million, and was partially offset by an increase in total revenues of approximately $9.1 million and adjustments for amounts attributable to noncontrolling interests.operating expenses. Core FFO was $22.0$62.3 million for the nine months ended September 30, 20172022 compared to $24.1$44.7 million for the nine months ended September 30, 2016,2021, which was a decreasean increase of approximately $2.1$17.6 million. The change in our Core FFO between the periods primarily relates to decreasesan increase in gain recognizedFFO and an increase in casualty related to the ineffective portionexpenses of changes in fair value of our interest rate swap derivatives designated as cash flow hedges of approximately $0.5$0.9 million, and FFO, partially offset by a $4.0 millionan increase in loss on extinguishmentamortization of debt and modificationdeferred financing costs and adjustments for amounts attributable to noncontrolling interests.- acquisition term notes of $0.3 million. AFFO was $25.6$69.4 million for the nine months ended September 30, 20172022 compared to $25.4$51.0 million for the nine months ended September 30, 2016,2021, which was an increase of approximately $0.2$18.4 million. The change in our AFFO between the periods primarily relates to an increase in Core FFO and an increase of equity-based compensation expense of approximately $2.1 million, partially offset by a decrease in Core FFO.$0.7 million. Liquidity and Capital Resources Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures directly associated with our multifamily properties, including: the repayment of the 2017 Bridge Facility if we are unable to extend or refinance the bridge facility;
| • | capital expenditures to continue our value-add program and to improve the quality and performance of our multifamily properties; |
capital expenditures to continue our value-add program and to improve the quality and performance of our multifamily properties;
| • | interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below); |
interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below);
| • | recurring maintenance necessary to maintain our multifamily properties; |
recurring maintenance necessary to maintain our multifamily properties;
| • | distributions necessary to qualify for taxation as a REIT; |
distributions necessary to qualify for taxation as a REIT;
| • | acquisition of additional properties; |
advisory and administrative fees payable to our Adviser;
| • | advisory and administrative fees payable to our Adviser; |
general and administrative expenses;
| • | general and administrative expenses; |
reimbursements to our Adviser; and
| • | reimbursements to our Adviser; and |
property management fees payable to BH.
| • | property management fees payable to BH. |
We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances. We intendbalances and any unused capacity on paying the outstanding principal balance of the 2017 Bridge Facility with proceeds from the sales of properties classified as held for sale as of September 30, 2017 or cash on hand.Corporate Credit Facility. As of September 30, 2017,2022, we had approximately $6.3$15.3 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements. Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property dispositions. However, there are a number of
factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating
performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The Company continues to monitor the impact on COVID-19 and its impact on future rent collections, valuation of real estate investments, impact on cash flow and ability to refinance or repay debt. The success of our business strategy will depend, in part, on our ability to access these various capital sources. In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to remain competitive. Also, acquisitions, redevelopments, or expansions of our multifamily properties will require significant capital outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could be materially and adversely affected. On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of the ATM Sales Agents, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, or their respective affiliates, through the 2020 ATM Program. During the nine months ended September 30, 2022, the Company issued 52,091 shares of common stock at an average price of $83.16 per share for gross proceeds of $4.3 million under the 2020 ATM Program. The Company paid approximately $0.1 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.3 million, both of which were netted against the gross proceeds and recorded in additional paid in capital (see Note 8 to our consolidated financial statements). We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following September 30, 2017.2022. Cash Flows The following table presents selected data from our consolidated statements of cash flows for the nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Nine Months Ended September 30, | | | | 2017 | | | 2016 | | Net cash provided by operating activities | | $ | 27,499 | | | $ | 26,281 | | Net cash provided by investing activities | | | 67,618 | | | | 105,865 | | Net cash used in financing activities | | | (28,266 | ) | | | (127,045 | ) | Net increase in cash and restricted cash | | | 66,851 | | | | 5,101 | | Cash and restricted cash, beginning of period | | | 55,261 | | | | 63,095 | | Cash and restricted cash, end of period | | $ | 122,112 | | | $ | 68,196 | |
| | For the Nine Months Ended September 30, | | | | 2022 | | | 2021 | | Net cash provided by operating activities | | $ | 69,582 | | | $ | 57,914 | | Net cash used in investing activities | | | (179,536 | ) | | | (222,955 | ) | Net cash provided by financing activities | | | 87,873 | | | | 175,310 | | Net increase (decrease) in cash, cash equivalents and restricted cash | | | (22,081 | ) | | | 10,269 | | Cash, cash equivalents and restricted cash, beginning of period | | | 88,696 | | | | 57,015 | | Cash, cash equivalents and restricted cash, end of period | | $ | 66,615 | | | $ | 67,284 | |
Cash flows from operating activities. During the nine months ended September 30, 2017,2022, net cash provided by operating activities was $27.5$69.6 million compared to net cash provided by operating activities of $26.3$57.9 million for the nine months ended September 30, 2016.2021. The change in cash flows from operating activities was mainly due to changes in operating assets and liabilities and an increase in NOI, partially offset by increases in interest on debt, prepayment penalties and debt modification expenses paid.total revenues. Cash flows from investing activities. During the nine months ended September 30, 2017,2022, net cash provided byused in investing activities was $67.6$179.5 million compared to net cash provided byused in investing activities of $105.9$223.0 million for the nine months ended September 30, 2016.2021. The change in cash flows from investing activities was mainly due to theour acquisition of two properties foractivity in 2022 and 2021 and disposition activity in 2020 and a combined purchase price of approximately $138.0 million during the perioddecrease in 2017, compared to the acquisition of one property for a purchase price of approximately $22.4 million during the period in 2016. The change in cash flowsinsurance proceeds received from investing activities was partially offset by an increase in net proceeds from sales of real estate; we sold nine properties for net proceeds of approximately $224.4 million during the period in 2017, compared to selling seven properties for net proceeds of approximately $131.8 million during the period in 2016.casualty losses. Cash flows from financing activities. During the nine months ended September 30, 2017,2022, net cash used inprovided by financing activities was $28.3$87.9 million compared to net cash used inprovided by financing activities of $127.0$175.3 million for the nine months ended September 30, 2016.2021. The change in cash flows from financing activities was mainly due to a netan increase in debtrepurchases of common stock of $11.1 million, a decrease in mortgage proceeds received of approximately $146.5$29.7 million, and a decrease in credit facilities proceeds received of $230 million, partially offset by the $51.7 million purchase amounta decrease in credit facility payments of the BH Buyout during the period in 2017. The proceeds from the net increase in debt proceeds during the period in 2017 were primarily used to acquire two properties for a combined purchase price of approximately $138.0 million and fund a portion of the BH Buyout.$193 million.
Debt, Derivatives and Hedging Activity Mortgage Debt As of September 30, 2017,2022, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $733.3 million$1.4 billion at a weighted average interest rate of 3.04%4.58% and an adjusted weighted average interest rate of 3.14%2.80%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3388%1.0682% for one-month LIBOR on our combined $650.0 million$1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest rate on $650.0 million$1.2 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information. We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of September 30, 2017,2022, interest rate swap agreements effectively covered $650.0 million, or 96%,91% of our $673.7 million$1.3 billion of floating rate mortgage debt outstanding. The interest rate cap agreements generally have a term of three to four years, and cover the outstanding principal amount of the underlying debt.debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As of September 30, 2017,2022, interest rate cap agreements covered $293.2$537.1 million of our $673.7 million$1.3 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on $293.2$537.1 million of our floating rate mortgage debt at a weighted average rate of 4.20%4.67%. On June 30, 2017, weOctober 4, 2022, the Company entered into 22 first mortgages,an agreement with KeyBank as a combined principal amount of $502.1 million, on certain of our properties, replacing the $168.4Freddie Mac servicer to refinance $790.5 million of existingits first mortgage debt outstandingrelating to 19 properties that had original loan maturities ranging from July 1, 2024 to July 1, 2028. The new loan is expected to have a 10-year term and bear interest at an annual rate of 30-day average SOFR plus 155 basis points. The loan will begin amortizing after the first 5 years. The loan is expected to close on nine properties and the $300.0 million outstanding under a credit facility (the “$300 Million Credit Facility”). The refinancing of the existing mortgage debt incurred approximately $1.7 million of prepayment penalties, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. The Federal Home Loan Mortgage Corporation (“Freddie Mac”), who was the lender on the existing mortgage debt and the $300 Million Credit Facility, also originated the 22 new first mortgages (the “Freddie Refinance”). In accordance with FASB ASC 470-50, Debt – Modifications and Extinguishments, we accounted for the refinancing as a modification of a debt instrument. As such, the existing $4.9 million of net deferred financing costs related to the prior mortgage debt and credit facility debt is included with the approximately $4.5 million of deferred financing costs incurred in connection with the modification. Such costs are recorded as a reduction from mortgages payable on the accompanying consolidated balance sheet as of Septemberor before November 30, 2017 and are amortized over the terms of the new mortgage debt. Additionally, we incurred approximately $2.0 million of debt modification costs in connection with the Freddie Refinance that were not capitalized as deferred financing costs. Such costs are recorded in loss on extinguishment of debt and modification costs on the accompanying consolidated statements of operations and comprehensive income. We used approximately $16.3 million of proceeds from the Freddie Refinance to fund a portion of the BH Buyout. The following nine properties had existing mortgage debt that was refinanced: The Summit at Sabal Park, Courtney Cove, The Preserve at Terrell Mill, The Ashlar, Heatherstone, Versailles, Seasons 704 Apartments, Madera Point and The Pointe at the Foothills. The following twelve properties, which were refinanced as described above, were previously cross-collateralized as security for the $300 Million Credit Facility: Arbors on Forest Ridge, Cutter’s Point, Eagle Crest, Silverbrook, Timberglen, Edgewater at Sandy Springs, Beechwood Terrace, Willow Grove, Woodbridge, Venue at 8651, Old Farm and Stone Creek at Old Farm. The Colonnade, which obtained a first mortgage as described above, was not previously encumbered by mortgage debt or credit facility debt.
For additional information regarding the Freddie Refinance and the BH Buyout, see Notes 6 and 10 to our consolidated financial statements.2022.
We intend to invest in additional multifamily properties as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common stock or other securities or property dispositions. In addition, we may seek financing from U.S. government agencies, including through Freddie Mac, the Federal National Mortgage Association, and the U.S. Department of Housing and Urban Development, in appropriate circumstances in connection with the acquisition or refinancing of existing mortgage loans. Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no
assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all. Furthermore, following the completion of our value-add and capital expenditures programs and depending on the interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.
2017 BridgeCorporate Credit Facility
On June 30, 2017, we, through our OP,March 25, 2022, the Company entered into a $65.9loan modification agreement by and among the Company, the OP, Truist Bank and the Lenders party thereto, which modified the Company’s existing credit agreement, dated as of June 30, 2021 (as amended and supplemented, the “Corporate Credit Facility”). As of September 30, 2022, there was $350.0 million bridge facility (the “2017 Bridge Facility”)available for borrowing under the Corporate Credit Facility. Subject to conditions provided in the Corporate Credit Facility, the commitments under Corporate Credit Facility may be increased up to an additional $150.0 million if the lenders agree to increase their commitments or if the lenders agree for the increase to be funded by any additional lender proposed by the Company, through the OP. The Corporate Credit Facility will mature on June 30, 2024 with KeyBank. We drew $44.5 millionrespect to fund a portionthe revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the purchase price of Rockledge Apartments and $21.4 million to fund a portion of the BH Buyout. In July 2017, we used proceeds from the sale of Regatta Bay to pay down $11.3 million on the 2017 Bridge Facility. The 2017 Bridge Facility is a full-term, interest-only facility with an initial four-month term (see below). The 2017 Bridge Facility is guaranteed by us. Interest accrues on the 2017 Bridge Facility at an interest rate of one-month LIBOR plus 3.75%. We intend on paying the outstanding principal balance of the 2017 Bridge Facility with proceeds from the sales of properties classified as held for sale as of September 30, 2017 or cash on hand. See Notes 5, 6 and 10 to our consolidated financial statements for additional information. In October 2017, we used proceeds from the sale of The Arbors, The Crossings, The Crossings at Holcomb Bridge and The Knolls to pay down $46.0 million on the 2017 Bridge Facility, bringing the outstanding principal balance to approximately $8.6 million as of October 31, 2017, and also extendedrevolving commitments before the maturity date or elects to March 31, 2018 (see Note 13exercise its right and option to our consolidated financial statements).
$extend the facility with respect to the revolving commitments for a single one-year term. As of September 30, Million Credit Facility
On December 29, 2016, we, through our OP, entered into a $30.02022, there was $335.0 million credit facility (the “$30 Million Credit Facility”) and immediately drew $15.0 million to fund a portion ofin aggregate principal outstanding under the purchase price of Old Farm and Stone Creek at Old Farm. On February 1, 2017, we drew $14.0 million and used $12.0 million to fund a portion of the purchase price of Hollister Place and $2.0 million to fund value-add renovations at our properties. In April 2017, we used cash on hand plus our share of the proceeds, net of distributions to noncontrolling interests, from four properties we sold to pay down $10.0 million on the $30 MillionCorporate Credit Facility. On June 30, 2017, we drew $11.0 million to fund a portion of the BH Buyout.
The $30 MillionCorporate Credit Facility is a full-term, interest-only facilitynon-recourse obligation and contains customary events of default, including defaults in the payment of principal or interest, defaults in compliance with an initial term of 24 monthsthe covenants contained in the document evidencing the loan, defaults in payments under any other security instrument, and one 12-month extension option and is guaranteed by our OP. See Notes 5, 6 and 10 to our consolidated financial statements for additional information. bankruptcy or other insolvency events. As of September 30, 2017, we had $30.0 million outstanding under2022, the Company believes it is compliant with all provisions. For additional information regarding our $30 Million Credit Facility. $300 Million Credit Facility
On June 6, 2016, we, through certain of our subsidiaries, entered into a $200.0 million credit facility, which was expanded to $300.0 million (the “$300 Million Credit Facility”) during the fourth quarter of 2016 to acquire three properties. The $300 MillionCorporate Credit Facility, was cross-collateralized by the following 12 properties: Arbors on Forest Ridge, Cutter’s Point, Eagle Crest, Silverbrook, Timberglen, Edgewater at Sandy Springs, Beechwood Terrace, Willow Grove, Woodbridge, Venue at 8651, Old Farm and Stone Creek at Old Farm.
On June 30, 2017, in connection with the Freddie Refinance, we repaid and retired the $300 Million Credit Facility. The refinancing of this existing credit facility debt did not incur prepayment penalties. Seesee Note 6 to our consolidated financial statements for additional information.6.
2016 Bridge Facility
On December 29, 2016, we, through our OP, entered into a $30.0 million bridge facility (the “2016 Bridge Facility”) with KeyBank and drew $30.0 million to fund a portion of the purchase price of Old Farm and Stone Creek at Old Farm. In April 2017, we paid down the entire $30.0 million of principal on the 2016 Bridge Facility, which was funded with our share of the proceeds, net of distributions to noncontrolling interests, from properties we sold in April 2017. The 2016 Bridge Facility was retired on April 28, 2017. See Notes 5 and 6 to our consolidated financial statements for additional information.
Interest Rate Swap Agreements In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through ourthe OP, have entered into seveneleven interest rate swap transactions with KeyBank orand two with Truist (collectively the Counterparty,“Counterparties”) with a combined notional
amount of $650.0 million.$1.2 billion. As of September 30, 2017,2022, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $650.0 million$1.2 billion of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3388%1.0682%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3388%1.0682%, on a weighted average basis, on the notional amounts, while the Counterparty isCounterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. WeFor purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information. The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands): Effective Date | | Termination Date | | Notional | | | Fixed Rate | | | Floating Rate Option (1) | July 1, 2016 | | June 1, 2021 | | $ | 100,000 | | | | 1.1055 | % | | One-month LIBOR | July 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 1.0210 | % | | One-month LIBOR | July 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 0.9000 | % | | One-month LIBOR | September 1, 2016 | | June 1, 2021 | | | 100,000 | | | | 0.9560 | % | | One-month LIBOR | April 1, 2017 | | April 1, 2022 | | | 100,000 | | | | 1.9570 | % | | One-month LIBOR | May 1, 2017 | | April 1, 2022 | | | 50,000 | | | | 1.9610 | % | | One-month LIBOR | July 1, 2017 | | July 1, 2022 | | | 100,000 | | | | 1.7820 | % | | One-month LIBOR | | | | | $ | 650,000 | | | | 1.3388 | % | (2) | |
Effective Date | | Termination Date | | Counterparty | | Notional Amount | | | Fixed Rate (1) | | | June 1, 2019 | | June 1, 2024 | | KeyBank | | | 50,000 | | | | 2.0020 | % | | June 1, 2019 | | June 1, 2024 | | Truist | | | 50,000 | | | | 2.0020 | % | | September 1, 2019 | | September 1, 2026 | | KeyBank | | | 100,000 | | | | 1.4620 | % | | September 1, 2019 | | September 1, 2026 | | KeyBank | | | 125,000 | | | | 1.3020 | % | | January 3, 2020 | | September 1, 2026 | | KeyBank | | | 92,500 | | | | 1.6090 | % | | March 4, 2020 | | June 1, 2026 | | Truist | | | 100,000 | | | | 0.8200 | % | | June 1, 2021 | | September 1, 2026 | | KeyBank | | | 200,000 | | | | 0.8450 | % | | June 1, 2021 | | September 1, 2026 | | KeyBank | | | 200,000 | | | | 0.9530 | % | | March 1, 2022 | | March 1, 2025 | | Truist | | | 145,000 | | | | 0.5730 | % | | March 1, 2022 | | March 1, 2025 | | Truist | | | 105,000 | | | | 0.6140 | % | | | | | | | | | 1,167,500 | | | | 1.0682 | % | (2) |
(1) | The floating rate option for the interest rate swaps is one-month LIBOR. As of September 30, 2017,2022, one-month LIBOR was 1.2322%3.14%. |
(2) | Represents the weighted average fixed rate of the interest rate swaps. |
As of September 30, 2022, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk with future effective dates (dollars in thousands): Effective Date | | Termination Date | | Counterparty | | Notional Amount | | | Fixed Rate (1) | | | September 1, 2026 | | January 1, 2027 | | KeyBank | | $ | 92,500 | | | | 1.7980 | % | |
(1) | The floating rate option for the interest rate swaps is one-month LIBOR. As of September 30, 2022, one-month LIBOR was 3.14%. |
Obligations and Commitments The following table summarizes our contractual obligations and commitments as of September 30, 20172022 for the next five calendar years subsequent to September 30, 2017.2022. We used one-month LIBOR as of September 30, 20172022 to calculate interest expense due by period on our floating rate debt and net interest expense due by period on our interest rate swaps. | | Payments Due by Period (in thousands) | | | | Payments Due by Period (in thousands) | | | | Total | | | 2017 | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | Thereafter | | | | Total | | | Remainder of 2022 | | | 2023 | | | 2024 | | | 2025 | | | 2026 | | | Thereafter | | Operating Properties Mortgage Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal payments | | $ | 702,474 | | | $ | 396 | | | $ | 13,352 | | | $ | 2,448 | | | $ | 2,483 | | | $ | 2,531 | | | $ | 681,264 | | | | $ | 1,275,372 | | | $ | 313 | | | $ | 20,925 | | | $ | 326,697 | | | $ | 191,105 | | | $ | 423,149 | | | $ | 313,183 | | Interest expense | (1) | | 144,459 | | | | 5,622 | | | | 22,080 | | | | 21,647 | | | | 21,616 | | | | 22,025 | | | | 51,469 | | (1) | | | 121,328 | | | | 8,699 | | | | 33,758 | | | | 26,951 | | | | 21,989 | | | | 16,182 | | | | 13,750 | | Total | | $ | 846,933 | | | $ | 6,018 | | | $ | 35,432 | | | $ | 24,095 | | | $ | 24,099 | | | $ | 24,556 | | | $ | 732,733 | | | | $ | 1,396,700 | | | $ | 9,012 | | | $ | 54,683 | | | $ | 353,648 | | | $ | 213,094 | | | $ | 439,331 | | | $ | 326,933 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held For Sale Properties Mortgage Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held For Sale Property Mortgage Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal payments | | $ | 30,826 | | | $ | — | | | $ | 276 | | | $ | 309 | | | $ | 316 | | | $ | 326 | | | $ | 29,599 | | | | $ | 82,971 | | | $ | — | | | $ | — | | | $ | 68,160 | | | $ | 14,811 | | | $ | — | | | $ | — | | Interest expense | | | 5,549 | | | | 253 | | | | 1,000 | | | | 989 | | | | 981 | | | | 968 | | | | 1,358 | | | | | 7,856 | | | | 1,010 | | | | 4,006 | | | | 2,337 | | | | 503 | | | | — | | | | — | | Total | | $ | 36,375 | | | $ | 253 | | | $ | 1,276 | | | $ | 1,298 | | | $ | 1,297 | | | $ | 1,294 | | | $ | 30,957 | | | | $ | 90,827 | | | $ | 1,010 | | | $ | 4,006 | | | $ | 70,497 | | | $ | 15,314 | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit Facility & Bridge Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Credit Facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Principal payments | | $ | 84,597 | | | $ | 54,597 | | | $ | 30,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | $ | 335,000 | | | $ | — | | | $ | — | | | $ | 335,000 | | | $ | — | | | $ | — | | | $ | — | | Interest expense | | | 2,184 | | | | 627 | | | | 1,557 | | | | — | | | | — | | | | — | | | | — | | | | | 32,932 | | | | 4,733 | | | | 18,851 | | | | 9,348 | | | | — | | | | — | | | | — | | Total | | $ | 86,781 | | | $ | 55,224 | | | $ | 31,557 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | $ | 367,932 | | | $ | 4,733 | | | $ | 18,851 | | | $ | 344,348 | | | $ | — | | | $ | — | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total contractual obligations and commitments | | $ | 970,089 | | | $ | 61,495 | | | $ | 68,265 | | | $ | 25,393 | | | $ | 25,396 | | | $ | 25,850 | | | $ | 763,690 | | (2) | | $ | 1,855,459 | | | $ | 14,755 | | | $ | 77,540 | | | $ | 768,493 | | | $ | 228,408 | | | $ | 439,331 | | | $ | 326,933 | |
(1) | Interest expense obligations includes the impact of expected settlements on interest rate swaps which have been entered into in order to fix the interest rate on the hedged portion of our floating rate debt obligations. As of September 30, 2017,2022, we had entered into seveneleven interest rate swap transactions with a combined notional amount of $650.0 million.$1.2 billion. We have allocated the total impact of expected settlements on the $650.0 million$1.2 billion notional amount of interest rate swaps to ‘Operating Properties Mortgage Debt.’ We used one-month LIBOR as of September 30, 20172022 to determine our expected settlements through the terms of the interest rate swaps. |
Corporate Credit Facility The Corporate Credit Facility will mature on June 30, 2024 with respect to the revolving commitments, unless the Company exercises its option to voluntarily and permanently reduce all of the revolving commitments before the maturity date or elects to exercise its right and option to extend the facility with respect to the revolving commitments for a single one-year term. Advisory Agreement Our Advisory Agreement requires that we pay our Adviser an annual advisory and administrative fee of 1.2%. The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million. For the three months ended September 30, 2022 and 2021, the Company incurred advisory and administrative fees of $1.9 million and $1.9 million, respectively. For the nine months ended September 30, 2022 and 2021, advisory and administrative fees were $5.6 million and $5.7 million, respectively. NLMF Holdco, LLC The Company’s agreement with NLMF Holdco, LLC may result in additional funding requirements to cover future project costs. The maximum exposure of potential commitments is expected to be no more than $4.0 million. We expect that these actions will provide faster, more reliable and lower cost internet to our residents. We expect to roll out this service to our other properties in the future. As of September 30, 2022, the Company has funded approximately $0.3 million to NLMF Holdco, LLC which is included in prepaid and other assets on the consolidated balance sheet of the Company. For the nine months ended September 30, 2022, the Company incurred expenses of $0.1 million for fiber internet service which is included in property operating expenses on the consolidated statement of operations and comprehensive income (loss).
Capital Expenditures and Value-Add Program We anticipate incurring average annual repairs and maintenance expense of $575-$725$575 to $725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average, approximately $250 to $350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in our Portfolio were underwritten and acquired with the premise that we would invest $4,000-$10,000$4,000 to $10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset’s exterior and interiors. In mostmany cases, we reservedreserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As of September 30, 2017,2022, we had approximately $6.3$15.3 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,000 planned interior rehabs.program. The following table sets forth a summary of our capital expenditures related to our value-add program for the three and nine months ended September 30, 20172022 and 20162021 (in thousands): | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | | Rehab Expenditures | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | 2022 | | | 2021 | | | 2022 | | | 2021 | | Interior | (1) | $ | 1,883 | | | $ | 2,439 | | | $ | 6,647 | | | $ | 7,136 | | (1) | $ | 6,946 | | | $ | 2,739 | | | $ | 17,584 | | | $ | 11,278 | | Exterior and common area | | | 1,166 | | | | 1,746 | | | | 5,067 | | | | 8,078 | | | | 3,519 | | | | 1,498 | | | | 6,874 | | | | 7,773 | | Total rehab expenditures | | $ | 3,049 | | | $ | 4,185 | | | $ | 11,714 | | | $ | 15,214 | | | $ | 10,465 | | | $ | 4,237 | | | $ | 24,458 | | | $ | 19,051 | |
(1) | Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the threenine months ended September 30, 20172022 and 2016,2021, we completed full and partial interior rehabs on 4221,830 and 538911 units, respectively. For the nine months ended September 30, 2017 and 2016, we completed full and partial interior rehabs on 1,253 and 1,475 units, respectively. |
Freddie Mac Multifamily Green Advantage
In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, we have decided to participate in Freddie Mac’s new Multifamily Green Advantage program. We have escrowed approximately $4.2 million to finance smarter, greener property improvements at 20 of our properties, which will be completed by the summer of 2019. We plan to reduce water/sewer costs at each property by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. By participating in this program, we were able to lower the interest rate on the properties we refinanced in the Freddie Refinance by 10 basis points.
Emerging Growth Company
Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.
We could remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year following the fifth anniversary of becoming a public company, (2) the last day of the first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (4) the date on which we have, during the preceding three year period, issued more than $1.0 billion in non-convertible debt.
Income Taxes We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than
the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the nine months ended September 30, 20172022 and 2016.2021. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax, including any applicable alternative minimum tax on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income (loss) and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT. We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. We have no examinations in progress and none are expected at this time.
We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement. We had no material unrecognized tax benefit or expense, accrued interest or penalties as of September 30, 2017. Our2022. We and our subsidiaries and we are subject to federal income tax as well as income tax of various state and local jurisdictions. The 20162021, 2020 and 20152019 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income.income (loss). Dividends We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities. We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our third quarterly dividend of 20172022 of $0.22$0.38 per share on July 31, 2017,25, 2022 which was paid on September 29, 201730, 2022 and funded out of cash flows from operations. Off-Balance Sheet Arrangements As of September 30, 20172022 and December 31, 2016,2021, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
SignificantCritical Accounting Policies and Critical Accounting Estimates
Our significant accounting policies are those having the most impact on the reportingManagement’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and those requiring significantestimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. TheseBelow is a discussion of the accounting policies include those related to: (1) revenue recognitionthat we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of recent accounting pronouncements and (2) real estate investments, capital expenditures and impairment.
Ourour significant accounting policies, are disclosedincluding further discussion of the accounting policies described below, can be found in Note 2 “Summary of Significant Accounting Policies” to theour consolidated financial statements.statements included in this quarterly report.
Purchase Price Allocation Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.
The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed. Impairment Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate investment. Inflation The real estate market has not been affected significantly by inflation in the past several years due to a relatively low inflation rate.increases in rents nationwide. The majority of our lease terms are for a period of one year or less and reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities. Should inflation return, dueDue to the short-term nature of our leases, we do not believe our results will be materially affected. Inflation may also affect the overall cost of debt, as the implied cost of capital increases. Currently, interest rates are less than historical averages. However, if the Federal Reserve institutes new monetary policies, tightening creditis raising interest rates in response to or in anticipation of continued inflation concerns, interest rates could rise.concerns. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements. REIT Tax Election We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the nine months ended September 30, 20172022 and 2016.2021. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.
Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the adverse effect on the value of assets and liabilities that results from a change in market conditions. Our primary market risk exposure is interest rate risk with respect to our indebtedness and counterparty credit risk with respect to our interest rate derivatives. In order to minimize counterparty credit risk, we enter into and expect to enter into hedging arrangements only with major financial institutions that have high credit ratings. As of September 30, 2017,2022, we had total indebtedness of $817.9 million$1.7 billion at a weighted average interest rate of 3.25%4.72%, of which $758.3 million$1.6 billion was debt with a floating interest rate. TheAs of September 30, 2022, interest rate swap agreements we have entered into effectively fix the interest rate on $650.0 million, or 96%,covered 91% of our $673.7 million$1.3 billion of floating rate mortgage debt outstanding (see below). As of September 30, 2017, the adjusted weighted average interest rate and 0.0% of our total indebtedness was 3.34%.$335.0 million floating rate Credit Facility. For purposes of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate of 1.3388%1.0682% for one-month LIBOR on the $650.0 million$1.2 billion notional amount of interest rate swap agreements that we have entered into as of September 30, 2017, which effectively fix the interest rate on $650.0 million of our floating rate mortgage debt outstanding.2022. An increase in interest rates could make the financing of any acquisition by us costlier.more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate cap and interest rate swap agreements. As of September 30, 2017,2022, the interest rate cap agreements we have entered into effectively cap one-month LIBOR on $293.2$537.1 million of our floating rate mortgage debt at a weighted average rate of 4.20%4.67% for the term of the agreements, which is generally 3-4three to four years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and floating rates for our indebtedness. In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through ourthe OP, have entered into seventhirteen interest rate swap transactions with KeyBank (the “Counterparty”)the Counterparties with a combined notional amount of $650.0 million.$1.2 billion. The interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3388%1.0682%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3388%1.0682%, on a weighted average basis, on the notional amounts,
while the Counterparty isCounterparties are obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. We have designated these interest rate swaps as cash flow hedges of interest rate risk. Until our interest rates reach the caps provided by our interest rate cap agreements, each quarter point change in LIBORreference rates would result in an approximate increase to annual interest expense costs on our floating rate indebtedness, reduced by any payments due from the CounterpartyCounterparties under the terms of the interest rate swap agreements we havehad entered into as of September 30, 2017,2022, of the amounts illustrated in the table below for our indebtedness as of September 30, 2017 (in2022 (dollars in thousands): Change in Interest Rates | | Annual Increase to Interest Expense | | | Annual Increase to Interest Expense | | 0.25% | | $ | 270 | | | $ | 1,140 | | 0.50% | | | 540 | | | | 2,280 | | 0.75% | | | 810 | | | | 3,420 | | 1.00% | | | 1,080 | | | | 4,560 | |
There is no assurance that we would realize such expense as such changes in interest rates could alter our liability positions or strategies in response to such changes. We may also be exposed to credit risk in the derivative financial instruments we use. Credit risk is the failure of the counterpartyCounterparties to perform under the terms of the derivative financial instruments. If the fair value of a derivative financial instrument is positive, the counterpartyCounterparties will owe us, which creates credit risk for us. If the fair value of a derivative financial instrument is negative, we will owe the counterpartyCounterparties and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative financial instruments by entering into transactions with high-quality counterparties.major financial institutions that have high credit ratings. In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.
Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of September 30, 2017,2022, 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 President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017,2022, to provide reasonable assurance that information required to be disclosed by us in reports 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 President and Chief Financial 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 (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – II—OTHER INFORMATION Item 1. Legal Proceedings From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies. Item 1A. Risk Factors Macroeconomic trends including inflation and rising interest rates may adversely affect our financial condition and results of operations. None.
Macroeconomic trends, including increases in inflation and rising interest rates, may adversely impact our business, financial condition and results of operations. Inflation in the United States has recently accelerated and is currently expected to continue at an elevated level in the near-term. Rising inflation could have an adverse impact on our operating expenses and our floating rate mortgages and credit facilities, as these costs could increase at a rate higher than our rental and other revenue. There is no guarantee we will be able to mitigate the impact of rising inflation. The Federal Reserve has recently started raising interest rates to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the remainder of 2022. In addition, to the extent our exposure to increases in interest rates on any of our debt is not eliminated through interest rate swaps and interest rate protection agreements, such increases will result in higher debt service costs which will adversely affect our cash flows. We cannot assure you that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. Such future constraints could increase our borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments, which could slow or deter future growth. Except as noted above, there have been no material changes to the risk factors previously disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report, filed with the U.S. Securities and Exchange CommissionSEC on March 15, 2017, risk factors which materially affect our business, financial condition or results of operations. There have been no material changes from the risk factors previously disclosed. You should carefully consider the risk factors set forth in the Annual Report and the other information set forth elsewhere in this quarterly report on Form 10-Q. You should be aware that these risk factors and other information may not describe every risk facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.February 18, 2022. Item 2.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
Repurchase of Shares On June 15, 2016, we announced that our Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $30$30.0 million during a two-year period that expireswas set to expire on June 15, 2018. The following table provides information on2018 (the “Share Repurchase Program”). On April 30, 2018, our purchases of equity securities duringBoard increased the threeShare Repurchase Program from $30.0 million to up to $40.0 million and extended it by an additional two years to June 15, 2020. On March 13, 2020, the Board increased the Share Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. During the nine months ended September 30, 2017:2022, the Company repurchased 168,473 shares of its common stock. During the nine months ended September 30, 2021, the Company repurchased no shares of its common stock. Since the inception of the Share Repurchase Program through September 30, 2022, the Company had repurchased 2,550,628 shares of its common stock, par value $0.01 per share, at a total cost of approximately $72.4 million, or $28.37 per share as shown in the table below: Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs (in millions) | | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs (in millions) | | Beginning Balance | | | 250,156 | | | $ | 18.34 | | | | 250,156 | | | $ | 25.4 | | | Beginning Total | | | | 2,451,722 | | | $ | 25.70 | | | | 2,451,722 | | | $ | 33.6 | | July 1 – July 31 | | | — | | | | — | | | | — | | | | 25.4 | | | | — | | | | — | | | | — | | | | 33.6 | | August 1 – August 31 | | | 31,616 | | | | 23.28 | | | | 31,616 | | | | 24.7 | | | | 98,906 | | | | 60.57 | | | | 98,906 | | | | 27.6 | | September 1 – September 30 | | | 26,541 | | | | 23.26 | | | | 26,541 | | | | 24.1 | | | | — | | | | — | | | | — | | | | 27.6 | | Balance as of September 30, 2017 | | | 308,313 | | | $ | 19.27 | | | | 308,313 | | | $ | 24.1 | | | Total as of September 30, 2022 | | | | 2,550,628 | | | $ | 28.37 | | | | 2,550,628 | | | $ | 27.6 | |
Item 3.
| Defaults upon
Item 3. Defaults Upon Senior Securities |
None. Item 4. Mine Safety Disclosures Not applicable. Item 4.
| Mine Safety Disclosures
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None.
Item 5.
| Item 5. Other Information |
None.
EXHIBIT INDEX
SIGNATURES
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEXPOINT RESIDENTIAL TRUST, INC. Signature | | Title | | Date | | | | | | | | | | | /s/ Jim Dondero | | President and Director | | October 31, 201726, 2022 | Jim Dondero | | (Principal Executive Officer) | | | | | | | | | | | | | /s/ Brian Mitts | | Chief Financial Officer and Director | | October 31, 201726, 2022 | Brian Mitts | | (Principal Financial Officer and Principal Accounting Officer) | | |
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