UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-55430
Resource REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
| 80-0854717 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1845 Walnut Street, 17th Floor, Philadelphia, PA 19103
(Address of principal executive offices) (Zip code)
(215) 231-7050
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
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| Name of exchange on which registered |
None |
| None |
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| None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(a) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | |
| Accelerated filer | |
Non-accelerated filer | |
| Smaller reporting company | |
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| Emerging growth company | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes No
There is no established market for the registrant’s shares of common stock. On January 23, 2022, the board of directors of the Registrant approved an estimated value per share of the Registrant’s common stock of $14.75 based solely on the merger consideration to be paid by Blackstone Real Estate Income Trust, Inc. in connection with its pending all cash acquisition of the Registrant on the terms and subject to the conditions of the Agreement and Plan of Merger, dated January 23, 2022, among the Registrant and affiliates of Blackstone Real Estate Income Trust, Inc. There were 158,009,186 shares of common stock held by non-affiliates as of June 30, 2021, the last business day of the registrant's most recently completed second fiscal quarter, for an aggregate market value of $1,431,563,223, assuming an estimated value per share of $9.06, which was the Registrant’s estimated value per share as of January 28, 2021 as determined by its board of directors on March 24, 2021.
For a full description of the methodologies used to calculate the Registrant’s estimated value per share as of January 28, 2021, see Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Market Information” in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020. As of March 23, 2022, there were 166,259,239 outstanding shares of common stock of Resource REIT, Inc.
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RESOURCE REIT, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
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Item 1. | 5 | |
Item 1A. | 9 | |
Item 1B. | 27 | |
Item 2. | 28 | |
Item 3. | 29 | |
Item 4. | 29 | |
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Item 5. | 30 | |
Item 6. | 32 | |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 33 |
Item 7A. | 46 | |
Item 8. | 47 | |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 47 |
Item 9A. | 47 | |
Item 9B. | 47 | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 47 |
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Item 10. | 48 | |
Item 11. | 51 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters | 67 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 68 |
Item 14. | 69 | |
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Item 15. | 71 | |
Item 16. | 73 | |
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74 |
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Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology. Such statements are subject to risks and uncertainties that could cause actual results to differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
For a discussion of some of the risks and uncertainties, although not all risks and uncertainties, that could cause actual results to differ materially from those presented in our forward-looking statements, see the risks identified in “Summary Risk Factors” below and in Part I, Item 1A of this Annual Report on Form 10-K.
SUMMARY RISK FACTORS
The following is a summary of the principal risks that could adversely affect our business, financial condition, results of operations and cash flows and an investment in our common stock. This summary highlights certain of the risks that are discussed further in this Annual Report but does not address all the risks that we face. For additional discussion of the risks summarized below and a discussion of other risks that we face, see “Risk Factors” in Part I, Item 1A of this Annual Report. You should interpret many of the risks identified in this summary and under “Risk Factors” as being heightened as a result of the ongoing and numerous adverse impacts of the novel coronavirus disease (“COVID-19”) pandemic.
PART I
ITEM 1. BUSINESS
General
Resource REIT, Inc. is a Maryland corporation that has elected to be taxed as a real estate investment trust, or REIT, and to operate as a REIT beginning with our taxable year ended December 31, 2014. As used herein, the terms “we,” “our” and “us” refer to Resource REIT, Inc. and, as required by context RRE Opportunity OP II, LP (“OP II”), a Delaware limited partnership through which we own our interest in all of our properties, and to its subsidiaries. We focus on multifamily assets, although we may also purchase interests in other types of commercial property assets consistent with our investment objectives. We have acquired and may continue to acquire underperforming apartment communities which we will renovate and optimize in order to increase rents and, to a lesser extent, acquire or originate commercial real estate debt secured by apartments. . As of December 31, 2021, we owned 45 properties in 13 states, comprising a total of 13,707 multifamily units, as described further in “Item 2. Properties”. Our objective is to invest in multifamily assets across the entire spectrum of investments in order to provide stockholders with growing cash flow and increasing asset values.
On January 28, 2021, we acquired Resource Real Estate Opportunity REIT I, Inc. (“REIT I”) and Resource Apartment REIT III, Inc. (“REIT III”) and their respective subsidiaries in stock-for-stock transactions (together, the “Resource REIT Mergers”). As a result of our acquisition of REIT I and its subsidiaries, including the entities that provide our advisory, asset and property management services, we are a self-managed REIT and have 44 employees. Prior to January 28, 2021, we were externally advised by Resource Real Estate Opportunity Advisor II, LLC (our “Advisor”) pursuant to an advisory agreement initially entered in February 2014.
Through a series of transactions which we refer to as the “Self-Management Transaction,” REIT I acquired our Advisor and Resource Real Estate Opportunity Manager II, LLC (our “Manager”) on September 8, 2020 from C-III Capital Partners, LLC (“C-III”) and its affiliates. Prior to this transaction, our Advisor was an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), our initial sponsor and a wholly-owned subsidiary of C-III.
Proposed Merger with Blackstone Real Estate Income Trust, Inc.
On January 23, 2022, we, Rapids Parent LLC (“Rapids Parent”) and Rapids Merger Sub LLC (“Rapids Merger Sub”) entered into an Agreement and Plan of Merger (the “Blackstone Merger Agreement”). The Blackstone Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into Rapids Merger Sub (the “Blackstone Merger”). Upon completion of the Blackstone Merger, Rapids Merger Sub will survive and our separate existence will cease. The Blackstone Merger and the other transactions contemplated by the Blackstone Merger Agreement were unanimously approved by our board of directors. Rapids Parent and Rapids Merger Sub are affiliates of BREIT, which is an affiliate of Blackstone, Inc.
Pursuant to the terms and conditions in the Blackstone Merger Agreement, at the effective time of the Blackstone Merger (the “Effective Time”), each share of our common stock that is issued and outstanding immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive an amount in cash equal to $14.75, without interest. In addition, at the Effective Time, each share of our convertible stock that is issued and outstanding immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive an amount in cash equal to $1,846.76, without interest.
The Blackstone Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by us to conduct our business in all material respects in the ordinary course of business and in a manner consistent with past practice, subject to certain exceptions, during the period between the execution of the Blackstone Merger Agreement and the consummation of the Blackstone Merger. The obligations of the parties to consummate the Blackstone Merger are not subject to any financing condition or the receipt of any financing by Rapids Parent or Rapids Merger Sub.
The consummation of the Blackstone Merger is subject to certain customary closing conditions, including, among others, approval of the Blackstone Merger by the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to cast a vote on the Blackstone Merger (the “Stockholder Approval”). We will hold a special meeting on May 16, 2022 for the purpose of obtaining the Stockholder Approval. In addition, the holders of more than two-thirds of the outstanding shares of our convertible stock entitled to vote on the Blackstone Merger have approved the Blackstone Merger by written consent in accordance with Maryland law and our charter and bylaws.
The foregoing description of the Blackstone Merger Agreement is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Blackstone Merger Agreement filed as Exhibit 2.1 to our Current
Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on January 24, 2022 and to our definitive proxy statement filed with the SEC on March 14, 2022. For additional information regarding the Blackstone Merger, including associated risks and uncertainties, see Part I, Item 1A – Risk Factors. There is no guarantee that the Blackstone Merger will be consummated.
Our Offerings
We commenced capital raising activities in February 2014 when we launched our initial public offering, the primary portion of which terminated in February 2016. As of December 31, 2021, we had raised $566.8 million in our public offerings, including $99.1 million in our distribution reinvestment plan offering (the “DRP Offering”).
Our Business Strategy
Our business strategy has a particular focus on multifamily assets, although we may also purchase interests in other types of commercial property assets consistent with our investment objectives. We have acquired underperforming apartment communities which we have or will renovate and optimize in order to increase rents and, to a lesser extent, acquired or originated commercial real estate debt secured by apartments. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego an attractive investment because it does not fit within our targeted asset class or portfolio composition.
Our Operating Policies and Strategies
Our Investment Committee, which includes three of our independent directors, approves proposed real estate property investments and real estate-related debt investments. Our board of directors meets regularly to monitor the execution of our investment strategies and our progress in achieving our investment objectives.
We may use leverage for our acquisitions in the form of both REIT level financing and individual investment financing. Such financing, both at the REIT level and at the individual investment level, may also be obtained from the seller of an investment.
Our Advisor and our Property Manager
As of January 28, 2021, when we acquired REIT I, we have acquired our Advisor and Manager, and are a self-managed REIT. Our Advisor originally invested approximately $1.2 million in us; however, in conjunction with the Self-Management Transaction, our Advisor transferred its 137,432 shares of our common stock to C-III. As of December 31, 2021, of the 50,000 shares of our convertible stock that are issued and outstanding, 19,968 shares were granted to individuals who were employees of RAI and its subsidiaries and affiliates at the time of the grants. The shares granted vested ratably over three years; 18,628 of the shares have vested as of December 31, 2021. Vested shares of convertible stock will only convert to common stock upon certain triggering events, none of which occurred or are probable to occur as of December 31, 2021.
Pursuant to the terms and conditions in the Blackstone Merger Agreement, at the Effective Time of the Blackstone Merger, each share of convertible stock owned by affiliated persons (or fraction thereof) that is issued and outstanding immediately prior to the Effective Time of the Blackstone Merger will be automatically cancelled and converted into the right to receive an amount in cash equal to $1,846.76, without interest.
Greystar, a third-party, is a property management company that we have subcontracted with to manage most of the real estate assets that we own. The employees of Greystar, with the oversight of our asset management team, assist in providing property management as well as construction management services to us.
Competition
We believe that the current market for properties that meet our investment objectives is extremely competitive and many of our competitors have greater resources than we do. We believe that our multifamily communities are suitable for their intended purposes and adequately covered by insurance. There are a number of comparable properties located in the same submarkets that may compete with them. We compete with numerous other entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, other REITs, real estate limited partnerships, the U.S. Government and other entities, to acquire, manage and sell real estate properties and real estate related assets. Many of our competitors enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase.
Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties in which we hold an interest, or on properties that may be acquired directly or indirectly in the future.
Human Capital Resources
Until the effective time of the REIT I Merger on January 28, 2021, we were externally advised by our Advisor and engaged our Manager, an affiliated property manager, and an unaffiliated property sub-manager, to provide property management services to us. As an externally advised REIT we relied on the employees of our Advisor, Manager and sub-manager to provide services related to our operations.
As of December 31, 2021, we have 44 employees located in three different cities with the majority based out of our principal office in Philadelphia. Approximately 45% of our employees are women and approximately 11% of our employees are people of color or minorities. 98% of our employees are full time. Although we are a recently self-managed REIT with our own employees, our employees have been involved in our operations through their employment with our Advisor, Manager and their affiliates for an average of 10.4 years. None of our employees are represented by a labor union. We believe that a wide range of opinions and experiences are key to our continued success, and we therefore value racial, gender, and generational diversity throughout our organization.
We believe prioritizing employee well-being is a key element for attracting and retaining the best and most talented associates. Our key human capital management objectives are to attract, recruit, hire, develop and promote a deep and diverse bench of talent that translates into a strong and successful workforce. To support these objectives, our human resources programs are designed to develop talent to prepare them for the critical roles and leadership positions for the future; reward and support employees through competitive pay and benefit programs; enhance our culture through efforts to foster, promote, and preserve a culture of diversity and inclusion; and evolve and invest in technology, tools, and resources to enable employees at work.
In addition to competitive wages and salaries, our compensation programs include cash bonus and equity incentive compensation opportunities, a 401(k) plan with employer matching, medical, dental and vision insurance, health savings and dependent care flexible spending accounts, paid time off, short- and long-term disability insurance, life insurance, a variety of personal and family leave options, life-planning financial and legal resources, and other voluntary supplemental benefits.
We sponsor a number of programs and events that emphasize the health and well-being of our employees, including relational, financial, emotional and physical programs. We promote a culture of health and well-being through employee assistance program services, comprehensive health care benefits and resources for preventative health, such as flu shot clinics and healthy lifestyle programs. Throughout the course of the COVID-19 pandemic, we have put the health and safety of our employees and their families first, supporting comprehensive work-from-home policies, as well as enhanced safety measures and precautions in each of our offices as recommended by the federal, state and local agencies for employees who carry out essential on-site work.
We communicate with our workforce through a variety of channels and encourage open and direct communication, including monthly company-wide calls with executives and frequent corporate email communications. Also, to continuously monitor and improve employee performance and engagement, we conduct annual performance reviews.
We actively support charitable organizations that promote education and social well-being and we encourage our employees to personally volunteer with organizations that are meaningful to them. For example, we proudly sponsor local charities and our employees volunteer in local charitable organizations such as Rebuilding Together Philadelphia which works to transform vulnerable, owner-occupied houses into safe, healthy and energy-efficient homes.
We believe that all individuals should be treated with dignity and respect, and have adopted policies that, among other things, prohibit discrimination and harassment.
Access to Company Information
We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the United States Securities and Exchange Commission (“SEC”). The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
We make available free of charge, the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports on our website, www.resourcereit.com, or by responding to requests addressed to our investor relations group. These reports are available as soon as reasonably practicable after such material is electronically filed or furnished to the SEC.
ITEM 1A. RISK FACTORS
Below are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and uncertainties that we believe are material to our business, operating results, prospects, and financial condition. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also harm our business.
Risks Related to the Proposed Blackstone Merger
The Blackstone Merger is subject to a number of conditions which, if not satisfied or waived in a timely manner, would delay the Blackstone Merger or adversely impact our ability to complete the transaction.
The completion of the Blackstone Merger is subject to the satisfaction or waiver of certain customary closing conditions, including the approval of the Blackstone Merger by the affirmative vote of the holders of a majority of the outstanding shares of our common stock. While it is currently anticipated that the Blackstone Merger will be completed shortly after our special meeting to approve the Blackstone Merger, there can be no assurance that the conditions to closing will be satisfied in a timely manner or at all, or that an effect, event, circumstance, occurrence, development or change will not transpire that could delay or prevent these conditions from being satisfied. In addition, under circumstances specified in the Blackstone Merger Agreement, we or BREIT may terminate the Blackstone Merger Agreement. Accordingly, we can provide no assurances with respect to the timing of the closing, whether the Blackstone Merger will be completed at all and when our stockholders would receive the consideration for the Blackstone Merger, if at all.
Failure to consummate the Blackstone Merger as currently contemplated or at all could adversely affect our future business and financial results.
The Blackstone Merger may be consummated on terms different than those contemplated by the Blackstone Merger Agreement, or the Blackstone Merger may not be consummated at all. If the Blackstone Merger is not completed, or is completed on different terms than as contemplated by the Blackstone Merger Agreement, we could be adversely affected and subject to a variety of risks associated with the failure to consummate the Merger, or to consummate the Blackstone Merger as contemplated by the Blackstone Merger Agreement, including the following:
Any delay in the consummation of the Blackstone Merger or any uncertainty about the consummation of the Blackstone Merger on terms other than those contemplated by the Blackstone Merger Agreement, or if the Blackstone Merger is not completed, could materially adversely affect our business and financial results.
The pendency of the Blackstone Merger could adversely affect our business and operations.
In connection with the pending Blackstone Merger, some of the parties with whom we do business may delay or defer decisions, which could negatively impact our revenues, earnings, cash flows and expenses, regardless of whether the Blackstone Merger is completed. In addition, under the Blackstone Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Blackstone Merger. These restrictions may prevent us from pursuing certain strategic transactions, acquiring and disposing assets, undertaking certain capital projects, undertaking certain financing transactions and otherwise pursuing other actions that are not in the ordinary course of business, even if such actions could prove beneficial. These restrictions may impede our growth which could negatively impact our revenue, earnings and cash flows. Additionally, the pendency of the Blackstone Merger may make it more difficult for us to effectively retain and incentivize key personnel.
Stockholder litigation could prevent or delay the closing of the pending Blackstone Merger or otherwise negatively impact our business, operating results and financial condition.
If a stockholder were to commence litigation related to the pending Blackstone Merger, we may incur significant costs in connection with the defense or settlement of any such litigation including costs associated with the indemnification of obligations to our directors. Such litigation may also adversely affect our ability to complete the pending Blackstone Merger.
Risks Related to an Investment in Us
There is no public trading market for your shares; therefore, it will be difficult for you to sell your shares.
There is no current established public market for our shares and our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date nor list our shares on an exchange by a specified date. Our charter limits your ability to transfer or sell your shares unless the prospective stockholder meets the applicable suitability and minimum purchase standards. Our charter also prohibits the ownership of more than 9.8% of our stock, unless exempted by our board of directors, which may inhibit large investors from desiring to purchase your shares. Moreover, our share redemption program is suspended. Therefore, it will be difficult for you to sell your shares promptly or at all. If you are able to sell your shares, you would likely have to sell them at a substantial discount to the estimated net asset value. It is also likely that your shares would not be accepted as the primary collateral for a loan.
We are recently self-managed.
On January 28, 2021, upon consummation of the merger with REIT I, we became a self-managed REIT. We no longer bear the costs of the various fees and expense reimbursements previously paid to our Advisor; however, our expenses now include the compensation and benefits of our officers, employees and consultants, as well as overhead previously paid by our Advisor and their affiliates. Our employees provide services historically provided by the external advisor and its affiliates. We are subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and we bear the cost of the establishment and maintenance of any employee compensation plans. In addition, because we had not previously operated as a self-managed REIT, we may encounter unforeseen costs, expenses and difficulties associated with providing these services on a self-advised basis. If we incur unexpected expenses as a result of our self-management, our results of operations could be lower than they otherwise would have been.
The loss of or the inability to hire additional or replacement key real estate and debt finance professionals could delay or hinder implementation of our investment strategies, which could limit our ability to make distributions and decrease the value of your investment.
We believe that our future success depends, in large part, upon our ability to retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and we may be unsuccessful in attracting and retaining such skilled individuals. If we are unable to obtain the services of highly skilled professionals, our ability to implement our investment strategies could be delayed or hindered and the value of your investment may decline.
If we make distributions from sources other than our cash flow from operations, we will have less funds available for the acquisition of properties, your overall return may be reduced and the value of a share of our common stock may be diluted.
We will declare distributions when our board of directors determines we have sufficient cash flow. Our board of directors considers many factors before authorizing a cash distribution, including current and projected cash flow from operations, capital expenditure needs, general financial conditions and REIT qualification requirements. We expect that our board may declare cash distributions that are paid in advance of our receipt of cash flow that we expect to receive during a later period. In these instances, where we do not have sufficient cash flow to cover our distributions, we expect to use the proceeds from borrowings or asset sales to pay distributions. We may borrow funds or sell assets to make and cover our declared distributions, all or a portion of which could be deemed a return of capital. We may also fund such distributions from third-party borrowings. If we fund cash distributions from borrowings, sales of assets or the net proceeds from securities issuances, we will have less funds available for the acquisition of real estate and real estate-related assets and your overall return may be reduced. Further, to the extent cash distributions exceed cash flow from operations, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations.
The outbreak of widespread contagious disease, such as the novel coronavirus, COVID-19, could adversely impact our operations and the value of our investments.
The outbreak of the COVID-19 virus in 2020 has created considerable instability and disruption in the U.S. and world economies. The extent to which our results of operations or our overall value will be affected by the COVID-19 virus will largely depend on future developments, which remain uncertain and cannot be accurately predicted, including new information which
may emerge concerning the severity of the COVID-19 virus and the actions required to be undertaken to contain the COVID-19 virus or treat its impact. As a result of shutdowns, quarantines or actual viral health issues, tenants at our multifamily apartment communities may experience reduced wages for a prolonged period of time and may be unable to make their rental payments. We may be unable to evict tenants due to federal, state and/or local laws or regulations or lender requirements implemented as a result of the COVID-19 virus outbreak. Our results of operations have also been partially impacted as a result of waiving late fees and the suspension of evictions at our properties. In addition, property managers may be limited in their ability to properly maintain our multifamily apartment communities and we have and may continue to defer significant value-add projects. Market fluctuations may affect our ability to obtain necessary funds for our operations from current lenders or new borrowings. In addition, we may be unable to obtain financing for the acquisition of investments on satisfactory terms, or at all. The occurrence of any of the foregoing events or any other related matters could materially and adversely affect our financial performance and our overall value, and investors could lose all or a substantial portion of their investment.
Future interest rate increases in response to inflation may inhibit our ability to conduct our business and acquire or dispose of real property or real estate-related debt investments at attractive prices and your overall return may be reduced.
While we expect a significant amount of our leases to be short term multi-family leases that are not impacted by inflation, we will be exposed to inflation risk with respect to income from any long-term leases on real property and from related real estate debt investments as these may constitute a source of our cash flows from operations. High inflation may tighten credit and increase prices. Further, if interest rates rise, such as during an inflationary period, the cost of acquisition capital to purchasers may also rise, which could adversely impact our ability to dispose of our assets at attractive sales prices. Should we be required to acquire, hold or dispose of our assets during a period of inflation, our overall return may be reduced.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. In addition, our charter eliminates our directors’ and officers’ liability to us and our stockholders for monetary damages, except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.
We may change our policies and our operations without stockholder consent.
Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. Our board’s broad discretion in setting policies and our stockholders’ inability to exert control over those policies increases the uncertainty and risks you face as a stockholder.
The estimated value per share of our common stock may not reflect the value that stockholders will receive for their investment.
On January 23, 2022, our board of directors approved an estimated value per share of our common stock of $14.75 based solely on the cash consideration to be paid to our common stockholders by BREIT in connection with the Blackstone Merger. See “Background of the Merger” in our definitive proxy statement filed with the SEC on March 14, 2022 for additional information about how the merger consideration was determined. We provided this estimated value per share to assist broker-dealers that participated in our public offerings in meeting their customer account statement reporting obligations under Financial Industry Regulatory Authority (“FINRA”) Rule 2231. The estimated value per share is based solely on the merger consideration that BREIT is willing to pay to acquire our shares of common stock. With respect to the estimated value per share, we can give no assurances that:
We face risks associated with security breaches through cyber-attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology, or IT, networks and related systems.
We will face risks associated with security breaches, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems or the IT systems of our vendors. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems (including the IT systems of our vendors, such as Greystar, our third-party property manager) are essential to the operation of our business and our ability to perform day-to-day operations, and, in some cases, may be critical to the operations of certain of our tenants. There can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our, or our vendors, IT networks and related systems could adversely impact our financial condition, results of operations, cash flows, and our ability to satisfy our debt service obligations and to pay distributions to our stockholders.
Risks Related to Our Corporate Structure
Our charter limits the number of shares a person may own, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. To help us comply with the REIT ownership requirements of the Internal Revenue Code, our charter prohibits a person from directly or constructively owning more than 9.8% of our outstanding shares, unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third-party from acquiring us in a manner that could result in a premium price to our stockholders.
Our board of directors may increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all, or substantially all, of our assets) that might provide a premium price to holders of our common stock. Prior to the amendment of our charter in July 2021 (following our transition to a self-managed structure), our charter required our conflicts committee, which consists of all of our independent directors, to approve any issuance of preferred stock. Although we have amended our charter to remove references to our conflicts committee due to no longer being externally advised, our independent directors continue to be charged with the responsibility of approving any such issuance of preferred stock.
Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exception from the definition of an investment company under the Investment Company Act.
If the market value or income potential of our qualifying real estate assets changes as compared to the market value or income potential of our non-qualifying assets, or if the market value or income potential of our assets that are considered “real estate-related assets” under the Investment Company Act or REIT qualification tests changes as compared to the market value or income potential of our assets that are not considered “real estate-related assets” under the Investment Company Act or REIT
qualification tests, whether as a result of increased interest rates, prepayment rates or other factors, we may need to modify our investment portfolio in order to maintain our REIT qualification or exception from the definition of an investment company. If the decline in asset values or income occurs quickly, this may be especially difficult, if not impossible, to accomplish. This difficulty may be exacerbated by the illiquid nature of many of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent REIT and Investment Company Act considerations.
You may not be able to sell your shares under our share redemption program and, if you are able to sell your shares under the program, you may not be able to recover the amount of your investment in our shares.
On January 23, 2022, our board of directors suspended our share redemption program. Previously, our share redemption program was only available for redemptions submitted in connection with a stockholder’s death, qualifying disability or confinement to a long-term care facility (each as defined in the share redemption program). Our board of directors may amend, suspend or terminate our share redemption program upon 30 days’ notice without stockholder approval. Our board of directors may reject any request for redemption of shares. Further, there are many limitations on your ability to sell your shares pursuant to the share redemption program. Any stockholder requesting repurchase of their shares pursuant to our share redemption program will be required to certify to us that such stockholder acquired the shares by either (1) a purchase directly from REIT II, REIT I or REIT III or (2) a transfer from the original investor by way of (i) a bona fide gift not for value to, or for the benefit of, a member of the stockholder’s immediate or extended family, (ii) a transfer to a custodian, trustee or other fiduciary for the account of the stockholder or his or her immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or (iii) operation of law.
In addition, our share redemption program contains other restrictions and limitations. We expect to redeem shares on a quarterly basis. If our board of directors determines to fully resume our share redemption program, shares will be redeemed pro rata among all stockholders requesting redemption in such quarter, with a priority given to redemptions upon the death, qualifying disability, or confinement to a long-term care facility of a stockholder; next, to stockholders who demonstrate, in the discretion of our board of directors, another involuntary, exigent circumstance, such as bankruptcy; next, to stockholders subject to a mandatory distribution requirement under such stockholder’s IRA; and, finally, to other redemption requests.
If open, we will not redeem more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption. In addition, the cash available for redemption in a given fiscal quarter will be limited to proceeds from our distribution reinvestment plan during the immediately preceding calendar quarter; provided that, for any quarter in which no proceeds from the distribution reinvestment plan are available, the funding limitation for the quarter will be set by the board of directors upon ten business days’ notice to stockholders.
Your interest in us will be diluted if we issue additional shares, which could reduce the overall value of your investment.
Our stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 1,010,050,000 shares of capital stock, of which 1,000,000,000 shares are designated as common stock, 50,000 shares are designated as convertible stock and 10,000,000 are designated as preferred stock. Our board of directors may increase the number of authorized shares of capital stock without stockholder approval. Our board may elect to (1) sell additional equity securities in future public or private offerings; (2) issue shares of our common stock upon the exercise of the options we may grant to our independent directors or to employees of our advisor or property manager; (3) issue shares to our Advisor, its successors or assigns, in payment of an outstanding obligation or as consideration in a related-party transaction; (4) issue shares of common stock upon the conversion of our convertible stock; or (5) issue shares of our common stock to sellers of properties we acquire in connection with an exchange of limited partnership interests of our operating partnership. To the extent we issue additional equity interests, your percentage ownership interest in us will be diluted. Further, depending upon the terms of such transactions, most notably the offering price per share, which may be less than the price paid per share in any public offering and the value of our properties, existing stockholders may also experience a dilution in the book value of their investment in us.
Our board of directors could opt into certain provisions of the Maryland General Corporation Law in the future, which may discourage others from trying to acquire control of us and may prevent our stockholders from receiving a premium price for their stock in connection with a business combination.
Under Maryland law, “business combinations” between a Maryland corporation and certain interested stockholders or affiliates of interested stockholders are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, an officer of the corporation or an employee of the corporation who is also a director of the corporation are excluded from the vote on whether to
accord voting rights to the control shares. Should our board opt into these provisions of Maryland law, it may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Because Maryland law permits our board to adopt certain anti-takeover measures without stockholder approval, investors may be less likely to receive a “control premium” for their shares.
In 1999, the State of Maryland enacted legislation that enhances the power of Maryland corporations to protect themselves from unsolicited takeovers. Among other things, the legislation permits our board, without stockholder approval, to amend our charter to:
Under Maryland law, a corporation can opt to be governed by some or all of these provisions if it has a class of equity securities registered under the Exchange Act, and has at least three independent directors. Our charter does not prohibit our board from opting into any of the above provisions permitted under Maryland law. Becoming governed by any of these provisions could discourage an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our securities.
Risks Related to Investments in Real Estate
Economic and regulatory changes that impact the real estate market generally may decrease the value of our investments and weaken our operating results.
The properties we acquire and their performance are subject to the risks typically associated with real estate, including:
Any of the above factors, or a combination thereof, could result in a decrease in the value of our investments, which would have an adverse effect on our results of operations, reduce the cash available for distributions and the return on your investment.
Residents of multifamily rental properties who have experienced personal financial problems or a downturn in their business may delay enforcement of our rights, and we may incur substantial costs attempting to protect our investment.
Residents or tenants who have experienced a downturn in their residential or business leases and residents or tenants who have experienced difficulties with their personal financial situations such as a job loss, bankruptcy or bad credit rating, may result in their failure to make timely rental payments or their default under their leases. In the event of any default by residents or tenants at our properties, we may experience delays in enforcing our rights and may incur substantial costs attempting to protect our investment.
The bankruptcy or insolvency of any resident or tenant also may adversely affect the income produced by our properties. If any resident or tenant becomes a debtor in a case under the U.S. Bankruptcy Code, our actions may be restricted by the bankruptcy court and our financial condition and results of operations could be adversely affected.
The operating costs of our properties will not necessarily decrease if our income decreases.
Certain expenses associated with ownership and operation of a property may be intentionally increased to enhance the short- and long-term success of the property in the form of capital gain and current income, such as:
Certain expenses associated with the ownership and operation of a property are not necessarily reduced by events that adversely affect the income from the property, such as:
For example, if the leased property loses tenants or rents are reduced, then those costs described in the preceding sentence are not necessarily reduced. As a result, our cost of owning and operating leased properties may, in the future, exceed the income the property generates even though the property’s income exceeded its costs at the time it was acquired. This would decrease the amount of cash available to us to distribute to you and could negatively affect your return on investment.
We compete with third parties in acquiring, managing and selling properties and other investments, which could reduce our profitability and the return on your investment.
We believe that the current market for properties that meet our investment objectives is extremely competitive and many of our competitors have greater resources than we do. We compete with numerous other entities engaged in real estate investment activities, including individuals, corporations, banks and insurance company investment accounts, other REITs, real estate limited partnerships, the U.S. Government and other entities, to acquire, manage and sell real estate and real estate-related assets. Many of our expected competitors enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase.
Competition with these entities may result in the following:
If such events occur, you may experience a lower return on your investment.
Properties that have significant vacancies may experience delays in leasing up or could be difficult to sell, which could diminish our return on these properties.
A property may incur vacancies either by the expiration of tenant leases or the continued default of tenants under their leases. Further, our potential investments in underperforming multifamily rental properties may have significant vacancies at the time of acquisition. If vacancies continue for a prolonged period of time beyond the expected lease-up stage that we anticipate will follow any redevelopment or repositioning efforts, we may suffer reduced revenues resulting in less cash available for distributions. In addition, the resale value of the property could be diminished because the market value of a particular property depends principally upon the value of the cash flow generated by the leases associated with that property. Such a reduction on the resale value of a property could also reduce your return on investment.
We utilize third-party property managers to manage the day-to-day affairs of properties we acquire, and should the staff of a particular property perform poorly, our operating results for that property will similarly be hindered and our net income may be reduced..
With our oversight, we depend upon the performance of third-party property managers to manage our properties. Poor performance by those sales, leasing and other management staff members operating a particular property will necessarily translate into poor results of operations for that particular property. Should our third-party property managers fail to identify problems in the day-to-day management of a particular property or fail to take the appropriate corrective action in a timely manner, our operating results may be hindered and our net income reduced.
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders could be reduced and the value of our investments could decline.
If we need additional capital in the future to improve or maintain our properties or for any other reason, we may have to obtain financing from sources beyond our cash flow from operations, such as borrowings, sales of assets or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both, which would limit our ability to make distributions to you and could reduce the value of your investment.
If we are unable to sell a property for the price, on the terms, or within the time frame we desire, it could limit our ability to pay cash distributions to you.
Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms, or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions to you and could reduce the value of your investment.
Government entities, community associations and contractors may cause unforeseen delays and increase costs to redevelop and reposition underperforming properties that we may acquire, which may reduce our net income and cash available for distributions to you.
We may seek to or be required to incur substantial capital obligations to redevelop or reposition existing properties that we acquire at a discount as a result of neglect of the previous owners or tenants of the properties and to sell the properties. Our advisor and its key real estate professionals will do their best to acquire properties that do not require excessive redevelopment or modifications and that do not contain hidden defects or problems. There could, however, be unknown and excessive costs, expenses and delays associated with a discounted property’s redevelopment, repositioning or interior and exterior upgrades. We will be subject to risks relating to the uncertainties associated with rezoning for redevelopment and other concerns of governmental entities, community associations and our construction manager’s ability to control costs and to build in conformity with plans and the established timeframe. We will pay a construction management fee to a construction manager, which may be our Manager or its affiliates, if new capital improvements are required.
If we are unable to increase rental rates or sell the redeveloped property at a price consistent with our underwritten projections due to local market or economic conditions to offset the cost of the redevelopment or repositioning the property, the return on your investment may suffer. To the extent we acquire discounted properties in major metropolitan areas where the local government has imposed rent controls, we may be prohibited from increasing the rental rates to a level sufficient to cover the particular property’s redevelopment costs and expenses.
Costs of responding to both known and previously undetected environmental contamination and hazardous conditions may decrease our cash flows and limit our ability to make distributions.
Real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to protection of the environment and human health. We could be subject to liability in the form of fines, penalties or damages for noncompliance with these laws and regulations. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, the remediation of contamination associated with the release or disposal of solid and hazardous materials, the presence of toxic building materials, and other health and safety-related concerns.
Some of these laws and regulations may impose joint and several liability on the tenants, current or previous owners or operators of real property for the costs to investigate or remediate contaminated properties, whether the contamination occurred prior to purchase, or whether the acts causing the contamination were legal. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Our tenants’ operations, the condition of properties at the time we buy them, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties.
Environmental laws also may impose liens on a property or restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials and lead-based paint. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances.
The presence of hazardous substances, or the failure to properly manage or remediate these substances, may hinder our ability to sell, rent or pledge such property as collateral for future borrowings. Any material expenditures, fines, penalties, or damages we must pay will reduce our ability to make distributions and may reduce the value of your investment.
Properties acquired by us may have toxic mold that could result in substantial liabilities to us.
Litigation and concern about indoor exposure to certain types of toxic molds has been increasing as the public becomes aware that exposure to mold can cause a variety of health effects and symptoms, including allergic reactions. It is impossible to eliminate all mold and mold spores in the indoor environment. There can be no assurance that the properties acquired by us will not contain toxic mold. The difficulty in discovering indoor toxic mold growth could lead to an increased risk of lawsuits by affected persons and the risk that the cost to remediate toxic mold will exceed the value of the property. There is a risk that we may acquire properties that contain toxic mold and such properties may negatively affect our performance and your return on investment.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage could reduce our cash flows and the return on your investment.
There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Such insurance policies may not be available at reasonable costs, if at all, which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions.
Our costs associated with and the risk of failing to comply with the Americans with Disabilities Act, the Fair Housing Act and other tax credit programs may adversely affect cash available for distributions.
Our properties are generally expected to be subject to the Americans with Disabilities Act of 1990, as amended. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We cannot assure you that we will be able to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third-party to ensure compliance with such laws. If we cannot, our funds used for compliance with these laws may affect cash available for distributions and the amount of distributions to you.
The multifamily rental properties we acquire must comply with Title III of the Disabilities Act, to the extent that such properties are “public accommodations” or “commercial facilities” as defined by the Disabilities Act. Compliance with the Disabilities Act could require removal of structural barriers to handicapped access in certain public areas of our apartment
communities where such removal is readily achievable. The Disabilities Act does not, however, consider residential properties, such as multifamily rental properties, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as the leasing office, are open to the public.
We also must comply with the Fair Housing Amendment Act of 1988 (“FHAA”), which requires that multifamily rental properties first occupied after March 13, 1991 be accessible to handicapped residents and visitors. Compliance with the FHAA could require removal of structural barriers to handicapped access in a community, including the interiors of apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily rental properties for compliance with the requirements of the FHAA and the Disabilities Act and an increasing number of substantial enforcement actions and private lawsuits have been brought against multifamily rental properties to ensure compliance with these requirements. Noncompliance with the FHAA and the Disabilities Act could result in the imposition of fines, awards of damages to private litigants, payment of attorneys’ fees and other costs to plaintiffs, substantial litigation costs and substantial costs of remediation.
Certain of our properties may be subject to the low income housing tax credits, historic preservation tax credits or other similar tax credit rules at the federal, state or municipal level. The application of these tax credit rules is extremely complicated and noncompliance with these rules may have adverse consequences for us. Noncompliance with applicable tax regulations may result in the loss of future or other tax credits and the fractional recapture of these tax credits already taken. Accordingly, noncompliance with these tax credit rules and related restrictions may adversely affect our ability to distribute any cash to our investors.
Our properties may be dispersed geographically and across various markets and sectors.
We may acquire and operate properties in different locations throughout the United States and in different markets and sectors. The success of our properties will depend largely on our ability to hire various managers and service providers in each area, market and sector where the properties are located or situated. It may be more challenging to manage a diverse portfolio. Failure to meet such challenges could reduce the value of your investment.
Because of the concentration of a significant portion of our assets in certain geographic markets, any adverse economic, real estate or business conditions in these markets could affect our operating results and our ability to make distributions to our stockholders
As of December 31, 2021, our real estate investments located in Texas, Georgia, Illinois and Colorado represented approximately 26%, 13%, 12% and 10% of the portfolio. As a result, the geographic concentration of our portfolio makes it particularly susceptible to adverse economic developments in these real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect our operating results and our ability to make distributions to stockholders.
Newly constructed and existing multifamily rental properties or other properties that compete with any properties we may acquire in any particular location could adversely affect the operating results of our properties and our cash available for distribution.
We may acquire properties in locations that experience increases in construction of multifamily rental or other properties that compete with our properties. This increased competition and construction could:
Our efforts to upgrade multifamily rental properties to increase occupancy and raise rental rates through redevelopment and repositioning may fail, which may reduce our net income and the cash available for distributions to you.
The success of our ability to upgrade any multifamily rental properties that we may acquire and realize capital gains and current income for you on these investments materially depends upon the status of the economy where the multifamily rental property is located. Our revenues will be lower if the rental market cannot bear the higher rental rate that accompanies the upgraded multifamily rental property due to job losses or other economic hardships. Should the local market be unable to support a higher rental rate for a multifamily rental property that we upgraded, we may not realize the premium rental we had assumed by a given upgrade and we may realize reduced rental income or a reduced gain or even loss upon the sale of the property. These events could cause us to reduce the cash available for distributions. Further, economic conditions caused by the COVID-19 pandemic may hinder or delay our ability to significantly carry out our value-add programs and thereby increase rents.
Repositioning risks could affect our profitability.
A component of our strategy is to renovate and reposition multifamily communities in order to effect long-term growth. Our renovation and repositioning activities generally entail certain risks, including the following:
These risks may reduce the funds available for distribution to our stockholders. Further, the renovation and repositioning of properties is also subject to the general risks associated with real estate investments.
A concentration of our investments in any one property sector may leave our profitability vulnerable to a downturn or slowdown in such sector.
All of our investments are in the multifamily sector. Vacancy rates in multifamily rental properties and other commercial real estate properties may be related to jobless rates. As a result, we are subject to risks inherent in investments in a single type of property. The potential effects on our revenues, and as a result, on cash available for distribution, resulting from increased jobless rates as well as a general downturn or slowdown in multifamily properties could be more pronounced than if we had more fully diversified our investments.
Increased competition and the increased affordability of single-family and multifamily homes and condominiums for sale or rent could limit our ability to retain residents, lease apartment units or increase or maintain rents.
Any multifamily rental property that we may acquire and own will most likely compete with numerous housing alternatives in attracting residents, including single-family and multifamily homes and condominiums. Due to the current economic conditions, competitive housing in a particular area and the increasing affordability of single-family and multifamily homes and condominiums to buy caused by relatively low mortgage interest rates and generous federal and state government programs to promote home ownership could adversely affect our ability to fully occupy any multifamily rental properties we may acquire. Further, single-family homes and condominiums available for rent could also adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.
Short-term multifamily leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions.
We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term or earlier in certain situations, such as when a resident loses his/her job, without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.
Risks Associated with Debt Financing
We have incurred, and may continue to incur, mortgage indebtedness and other borrowings, which increases our risk of loss due to foreclosure.
We have incurred, and may continue to incur, mortgage indebtedness and lines of credit and long-term financing that may be secured by our properties and other assets. In some instances, we may acquire real properties by financing a portion of the price of the properties and mortgaging or pledging some or all of the properties purchased as security for that debt. We may also incur mortgage debt on properties that we already own in order to obtain funds to acquire additional properties. In addition, we may borrow as necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes, including borrowings to satisfy the REIT requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders (computed without regard to the dividends paid deduction and excluding net capital gain). We, however, can give you no assurance that we will be able to obtain such borrowings on satisfactory terms.
If we do mortgage a property and there is a shortfall between the cash flow from that property and the cash flow needed to service mortgage debt on that property, then the amount of cash available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss of a property since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default, reducing the value of your investment. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure even though we would not necessarily receive any cash proceeds. We may give full or partial guaranties to lenders of mortgage debt on behalf of the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
We also have obtained recourse debt which may be used to finance our acquisitions and meet our REIT distribution requirements. If we have insufficient income to service our recourse debt obligations, our lenders could institute proceedings against us to foreclose upon certain of our assets. If a lender successfully forecloses upon any of our assets, our ability to pay cash distributions to our stockholders will be limited and you could lose all or part of your investment.
High mortgage interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire, our net income and the amount of cash distributions we can make.
If mortgage debt is unavailable at reasonable interest rates, we may not be able to finance the purchase of properties. If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans become due, or of being unable to refinance on favorable terms. If interest rates are higher when we refinance the properties, our income could be reduced. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to you and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our business plan.
We may finance our assets over the long term through a variety of means, including credit facilities, issuance of commercial mortgage-backed securities, and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long‑term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long‑term financing for our assets. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders and funds available for operations, as well as for future business opportunities.
We could be negatively impacted by the condition of Fannie Mae or Freddie Mac and by changes in government support for multifamily housing.
Fannie Mae and Freddie Mac are a major source of financing for multifamily real estate in the United States. We have utilized and expect to continue to utilize loan programs sponsored by these entities as a key source of capital to finance our growth and our operations. In September 2008, the U.S. government increased its control of Fannie Mae and Freddie Mac and placed both companies into a government conservatorship under the Federal Housing Finance Agency (the “FHFA”). Since that time, members of Congress have introduced and Congressional committees have considered a substantial number of bills that include comprehensive or incremental approaches to winding down Fannie Mae and Freddie Mac or changing their purposes, businesses or operations. In 2019, the FHFA for the first time released formal objectives calling for the return of Fannie Mae and Freddie Mac to the private sector. It was also announced during the year that Fannie Mae and Freddie Mac will be permitted to retain a combined $45 billion worth of earnings (Fannie Mae will be allowed to retain $25 billion and Freddie Mac $20 billion). This is a modification of the so-called “net worth sweep” provision that has required Fannie Mae and Freddie Mac to deliver nearly all of their profits to the Treasury; the result being that each organization will have the opportunity to build its net worth. A decision by the U.S. government to eliminate or downscale Fannie Mae or Freddie Mac or to reduce government support for multifamily housing more generally may adversely affect interest rates, capital availability, development of multifamily communities and the value of multifamily assets and, as a result, may adversely affect our operations. Any potential reduction in loans, guarantees and credit enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s derivative securities market, potentially causing breaches in loan covenants, and through reduced loan availability, impact the value of multifamily assets, which could impair the value of a significant portion of multifamily communities. Specifically, the potential for a decrease in liquidity made available to the multifamily sector by Fannie Mae and Freddie Mac could (i) hinder
our ability to refinance our existing loans; (ii) require us to obtain other sources of debt capital with potentially different terms; and (iii) make it more difficult for potential buyers of our properties to obtain financing.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property or discontinue insurance coverage. These or other limitations may limit our flexibility and our ability to achieve our operating plans.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.
As of December 31, 2021, we had total outstanding debt of approximately $1.42 billion, including $613.0 million of debt subject to variable interest rates (excluding amounts that were hedged to fix rates), and may incur additional indebtedness in the future. Interest we pay reduces our cash available for distributions. Since we have incurred and may continue to incur variable rate debt, increases in interest rates raise our interest costs, which reduces our cash flows and our ability to make distributions to you. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to sell one or more of our properties at times which may not permit realization of the maximum return on such investments.
We may be adversely affected by the discontinuation of LIBOR after June 2023.
As of December 31, 2021, we had approximately $588.3 million of debt and 17 interest rate caps with an aggregate notional value of approximately $601.9 million that were indexed to the London Interbank Offered Rate (“LIBOR”). After June 2023, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, intends to stop compelling banks to submit rates for the calculation of the tenors used in our LIBOR-based debt. As a result, the Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of U.S. financial market participants, published model LIBOR replacement language for use in bilateral and syndicated loan facilities and identified the Secured Overnight Financing Rate (“SOFR”) as the replacement to LIBOR.
The International Swaps and Derivatives Association (“ISDA”), the trade association for the derivatives marketplace, published the ISDA IBOR Fallbacks Protocol (the “Protocol”) and the ISDA IBOR Fallbacks Supplement (the “Supplement”) which became effective on January 25, 2021. The Protocol incorporates LIBOR transition provisions into non-cleared derivatives transactions that reference LIBOR and were entered into before January 25, 2021 between parties to derivatives transactions that each have adhered to the Protocol. The Supplement automatically incorporates these LIBOR transition provisions into non-cleared derivatives transactions that reference LIBOR and are entered into on or after January 25, 2021. Any interest rate hedges that reference LIBOR and that we entered into on or after January 25, 2021 and that incorporate the 2006 ISDA Definition are subject to conversion based on the ISDA methodology set forth in the Supplement. In 2021, ISDA published the 2021 ISDA Interest Rate Derivatives Definitions (the “2021 Definitions”). Any interest rate hedges that reference LIBOR and that incorporate the ISDA 2021 Definitions are subject to conversion based on the ISDA methodology set forth in the 2021 Definitions. The spread adjustments to be used in connection with the transition from LIBOR to SOFR under any of our hedging agreements have been fixed pursuant to ISDA’s conversion methodology. These spread adjustments are expected to be the same regardless of whether the conversion occurs under the terms of the Protocol, the Supplement or the 2021 Definitions.
Differences between ARRC and ISDA LIBOR replacement methodology could result in differences in conversion between our debt instruments and corresponding hedges. Mismatches could occur resulting from conversion at different times, into different benchmark replacement rates, or into the same benchmark replacement rates calculated at different times or using different methods of calculation.
The transition from LIBOR to an alternate reference rate could result in higher all-in interest costs and could hinder our ability to maintain effective hedges, which could impact our financial performance. Furthermore, the impact or potential impact of LIBOR transition could incentivize us to prepay debt and/or unwind hedge positions earlier than we anticipated when closing the debt facility and/or entering into the hedge position. If we prepay debt, we may owe prepayment penalties or other breakage costs. If we unwind hedge positions, we could owe unwind payments to our counterparties, which could be significant. For hedges entered into before January 25, 2021, if we do not subsequently adhere to the Protocol, negotiate bilateral solutions with our counterparties, or unwind our positions before the discontinuation of LIBOR, it may be impossible for us or our counterparties to perform under these hedges following the discontinuation of LIBOR.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and decrease the value of your investment.
We have no limit on the amount of debt that we may incur. High debt levels would cause us to incur higher interest charges and higher debt service payments and may also be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of your investment.
Federal Income Tax Risks
Our failure to continue to qualify as a REIT would subject us to federal income tax and reduce cash available for distribution to stockholders.
We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2014. We intend to continue to operate in a manner so as to continue to qualify as a REIT for federal income tax purposes. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to continue to qualify as a REIT. If we fail to continue to qualify as a REIT in any taxable year, we would be subject to federal and applicable state and local income tax on our taxable income at corporate rates, in which case we might be required to borrow or liquidate some investments in order to pay the applicable tax. Losing our REIT status would reduce our net income available for investment or distribution to you because of the additional tax liability. In addition, distributions to stockholders would no longer qualify for the dividends-paid deduction and we would no longer be required to make distributions. Furthermore, if we fail to qualify as a REIT in any taxable year for which we have elected to be taxed as a REIT, we would generally be unable to elect REIT status for the four taxable years following the year in which our REIT status is lost.
Complying with REIT requirements may force us to borrow funds to make distributions to you or otherwise depend on external sources of capital to fund such distributions.
To continue to qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, if we so elect, a stockholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A stockholder, including a tax-exempt or foreign stockholder, would have to file a federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.
From time-to-time, we may generate taxable income greater than our net income for GAAP. In addition, our taxable income may be greater than our cash flow available for distribution to you as a result of, among other things, investments in assets that generate taxable income in advance of the corresponding cash flow from the assets (for instance, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise).
If we do not have other funds available in the situations described in the preceding paragraphs, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.
Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital will depend upon a number of factors, including our current and potential future earnings and cash distributions.
Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to other tax liabilities that reduce our cash flow and our ability to make distributions to you.
Despite our qualification for taxation as a REIT for federal income tax purposes, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income or property. Any of these taxes would decrease cash available for distribution to you. For instance:
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.
To continue to qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to our stockholders at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the requirements for qualifying as a REIT.
We must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and mortgage-backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets) and no more than 20% of the value of our gross assets (25% for tax years ending before 2018) may be represented by securities of one or more TRSs. Finally, for the taxable years after 2017, no more than 25% of our assets may consist of debt investments that are issued by “publicly offered REITs” and would not otherwise be treated as qualifying real estate assets. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate investments from our portfolio, or refrain from making, otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations effectively. Our aggregate gross income from non-qualifying hedges, fees and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with interest rate or other changes than we would otherwise incur.
Liquidation of assets may jeopardize our REIT qualification.
To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% prohibited transaction tax on any resulting gain if we sell assets that are treated as dealer property or inventory.
The prohibited transactions tax may limit our ability to engage in transactions, including disposition of assets and certain methods of securitizing loans, which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of dealer property, other than foreclosure property, but including loans held primarily for sale to customers in the ordinary course of business. We might be subject to the prohibited transaction tax if we were to dispose of or securitize loans in a manner that is treated as a sale of the loans, for federal income tax purposes. In order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans and may limit the structures we use for any securitization financing transactions, even though such sales or structures might otherwise be beneficial to us. Additionally, we may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe-harbor exception to prohibited transaction treatment is available, we cannot assure you that we can comply with such safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of our trade or business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a TRS.
It may be possible to reduce the impact of the prohibited transaction tax by conducting certain activities through a TRS. However, to the extent that we engage in such activities through a TRS, the income associated with such activities will be subject to a corporate income tax. In addition, the IRS may attempt to ignore or otherwise recast such activities in order to impose a prohibited transaction tax on us, and there can be no assurance that such recast will not be successful.
We also may not be able to use secured financing structures that would create taxable mortgage pools, other than in a TRS or through a subsidiary REIT.
We may recognize substantial amounts of REIT taxable income, which we would be required to distribute to you, in a year in which we are not profitable under GAAP principles or other economic measures.
We may recognize substantial amounts of REIT taxable income in years in which we are not profitable under GAAP or other economic measures as a result of the differences between GAAP and tax accounting methods. For instance, certain of our assets will be marked-to-market for GAAP purposes but not for tax purposes, which could result in losses for GAAP purposes that are not recognized in computing our REIT taxable income. Additionally, we may deduct our capital losses only to the extent of our capital gains in computing our REIT taxable income for a given taxable year. Consequently, we could recognize substantial amounts of REIT taxable income and would be required to distribute such income to you, in a year in which we are not profitable under GAAP or other economic measures.
We may distribute our common stock in a taxable distribution, in which case our stockholders may sell shares of our common stock to pay tax on such distributions, and our stockholders may receive less in cash than the amount of the dividend that is taxable.
We may make taxable distributions that are payable in cash and common stock. The IRS has issued private letter rulings to other REITs treating certain distributions that are paid partly in cash and partly in stock as taxable distributions that would satisfy the REIT annual distribution requirement and qualify for the dividends paid deduction for federal income tax purposes. Those rulings may be relied upon only by taxpayers to whom they were issued, but we could request a similar ruling from the IRS. Accordingly, it is unclear whether and to what extent we will be able to make taxable distributions payable in cash and common stock. If we made a taxable dividend payable in cash and common stock, taxable stockholders receiving such distributions will be required to include the dividend as taxable income to the extent of our current and accumulated earnings and profits, as determined for federal income tax purposes. As a result, our stockholders may be required to pay income tax with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount recorded in earnings with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income (which is determined without regard to the dividends paid deduction or net capital gain for this purpose) in order to continue to qualify as a REIT. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code and to avoid corporate income tax and the 4% excise tax. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.
Distributions paid by REITs do not qualify for the reduced tax rates that apply to other corporate distributions.
The maximum tax rate for “qualified dividends” paid by corporations to non-corporate stockholders is currently 20%. Distributions paid by REITs, however, generally are taxed at ordinary income rates (subject to a maximum rate of 37% for non-corporate stockholders, provided individuals may be able to deduct 20% of income received as ordinary REIT dividends, thus reducing the maximum effective federal income tax rate on such dividends), rather than the preferential rate applicable to qualified dividends.
You may have current tax liability on distributions you elect to reinvest in our common stock.
If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, you will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the shares of common stock received.
Retirement Plan Risks
If the fiduciary of an employee benefit plan subject to ERISA (such as a profit sharing, Section 401(k) or pension plan) or an owner of a retirement arrangement subject to Section 4975 of the Internal Revenue Code (such as an IRA) fails to meet the fiduciary and other standards under ERISA or the Internal Revenue Code as a result of an investment in our stock, the fiduciary could be subject to penalties and other sanctions.
There are special considerations that apply to employee benefit plans subject to ERISA (such as profit sharing, Section 401(k) or pension plans) and other retirement plans or accounts subject to Section 4975 of the Internal Revenue Code (such as an IRA) that are investing in our shares. Fiduciaries and IRA owners investing the assets of such a plan or account in our common stock should satisfy themselves that:
With respect to the annual valuation requirements described above, we will provide an estimated value for our shares annually. We can make no claim whether such estimated value will or will not satisfy the applicable annual valuation requirements under ERISA and the Internal Revenue Code. The Department of Labor or the Internal Revenue Service may determine that a plan fiduciary or an IRA custodian is required to take further steps to determine the value of our common stock. In the absence of an appropriate determination of value, a plan fiduciary or an IRA custodian may be subject to damages, penalties or other sanctions. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities - Market Information” of this Annual Report on Form 10-K.
Failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA and the Internal Revenue Code may result in the imposition of civil and criminal penalties and could subject the fiduciary to claims for damages or for equitable remedies, including liability for investment losses. In addition, if an investment in our shares constitutes a prohibited transaction under ERISA or the Internal Revenue Code, the fiduciary or IRA owner who authorized or directed the investment may be subject to the imposition of excise taxes with respect to the amount invested. In addition, the investment transaction must be undone. In the case of a prohibited transaction involving an IRA owner, the IRA may be disqualified as a tax-exempt account and all of the assets of the IRA may be deemed distributed and subjected to tax.
If our assets are deemed to be plan assets, we may be exposed to liabilities under Title I of ERISA and the Internal Revenue Code
In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entity are deemed to be ERISA plan assets unless an exception applies. This is known as the “look-through rule.” Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA or Section 4975 of the Internal Revenue Code, may be applicable, and there may be liability under these and other provisions of ERISA and the Internal Revenue Code. We believe that our assets should not be treated as plan assets because the shares should qualify as “publicly-offered securities” that are exempt from the look-through rules under applicable Treasury Regulations. We note, however, that because certain limitations are imposed upon the transferability of shares so that we may qualify as a REIT, and perhaps for other reasons, it is possible that this exemption may not apply. If that is the case, and if we are exposed to liability under ERISA or the Internal Revenue Code, our performance and results of operations could be adversely affected.
If you invest in our shares through an IRA or other retirement plan, you may be limited in your ability to withdraw required minimum distributions.
If you establish an IRA or other retirement plan through which you invest in our shares, federal law may require you to withdraw required minimum distributions ("RMDs") from such plan in the future. Our share redemption program limits the amount of redemptions that can be made in a given year. As a result, you may not be able to have your shares redeemed at a time in which you need liquidity to satisfy the RMD requirements under your IRA or other retirement plan. Even if you are able to have your shares redeemed, such redemption may be at a price less than the price at which the shares were initially purchased. If you fail to withdraw RMDs from your IRA or other retirement plan, you may be subject to certain tax penalties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
As of December 31, 2021, we owned 45 multifamily properties encompassing approximately 13,707 units. Additional information is included in Schedule III to our financial statements included in this Report. The following is a summary of our real estate properties as of December 31, 2021:
Property |
| City, State |
| Number of Units |
|
| Net Effective Rent per Occupied Unit (1) |
|
| Average Occupancy (2) |
| |||
1000 Spalding |
| Atlanta, GA |
|
| 252 |
|
|
| 1,394 |
|
|
| 94.5 | % |
81 Fifty at West Hills |
| Portland, OR |
|
| 357 |
|
|
| 1,410 |
|
|
| 95.2 | % |
The Adairs |
| Dallas, TX |
|
| 352 |
|
|
| 1,223 |
|
|
| 95.6 | % |
Addison at Sandy Springs |
| Sandy Springs, GA |
|
| 236 |
|
|
| 1,253 |
|
|
| 93.7 | % |
Arcadia |
| Centennial , CO |
|
| 300 |
|
|
| 1,596 |
|
|
| 94.1 | % |
Aston at Cinco Ranch |
| Katy, TX |
|
| 228 |
|
|
| 1,365 |
|
|
| 97.5 | % |
Bay Club |
| Jacksonville, FL |
|
| 220 |
|
|
| 1,301 |
|
|
| 96.3 | % |
Bristol at Grapevine |
| Grapevine, TX |
|
| 376 |
|
|
| 1,070 |
|
|
| 95.0 | % |
Calloway at Las Colinas |
| Irving, TX |
|
| 536 |
|
|
| 1,171 |
|
|
| 92.1 | % |
Cannery Lofts |
| Dayton, OH |
|
| 156 |
|
|
| 1,282 |
|
|
| 94.3 | % |
Courtney Meadows |
| Jacksonville, FL |
|
| 276 |
|
|
| 1,279 |
|
|
| 97.7 | % |
Crosstown at Chapel Hill |
| Chapel Hill, NC |
|
| 411 |
|
|
| 1,218 |
|
|
| 94.5 | % |
Estates at Johns Creek |
| John’s Creek , GA |
|
| 403 |
|
|
| 1,692 |
|
|
| 95.3 | % |
Grand Reserve |
| Naperville, IL |
|
| 319 |
|
|
| 1,775 |
|
|
| 96.5 | % |
Green Trails |
| Lisle, IL |
|
| 440 |
|
|
| 1,471 |
|
|
| 96.4 | % |
Heritage Pointe |
| Gilbert, AZ |
|
| 458 |
|
|
| 1,220 |
|
|
| 96.8 | % |
Indigo Creek |
| Glendale, AZ |
|
| 408 |
|
|
| 1,275 |
|
|
| 96.6 | % |
Legacy at Martin's Point |
| Lombard, IL |
|
| 256 |
|
|
| 1,530 |
|
|
| 96.2 | % |
Matthews Reserve |
| Matthews, NC |
|
| 212 |
|
|
| 1,273 |
|
|
| 95.6 | % |
Maxwell Townhomes |
| San Antonio, TX |
|
| 316 |
|
|
| 1,136 |
|
|
| 90.0 | % |
Meridian Pointe |
| Burnsville, MN |
|
| 339 |
|
|
| 1,402 |
|
|
| 95.3 | % |
Montclair Terrace |
| Portland, OR |
|
| 188 |
|
|
| 1,479 |
|
|
| 95.0 | % |
Perimeter 5550 |
| Atlanta, GA |
|
| 165 |
|
|
| 1,317 |
|
|
| 97.1 | % |
Perimeter Circle |
| Atlanta, GA |
|
| 194 |
|
|
| 1,401 |
|
|
| 96.2 | % |
Point Bonita |
| Chula Vista, CA |
|
| 294 |
|
|
| 1,795 |
|
|
| 94.8 | % |
Providence Park |
| Arlington , TX |
|
| 524 |
|
|
| 1,328 |
|
|
| 91.3 | % |
Ravina |
| Austin, TX |
|
| 498 |
|
|
| 1,302 |
|
|
| 97.5 | % |
Skyview |
| Westminster, CO |
|
| 224 |
|
|
| 1,309 |
|
|
| 86.4 | % |
South Lamar Village |
| Austin, TX |
|
| 208 |
|
|
| 1,371 |
|
|
| 96.3 | % |
Sunset Ridge |
| San Antonio, TX |
|
| 324 |
|
|
| 1,162 |
|
|
| 95.2 | % |
Terraces at Lake Mary |
| Lake Mary, FL |
|
| 284 |
|
|
| 1,332 |
|
|
| 96.3 | % |
The Bryant at Yorba Linda |
| Yorba Linda, CA |
|
| 400 |
|
|
| 2,180 |
|
|
| 94.2 | % |
The Palmer at Las Colinas |
| Dallas, TX |
|
| 476 |
|
|
| 1,451 |
|
|
| 93.2 | % |
The Summit |
| Alexandria, VA |
|
| 141 |
|
|
| 1,939 |
|
|
| 95.8 | % |
The Westside |
| Plano, TX |
|
| 412 |
|
|
| 1,173 |
|
|
| 94.2 | % |
Trailpoint at the Woodlands |
| The Woodlands, TX |
|
| 271 |
|
|
| 1,112 |
|
|
| 96.1 | % |
Tramore Village |
| Austell, GA |
|
| 324 |
|
|
| 1,251 |
|
|
| 95.2 | % |
Uptown Buckhead |
| Atlanta, GA |
|
| 216 |
|
|
| 1,288 |
|
|
| 95.6 | % |
Verdant |
| Boulder , CO |
|
| 216 |
|
|
| 1,899 |
|
|
| 93.4 | % |
Verona |
| Littleton, CO |
|
| 276 |
|
|
| 1,327 |
|
|
| 94.0 | % |
Vista Apartment Homes |
| Philadelphia , PA |
|
| 133 |
|
|
| 1,470 |
|
|
| 97.0 | % |
Wimbledon Oaks |
| Arlington, TX |
|
| 248 |
|
|
| 1,146 |
|
|
| 94.6 | % |
Windbrooke Crossing |
| Buffalo Grove, IL |
|
| 236 |
|
|
| 1,593 |
|
|
| 95.7 | % |
Winthrop West |
| Riverview, FL |
|
| 204 |
|
|
| 1,294 |
|
|
| 96.3 | % |
Woods of Burnsville |
| Burnsville, MN |
|
| 400 |
|
|
| 1,288 |
|
|
| 96.4 | % |
Total |
|
|
|
| 13,707 |
|
|
|
|
|
| 94.9 | % |
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in 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 governmental authorities, except for the following:
On June 17, 2021, stockholders Karl R. Wilber and Julia M. Wilber, as co-trustees of the Karl R. and Julia M. Wilber Revocable Trust dtd 2/18/2002 (“Wilber Trust”), sent a letter to Alan F. Feldman alleging breaches of fiduciary duty by the directors of our predecessor entities arising from the Self-Management Transaction and Resource REIT Mergers and demanding that our board of directors (our “Board”) take action to remedy such breaches (the “Demand Letter”). On August 3, 2021, our Board formed a special committee to investigate the allegations in the Demand Letter. The special committee engaged independent counsel and conducted a full investigation and, on January 25, 2022, communicated to Wilber Trust its conclusion that the claims in the Demand Letter had no merit and would not be pursued by us. On February 7, 2022, the Wilber Trust filed a class action complaint in the Circuit Court for Baltimore City, Maryland (Karl R. Wilber et al. v. Alan F. Feldman et al., Case No. 24-C-22-000531) against current and former members of our Board, us, C-III Capital Partners LLC, and its subsidiary, RRE Legacy Co LLC. The complaint alleges, among other things, that (a) the former REIT II directors breached their fiduciary duties by approving the REIT I Merger given that the Self-Management Transaction provided inadequate value to both REIT I and REIT II, thus diluting the stock value of the purported class; (b) the current Board failed to consider the value of the claims in the Demand Letter when negotiating the proposed transaction with BREIT; and (c) C-III and the sponsor were unjustly enriched by the Self-Management Transaction. Wilber Trust seeks an unspecified award of compensatory damages and invalidation of the stock consideration paid to C-III and the sponsor in the Self-Management Transaction. Defendants’ response is due on April 15, 2022. We intend to vigorously defend against the complaint. Based on the early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Stockholder Information
As of December 31, 2021, we had approximately 165.8 million shares of common stock outstanding, including approximately 1.1 million restricted shares, held by a total of approximately 29,121 stockholders.
Estimated Value Per Share
On January 23, 2022, we entered the Blackstone Merger Agreement with Rapids Parent and Rapids Merger Sub, both affiliates of BREIT. The Blackstone Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into Rapids Merger Sub. Upon completion of the Blackstone Merger, Rapids Merger Sub will survive and our separate existence will cease. Pursuant to the terms and conditions in the Blackstone Merger Agreement, at the Effective Time, each share of our common stock that is issued and outstanding immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive an amount in cash equal to $14.75, without interest. For additional information regarding the Blackstone Merger, including risks and uncertainties, see Part I, Item 1 – Business and Part I, Item 1A – Risk Factors as well as our definitive proxy statement filed with the SEC on March 14, 2022.
On January 23, 2022, our board of directors approved an estimated value per share of our common stock of $14.75 based solely on the consideration to be paid to holders of our common stock by BREIT in connection with the Blackstone Merger. See “Background of the Merger” in our definitive proxy statement filed with the SEC on March 14, 2022 for additional information about how the merger consideration was determined. We are providing this estimated value per share to assist broker-dealers that participated in our public offerings in meeting their customer account statement reporting obligations under Financial Industry Regulatory Authority (“FINRA”) Rule 2231.
Limitations of Estimated Value Per Share
With respect to the estimated value per share, we can give no assurance that:
Historical Estimated Values per Share
The historical reported estimated values per share of our common stock approved by the board of directors are set forth below:
Estimated Value per Share |
|
| Valuation Date |
| Filing with the Securities and Exchange Commission | |
$ | 9.01 |
|
| December 31, 2015 |
| Annual Report on Form 10-K filed March 30, 2016 |
$ | 9.10 |
|
| December 31, 2016 |
| Annual Report on Form 10-K filed March 31, 2017 |
$ | 9.08 |
|
| December 31, 2017 |
| Annual Report on Form 10-K filed March 29, 2018 |
$ | 8.77 |
|
| December 31, 2018 |
| Annual Report on Form 10-K filed March 22, 2019 |
$ | 9.08 |
|
| December 31, 2019 |
| Annual Report on Form 10-K filed March 20, 2020 |
$ | 9.06 |
|
| January 28, 2021 |
| Annual Report on Form 10-K filed March 25, 2021 |
Unregistered Sale of Equity Securities
All securities sold by us during the year ended December 31, 2021 were sold in an offering registered under the Securities Act of 1933.
Redemption of Securities
Our board of directors has adopted a share redemption program that may enable stockholders to sell their shares to us, subject to the significant conditions and limitations of the program. The program was initially adopted in February 2014 and has been amended and restated at various times thereafter. On February 3, 2021, our board of directors adopted the Fifth Amended and Restated Share Redemption Program (the “SRP”). Under the SRP, redemptions will be made quarterly in an amount not to exceed proceeds from the sale of shares in our distribution reinvestment plan offering (the “DRP Offering”) in the immediately preceding calendar quarter; provided that, for any quarter in which no DRP Offering proceeds are available, the funding limitation for the quarter will be set by the board of directors upon ten business days’ notice to stockholders. In addition, we will not redeem in excess of 5% of the weighted average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (each as defined in the SRP and collectively, “Special Redemptions”). Since the first quarter of 2020, the SRP has been suspended except for Special Redemptions. During the year ended December 31, 2021, we honored all Special Redemption requests that were submitted pursuant to the terms of the SRP.
Pursuant to the SRP, during the three months ended December 31, 2021, we redeemed shares as follows (in thousands, except per share data):
Period |
| Total Number of Shares Redeemed (1) |
|
| Average Price Paid per Share |
|
| Year to Date Number of Shares Purchased as Part of a Publicly Announced Plan or Program (2) |
|
| Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program | |||
October 2021 |
|
| — |
|
|
| — |
|
|
| — |
|
| (2) |
November 2021 |
|
| — |
|
|
| — |
|
|
| — |
|
| (2) |
December 2021 |
|
| 184,236 |
|
| $ | 9.06 |
|
|
| 879,789 |
|
| (2) |
(1) All purchases of equity securities in the three months ended December 31, 2021 were made pursuant to our share redemption program.
(2) As of December 31, 2021, we limit the dollar value and number of shares that may be repurchased under the program, as discussed above. As of December 31, 2021, we had $2.7 million available to repurchase shares under the SRP.
Distribution Information
For the year ended December 31, 2021, we paid aggregate distributions of $45.2 million, including $34.6 million of distributions paid in cash and $10.6 million of distributions reinvested in shares of common stock through our DRP. Distributions declared, distributions paid and cash flows provided by operating activities were as follows for the year ended December 31, 2021 (in thousands):
|
| Distributions Paid |
|
|
|
|
| Distributions Declared |
|
| Sources of Distributions Paid | |||||||||||||||
2021 |
| Cash |
|
| Distributions Reinvested (DRP) |
|
| Total |
|
| Cash Provided By Operating Activities |
|
| Total |
|
| Per Share |
|
| Operating Activities Amount Paid/Percent of Total | ||||||
First Quarter |
| $ | 8,539 |
|
| $ | 2,490 |
|
| $ | 11,029 |
|
| $ | 12,101 |
|
| $ | 11,029 |
|
| $ | 0.07 |
|
| $11,029 / 100% |
Second Quarter |
|
| 8,365 |
|
|
| 2,674 |
|
|
| 11,039 |
|
|
| 22,269 |
|
|
| 11,039 |
|
|
| 0.07 |
|
| $11,039 / 100% |
Third Quarter |
|
| 8,868 |
|
|
| 2,704 |
|
|
| 11,572 |
|
|
| 25,182 |
|
|
| 11,572 |
|
|
| 0.07 |
|
| $11,572 / 100% |
Fourth Quarter |
|
| 8,875 |
|
|
| 2,707 |
|
|
| 11,582 |
|
|
| 12,997 |
|
|
| 11,582 |
|
|
| 0.07 |
|
| $11,582 / 100% |
Total |
| $ | 34,647 |
|
| $ | 10,575 |
|
| $ | 45,222 |
|
| $ | 72,549 |
|
| $ | 45,222 |
|
| $ | 0.28 |
|
|
|
We elected to be taxed as a REIT and to operate as a REIT beginning with our taxable year ended December 31, 2014. To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our common stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.
Our board of directors considers many factors before authorizing a cash distribution, including current and projected cash flow from operations, capital expenditure needs, general financial conditions and REIT qualification requirements. To the extent permitted by Maryland law, we may borrow funds, issue new securities or sell assets to make and cover our declared distributions, all or a portion of which could be deemed a return of capital. Our organizational documents do not limit the amount of distributions we can fund from sources other than from cash flows from operations.
We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders. We will make distributions with respect to our shares of common stock in the sole discretion of our Board of Directors. No distributions will be made with respect to shares of our convertible stock.
Pursuant to the terms of the Blackstone Merger Agreement, we may continue to pay regular quarterly distributions of no more than $0.07 per share of our common stock for the first two quarters of 2022. Thereafter, we may not pay distribution except as necessary to preserve our tax status as a REIT, and any such distributions would result in an offsetting decrease to the merger consideration to be paid to our common stockholders.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for Resource Real Estate Opportunity REIT I, Inc. included in the Amended Current Report on Form 8-K/A filed by Resource REIT, Inc. on April 8, 2021.
Overview
We are a self-managed REIT formed as a Maryland corporation on September 28, 2012. We own a diversified portfolio of U.S. commercial real estate. We conduct our operations through RRE Opportunity OP II, LP, (“REIT II OP” or “OP II”), our operating partnership. We have sub-contracted with Greystar, a third-party property management company to provide property management services at our properties. Our portfolio consists of multifamily rental properties to which we have added value with a capital infusion (referred to as “value add properties”). The primary portion of our initial public offering commenced in February 2014 and closed in February 2016.
On January 28, 2021, we acquired REIT I and Resource Apartment REIT III, Inc. (“REIT III”) and their respective subsidiaries in stock-for-stock transactions (collectively, the “Resource REIT Mergers”). As a result of our acquisition of REIT I and its subsidiaries, including the entities that provide our advisory, asset and property management services, we became self-managed and as of December 31, 2021, have 44 employees. Prior to January 28, 2021, we were externally advised by Resource Real Estate Opportunity Advisor II, LLC (our “Advisor”) pursuant to an advisory agreement initially entered into in February 2014. As of December 31, 2021, we owned 45 properties in 13 states, comprising a total of 13,707 multifamily units.
In connection with the Resource REIT Mergers, REIT II was the legal acquirer of both REIT I and REIT III, however, REIT I was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the Resource REIT Mergers reflects results of the combined entity, and the financial information set forth herein prior to the Resource REIT Mergers reflects REIT I’s results. For this reason, period to period comparisons may not be meaningful.
In addition, unless the context requires otherwise, all references to the “Company,” “we,” “our,” and “us” herein mean REIT I, and one or more of REIT I’s subsidiaries for periods prior to the Resource REIT Mergers, and REIT II and one or more of REIT II’s subsidiaries for periods following the Resource REIT Mergers. Certain historical information of REIT II is included for background purposes.
Self-Management Transaction
On September 8, 2020, REIT I engaged in a series of transactions which we refer to as the “Self-Management Transaction,” pursuant to which REIT I acquired the advisors and property managers for REIT I, REIT II and REIT III from C-III Capital Partners, LLC (“C-III”) and its affiliates in exchange for 6,158,759 REIT I OP Common Units (“OP Common units”), 319,965 REIT I OP Series A Preferred Units (“OP I Preferred Units”) with a face value of $67.5 million, and the right to receive certain deferred payments having the aggregate value of $27.0 million. Prior to this transaction, our Advisor was an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), our initial sponsor and an indirect wholly-owned subsidiary of C-III.
As a result of the Self-Management Transaction, REIT I was self-managed for the period from September 8, 2020 through the effectiveness of the Resource REIT Mergers and succeeded to the advisory, asset management and property management arrangements formerly in place with REIT II and REIT III until the Resource REIT Mergers. At the time of the Resource REIT Mergers, the OP I Common Units converted into 7,539,738 OP Common Units and Op I Preferred Units have participation rights of 391,711 OP Preferred Units.
On September 14, 2021, in accordance with a letter agreement entered with C-III and RRE Legacy Co LLC (“Legacy Co”), we redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of our common stock.
Blackstone Merger
On January 23, 2022, we entered into an Agreement and Plan of Merger (the “Blackstone Merger Agreement”). The Blackstone Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into an affiliate of Blackstone Real Estate Income Trust, Inc. (“BREIT”), which is an affiliate of Blackstone, Inc. Upon completion of the transaction (the “Blackstone Merger”), our separate existence will cease. The transactions contemplated by the Blackstone Merger Agreement were unanimously approved by our board of directors.
COVID-19 Pandemic and Portfolio Outlook
As of December 31, 2021, the novel coronavirus, or COVID-19, pandemic is ongoing. During the year ended December 31, 2020, the COVID-19 pandemic created disruption in the U.S. and global economies, adversely impacting many industries, including the real estate industry, directly or indirectly. During the year ended December 31, 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus.
The outbreak of COVID-19 and its impact on the current financial, economic, capital markets and real estate market environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. Although a recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. The most recent round of U.S. fiscal stimulus could provide meaningful support, along with continued accommodative monetary policy and wider distribution of vaccines. Issues with respect to the distribution and acceptance of vaccines or the spread of new variants of the virus could adversely impact the recovery. Overall, there remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact COVID-19 may have on our business.
Many of our tenants have suffered difficulties with their personal financial situations as a result of job loss or reduced income and, depending upon the duration of the measures put in place to mitigate or contain the spread of the virus and the corresponding economic slowdown, some of our tenants have or will seek rent deferrals or become unable to pay their rent. For the three months ended December 31, 2021, our 30-day collection rate was approximately 95.6%, of the billed rental income. Collections and rent relief requests to-date may not be indicative of collections or requests in any future period. In particular, many of our tenants may be the recipients of unemployment benefits or other economic stimulus under the CARES Act and the 2021 American Rescue Plan which will have aided in the payment of rent due. The extent to which these benefits will be available going forward is uncertain. To the extent our tenants do not have access to additional federal or state relief to mitigate the impact of the COVID-19 pandemic on their personal finances our ability to collect rent and our operations would be adversely affected. In addition, we expect the economic disruptions caused by the COVID-19 pandemic will cause elevated credit losses and may impede our ability to increase rental rates. If required by applicable law, we may continue to waive late fees, halt evictions, and offer a payment deferral plan to residents who have been adversely financially impacted by COVID-19 where applicable federal, state or local restrictions are in effect. To help mitigate the impact on our operating results of the COVID-19 pandemic, in 2020, we initiated various operational cost saving initiatives across our portfolio. In addition, we have taken measures to preserve cash, which will help to offset any impact to our liquidity that may occur as a result of the COVID-19 pandemic.
The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations and those of our tenants remain uncertain and cannot be predicted with confidence and will depend on the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. However, notwithstanding the challenging economic circumstances created by the COVID-19 pandemic, we believe our focus on multifamily assets makes us better positioned relative to other classes of real estate to withstand many of the adverse impacts of the COVID-19 pandemic as housing is a basic need, rather than a discretionary expense. In addition, we have taken several steps to offset any disruptions in rent that may occur as a result of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic (or a future pandemic, epidemic or disease) presents material uncertainty and risk with respect to our business, financial condition, results of operations and cash flows.
Results of Operations
As of December 31, 2021, we owned interests in a total of 45 multifamily properties. The three combined REITs have acquired interests in 78 multifamily properties, and as of December 31, 2021, have sold interests in 33 of these properties.
Through December 31, 2021, the COVID-19 pandemic has not significantly impacted our operating results; however, we have experienced some reductions in revenue during the year as a result of increased bad debt expense, waiving late fees and the suspension of evictions at our properties. We expect, however, that as the impact of COVID-19 continues to be felt, the COVID-19 outbreak will adversely affect our business, financial condition, results of operations and cash flows going forward,
including but not limited to, rental revenues and leasing activity, in ways that may vary widely depending on the duration and magnitude of the COVID-19 pandemic and ensuing economic turmoil, as well as numerous factors, many of which are outside of our control, as discussed above.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined below) for the years ended December 31, 2021 and 2020 for our Same Store and Non-Same Store properties (as defined below) (dollars in thousands, except per unit):
|
| As Of or For the Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, 2021(2) |
|
| December 31, 2020 |
|
| Increase / (Decrease) |
|
| % Change(1) |
| ||||
Number of properties: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 24 |
|
|
| 24 |
|
|
| — |
|
|
| 0 | % |
Non-Same Store |
|
| 21 |
|
|
| 4 |
|
|
| 17 |
|
|
| 425 | % |
Total |
|
| 45 |
|
|
| 28 |
|
|
| 17 |
|
|
| 61 | % |
Number of Units |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 7,473 |
|
|
| 7,473 |
|
|
| — |
|
|
|
| |
Non-Same Store |
|
| 6,234 |
|
|
| 1,014 |
|
|
| 5,220 |
|
| N/M |
| |
Total |
|
| 13,707 |
|
|
| 8,487 |
|
|
| 5,220 |
|
|
| 62 | % |
Average Occupancy |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 94.5 | % |
|
| 93.1 | % |
|
|
|
|
| 1.4 | % | |
Non-Same Store |
|
| 95.6 | % |
|
| 95.6 | % |
|
|
|
|
| 0.0 | % | |
Total |
|
| 95.1 | % |
|
| 93.4 | % |
|
|
|
|
| 1.7 | % | |
Net effective rent, per occupied unit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
| $ | 1,362 |
|
| $ | 1,308 |
|
| $ | 54 |
|
|
| 4 | % |
Non-Same Store |
|
| 1,350 |
|
|
| 974 |
|
|
| 376 |
|
|
| 39 | % |
All properties |
|
| 1,356 |
|
|
| 1,267 |
|
|
| 89 |
|
|
| 7 | % |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store revenues |
| $ | 126,275 |
|
| $ | 120,609 |
|
| $ | 5,666 |
|
|
| 5 | % |
Non-Same Store revenues |
|
| 114,602 |
|
|
| 12,633 |
|
|
| 101,969 |
|
| N/M |
| |
Total Rental income |
|
| 240,877 |
|
|
| 133,242 |
|
|
| 107,635 |
|
|
| 81 | % |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property operating expenses, including real estate taxes |
|
| 51,194 |
|
|
| 50,634 |
|
|
| 560 |
|
|
| 1 | % |
Property management fees - third party |
|
| 3,411 |
|
|
| 1,015 |
|
|
| 2,396 |
|
|
| 236 | % |
Property management fees - related party |
|
| — |
|
|
| 3,682 |
|
|
| (3,682 | ) |
|
| -100 | % |
General and administrative - property |
|
| 3,036 |
|
|
| 3,211 |
|
|
| (175 | ) |
|
| -5 | % |
Same Store operating expenses |
|
| 57,641 |
|
|
| 58,542 |
|
|
| (901 | ) |
|
| -2 | % |
Non-Same Store |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property operating expenses, including real estate taxes |
|
| 44,006 |
|
|
| 5,362 |
|
|
| 38,644 |
|
| N/M |
| |
Property management fees - third party |
|
| 3,279 |
|
|
| 121 |
|
|
| 3,158 |
|
|
| 2610 | % |
Property management fees - related party |
|
| — |
|
|
| 389 |
|
|
| (389 | ) |
|
| -100 | % |
General and administrative - property |
|
| 2,782 |
|
|
| 432 |
|
|
| 2,350 |
|
| N/M |
| |
Non-Same Store operating expenses |
|
| 50,067 |
|
|
| 6,304 |
|
|
| 43,763 |
|
| N/M |
| |
Total operating expenses |
|
| 107,708 |
|
|
| 64,846 |
|
|
| 42,862 |
|
|
| 66 | % |
Net Operating Income "NOI" |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 68,634 |
|
|
| 62,067 |
|
|
| 6,567 |
|
|
| 11 | % |
Non-Same Store |
|
| 64,535 |
|
|
| 6,329 |
|
|
| 58,206 |
|
| N/M |
| |
Total NOI |
| $ | 133,169 |
|
| $ | 68,396 |
|
| $ | 64,773 |
|
|
| 95 | % |
(1) N/M- result not meaningful.
(2) We have combined two properties; Adair off Addison and Adair off Addison II.
See reconciliation of Net income (loss) attributable to common stockholders to NOI table below:
| For the Year Ended |
|
|
|
|
|
|
| |||||||
| December 31, 2021 |
|
| December 31, 2020 |
|
| Increase / (Decrease) |
|
| % Change |
| ||||
Net income (loss) attributable to common stockholders | $ | 52,254 |
|
| $ | (25,159 | ) |
|
| 77,413 |
|
|
| -308 | % |
Allocation of income to preferred unit holders attributable to noncontrolling interests |
| (158 | ) |
|
| (101 | ) |
|
| (57 | ) |
|
| 56 | % |
Net loss attributable to noncontrolling interests |
| (696 | ) |
|
| (279 | ) |
|
| (417 | ) |
|
| 149 | % |
Net income (loss) after preferred unit distributions |
| 51,400 |
|
|
| (25,539 | ) |
|
| 76,939 |
|
|
| -301 | % |
Preferred return to preferred OP unit holders |
| 3,161 |
|
|
| 1,406 |
|
|
| 1,755 |
|
|
| 125 | % |
Redemption of preferred OP units |
| 342 |
|
|
| — |
|
|
| 342 |
|
|
| 100 | % |
Net income (loss) | $ | 54,903 |
|
| $ | (24,133 | ) |
| $ | 79,036 |
|
|
| -328 | % |
Adjustments to reconcile net income (loss) to NOI: |
|
|
|
|
|
|
|
|
|
|
| ||||
Casualty loss |
| 2,359 |
|
|
| 338 |
|
|
| 2,021 |
|
|
| 598 | % |
Acquisition fees |
| — |
|
|
| 113 |
|
|
| (113 | ) |
|
| -100 | % |
Transaction expenses |
| 465 |
|
|
| 2,282 |
|
|
| (1,817 | ) |
|
| -80 | % |
Property management fees - third party |
| — |
|
|
| 887 |
|
|
| (887 | ) |
|
| -100 | % |
Asset Management fees - related party |
| �� |
|
|
| 8,518 |
|
|
| (8,518 | ) |
|
| -100 | % |
General and administrative - corporate |
| 25,303 |
|
|
| 8,543 |
|
|
| 16,760 |
|
|
| 196 | % |
Loss on disposal of assets |
| 848 |
|
|
| 656 |
|
|
| 192 |
|
|
| 29 | % |
Depreciation and amortization expense |
| 96,918 |
|
|
| 51,460 |
|
|
| 45,458 |
|
|
| 88 | % |
Interest expense |
| 47,377 |
|
|
| 25,723 |
|
|
| 21,654 |
|
|
| 84 | % |
Interest income |
| (22 | ) |
|
| (217 | ) |
|
| 195 |
|
|
| -90 | % |
Gain on sale of land easement |
| — |
|
|
| (310 | ) |
|
| 310 |
|
|
| -100 | % |
Gain on sale of rental property |
| (93,665 | ) |
|
| — |
|
|
| (93,665 | ) |
|
| 100 | % |
Management fee and other income |
| (1,212 | ) |
|
| (5,296 | ) |
|
| 4,084 |
|
|
| -77 | % |
Insurance proceeds in excess of cost basis |
| (311 | ) |
|
| (168 | ) |
|
| (143 | ) |
|
| 85 | % |
Provision for income taxes |
| 206 |
|
|
| — |
|
|
| 206 |
|
|
| 100 | % |
NOI |
| 133,169 |
|
|
| 68,396 |
|
|
| 64,773 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net Operating Income or “NOI” is a non-GAAP financial measure, which we define as total rental property revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation and amortization, interest expense, related party management fees, casualty losses and gains, losses on disposal of assets and corporate general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
We define “Same Store NOI” as NOI for our properties that are comparable between periods. We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods. The 22 properties formerly held by REIT II and REIT III which were acquired in the Resource REIT Mergers are included in Non-Same Store results and statistics for the year ended December 31, 2021.
Net effective rent, per occupied unit is equal to the average of gross potential rent net of gain/loss to lease, less vacancy, non-revenue units and concessions, divided by the average occupancy (in units) for the periods presented.
Average occupancy represents the daily average occupied units for the reporting period divided by the total number of units, expressed as a percentage.
Rental and other property revenue. Same store property revenue of the former REIT I portfolio, increased by approximately $5.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase was principally due to an approximately $5.2 million increase in rental income resulting from a 1.4% increase in average occupancy and an approximately $54 per unit increase in net effective monthly rent. This increase was offset by an increase in bad debt expense, net of recoveries, of approximately $420,000 for the year ended December 31, 2021 as compared to the year ended December 31, 2020. In addition, utility income and ancillary tenant fees increased by approximately $861,000 due to increased utility charges and late fees charged to tenants. Non-same store results include the former REIT II and REIT III properties for the period from January 28, 2021 through December 31, 2021 due to the Resource REIT Mergers as well as four former REIT I properties sold during 2021.
Property operating expenses. Same store property operating expenses increased by approximately $560,000 primarily due to an approximately $383,000 increase in real estate taxes and an approximately $195,000 increase in utilities. There was an approximately $1.3 million net decrease in property management fees for same store for the year ended December 31, 2021 as compared the year ended December 31, 2020. Prior to September 8, 2020, our former Advisor subcontracted certain services to
an unaffiliated third-party, Greystar, and paid for those services from its property management fee; after September 8, 2020, we paid those fees directly to Greystar.
Management Fees. Asset management fees- related party decreased by approximately $8.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 as a result of the Self-Management Transaction on September 8, 2020. In addition, we paid Greystar approximately $887,000 for the period September 8, 2020 to December 31, 2020 to manage the former REIT II and III properties. These costs are included in non-same store operating expenses in 2021.
Casualty Loss. We are self-insured for property related casualties up to $1.1 million and as of December 31, 2021, we had incurred approximately $944,000 of expense related to these losses. In addition, we have deductibles of $25,000 for general liability losses and $100,000 for property related losses.
Transaction expenses. We incurred approximately $465,000 of transaction costs related to the Blackstone Merger in the three months ended December 31, 2021. Transaction costs of approximately $2.3 million were expensed in connection with the Self-Management Transaction during the year ended December 31, 2020.
General and Administrative. Corporate general and administrative expenses increased by approximately $16.8 million for the year ended December 31, 2021 as compared the year ended December 31, 2020 including an increase in payroll and benefit costs of approximately $12.3 million including approximately $4.6 million of compensation expense for restricted stock awards, professional fees of approximately $980,000, transfer agent fees of approximately $628,000 and insurance expense of approximately $777,000. The year ended December 31, 2020 primarily included allocations from our former Advisor to reimburse for costs incurred to manage assets of REIT I. As of December 31, 2021, we employed 44 employees to manage the assets of the merged REITs.
Depreciation and Amortization. Depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets primarily related to in-place apartment unit leases from the Resource REIT Mergers. The increase in depreciation and amortization expense during the year ended December 31, 2021, as compared to the year ended December 31, 2020, was comprised as follows (in thousands):
|
| Same Store |
|
| Non-Same Store |
|
| Corporate |
|
| Total |
| ||||
Depreciation |
| $ | (3,958 | ) |
| $ | 40,941 |
|
| $ | 105 |
|
| $ | 37,088 |
|
Amortization of intangibles |
|
| (4 | ) |
|
| 8,374 |
|
|
| — |
|
|
| 8,370 |
|
|
| $ | (3,962 | ) |
| $ | 49,315 |
|
| $ | 105 |
|
| $ | 45,458 |
|
Interest Expense. Interest expense increased by approximately $21.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 and the increase was comprised as follows (in thousands):
|
| Same Store |
|
| Non-Same Store |
|
| Revolving Credit Facility |
|
| Total |
| ||||
Interest payable to banks |
| $ | (2,364 | ) |
| $ | 17,727 |
|
| $ | 189 |
|
| $ | 15,552 |
|
Deferred finance cost amortization |
|
| (211 | ) |
|
| 93 |
|
|
| 230 |
|
|
| 112 |
|
Fair value amortization |
|
| 67 |
|
|
| 269 |
|
|
| — |
|
|
| 336 |
|
Interest rate cap adjustments |
|
| (23 | ) |
|
| (60 | ) |
|
| — |
|
|
| (83 | ) |
Prepayment penalties |
|
| 1,557 |
|
|
| 1,817 |
|
|
| — |
|
|
| 3,374 |
|
Deferred finance extinguishment |
|
| 1,959 |
|
|
| 404 |
|
|
| — |
|
|
| 2,363 |
|
|
| $ | 985 |
|
| $ | 20,250 |
|
| $ | 419 |
|
| $ | 21,654 |
|
Gain on sale of rental properties. We sold five properties (Evergreen at Coursey, Brookwood, Pines of York, Retreat at Rocky Ridge, and Tech Center) during the year ended December 31, 2021 totaling approximately $202.2 million in gross proceeds and realizing approximately $93.7 million in gain on sales.
Other Revenue. We recorded approximately $1.2 million of asset and property management fee revenue from REIT II and REIT III for the period from January 1, 2021 through January 27, 2021 prior to the Resource REIT Mergers in 2021. We recorded asset and property management fee revenue and debt financing fees from REIT II and REIT III for the period September 9, 2020 through December 31, 2020 of approximately $5.2 million following the Self-Management Transaction in 2020. Upon effectiveness of the Resource REIT Mergers, these fees were no longer earned.
Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined below) for the years ended December 31, 2020 and 2019 for our Same Store and Non-Same Store properties (as defined below) (dollars in thousands, except per unit):
|
| For the Year Ended |
|
|
|
|
|
|
| |||||||
|
| December 31, 2020 |
|
| December 31, 2019 |
|
| Increase / (Decrease) |
|
| % Change (1) |
| ||||
Number of properties: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 24 |
|
|
| 24 |
|
|
| — |
|
|
| 0 | % |
Non-Same Store |
|
| 4 |
|
|
| 4 |
|
|
| — |
|
|
| 0 | % |
Total |
|
| 28 |
|
|
| 28 |
|
|
| — |
|
|
| 0 | % |
Number of Units |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 7,473 |
|
|
| 7,473 |
|
|
| — |
|
|
| 0 | % |
Non-Same Store |
|
| 1,014 |
|
|
| 1,014 |
|
|
| — |
|
|
| 0 | % |
Total |
|
| 8,487 |
|
|
| 8,487 |
|
|
| — |
|
|
| 0 | % |
Average Occupancy |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 93.1 | % |
|
| 93.5 | % |
|
|
|
|
| -0.4 | % | |
Non-Same Store |
|
| 95.6 | % |
|
| 93.4 | % |
|
|
|
|
| 2.2 | % | |
Total |
|
| 93.4 | % |
|
| 93.5 | % |
|
|
|
|
| -0.1 | % | |
Net effective rent, per occupied unit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
| $ | 1,308 |
|
| $ | 1,285 |
|
| $ | 23 |
|
|
| 2 | % |
Non-Same Store |
|
| 974 |
|
|
| 870 |
|
|
| 104 |
|
|
| 12 | % |
All properties |
|
| 1,267 |
|
|
| 1,220 |
|
|
| 47 |
|
|
| 4 | % |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store revenues |
| $ | 120,609 |
|
| $ | 119,344 |
|
| $ | 1,265 |
|
|
| 1 | % |
Non-Same Store revenues |
|
| 12,633 |
|
|
| 15,827 |
|
|
| (3,194 | ) |
|
| -20 | % |
Total Rental income |
|
| 133,242 |
|
|
| 135,171 |
|
|
| (1,929 | ) |
|
| -1 | % |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property operating expenses, including real estate taxes |
|
| 50,634 |
|
|
| 48,104 |
|
|
| 2,530 |
|
|
| 5 | % |
Property management fees - third party |
|
| 1,015 |
|
|
| — |
|
|
| 1,015 |
|
|
| 100 | % |
Property management fees - related party |
|
| 3,682 |
|
|
| 5,340 |
|
|
| (1,658 | ) |
|
| -31 | % |
General and administrative - property |
|
| 3,211 |
|
|
| 3,014 |
|
|
| 197 |
|
|
| 7 | % |
Same Store operating expenses |
|
| 58,542 |
|
|
| 56,458 |
|
|
| 2,084 |
|
|
| 4 | % |
Non-Same Store |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Property operating expenses, including real estate taxes |
|
| 5,362 |
|
|
| 7,412 |
|
|
| (2,050 | ) |
|
| -28 | % |
Property management fees - third party |
|
| 121 |
|
|
| — |
|
|
| 121 |
|
|
| 100 | % |
Property management fees - related party |
|
| 389 |
|
|
| 689 |
|
|
| (300 | ) |
|
| -44 | % |
General and administrative - property |
|
| 432 |
|
|
| 581 |
|
|
| (149 | ) |
|
| -26 | % |
Non-Same Store operating expenses |
|
| 6,304 |
|
|
| 8,682 |
|
|
| (2,378 | ) |
|
| -27 | % |
Total operating expenses |
|
| 64,846 |
|
|
| 65,140 |
|
|
| (294 | ) |
|
| 0 | % |
Net Operating Income "NOI" |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Same Store |
|
| 62,067 |
|
|
| 62,886 |
|
|
| (819 | ) |
|
| -1 | % |
Non-Same Store |
|
| 6,329 |
|
|
| 7,145 |
|
|
| (816 | ) |
|
| -11 | % |
Total NOI |
| $ | 68,396 |
|
| $ | 70,031 |
|
| $ | (1,635 | ) |
|
| -2 | % |
(1) N/M- result not meaningful.
See reconciliation of net loss attributable to common stockholders to NOI in the table below:
| For the Year Ended |
|
|
|
|
|
|
| |||||||
| December 31, 2020 |
|
| December 31, 2019 |
|
| Increase / (Decrease) |
|
| % Change |
| ||||
Net loss attributable to common stockholders | $ | (25,159 | ) |
| $ | (1,747 | ) |
| $ | (23,412 | ) |
|
| 1340 | % |
Allocation of income to preferred unit holders attributable to noncontrolling interests |
| (101 | ) |
|
| — |
|
|
| (101 | ) |
|
| -100 | % |
Net loss attributable to noncontrolling interests |
| (279 | ) |
|
| — |
|
|
| (279 | ) |
|
| -100 | % |
Net loss after preferred unit distributions |
| (25,539 | ) |
|
| (1,747 | ) |
|
| (23,792 | ) |
|
| 1362 | % |
Preferred return to preferred OP unit holders |
| 1,406 |
|
|
| — |
|
|
| 1,406 |
|
|
| 100 | % |
Net loss | $ | (24,133 | ) |
| $ | (1,747 | ) |
| $ | (22,386 | ) |
|
| 1281 | % |
Adjustments to reconcile net loss to NOI: |
|
|
|
|
|
|
|
|
|
|
| ||||
Casualty loss |
| 338 |
|
|
| 302 |
|
|
| 36 |
|
|
| 12 | % |
Acquisition fees |
| 113 |
|
|
| — |
|
|
| 113 |
|
|
| 100 | % |
Transaction expenses |
| 2,282 |
|
|
| — |
|
|
| 2,282 |
|
|
| 100 | % |
Property management fees - third party |
| 887 |
|
|
| — |
|
|
| 887 |
|
|
| 100 | % |
Asset Management fees - related party |
| 8,518 |
|
|
| 12,505 |
|
|
| (3,987 | ) |
|
| -32 | % |
General and administrative - corporate |
| 8,543 |
|
|
| 6,462 |
|
|
| 2,081 |
|
|
| 32 | % |
Loss on disposal of assets |
| 656 |
|
|
| 541 |
|
|
| 115 |
|
|
| 21 | % |
Depreciation and amortization expense |
| 51,460 |
|
|
| 53,814 |
|
|
| (2,354 | ) |
|
| -4 | % |
Interest expense |
| 25,723 |
|
|
| 37,908 |
|
|
| (12,185 | ) |
|
| -32 | % |
Interest income |
| (217 | ) |
|
| (374 | ) |
|
| 157 |
|
|
| -42 | % |
Gain on sale of land easement |
| (310 | ) |
|
| — |
|
|
| (310 | ) |
|
| -100 | % |
Gain on sale of rental property |
| — |
|
|
| (38,810 | ) |
|
| 38,810 |
|
|
| -100 | % |
Management fee and other income |
| (5,296 | ) |
|
| — |
|
|
| (5,296 | ) |
|
| 100 | % |
Insurance proceeds in excess of cost basis |
| (168 | ) |
|
| (570 | ) |
|
| 402 |
|
|
| -71 | % |
NOI |
| 68,396 |
|
|
| 70,031 |
|
|
| (1,635 | ) |
|
|
|
Net Operating Income or “NOI” is a non-GAAP financial measure, which we define as total rental property revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation and amortization, interest expense, related party management fees, casualty losses and gains, losses on disposal of assets and corporate general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
We define “Same Store NOI” as NOI for our properties that are comparable between periods. We view Same Store NOI as an important measure of the operating performance of our properties because it allows us to compare operating results of properties owned for the entirety of the current and comparable periods and therefore eliminates variations caused by acquisitions or dispositions during the periods. Same Store and Non-Same Store for the years ended December 31, 2020 and 2019 are comprised of REIT I properties only.
Net effective rent, per occupied unit is equal to the average of gross potential rent net of gain/loss to lease, less vacancy, non-revenue units and concessions, divided by the average occupancy (in units) for the periods presented.
Average occupancy represents the daily average occupied units for the reporting period divided by the total number of units, expressed as a percentage.
Rental and other property revenue. Same store property revenue of the former REIT I portfolio, increased by approximately $1.3 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase was principally resulting from an increase of approximately $23 per unit net effective monthly rent. This increase was offset by an increase in bad debt expense, net of recoveries, of approximately $834,000 for the year ended December 31, 2020 as compared to the year ended December 31, 2019. In addition, utility income increased by approximately $110,000 due to increased utility charges to tenants.
Property operating expenses. Same store property operating expenses increased by approximately $2.5 million primarily due to an approximate $486,000 increase in real estate taxes, $436,000 increase in turnover costs, $494,000 increase in utilities and an $608,000 increase in insurance. There was an approximate $643,000 net decrease in property management fees for same store for the year ended December 31, 2020 as compared the year ended December 31, 2019. Prior to September 8, 2020, our former Advisor subcontracted certain services to an unaffiliated third-party, Greystar, and paid for those services from its property management fee; after September 8, 2020, we paid those fees directly to Greystar.
Transaction expenses. Transaction costs of approximately $2.3 million were expensed in connection with the Self-Management Transaction during the twelve months ended December 31, 2020.
Management Fees. Asset management fees- related party decreased by approximately $4.0 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of these fees no longer being paid as of September 8, 2020.
General and Administrative. Corporate general and administrative expenses, primarily payroll and benefit costs, increased by approximately $2.1 million for the year ended December 31, 2020 as compared the year ended December 31, 2019 connected to the Self-Management Transaction in 2020.
Depreciation and Amortization. Depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place apartment unit leases from the Resource REIT Mergers and in-place antennae leases. The decrease in depreciation and amortization expense during the year ended December 31, 2020, as compared to the year ended December 31, 2019, was comprised as follows (in thousands):
|
| Same Store |
|
| Non-Same Store |
|
| Corporate |
|
| Total |
| ||||
Depreciation |
| $ | (2,118 | ) |
| $ | (274 | ) |
| $ | 42 |
|
| $ | (2,350 | ) |
Amortization of intangibles |
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| (4 | ) |
|
| $ | (2,122 | ) |
| $ | (274 | ) |
| $ | 42 |
|
| $ | (2,354 | ) |
Interest Expense. Interest expense decreased by approximately $12.2 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 and the decrease was comprised as follows (in thousands):
|
| Same Store |
|
| Non-Same Store |
|
| Total |
| |||
Interest payable to banks |
| $ | (10,769 | ) |
| $ | (436 | ) |
| $ | (11,205 | ) |
Deferred finance cost amortization |
|
| (771 | ) |
|
| (2 | ) |
|
| (773 | ) |
Fair value amortization |
|
| 19 |
|
|
| (1 | ) |
|
| 18 |
|
Interest rate cap adjustments |
|
| (197 | ) |
|
| (22 | ) |
|
| (219 | ) |
Deferred finance extinguishment |
|
| (6 | ) |
|
| — |
|
|
| (6 | ) |
|
| $ | (11,724 | ) |
| $ | (461 | ) |
| $ | (12,185 | ) |
Gain on sale of rental properties. We sold Williamsburg on March 8, 2019 for $70.0 million realizing an approximate $34.6 million gain on sale. We sold Pinehurst on December 20, 2019 for $12.3 million realizing an approximate $4.2 million gain on sale.
Liquidity and Capital Resources
We have derived the capital required to purchase real estate investments and conduct our operations from the proceeds of our public offerings, secured financings from banks or other lenders, proceeds from the sale of assets, and cash flow generated from our operations.
Our ability to derive the capital needed to conduct our operations may be adversely affected by the impact of the COVID-19 pandemic as discussed above.
We allocate funds as necessary to support the future maintenance and viability of properties we acquire in order to preserve value for our investors. If such allocations and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms.
During the year ended December 31, 2021, we obtained REIT-level financing through a line of credit from Bank of America. Some of our assets serve as collateral for this debt. In addition to debt financing at the REIT-level, we have financed, and may continue to finance, the acquisition costs of individual real estate investments, as well as the acquisition costs of all or a group of real estate investments acquired by us, by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Under these circumstances, we anticipate that certain properties will serve as collateral for the debt we incur to acquire those particular properties and that we will seek to obtain nonrecourse financing for the acquisition of the properties. However, there is no guarantee that we will be successful in obtaining financing arrangements on a property-by-property basis and that the loans would be nonrecourse to us. We have and may again also obtain mortgage financing which contains cross-collateralization or cross-default provisions whereby a default on a single property could affect multiple properties. Finally, we may also obtain seller financing with respect to specific assets that we acquire.
Material Cash Requirements
Our expected material cash requirements for the twelve months ended December 31, 2022 and thereafter are comprised of (i) contractually obligated expenditures; (ii) other required expenditures; and (iii) capital expenditures.
Contractually Obligated Expenditures
The following table summarizes our debt payments (excluding extension options), interest payment obligations (excluding debt premiums and discounts, unused fees and deferred financing costs) and obligations under non-cancelable operating leases (excluding renewal options) as of December 31, 2021 (dollars in millions):
|
| Twelve Months Ended |
|
|
|
| ||
|
| December 31, 2022 |
|
| Thereafter |
| ||
Debt repayments |
| $ | 38,899 |
|
| $ | 1,376,422 |
|
Interest payments (1) |
|
| 36,053 |
|
|
| 160,996 |
|
Operating leases |
|
| 583 |
|
|
| 2,179 |
|
|
| $ | 75,535 |
|
| $ | 1,539,597 |
|
(1) Scheduled interest payments included in these amounts for variable rate loans are presented using rates as of December 31, 2021.
Other Required Expenditures
We incur certain other required expenditures in the ordinary course of business, such as utilities, insurance, real estate taxes, third-party management fees, certain capital expenditures related to the maintenance of our properties, and corporate level expenses. Additionally, we carry comprehensive insurance to protect our properties against various losses. The amount of insurance expense that we incur depends on the assessed value of our properties, prevailing market rates, changes in risk. Furthermore, we incur real estate taxes in the various jurisdictions in which we operate. The amount of real estate taxes that we incur depends on changes in the assessed value of our properties, changes in tax rates assessed by certain jurisdictions.
In order to continue to qualify as a REIT for federal income tax purposes, we must meet several organizational and operational requirements, including a requirement that we annually distribute to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. We intend to continue to satisfy this requirement and maintain our REIT status. Our Board of Directors will evaluate the dividend on a quarterly basis,
taking into account a variety of relevant factors, including REIT taxable income. Pursuant to the terms of the Blackstone Merger Agreement, we may continue to pay regular quarterly distributions of no more than $0.07 per share of our common stock for the first two quarters of 2022. Thereafter, we may not pay distribution except as necessary to preserve our tax status as a REIT, and any such distributions would result in an offsetting decrease to the merger consideration to be paid to our common stockholders.
Capital Expenditures
We deployed approximately $28.4 million during the year ended December 31, 2021 for capital expenditures. The properties in which we deployed the most capital during the year ended December 31, 2021 are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):
|
| Capital deployed |
|
| 2022 capital |
| ||
|
| December 31, 2021 |
|
| budgeted |
| ||
Skyview |
| $ | 4,614 |
|
| $ | 1,292 |
|
Calloway at Las Colinas |
|
| 3,210 |
|
|
| 601 |
|
Maxwell Townhomes |
|
| 1,627 |
|
|
| — |
|
The Westside Apartment Homes |
|
| 1,564 |
|
|
| 610 |
|
Meridian Pointe |
|
| 1,494 |
|
|
| 1,608 |
|
Providence in the Park |
|
| 1,418 |
|
|
| 1,422 |
|
The Palmer at Las Colinas |
|
| 1,019 |
|
|
| 1,827 |
|
Crosstown at Chapel Hill |
|
| 835 |
|
|
| 1,314 |
|
Verona Apartment Homes |
|
| 781 |
|
|
| 955 |
|
The Adairs |
|
| 626 |
|
|
| 1,227 |
|
All other properties |
|
| 11,235 |
|
|
| 29,360 |
|
|
| $ | 28,424 |
|
| $ | 40,216 |
|
Distributions Paid to Common Stockholders
For the year ended December 31, 2021, we paid aggregate distributions as follows (dollars in thousands, except per share data):
Record Date |
| Per Common Share |
|
| Distribution Date |
| Net Cash Distributions |
|
| Distributions reinvested in shares of Common Stock |
|
| Total Aggregate Distributions |
| ||||
March 30, 2021 |
| $ | 0.07 |
|
| March 31, 2021 |
| $ | 8,539 |
|
| $ | 2,490 |
|
| $ | 11,029 |
|
June 29, 2021 |
|
| 0.07 |
|
| June 30, 2021 |
|
| 8,365 |
|
|
| 2,674 |
|
|
| 11,039 |
|
September 29, 2021 |
|
| 0.07 |
|
| September 30, 2021 |
|
| 8,868 |
|
|
| 2,704 |
|
|
| 11,572 |
|
December 28, 2021 |
|
| 0.07 |
|
| December 29, 2021 |
|
| 8,875 |
|
|
| 2,707 |
|
|
| 11,582 |
|
|
| $ | 0.28 |
|
|
|
| $ | 34,647 |
|
| $ | 10,575 |
|
| $ | 45,222 |
|
Gross Offering Proceeds
As of December 31, 2021, we had an aggregate of 165.8 million shares of our $0.01 par value common stock outstanding including 1.1 million unvested restricted shares. The following table presents our shares issued (dollars in thousands):
|
| Shares |
|
| Gross |
| ||
Shares issued through private offering |
|
| 1,279,227 |
|
| $ | 12,737 |
|
Shares issued through primary public offering |
|
| 129,923,354 |
|
|
| 1,289,845 |
|
Shares issued through stock distributions |
|
| 2,406,986 |
|
|
| — |
|
Shares issued through distribution reinvestment plan |
|
| 29,042,460 |
|
|
| 279,519 |
|
Restricted shares issued to employees |
|
| 1,370,952 |
|
|
| — |
|
Shares issued through conversion of common OP units |
|
| 7,539,738 |
|
|
| — |
|
Shares issued in conjunction with the Resource REIT Mergers |
|
| 14,724,323 |
|
|
| — |
|
Total |
|
| 186,287,040 |
|
| $ | 1,582,101 |
|
Shares redeemed and retired |
|
| (20,520,287 | ) |
|
|
| |
Total shares issued and outstanding as of December 31, 2021 |
|
| 165,766,753 |
|
|
|
|
LIBOR
Central banks and regulators in a number of major jurisdictions (including both the U.S. and the U.K.) have convened working groups to find, and implement the transition to, suitable replacements for Interbank Offered Rates (IBORs), including LIBOR. The FCA, which regulates LIBOR, has announced that it will not compel panel banks to contribute to LIBOR after 2021.
On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative (i) immediately after December 31, 2021, in the case of the 1-week and 2-month US dollar settings; and (ii) immediately after June 30, 2023, in the case of the remaining US dollar settings. The tenors that were extended to June 30, 2023 are more widely used and are the tenors used in our LIBOR-based debt.
We have exposure to IBORs through floating rate mortgage debt with maturity dates beyond 2021 for which the interest rates are tied to LIBOR. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Any changes in benchmark interest rates could increase our cost of capital, which could impact our results of operations, cash flows, and the market value of our real estate investments.
Share Redemption Program
On February 3, 2021, our board of directors adopted the Fifth Amended and Restated Share Redemption Program (the “Amended SRP”) pursuant to which, subject to significant conditions and limitations of the program, our stockholders can have their shares repurchased by us. The Amended SRP provides that redemptions will continue to be made quarterly but in an amount not to exceed proceeds from the sale of shares in the DRP in the immediately preceding calendar quarter; provided that, for any quarter in which no DRP proceeds are available, the funding limitation for the quarter will be set by the board of directors upon ten business days’ notice to stockholders. Additional changes to the share redemption program in the Amended SRP clarify the timing of redemption procedures. The share redemption program remains suspended except with respect to redemptions sought up on a stockholder’s death, disability, or confinement to a long-term care facility (each as defined in the Amended SRP). Further, on January 23, 2022, in connection with the entry into the Blackstone Merger Agreement, our board of directors suspended the share redemption program.
Funds from Operations (FFO) and Core Funds from Operations (Core FFO)
Funds from operations, or FFO, is a non-GAAP financial measurement that is widely recognized as a measure of operating performance for a REIT. We calculate FFO as defined by the National Association of Real Estate Investment Trusts, or NAREIT, to be net income or loss, computed in accordance with GAAP, excluding:
These reconciling items include adjustments related to noncontrolling interests.
We believe that FFO is helpful to our investors as a measure of operating performance because it reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, we believe that the use of FFO, together with the required GAAP presentations, is helpful to our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, yields on cash held in accounts, interest rates on acquisition financing, and operating expenses. In addition, FFO will be affected by the types of investments in our portfolio.
Core FFO includes certain adjustments to FFO for non-routine items or items not considered core to business operations. Core FFO adjusts FFO to exclude equity compensation expense, losses on extinguishment of debt and modification costs, transaction (including Self-Management) costs, amortization of deferred financing costs, amortization of intangible lease assets, debt premium or discount amortization, realized losses on fair value adjustments related to interest rate caps, and casualty gains and losses. By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods.
FFO and Core FFO should not be considered as alternatives to net income or loss or any other GAAP measurement of performance, but rather should be considered as additional, supplemental measures. FFO and Core FFO do not represent cash generated from operating activities in accordance with GAAP, nor indicate funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders. In addition, Core FFO is a non-GAAP and non-standardized financial measure that may be calculated differently by other REITs and that should not be considered a substitute for operating results determined in accordance with GAAP.
The following table reconciles net income (loss) attributable to common shareholders to FFO and Core FFO for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share amounts). Amounts reported in the tables below include adjustments attributable to noncontrolling interests for the years ended December 31,2021 and 2020. There were no noncontrolling interests in the year ended December 31, 2019.
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net income (loss) attributable to common stockholders – GAAP |
| $ | 52,254 |
|
| $ | (25,159 | ) |
| $ | (1,747 | ) |
Depreciation expense (1) |
|
| 85,531 |
|
|
| 50,099 |
|
|
| 53,802 |
|
Net gains on disposition of properties (2) |
|
| (92,805 | ) |
|
| — |
|
|
| (38,810 | ) |
FFO attributable to common stockholders |
|
| 44,980 |
|
|
| 24,940 |
|
|
| 13,245 |
|
Stock compensation expense (3) |
|
| 4,380 |
|
|
| 9 |
|
|
| — |
|
Redemption of preferred units (4) |
|
| 329 |
|
|
| — |
|
|
| — |
|
Debt prepayment costs (5) |
|
| 3,245 |
|
|
| — |
|
|
| — |
|
Acquisition fees |
|
| — |
|
|
| 113 |
|
|
| — |
|
Amortization of intangible lease assets (6) |
|
| 7,983 |
|
|
| 9 |
|
|
| 12 |
|
Realized loss on change in fair value of interest rate cap (7) |
|
| 37 |
|
|
| 122 |
|
|
| 344 |
|
Debt premium (discount) amortization (8) |
|
| 6 |
|
|
| (308 | ) |
|
| (333 | ) |
Deferred financing costs amortization (9) |
|
| 3,848 |
|
|
| 1,499 |
|
|
| 2,389 |
|
Casualty losses, net of casualty gains (10) |
|
| 1,997 |
|
|
| 171 |
|
|
| (268 | ) |
Transaction expenses (11) |
|
| 465 |
|
|
| 2,203 |
|
|
| — |
|
Core FFO attributable to common stockholders |
| $ | 67,270 |
|
| $ | 28,758 |
|
| $ | 15,389 |
|
|
|
|
|
|
|
|
|
|
| |||
Basic and diluted net income (loss) per common share - GAAP |
| $ | 0.34 |
|
| $ | (0.29 | ) |
| $ | (0.02 | ) |
FFO per diluted share (12) |
| $ | 0.29 |
|
| $ | 0.29 |
|
| $ | 0.15 |
|
Core FFO per diluted share (12) |
| $ | 0.44 |
|
| $ | 0.34 |
|
| $ | 0.18 |
|
|
|
|
|
|
|
|
|
|
| |||
Weighted average shares outstanding - basic |
|
| 153,820 |
|
|
| 85,531 |
|
|
| 85,861 |
|
Weighted average shares outstanding - diluted (13) |
|
| 153,889 |
|
|
| 85,531 |
|
|
| 85,861 |
|
(1) Includes allocation for noncontrolling interests of approximately $3.0 million and $1.4 million, respectively, for the years ended December 31, 2021 and 2020.
(2) Includes allocation for noncontrolling interests of approximately $860,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(3) Includes allocation for noncontrolling interests of approximately $192,000 and $1,000, respectively, for the years ended December 31, 2021 and 2020.
(4) Includes allocation for noncontrolling interests of approximately $13,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(5) Includes allocation for noncontrolling interests of approximately $129,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(6) Includes allocation for noncontrolling interests of approximately $396,000 for the year ended December 31, 2021. There was no allocation for the year ended December 31, 2020.
(7) Includes allocation for noncontrolling interests of approximately $5,000 and $2,000, respectively, for the years ended December 31, 2021 and 2020.
(8) Includes allocation for noncontrolling interests of approximately $15,000, and $7,000, respectively, for the years ended December 31, 2021 and 2020.
(9) Includes allocation for noncontrolling interests of approximately $168,000 and $42,000, respectively, for the years ended December 31, 2021 and 2020.
(10) Includes allocation for noncontrolling interests of approximately $51,000 and $1,000, respectively, for the years ended December 31, 2021 and 2020.
(11) Includes allocation for noncontrolling interests of approximately $79,000 for the year ended December 31, 2020. There was no allocation for the year ended December 31, 2021.
(12) Calculated using weighted average shares outstanding – diluted.
(13) None of the shares of convertible stock or 467,461 unvested performance awards that vest only upon a liquidation event are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of either December 31, 2021, 2020 and 2019. Income (loss) attributable to outstanding OP Common and Preferred units issued in the Self-Management Transaction prior to their redemption and or conversion were included in net (income) loss attributable to noncontrolling interest, and therefore, excluded from the calculation of earnings (loss) per common share, basic and diluted, for all periods presented.
Critical Accounting Estimates
We consider these policies critical because they involve significant management judgments and assumptions, they require estimates about matters that are inherently uncertain, and they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of our assets and liabilities and our disclosure of contingent assets and liabilities on the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.
Real Estate Assets
Real Estate Purchase Price Allocation
Acquisitions that do not meet the definition of a business under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), Business Combinations, ("ASC 805") are accounted for as asset acquisitions. In most cases, we believe acquisitions of real estate will no longer be considered business combinations, as in most cases
substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if we determine that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, we will then perform an assessment to determine whether the asset is a business by using the framework outlined in the guidance. If we determine that the acquired asset is not a business, we will allocate the cost of the acquisition, including transaction costs, to the assets acquired or liabilities assumed based on their relative fair value.
Upon the acquisition of real properties, we allocate the purchase price of properties to acquired tangible assets consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
We record above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. We amortize any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
We measure the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant. Management’s estimates of value are determined by independent appraisers. Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating the fair value of both the tangible and intangible acquired assets, we also consider information obtained about each property as a result of its pre-acquisition due diligence. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the our existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
We amortize the value of in-place leases to expense over the average remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.
The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of our reported net income.
Valuation of Real Estate Assets
We periodically evaluate our long-lived assets, primarily investments in rental properties, for impairment indicators. The review considers factors such as past and expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for permanent impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset.
In conjunction with the Resource REIT Mergers and for our annual estimated value per share calculation in 2020 and 2019, we engaged with a third-party to provide the estimated fair value of its rental properties as of January 28, 2021, December 31, 2020 and 2019, respectively. We compared these values to the carrying values and concluded that there was no indication that the carrying value of our investments in real estate were not recoverable as of December 31, 2021, 2020 and 2019. There were no impairment losses recorded on long lived assets during the years ended December 31, 2021, 2020 and 2019.
Adoption of New Accounting Standards
In March 2020, FASB issued Accounting Standards Update ("ASU") No. 2020-04, “Reference Rate Reform (Topic 848).” ASU No. 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. During the year ended December 31, 2021, we have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Off-Balance Sheet Arrangements
As of both December 31, 2021 and 2020, we did not have any off-balance sheet arrangements or obligations.
Subsequent Events
On January 20, 2022, we sold The Bryant at Yorba Linda in Yorba Linda, California for $205.5 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 20, 2022, we sold Maxwell Townhomes in San Antonio, Texas for $48.0 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 23, 2022, we entered into the Blackstone Merger Agreement. In addition, our board of directors suspended our share redemption program and our distribution reinvestment plan offering.
On January 28, 2022, we repaid in the full the loans secured by Skyview, Courtney Meadows, Indigo Creek, and Meridian Pointe.
On March 22, 2022, we sold Sunset Ridge in San Antonio, Texas for $60.8 million. We expect to recognize a gain on the sale during the quarter ending March 31, 2022.
We have evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risks. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily changes in LIBOR, as a result of borrowings under our outstanding mortgage loans.
We enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into a total of 18 interest rate caps that were designated as cash flow hedges. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
As of December 31, 2021 and 2020, we had approximately $613.0 million and $680.9 million, respectively, in variable rate debt outstanding. If interest rates on the variable rate debt had been 100 basis points higher during the years ended December 31, 2021 and 2020, our annual interest expense would have increased by approximately $7.0 million and $6.7 million, respectively.
In addition, changes in interest rates affect the fair value of our fixed rate mortgage notes payable. As of December 31, 2021 and 2020, the face value of fixed rate outstanding borrowings was approximately $802.3 million and $150.1 million, respectively. As of December 31, 2021 and 2020, this fixed rate debt had fair values of approximately $782.5 million and $151.0 million, respectively. Fair values are computed using rates available to us for debt with similar terms and remaining maturities.
46
If interest rates had been 100 basis points higher as of December 31, 2021 and 2020, the fair value of this fixed rate debt would have decreased by approximately $43.7 million and $4.4 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements at page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with our independent registered public accountants during the year ended December 31, 2021.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth in the 2013 version of the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management believes that our internal control over financial reporting is effective as of December 31, 2021.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred in the three months ended December 31, 2021 that has materially affected, or is reasonable likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
47
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
We have provided below certain information about our executive officers and directors. At our July 21, 2021 annual meeting, Alan F. Feldman, Andrew Ceitlin, Gary Lichtenstein, Lee F. Shlifer, Robert C. Lieber, and Thomas J. Ikeler were elected to the board of directors for one-year terms. On August 3, 2021, our board of directors increased the size of the board from six to eight members and appointed Paula Baiman Brown and Alan F. Riffkin to serve as independent directors for one-year terms expiring at the next annual meeting. Mr. Lieber subsequently resigned on September 14, 2021, for reasons unrelated to any disagreement with our operations, policies, or practices.
Name * |
| Age ** |
| Positions |
Alan F. Feldman |
| 58 |
| Chairman of the Board, Chief Executive Officer, President and Director |
Paula Baiman Brown |
| 56 |
| Independent Director |
Andrew Ceitlin |
| 48 |
| Independent Director |
Thomas J. Ikeler |
| 66 |
| Independent Director |
Gary Lichtenstein |
| 73 |
| Independent Director |
Alan F. Riffkin |
| 56 |
| Independent Director |
Lee F. Shlifer |
| 73 |
| Independent Director |
Thomas C. Elliott |
| 48 |
| Chief Financial Officer, Executive Vice President and Treasurer |
Marshall P. Hayes |
| 45 |
| Chief Investment Officer and Senior Vice President |
Shelle R. Weisbaum |
| 60 |
| Chief Legal Officer, Senior Vice President and Secretary |
* The address of each executive officer and director listed is 1845 Walnut Street, 17th Floor, Philadelphia, Pennsylvania 19103.
** As of March 1, 2022.
Alan F. Feldman has served as our Chief Executive Officer and Chairman of our Board of Directors since October 2012 and as our President since September 2020 overseeing the strategy for the company and its investment strategy. Prior to the Resource REIT Mergers, he was also Chief Executive Officer and Chairman of the Board of REIT I from June 2009 and REIT III from June 2017. He also served as the President of REIT I and REIT III from September 2020 until the Resource REIT Mergers. Mr. Feldman also served as a Senior Vice President of RAI from August 2002 to September 2020 and as Chief Executive Officer of its wholly owned subsidiary, Resource Real Estate (our founding sponsor) from May 2004 to September 2020. In addition, prior to September 2020, he served in various officer and director positions for other real estate program sponsored by Resource Real Estate. From 1998 to 2002, Mr. Feldman was a Vice President at Lazard Freres & Co., an investment banking firm specializing in real estate matters. From 1992 through 1998, Mr. Feldman was an Executive Vice President of the Pennsylvania Real Estate Investment Trust and its predecessor, The Rubin Organization. From 1990 to 1992, Mr. Feldman was a director at Strouse, Greenberg & Co., a regional full-service real estate company. From 1986 through 1988, Mr. Feldman was an engineer at Squibb Corporation. Mr. Feldman received a Bachelor of Science degree and Master of Science degree from Tufts University, and a Master of Business Administration, Real Estate and Finance concentration degree from The Wharton School, University of Pennsylvania.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Feldman, in light of his day-to-day company-specific operational experience, significant finance and market experience, and his real estate investment trust experience, to serve as one of our directors.
Paula Baiman Brown was appointed to our board of directors on August 3, 2021. She has served as the Senior Vice President and General Counsel of Lanard & Axilbund, LLC (d/b/a Colliers International) from March 2010 to the present. From March 1993 to March 2009, Ms. Brown was counsel at Ledgewood, a law firm where she practiced real estate and real estate finance law. She also holds a Real Estate Broker license from the Commonwealth of Pennsylvania. Ms. Brown received a Bachelor of Arts from Connecticut College and a Juris Doctorate from the University of Pennsylvania Law School.
The board of directors has determined that it is in the best interests of our company and our stockholders for Ms. Brown, in light of her legal background in real estate transactions, to serve as one of our directors.
Andrew Ceitlin was appointed to our board of directors at the closing of the REIT I Merger as the REIT I designated director pursuant to the terms of the REIT I Merger Agreement. He served as a REIT I director from February 2014 until the closing of the REIT I Merger. Mr. Ceitlin has served as the Vice President and Assistant General Counsel for Tishman Construction Corporation, an AECOM company, since June 2017 and previously served as its Senior Corporate Counsel from
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June 2010 to June 2017. Prior to joining Tishman Construction Corporation, Mr. Ceitlin served as legal counsel for Bovis Lend Lease Holdings, Inc. from May 2007 to June 2010. Prior to joining Bovis Lend Lease Holdings, Inc., Mr. Ceitlin was an associate attorney at Peckar & Abramson, P.C., a law firm specializing in construction law. Mr. Ceitlin served as a director of Resource IO REIT from March 2015 to May 2018. Mr. Ceitlin is a licensed member of the New York State Bar and has practiced law for over 20 years. He holds a Bachelor’s degree in political science from The Ohio State University and a Juris Doctor degree from New York Law School.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Ceitlin, in light of his significant experience in the legal and real estate markets and his expertise in construction law, to serve as one of our directors.
Thomas J. Ikeler has been a director since November 2013. Mr. Ikeler also served as an independent director for REIT I from September 2009 until February 2014. From November 2014 to December 2020 when he retired, Mr. Ikeler served as Executive Vice President, Chief Investment Officer and Partner of Hoffman & Associates, a Washington, DC based mixed-use and residential real estate developer, but continues to serve as an advisor to the firm. From January 2010 to November 2014, Mr. Ikeler served as Managing Director, Capital Markets of Penzance, a private equity real estate investment and operating company, based in Washington, DC, and was one of four members of its Executive Committee. He was involved with all aspects of the firm’s investment activities, including acquisitions, development and capital placement. Immediately prior to that, from January 2009 to January 2010, Mr. Ikeler was President of K2 Capital Advisors, LLC, a boutique advisory practice that assisted real estate companies in selling or capitalizing existing assets and new acquisitions. From 2005 to 2009, Mr. Ikeler served as Managing Director of Jones Lang LaSalle, one of the largest global real estate service firms with 180 offices in 60 countries and over 36,000 employees, where he specialized in commercial property and multifamily equity and debt financing. From 1999 to 2005, he served as Managing Director of Aegis Realty Consultants, the real estate banking affiliate of Berwind Property Group, which owns and operates more than 25,000 apartment units and 100 communities. From 1997 to 1999, Mr. Ikeler served as Vice President/Corporate Finance for Security Capital Group and Senior Vice President for a subsidiary. From 1994 to 1997, he established a real estate investment and advisory firm that targeted “off market” opportunities and advised institutional owners and operators of real estate, which included serving as lead outside advisor to RF&P Corporation, a private REIT owned by the Virginia Retirement System. He received his Bachelor of Arts degree from Bucknell University and his Master in Business Administration from Harvard University.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Ikeler, in light of his significant experience in finance and real estate markets and his expertise in commercial property and multifamily equity and debt financing, to serve as one of our directors.
Gary Lichtenstein has been a director since November 2013. Mr. Lichtenstein also served as an independent director for REIT I from September 2009 until the closing of the REIT I Merger. Mr. Lichtenstein served as a partner of Grant Thornton LLP, a registered public accounting firm, from 1987 to July 2009. He worked at Grant Thornton LLP from 1974 to 1977 and served as a manager at Grant Thornton LLP from 1977 to 1987. Prior to joining Grant Thornton LLP, Mr. Lichtenstein served as an accountant for Soloway & von Rosen CPA from 1970 to 1974 and for Touche Ross Bailey & Smart from 1969 to 1970. Mr. Lichtenstein served on the Board of Directors of Atlas Resources, LLC from September 2016 to September 2018. He received his Bachelor of Business Administration and his Juris Doctor degree from Cleveland State University.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Lichtenstein, in light of his public company accounting and financial reporting expertise, to serve as one of our directors.
Alan F. Riffkin was appointed to our board of directors on August 3, 2021. He is the Managing Member of AFR Capital Advisory LLC, a strategic advisor to real estate owners and operators since December 2020. From 2003 to December 2019, Mr. Riffkin held positions as Director to Managing Director of the Real Estate Investment Banking Group at Lazard Freres & Co LLC. From 1994 to 2003, he held positions as Associate to Vice President of the Real Estate, Technology and Industrial Groups in the Investment Banking Division of Goldman Sachs & Co. Prior to that, Mr. Riffkin held positions as Account Officer to Senior Account Officer at Citicorp in the Real Estate Division from 1988 to 1992. Mr. Riffkin has served as a Trustee of the Urban Land Institute since 2017. He received a Bachelor of Science from Cornell University and a Master of Business Administration from The Wharton School of the University of Pennsylvania.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Riffkin, in light of his financial expertise and in particular his background in real estate finance, to serve as one of our directors.
Lee F. Shlifer was appointed to our board of directors at the closing of the REIT III Merger as the REIT III designated director pursuant to the terms of the REIT III Merger Agreement. He served as a director of REIT I from September 2009 and of
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REIT III from January 2016, each until the closing of the respective mergers. Mr. Shlifer has served as founder, President and broker for Signature Investment Realty, Inc., an investment brokerage and management/consulting firm that emphasizes the acquisition and management of multifamily apartment buildings, since 1985. Prior to founding Signature Investment Realty, Inc., he served as Vice President of Marketing for Spencer Industries from 1979 to 1981. In addition, Mr. Shlifer served as a psychotherapist for the Eastern Pennsylvania Psychiatric Institute from 1978 to 1979. Mr. Shlifer is a member of the board of directors of ELIT, a non-profit organization that operates schools in India and Pakistan to teach impoverished women basic computer skills. He received his Bachelor of Arts degree from the University of Pennsylvania and his Masters of Arts degree in Clinical Psychology from The New School for Social Research.
The board of directors has determined that it is in the best interests of our company and our stockholders for Mr. Shlifer, in light of his significant finance and real estate market experience and his expertise in the acquisition and management of multifamily apartment buildings, to serve as one of our directors.
Thomas C. Elliott has served as our Chief Financial Officer, Executive Vice President and Treasurer since September 8, 2020. He served in the same positions for REIT I and REIT III from September 2020 until the closing of the respective mergers. From June 2020 until June 2021, he also served on the board of directors of ACRES REIT. Mr. Elliott previously held various officer positions at Resource America, all of which he resigned from, effective as of September 8, 2020: Chief Financial Officer since December 2009, Executive Vice President since September 2016 and Senior Vice President since 2005. Prior to that, he was Senior Vice President-Finance and Operations of Resource America from 2006 to December 2009; Senior Vice President-Finance from 2005 to 2006 and Vice President-Finance from 2001 to 2005. From February 2017 to July 2020, Mr. Elliott was Executive Vice President-Finance and Operations of ACRES REIT and was its Senior Vice President-Finance and Operations from September 2006 to February 2017 and, prior to that, was its Chief Financial Officer, Chief Accounting Officer and Treasurer from September 2005 to June 2006. He was also Senior Vice President-Assets and Liabilities Management of ACRES REIT from June 2005 until September 2005 and, before that, served as its Vice President-Finance from March 2005. Prior to joining Resource America in 2001, Mr. Elliott was a Vice President at Fidelity Leasing, Inc., a former equipment leasing subsidiary of Resource America, where he managed all capital market functions, including the negotiation of all securitizations and credit and banking facilities in the U.S. and Canada. Mr. Elliott also oversaw the financial controls and budgeting departments.
Marshall Hayes has served as our Chief Investment Officer and Senior Vice President since February 2021. Prior to the acquisition of our sponsor and external advisor by REIT I, Mr. Hayes was employed by our sponsor and the owner of our advisor. Mr. Hayes held various titles at our sponsor, including Managing Director, Senior Vice President and Vice President. Mr. Hayes first joined our sponsor in 2006. Prior to working for our sponsor, Mr. Hayes was Vice President of Transactions at AIMCO, a Denver-based multifamily REIT from 2004-2006. From 1998 to 2004 Mr. Hayes worked for investment banking firm Lazard, Freres & Co., in New York, where he was a member of the real estate investment banking group. Mr. Hayes received a Bachelor of Science in Economics from The Wharton School at the University of Pennsylvania, Magna Cum Laude.
Shelle Weisbaum has served as our Chief Legal Officer, Senior Vice President and Secretary since October 2012 and in the same positions for REIT I from June 2009 and for REIT III from July 2015, until the closing of the respective mergers. Ms. Weisbaum has also served as Chief Legal Officer, Senior Vice President and Secretary of our advisor since its formation in October 2012 as well as for the advisors for REIT I and REIT II. Ms. Weisbaum also previously served as Executive Vice President, from April 2017 to September 2020, Senior Vice President, from January 2014, and General Counsel and Secretary, from August 2007, of the Sponsor to September 2020. Previously she held the position of Vice President of our sponsor from August 2007 to December 2013. Ms. Weisbaum also served as the Chief Legal Officer, Senior Vice President and Secretary of ACRES REIT from September 2016 to July 2020. Ms. Weisbaum joined our sponsor in October 2006 from Ledgewood Law, a Philadelphia-based law firm, where she practiced commercial real estate law from 1998 to 2006 as an associate and later as a partner of the firm. Prior to Ledgewood, from 1987 to 1998, Ms. Weisbaum was Vice President and Assistant General Counsel at the Philadelphia Stock Exchange. Ms. Weisbaum received a Bachelor of Science degree in Business Administration from Boston University and a Juris Doctor degree from Temple University.
Other Significant Employees
The following sets forth certain information regarding other significant employees of our company who provide important services to us.
Steven R. Saltzman has served as Chief Accounting Officer and Vice President since September 2020. He served in the same position for REIT I and REIT III from September 2020 until the closing of the respective mergers. Prior to that, he was Chief Financial Officer, Senior Vice President and Treasurer for us since October 2012 and in the same capacity for REIT I since June 2009 and for REIT III since July 2015. Mr. Saltzman has also served as Chief Financial Officer, Senior Vice President and Treasurer for REIT II Advisor since its formation in October 2012. In addition, Mr. Saltzman previously served as Senior Vice
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President and Chief Financial Officer of our sponsor from January 2014 to September 2020; and previously held the positions of Vice President and Controller from May 2004. From 1999 to 2003, Mr. Saltzman was Controller at WP Realty, Inc., a regional developer and property manager specializing in community shopping centers. Mr. Saltzman began his real estate career in 1988 as a Property Controller at The Rubin Organization, a predecessor to the Pennsylvania Real Estate Investment Trust. Mr. Saltzman began his professional career at Price Waterhouse from 1985 to 1988. Mr. Saltzman earned a Bachelor of Science degree from The Wharton School, University of Pennsylvania. Mr. Saltzman is both a Certified Public Accountant and a Certified Management Accountant.
Yvana L. Rizzo serves as Vice President, Asset Management. Ms. Rizzo joined Resource Real Estate in 2006 and oversees the asset management of the company’s commercial real estate equity portfolios. Prior to joining Resource Real Estate, Ms. Rizzo served for six years as Vice President of both the Structured Asset Management and CMBS Credit Administration groups for Capmark Finance, Inc. (formerly GMAC Commercial Mortgage Corporation). Ms. Rizzo began her career as an underwriter and loan originator for the Northeast Commercial Real Estate Lending division of Washington Mutual Bank. Ms. Rizzo received a bachelor’s degree in Finance from the University of Pittsburgh.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the directors and officers, and persons who own more than 10% of a registered class of our equity securities, to file initial reports of ownership and reports of changes in ownership of such equity securities with the SEC. As a matter of practice, our inside general counsel and outside counsel assists our directors and executive officers in preparing these reports, and typically file those reports on behalf of our directors and executive officers. Based solely on a review of the copies of such forms filed with the SEC during fiscal year 2021 and on written representations from our directors and executive officers, we believe that during fiscal year 2021, except for one Form 4 for Mr. Lichtenstein to report the receipt of our common stock in connection with the REIT I Merger, and one Form 3 for Mr. Ceitlin to report his initial ownership of our equity securities, of which he owned none, all of our directors and executive officers filed the required reports on a timely basis under Section 16(a).
Code of Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our chief executive officer and chief financial officer. Our Code of Business Conduct and Ethics may be found at http://www.resourcereit.com, on the Investors/Corporate Governance page. Any amendment to, or a waiver from, a provision of the Code of Conduct and Ethics that would require disclosure under Item 5.05 of Form 8-K will be posted on our website.
The Audit Committee
Our board of directors has established an audit committee. The audit committee assists the board of directors in overseeing:
The audit committee is responsible for engaging independent public accountants, reviewing with the independent public accountants the plans and results of the audit engagement, and considering and approving the audit and non-audit services and fees provided by the independent public accountants. The audit committee fulfills these responsibilities primarily by carrying out the activities enumerated in the audit committee charter adopted by our board of directors initially in 2013 and as amended and restated in February 2021. A copy of the audit committee charter is available under “Corporate Governance” in the “Investors” section of our website at www.resourcereit.com.
Since February 3, 2021, the members of the audit committee are Gary Lichtenstein (Chairman), Andrew Ceitlin and Lee F. Shlifer. Previously, Gary Lichtenstein (Chairman), Thomas J. Ikeler and David Spoont comprised the audit committee. Each of the members of the audit committee is “independent” as defined by the NYSE. The board of directors has determined that Mr. Lichtenstein qualifies as the audit committee “financial expert” as defined by SEC rules.
ITEM 11. EXECUTIVE COMPENSATION
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Executive Compensation Paid by Our Former Advisor
Prior to the closing of the REIT I Merger and our transition to a self-managed structure, pursuant to the terms of our advisory agreement, our former advisor was responsible for providing our day-to-day management, subject to the supervision of our board of directors, and we reimbursed our advisor for expenses incurred in connection with its provision of services to us and our allocable share of costs for advisor personnel and overhead, including allocable personnel salaries and other employment expenses. Included in the operating expenses reimbursed to our advisor during the year ended December 31, 2020 was $537,839 for a portion of the compensation paid in 2020 to Alan F. Feldman, our Chief Executive Officer and President, $165,032 for a portion of the compensation paid in 2020 to Thomas C. Elliott, our Chief Financial Officer, Executive Vice President and Treasurer as of September 2020 and 177,308 for a portion of the compensation paid in 2020 to Shelle R. Weisbaum, our Senior Vice President and Chief Legal Officer. Included in the operating expenses reimbursed to our advisor during the year ended December 31, 2019 was $460,884 for a portion of the compensation paid in 2019 to Mr. Feldman and $110,629 for a portion of the compensation paid in 2019 to Ms. Weisbaum.
Compensation Discussion and Analysis
Overview
This section discusses the components of, and objectives behind, our executive compensation program for our executive officers who are named in the “Summary Compensation Table” below. Our “named executive officers” during 2021 were Alan F. Feldman, Chief Executive Officer and President, Thomas C. Elliott, Executive Vice President, Chief Financial Officer and Treasurer, Marshall P. Hayes, Senior Vice President and Chief Investment Officer, and Shelle R. Weisbaum, Senior Vice President and Chief Legal Officer.
Prior to the closing of the REIT I Merger on January 28, 2021, all of our executive officers were employees of our former advisor or its affiliates and we were not a party to any employment or severance agreements with our executive officers and did not pay or grant, and were not involved in determining, cash compensation, equity plan-based awards or any pension benefits, perquisites or other personal benefits for any of these individuals. Therefore, the discussion below reflects executive compensation that we paid to our executive officers since January 28, 2021.
Compensation Philosophy and Objectives
We seek to maintain a total compensation package that provides fair, reasonable and competitive compensation for executives while also permitting us the flexibility to differentiate actual pay based on the level of individual and organizational performance.
Our compensation programs are designed to achieve the following objectives:
Determination of Executive Compensation
On February 3, 2021, following the closing of the REIT I Merger on January 28, 2021, the board of directors formed the compensation committee which has the authority to determine the compensation for our executive officers. The compensation committee exercises independent discretion with respect to executive compensation matters and administers our equity incentive programs, including reviewing and approving equity grants to our executive officers under the 2020 Incentive Plan. The compensation committee operates pursuant to the terms of a written charter adopted by the board of directors, a copy of which is available under “Corporate Governance” in the “Investors” section of our website at www.resourcereit.com.
In connection with the REIT I Merger, we assumed from REIT I the employment agreements, dated September 8, 2020, with Mr. Feldman, our Chief Executive Officer and President; Mr. Elliott, our Executive Vice President, Chief Financial Officer
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and Treasurer; and Ms. Weisbaum, our Senior Vice President and Chief Legal Officer. We assumed REIT I’s obligations under these employment agreements in their entirety. As a result, the initial compensation arrangements with our executive officers were determined in REIT I’s negotiations with each individual executive officer and were formalized in each executive officer’s employment agreement. Such negotiations were the purview of the special committee of REIT I, which was composed entirely of independent directors. For a more detailed discussion of the employment agreements with each of our executive officers, see “—Employment Agreements” below.
In making compensation decisions for 2021, the compensation committee reviewed market‑based compensation data provided by its independent compensation consultant, Ferguson Partners Consulting L.P., f/k/a FPL Associates, L.P. (“FPC”), a nationally recognized compensation consulting firm specializing in the real estate industry. The compensation committee also evaluated the performance of our Chief Executive Officer and, together with our Chief Executive Officer, assessed the individual performance of the other executive and senior officers. While the compensation committee considers these recommendations, along with data provided by its other advisors, it retains full discretion to set all compensation. As of the filing of this report, we have not yet held an advisory vote on executive compensation as 2021 was the first year we compensated our officers directly.
Engagement of Compensation Consultant
The compensation committee is authorized to retain the services of one or more executive compensation consultants, in its discretion, to assist with the establishment and review of our compensation programs and related policies. The compensation committee has sole authority to hire, terminate and set the terms of any future engagement of FPC or any other compensation consultant.
For compensation advice in 2021, the compensation committee engaged FPC to provide market‑based compensation data to assist the committee in the implementation of our comprehensive executive compensation program. In connection with these efforts, FPC prepared for the compensation committee reports that included compensation analyses for each executive position, an analysis of a recommended peer group for the company and a description of the methodology used to provide the compensation analyses. FPC researched competitive market practices, reviewed the proxy statements of its recommended peer group and checked its own proprietary information data bases. The compensation committee reviewed the information provided to the company and approved the 2021 executive compensation program.
Elements of Executive Compensation
The following table summarizes the key elements of our executive compensation program for our executive officers and each element’s objectives, including annual cash compensation and equity incentive awards. A more detailed discussion of each element of our executive compensation program follows this table.
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Element | Description | Objectives |
Annual Cash Compensation | ||
Annual Base Salary | Fixed cash compensation. Reviewed and adjusted periodically. | • Attract and retain executives • Provide steady source of income sufficient to permit executives to focus effectively on their responsibilities • Help ensure that total cash compensation is competitive |
Short-Term Incentive Plan | Annual cash bonus based on company, strategic and individual performance goals. | • Encourage executives to achieve annual company, strategic and individual performance goals • Align executives’ interests with the stockholders’ interests |
Equity Incentive Compensation | ||
Time-Based Restricted Stock | Awards vest in equal installments over three years, subject to continued service. Time-based restricted stock awards constitute 70% of the executive officers’ total equity incentive compensation. | • Promote long-term equity ownership by executives • Encourage the retention of executives • Align executives’ interests with the stockholders’ interests |
Performance-Based Restricted Stock | Variable equity compensation based on company performance over a three-year performance period. Awards are paid in common stock. Performance-based restricted stock awards constitute 30% of the executive officers’ total equity incentive compensation. | • Encourage executives to achieve long-term company performance goals • Align executives’ interests with the stockholders’ interests • Attract and retain executives |
Base Salary
Each executive officer’s compensation was initially established based on negotiations with the special committee of REIT I, composed entirely of independent directors, in connection with the execution of each officer’s employment agreement in September 2020. We believe that our executive officers’ base salary levels are commensurate with their positions and are expected to provide a steady source of income sufficient to permit these officers to focus their time and attention on their work duties and responsibilities. Base salaries of our named executive officers periodically will be reviewed by the compensation committee.
Short-Term Incentive Plan
The short-term incentive plan is intended to compensate our executive officers for achieving annual company, strategic and individual performance goals. The compensation committee believes that the opportunity to earn an annual cash bonus encourages our executive officers to achieve company, strategic and individual performance goals, which fosters a performance‑driven company culture that aligns the executives’ interests with the stockholders’ interests.
The short-term incentive plan allows our executive officers to earn a cash bonus based on various pre-defined and pre-weighted company, strategic and individual performance goals established by the compensation committee (at least 50% of which are objective, calculable company performance measurements). Strategic and individual performance goals are assessed subjectively.
The table below provides a summary of our short-term incentive plan, including the 2021 performance goals and their relative weighting:
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Short-Term Incentive Plan | ||||
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Performance Metrics |
| 50% Corporate Performance Goals 20% Core FFO per Share 10% Same Store NOI Growth 10% Operating Margin 10% Net Debt to EBITDA 25% Strategic Performance Goals 25% Individual Performance Goals | ||
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| . |
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Performance Bandwidths |
| Defined performance bandwidths based on percentage of base salary: | ||
| Feldman / Elliott: Threshold - 62.5% Target - 125% Maximum -187.5% | Hayes: Threshold – 56.25% Target – 112.5% Maximum -168.75% |
Threshold - 50% Target - 100% Maximum -150%
|
Results between threshold and target or between target and maximum are based on linear interpolation. Performance below threshold earns 0%, and performance above the maximum is capped at the maximum level (no additional amounts are paid for exceeding the maximum performance goal). The total cash bonus earned by an executive officer is the sum of the weighted annual incentive amounts earned with respect to each goal.
Company Performance Goals
For 2021, 50% of the annual cash incentive bonuses was based on the following company performance goals:
Core FFO per Share
FFO is a widely recognized measure of the performance of REITs. We calculate FFO in accordance with the standards established by NAREIT. FFO represents net income or loss (computed in accordance with GAAP), excluding depreciation and amortization related to real estate, gains and losses from the sale of certain real estate assets, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. These reconciling items include adjustments related to noncontrolling interests. Core FFO includes certain adjustments to FFO for non-routine items or items not considered core to business operations. Core FFO adjusts FFO to exclude equity compensation expense, losses on extinguishment of debt and modification costs, transaction (including Self-Management) costs, amortization of deferred financing costs, amortization of intangible lease assets, debt premium or discount amortization, realized losses on fair value adjustments related to interest rate caps, and casualty gains and losses. By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides useful information to compare core operating and financial performance between periods.
With the 20% weighting of the Core FFO per Share component, Messrs. Feldman and Elliott can earn between 12.5 percentage points (at the threshold level) and 37.5 percentage points (at the maximum level), Mr. Hayes can earn between 11.25 (at the threshold level) and 33.75 (at maximum level), and Ms. Weisbaum can earn between 10 (at the threshold level) and 30 (at maximum level) under this performance goal component. For 2021, the Core FFO per share performance criteria was $0.32 at the threshold, $0.33 to $0.35 at target and $0.36 at the maximum. Our Core FFO per Share, assuming bonuses were paid at target levels, was $0.44 per share. As a result, Messrs. Feldman and Elliott earned 37.5 percentage points, Mr. Hayes earned 33.75 percentage points and Ms. Weisbaum earned 30 percentage points under the Core FFO per Share performance goal component.
Same Store NOI Growth
Same Store NOI Growth is a measurement of our internal growth and a primary financial measure for evaluating the core operating performance of our properties. We define “NOI” as total property revenue less total property expenses, excluding interest expense, depreciation and amortization and non-recurring and recurring expenses that are not reflective of the continuing operations of the properties. We believe that NOI is an appropriate supplemental performance measure because it reflects the core operations of property performance without the other corporate level and non-recurring items not related to our properties
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and their continuing operations. Comparing NOI on a “same store” basis (i.e., looking at the exact same set of properties over the periods being compared) allows for an apples-to-apples comparison.
With the 10% weighting of the Same Store Cash NOI Growth component, Messrs. Feldman and Elliott can earn between 6.25 percentage points (at the threshold level) and 18.75 percentage points (at the maximum level), Mr. Hayes can earn between 5.625 (at the threshold level) and 16.875 (at maximum level), and Ms. Weisbaum can earn between 5 (at the threshold level) and 15 (at maximum level) under this performance goal component. For 2021, the Same Store Cash NOI Growth performance criteria was -1.5% at the threshold, -1.0% to 0.5% at target and 1.0% at the maximum. Our Same Store NOI Growth was 15.0%. As a result, Messrs. Feldman and Elliott earned 18.75 percentage points, Mr. Hayes earned 16.875 percentage points and Ms. Weisbaum earned 15 percentage points under the Same Store NOI Growth performance goal component.
Operating Margin
We define “Operating Margin” as our property revenues less property expenses (excluding property management expenses) divided by property revenues. We believe that Operating Margin is an important metric to evaluate the core performance of our portfolio and provides an objective goal for increasing performance through revenue growth and expense management.
With the 10% weighting of the Operating Margin component, Messrs. Feldman and Elliott can earn between 6.25 percentage points (at the threshold level) and 18.75 percentage points (at the maximum level), Mr. Hayes can earn between 5.625 (at the threshold level) and 16.875 (at maximum level), and Ms. Weisbaum can earn between 5 (at the threshold level) and 15 (at maximum level) under this performance goal component. For 2021, the Operating Margin performance criteria was 52.5% at the threshold, 53.5% to 54.0% at target and 55.0% at the maximum. Our Operating Margin for 2021 was 58.2%. As a result, Messrs. Feldman and Elliott earned 18.75 percentage points, Mr. Hayes earned 16.875 percentage points and Ms. Weisbaum earned 15 percentage points under the Operating Margin performance goal component.
Net Debt to EBITDA
We define “Net Debt” as our total debt less cash and cash equivalents. We believe that Net Debt is a helpful measure of its credit position and progress towards reducing overall leverage. We define “EBITDA” as net income (loss) (computed in accordance with GAAP) before interest expense, including amortization of deferred financing costs, income tax expense and depreciation and amortization expenses. We consider EBITDA to be appropriate supplemental measures of performance because they eliminate interest, income taxes, and depreciation and amortization which permit investors to view income from operations without these non-cash or non-operating items. We also use these measures in ratios to compare our performance to that of our industry peers, such as Net Debt to EBITDA, which we view as an important measurement of the ability of our earnings to service our debt.
With the 10% weighting of the Net Debt to EBITDA component, Messrs. Feldman and Elliott can earn between 6.25 percentage points (at the threshold level) and 18.75 percentage points (at the maximum level), Mr. Hayes can earn between 5.625 (at the threshold level) and 16.875 (at maximum level), and Ms. Weisbaum can earn between 5 (at the threshold level) and 15 (at maximum level) under this performance goal component. For 2021, the Net Debt to EBITDA performance criteria was 15.25x at the threshold, 14.50x to 15.00x at target and 14.25x at the maximum. Our Net Debt to EBITDA was 11.9x. As a result, Messrs. Feldman and Elliott earned 18.75 percentage points, Mr. Hayes earned 16.875 percentage points and Ms. Weisbaum earned 15 percentage points under the Net Debt to EBIDTA performance goal component.
Strategic Performance Goals
For 2021, 25% of the annual cash incentive bonuses was based on the compensation committee’s (and the chief executive officer’s with respect to the other named executive officers) assessment of such strategic performance goals as managing occupancy rates and delinquency rates through the continuing pandemic, disposing of non-core assets and starting to reimplement our value add program.
With the 20% weighting of the strategic performance component, Messrs. Feldman and Elliott can earn between 15.625 percentage points (at the threshold level) and 46.875 percentage points (at the maximum level), Mr. Hayes can earn between 14.0625 (at the threshold level) and 42.1875 (at maximum level), and Ms. Weisbaum can earn between 12.5 (at the threshold level) and 37.5 (at maximum level) under this component. Based on this assessment, the compensation committee determined that Messrs. Feldman, Elliott and Hayes and Ms. Weisbaum earned 46.875, 46.875, 42.1875, and 37.5 percentage points, respectively, under this strategic performance goal component.
56
Individual Performance Goals
For 2021, 25% of the annual cash incentive bonuses was based on the compensation committee’s (and the chief executive officer’s with respect to the other named executive officers) assessment of each officer’s individual contributions to our overall success in significant areas based upon the executive’s position and responsibilities as they related to our overall business plan.
With the 20% weighting of the individual performance component, Messrs. Feldman and Elliott can earn between 15.625 percentage points (at the threshold level) and 46.875 percentage points (at the maximum level), Mr. Hayes can earn between 14.0625 (at the threshold level) and 42.1875 (at maximum level), and Ms. Weisbaum can earn between 12.5 (at the threshold level) and 37.5 (at maximum level) under this component. Based on this assessment, the compensation committee determined that Messrs. Feldman, Elliott and Hayes and Ms. Weisbaum earned 46.875, 46.875, 42.1875, and 37.5 percentage points, respectively, under this individual performance goal component.
Calculation of the Bonuses
Based on our actual performance in 2021, the compensation committee approved annual cash incentive bonuses for the named executive officers for 2021 in the following amounts:
|
|
|
|
| 2021 Annual Cash Incentive Bonus Opportunity |
|
| Percentage Points Earned |
|
|
|
| ||||||||||||||||||||||
Executive |
| 2021 Base Salary |
|
| Below Threshold |
| Threshold |
| Target |
| Maximum |
|
| Company Performance |
| Strategic Performance |
| Individual Performance |
| Total |
|
| 2021 Bonus |
| ||||||||||
Alan F. Feldman |
| $ | 700,000 |
|
|
| — |
| $ | 437,500 |
| $ | 875,000 |
| $ | 1,312,500 |
|
|
| 93.75 |
|
| 46.875 |
|
| 46.875 |
|
| 187.50 |
|
| $ | 1,312,500 |
|
Thomas C. Elliott |
|
| 500,000 |
|
|
| — |
|
| 312,500 |
|
| 625,000 |
|
| 937,500 |
|
|
| 93.75 |
|
| 46.875 |
|
| 46.875 |
|
| 187.50 |
|
|
| 937,500 |
|
Marshall P. Hayes |
|
| 300,000 |
|
|
| — |
|
| 168,750 |
|
| 337,500 |
|
| 506,250 |
|
|
| 84.375 |
|
| 42.1875 |
|
| 42.1875 |
|
| 168.75 |
|
|
| 506,250 |
|
Shelle R. Weisbaum |
|
| 300,000 |
|
|
| — |
|
| 150,000 |
|
| 300,000 |
|
| 450,000 |
|
|
| 75 |
|
| 37.5 |
|
| 37.5 |
|
| 150.00 |
|
|
| 450,000 |
|
Equity Incentive Compensation
The goals of our equity incentive compensation program are to incentivize and reward increases in long‑term stockholder value and to align the interests of our executive officers with the interests of our stockholders. Because vesting is based on continued employment or the achievement of company performance goals, our equity‑based incentives also encourage the retention of our executive officers through the multi-year vesting or performance periods in the awards. For 2021, the compensation committee determined that annual equity awards should consist of approximately 70% in time-based awards (subject to multi-year vesting) and 30% in performance-based awards (with a multi-year measurement period).
Time-Based Restricted Stock
The following table sets forth the number of shares of time-based restricted stock granted to our executive officers in February 2021 for 2021 compensation. The time-based awards vest over three years in equal installments on the first, second and third anniversaries of the grant date, subject to continued service.
Executive |
| Date of Grant |
| Number of Shares |
| |
Alan F. Feldman |
| February 17, 2021 |
|
| 140,693 |
|
Thomas C. Elliott |
| February 17, 2021 |
|
| 79,019 |
|
Marshall P. Hayes |
| February 17, 2021 |
|
| 39,509 |
|
Shelle R. Weisbaum |
| February 17, 2021 |
|
| 26,982 |
|
In January 2022, the compensation committee approved the grant of an aggregate of 286,836 shares of restricted stock to the named executive officers for 2022 compensation. The grants were made on January 4, 2022. These shares vest in full over three years with 331/3 vesting per year beginning on January 4, 2023, subject to continued service. The 2022 grants of time-based restricted stock will be reflected in the “Summary Compensation Table” and “2022 Grants of Plan-Based Awards” table in our next filing for which such disclosure is required.
Performance-Based Restricted Stock
The compensation committee grants performance-based restricted stock to our executive officers as an additional long-term incentive award designed to align the executive officers’ interests more closely with those of the stockholders. The ultimate value of the performance-based restricted stock depends on our Same Store Relative NOI Growth (measured against a select group of peer companies) (50% weighting) and our ratio of Net Debt to Average EBITDA (50% weighting) over a three-year measuring period. See “—Company Performance Goals” above for a discussion of how we determine Same Store NOI Growth and Net Debt to EBITDA.
57
For our 2021 performance-based restricted stock, the Same Store Relative NOI Growth targets as measured against a peer group of companies over the three-year performance period are 25% at the threshold, 50% at the target and 75% at the maximum. The Net Debt to Average EBITDA targets, as measured over a three-year period are 14.75x at the threshold, 14.25x at target and 13.75x at the maximum. Awards for performance between the indicated targets are determined by interpolating between the earned amounts.
The following table sets forth the target number of shares of performance-based restricted stock granted to our executive officers in February 2021 for 2021 compensation.
Executive |
| Date of Grant |
| Target Number of Shares |
| |
Alan F. Feldman |
| February 17, 2021 |
|
| 60,297 |
|
Thomas C. Elliott |
| February 17, 2021 |
|
| 33,865 |
|
Marshall P. Hayes |
| February 17, 2021 |
|
| 16,932 |
|
Shelle R. Weisbaum |
| February 17, 2021 |
|
| 11,564 |
|
A recipient of performance-based restricted stock may receive as few as zero shares or as many as 125% of the target number of shares. For example, at the end of the measurement period, a recipient of 10,000 shares of performance-based restricted stock may receive no value (no shares of common stock and no dividends) or receive as many as 12,500 shares of common stock, plus cash dividends on earned shares. After the actual amount of the performance-based award is determined (or earned) on the determination date, the earned shares will be fully vested and generally transferable. Dividends will be deemed to have accrued on all of the earned shares during the measurement period until the determination date. Such accrued dividends on earned shares will be paid to the awardee on the determination date. Thereafter, the awardee is entitled to receive dividends as declared and paid on the earned shares. The awardee will be entitled to vote the shares from the grant date.
In January 2022, the compensation committee approved the grant of an aggregate target of 122,929 shares of performance-based restricted stock to the named executive officers for 2022 compensation. The 2022 grants of performance-based restricted stock will be reflected in the “Summary Compensation Table” and “2022 Grants of Plan-Based Awards” table in our next filing for which such disclosure is required.
2020 Long-Term Incentive Plan
As of January 28, 2021, the effective time of the REIT I Merger, we assumed the 2020 Long-Term Incentive Plan of REIT I, as amended to replace all references to REIT I with Resource REIT, Inc. (the “2020 Incentive Plan”). The purpose of the 2020 Incentive Plan is to advance the interests of the company and its stockholders by providing an incentive to attract, retain, and reward certain eligible persons performing services for the company and by motivating such persons to contribute to the growth and profitability of the company. The 2020 Incentive Plan allows for grants of stock options (non-statutory and incentive), restricted stock awards, stock appreciation rights, restricted stock units, performance shares, performance units, cash-based awards, and other stock-based awards to our employees, consultants, and directors. The maximum aggregate number of shares of our common stock that may be issued pursuant to awards granted under the 2020 Incentive Plan is 3,500,000 shares.
Employment Agreements
Alan F. Feldman
In connection with Mr. Feldman’s appointment as Chief Executive Officer and President of REIT I, on September 8, 2020, REIT I entered into an employment agreement with Mr. Feldman (the “Feldman Employment Agreement”). Upon the closing of the REIT I Merger, we assumed REIT I’s obligations under the Feldman Employment Agreement in its entirety.
The Feldman Employment Agreement has an initial term continuing until December 31, 2023 and will automatically renew for additional one-year periods thereafter, unless either we or Mr. Feldman provides advance written notice of our or his intent not to renew or unless sooner terminated in accordance with the terms thereof (the “Term”).
Pursuant to the terms of the Feldman Employment Agreement, Mr. Feldman is entitled to, among other things:
58
The Feldman Employment Agreement also provides that Mr. Feldman will be subject to customary non-compete, non-solicitation and other restrictive covenants.
Mr. Elliott and Ms. Weisbaum
On September 8, 2020, REIT I also entered into employment agreements with each of Mr. Elliott in connection with his appointment as REIT I’s Executive Vice President, Chief Financial Officer and Treasurer (the “Elliott Employment Agreement”) and Ms. Weisbaum in connection with her appointment as REIT I’s Senior Vice President and Chief Legal Officer (the “Weisbaum Employment Agreement”). In connection with the REIT I Merger, we assumed REIT I’s obligations under the Elliott Employment Agreement and Weisbaum Employment Agreement in their entirety.
59
Each of such employment agreements is substantially similar to the material terms of the Feldman Employment Agreement except as noted below:
Potential Payments upon Termination or Change in Control
Vesting of Long-Term Equity Incentive Awards
The terms of the time-based restricted stock granted to the named executive officers generally provide that:
The terms of the performance-based restricted share award agreements granted to the named executive officers generally provide that:
60
Severance Arrangements
See “Employment Agreements” above for information regarding our severance arrangements with Messrs. Feldman and Elliott and Ms. Weisbaum.
Employee Benefits
Effective upon the closing of the REIT I Merger on January 28, 2021, our full‑time employees, including our executive officers, became eligible to participate in health and welfare benefit plans, which provide medical, dental, prescription, life insurance, disability insurance and related benefits.
Pension Benefits and Nonqualified Deferred Compensation
We did not provide our executive officers with any benefits pursuant to defined benefit plans or nonqualified deferred compensation plans during 2021.
Additional Compensation Components
In the future, as we further formulate and implement our compensation program, we may provide different and/or additional compensation components, benefits and/or perquisites to our executive officers, to ensure that we provide a balanced and comprehensive compensation structure. We believe that it is important to maintain flexibility to adapt our compensation structure when needed to properly attract, motivate and retain the top executive talent for which we compete.
Risk Management
A committee of independent directors for REIT I was involved in negotiating each of the employment agreements with our executives. In February 2021 we formed the compensation committee to act with respect to various compensation matters of the company. The compensation committee manages risks related to our compensation policies and programs, including whether any compensation program has the potential to encourage excessive risk taking. The committee believes that our compensation policies and practices do not encourage our employees to take excessive or unnecessary risks and are not reasonably likely to have a material adverse effect on the company. The compensation committee considered a variety of factors, including base salary, annual cash incentive compensation, and long-term equity incentive compensation opportunities available to our executives. The committee believes that the combination of those factors should lead to executive and employee behavior that is consistent with our overall objectives and risk profile.
Executive Officer Compensation Tables
Summary Compensation Table
The following table sets forth the information required by Item 402 of Regulation S-K promulgated by the SEC. The table sets forth the base salary and other compensation that was paid to or earned by the named executive officers during 2021 as prior to January 28, 2021, we did not directly employ our named executive officers. With respect to equity incentive awards, the dollar amounts indicated in the table under “Stock Awards” are the aggregate grant date fair value of awards computed in accordance with ASC Topic 718.
61
Executive |
| Year |
| Salary |
| Stock Awards (1) |
| Non-Equity Incentive Plan Compensation |
| All Other Compensation (2) |
|
| Total |
| |||||
Alan F. Feldman |
| 2021 |
| $ | 700,000 |
| $ | 1,825,000 |
| $ | 1,312,500 |
| $ | 70,033 |
|
| $ | 3,907,533 |
|
Chief Executive Officer and President |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Thomas C. Elliott |
| 2021 |
|
| 500,000 |
|
| 1,025,000 |
|
| 937,500 |
|
| 52,474 |
|
| $ | 2,514,974 |
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Marshall P. Hayes |
| 2021 |
|
| 300,000 |
|
| 512,500 |
|
| 506,250 |
|
| 22,663 |
|
| $ | 1,341,413 |
|
Senior Vice President and Chief Investment Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Shelle R. Weisbaum |
| 2021 |
|
| 300,000 |
|
| 350,000 |
|
| 450,000 |
|
| 23,235 |
|
| $ | 1,123,235 |
|
(1) Represents the total grant date fair value of restricted stock granted on February 17, 2021 under the 2020 Incentive Plan, determined in accordance with ASC Topic 718. See Note 12 to our consolidated financial statements herein, for a discussion of our accounting of share-based compensation and the assumptions used.
The grant date fair values for the following named executive officers relating to restricted stock awards granted on February 17, 2021, are as follows: Alan F. Feldman—$1,277,500; Thomas C. Elliott—$717,500; Marshall P. Hayes—$358,750; and Shelle R. Weisbaum—$245,000. The time-based restricted stock awards granted in 2021 vest over three years from the date of grant in equal installments with 331/3 vesting per year, subject to continued service.
The grant date fair values for the named executive officers relating to 2021 performance-based restricted stock granted on February 17, 2021, are as follows: Alan F. Feldman—$547,500; Thomas C. Elliott—$307,500; Marshall P. Hayes—$153,750; and Shelle R. Weisbaum—$105,000. The maximum value of the 2021 performance unit awards assuming that the highest level of performance is achieved are as follows: Alan F. Feldman—$684,375; Thomas C. Elliott—$384,375; Marshall P. Hayes—$192,188; and Shelle R. Weisbaum—$131,250.
(2) All other compensation for 2021 represents amounts paid for 401(k) matching contributions for each officer of $11,600; dividends paid on unvested restricted stock awards that were not included in grant date fair value as follows: Alan F. Feldman—$39,394; Thomas C. Elliott—$22,125; Marshall P. Hayes—$11,063; and Shelle R. Weisbaum—$7,555; automobile allowances of $12,000 each to Alan F. Feldman and Thomas C. Elliott, as well as perquisites of parking allowances and life insurance premiums.
2021 Grants of Plan-Based Awards
The following table sets forth information with respect to plan-based awards granted in 2021 to the named executive officers.
|
|
|
| Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1) |
|
| Estimated Future Payouts Under Equity Incentive Plan Awards (2) |
|
| All Other Stock Awards: |
|
|
|
| ||||||||||||||||
Executive |
| Date of Grant |
| Threshold ($) |
| Target ($) |
| Maximum ($) |
|
| Threshold (#) |
| Target (#) |
| Maximum (#) |
|
| Number of Shares or Units (#)(3) |
|
| Grant Date Fair Value (4) |
| ||||||||
Alan F. Feldman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Annual cash incentive bonus |
|
|
| $ | 437,500 |
| $ | 875,000 |
| $ | 1,312,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Time-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 140,693 |
|
| $ | 1,277,500 |
| ||||||
Performance-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
| 45,223 |
|
| 60,297 |
|
| 75,371 |
|
|
|
|
|
| 547,500 |
| ||||
Thomas C. Elliott |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Annual cash incentive bonus |
|
|
| $ | 312,500 |
| $ | 625,000 |
| $ | 937,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Time-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 79,019 |
|
| $ | 717,500 |
| ||||||
Performance-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
| 25,399 |
|
| 33,865 |
|
| 42,332 |
|
|
|
|
|
| 307,500 |
| ||||
Marshall P. Hayes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Annual cash incentive bonus |
|
|
| $ | 168,750 |
| $ | 337,500 |
| $ | 506,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Time-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 39,509 |
|
| $ | 358,750 |
| ||||||
Performance-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
| 12,699 |
|
| 16,932 |
|
| 21,166 |
|
|
|
|
|
| 153,750 |
| ||||
Shelle R. Weisbaum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Annual cash incentive bonus |
|
|
| $ | 150,000 |
| $ | 300,000 |
| $ | 450,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Time-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 26,982 |
|
| $ | 245,000 |
| ||||||
Performance-based restricted stock |
| February 17, 2021 |
|
|
|
|
|
|
|
|
| 8,672 |
|
| 11,563 |
|
| 14,454 |
|
|
|
|
|
| 105,000 |
|
(1) For the year ended December 31, 2021, the compensation committee approved annual cash incentive bonuses for Messrs. Feldman, Elliott, Hayes, and Ms. Weisbaum of $1,312,500, $937,500, $506,250 and $450,000, respectively. For more information regarding the company and individual performance goals for these annual cash incentive bonuses, see “2021 Executive Compensation—Short-Term Incentive Plan.”
(2) Equity incentive plan awards were made in the form of performance-based restricted stock. At the end of the three-year measuring period, a recipient of performance-based restricted stock may receive as few as zero shares or as many as 125% of the target number of shares, plus accrued dividends on earned
62
shares. For more information regarding the performance criteria for these awards, see “Compensation Discussion and Analysis—Equity Incentive Compensation —Performance -Based Restricted Stock.”
(3) Stock awards were made in the form of time-based restricted stock. The time-based restricted stock will vest over three years from the date of grant in equal installments with 331/3 vesting per year, subject to continued service. For more information regarding the time-based awards, see “Compensation Discussion and Analysis—Equity Incentive Compensation—Time-Based Restricted Stock.”
(4) The amounts included in this column represent the full grant date fair value of the awards, determined in accordance with ASC Topic 718. See Note 12 to our consolidated financial statements herein, for a discussion of our accounting of share-based compensation and the assumptions used. The grant date fair value of each award granted on February 17, 2021 was $9.08 based on the estimated value per share of our common stock approved by our board of directors on March 19, 2020. For a full description of the methodologies used to calculate the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information" our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 20, 2020.
2021 Outstanding Equity Awards
The following table sets forth information with respect to outstanding equity awards held by the named executive officers as of December 31, 2021. No option awards were outstanding for the named executive officers as of December 31, 2021.
|
| Restricted Stock Awards |
| |||||||||||||
Name |
| Number of Shares of Stock That Have Not Vested (1) |
|
| Market Value of Shares That Have Not Vested (2) |
|
| Equity Incentive Plan Awards: |
|
| Equity Incentive Plan Awards: |
| ||||
Alan F. Feldman |
|
| 140,693 |
|
| $ | 1,277,492 |
|
|
| 244,601 |
|
| $ | 2,220,981 |
|
Thomas C. Elliott |
|
| 79,019 |
|
| $ | 717,493 |
|
|
| 137,745 |
|
| $ | 1,250,730 |
|
Marshall P. Hayes |
|
| 39,509 |
|
| $ | 358,742 |
|
|
| 58,819 |
|
| $ | 534,077 |
|
Shelle R. Weisbaum |
|
| 26,982 |
|
| $ | 244,997 |
|
|
| 45,072 |
|
| $ | 409,259 |
|
(1) The following table summarizes the time-based restricted stock awards for which a portion of the awards remain unvested as of December 31, 2021. The table also provides information about the applicable vesting periods:
|
|
|
|
| Number of Shares of Time-Based Restricted Stock |
|
|
| ||||||||||||||
Grant Date |
| Grant Date Fair Value |
|
| Feldman |
|
| Elliott |
|
| Hayes |
|
| Weisbaum |
|
| Vesting Period | |||||
February 17, 2021 |
| $ | 9.08 |
|
|
| 140,693 |
|
|
| 79,019 |
|
|
| 39,509 |
|
|
| 26,982 |
|
| Over three years with 33.33% vesting per year beginning on February 17, 2022 |
(2) The grant date fair value of each award granted on February 17, 2021 was $9.08 based on the estimated value per share of our common stock approved by our board of directors on March 19, 2020. For a full description of the methodologies used to calculate the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information" our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 20, 2020.
(3) The following table summarizes the performance-based restricted stock awards (at target amounts) for which a portion of the awards remain unearned and unvested as of December 31, 2021, assuming the performance-based restricted stock awards are earned at the conclusion of the applicable measurement period. The table also provides information about the applicable vesting periods.
|
|
|
|
| Number of Shares of Performance-Based Restricted Stock |
|
|
| ||||||||||||||
Grant Date |
| Grant Date Fair Value |
|
| Feldman |
|
| Elliott |
|
| Hayes |
|
| Weisbaum |
|
| Vesting Period | |||||
February 17, 2021 |
| $ | 9.08 |
|
|
| 244,601 |
|
|
| 137,746 |
|
|
| 58,819 |
|
|
| 45,073 |
|
| All earned shares vest immediately in full |
(4) For performance units, value is based on $9.08. The number and value set forth in the table above assumes that the named executive officers earn the target amounts of performance-based restricted stock. See footnote 3 above.
2021 Option Exercises and Stock Vested Table
The following table sets forth information regarding vesting of restricted stock during the last completed fiscal year for each of the named executive officers. The value realized on vesting is the product of (i) the fair market value of a share of common stock on the vesting date, multiplied by (ii) the number of shares vesting. The value realized is before payment of any applicable withholding tax. The named executive officers did not exercise any stock options during 2021.
Name |
| Number of Shares Acquired on Vesting (#) |
|
| Value Realized on Vesting ($) (1) |
| ||
Alan F. Feldman |
|
| 122,870 |
|
| $ | 1,115,656 |
|
Thomas C. Elliott |
|
| 69,254 |
|
| $ | 628,824 |
|
Marshall P. Hayes |
|
| 27,925 |
|
| $ | 253,556 |
|
Shelle R. Weisbaum |
|
| 22,340 |
|
| $ | 202,845 |
|
63
(1) Reflects the vesting of restricted stock awards granted by REIT I and assumed and adjusted by us to become awards with respect to our common stock at the effective time of the REIT I Merger. These shares vested upon the consummation of the REIT I Merger on January 28, 2021. The fair market value at vesting was $9.08 based on the estimated value per share of our common stock approved by our board of directors on March 19, 2020. For a full description of the methodologies used to calculate the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information" our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 20, 2020.
2021 Termination Payment Table
The following table indicates the cash amounts and accelerated vesting that Messrs. Feldman, Elliott, Hayes and Ms. Weisbaum would be entitled to receive under various termination or change of control circumstances pursuant to the terms of their employment agreements, as applicable to Messrs. Feldman and Elliott and Ms. Weisbaum, and the applicable award agreements under the 2020 Incentive Plan. This table assumes that the termination or change of control, as applicable, occurred on December 31, 2021.
Name and Termination or Change of Control Scenario |
| Cash Payment (1) ($) |
|
| Acceleration of Vesting of Equity Awards (2) ($) |
|
| Perquisites/ |
|
| Total ($) |
| ||||
Alan F. Feldman |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Voluntary termination, retirement or involuntary termination for cause |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Termination by company without cause or upon expiration of term of employment agreement (4)(5) |
|
| 3,425,000 |
|
|
| 3,107,514 |
|
|
| 30,151 |
|
|
| 6,562,665 |
|
Termination by employee with good reason (4)(6) |
|
| 4,275,000 |
|
|
| 3,107,514 |
|
|
| 30,151 |
|
|
| 7,412,665 |
|
Within 12 months following a change of control, termination by company without cause or upon expiration of term of employment agreement, termination by employee with good reason (4)(7) |
|
| 5,975,000 |
|
|
| 3,107,514 |
|
|
| 30,151 |
|
|
| 9,112,665 |
|
Death or disability (8) |
|
| 875,000 |
|
|
| 3,107,514 |
|
|
| — |
|
|
| 3,982,514 |
|
Thomas C. Elliott |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Voluntary termination, retirement or involuntary termination for cause |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Termination by company without cause or upon expiration of term of employment agreement (4)(5) |
|
| 2,500,000 |
|
|
| 1,748,638 |
|
|
| 29,683 |
|
|
| 4,278,321 |
|
Termination by employee with good reason (4)(6) |
|
| 3,125,000 |
|
|
| 1,748,638 |
|
|
| 29,683 |
|
|
| 4,903,321 |
|
Within 12 months following a change of control, termination by company without cause or upon expiration of term of employment agreement, termination by employee with good reason (4)(7) |
|
| 4,375,000 |
|
|
| 1,748,638 |
|
|
| 29,683 |
|
|
| 6,153,321 |
|
Death or disability (8) |
|
| 625,000 |
|
|
| 1,748,638 |
|
|
| — |
|
|
| 2,373,638 |
|
Marshall P. Hayes |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Voluntary termination, retirement or involuntary termination for cause |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Termination by company without cause or upon expiration of term of employment agreement (4)(5) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Termination by employee with good reason (4)(6) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Within 12 months following a change of control, termination by company without cause or upon expiration of term of employment agreement, termination by employee with good reason (4)(7) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Death or disability (8) |
|
| — |
|
|
| 783,231 |
|
|
| — |
|
|
| 783,231 |
|
Shelle R. Weisbaum |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Voluntary termination, retirement or involuntary termination for cause |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Termination by company without cause or upon expiration of term of employment agreement (4)(5) |
|
| 825,000 |
|
|
| 579,319 |
|
|
| 20,568 |
|
|
| 1,424,887 |
|
Termination by employee with good reason (4)(6) |
|
| 1,087,500 |
|
|
| 579,319 |
|
|
| 20,568 |
|
|
| 1,687,387 |
|
Within 12 months following a change of control, termination by company without cause or upon expiration of term of employment agreement, termination by employee with good reason (4)(7) |
|
| 1,350,000 |
|
|
| 579,319 |
|
|
| 20,568 |
|
|
| 1,949,887 |
|
Death or disability (8) |
|
| 300,000 |
|
|
| 579,319 |
|
|
| — |
|
|
| 879,319 |
|
(1) Each named executive officer is also paid his salary earned but not yet paid, reimbursement for unpaid expenses to which the officer is entitled to reimbursement, and the cash equivalent vacation time or other vested compensation or benefits to which the named executive officer is entitled. In addition, unless termination is for cause or without good reason, or by the named executive officer upon the expiration of the term of the employment agreement, each named executive officer also receives any incentive bonus earned for the prior calendar year but not yet paid.
(2) Amounts in this column reflect accelerated vesting of unvested time-based restricted stock awards and a pro-rated portion of performance-based restricted stock (assuming target performance), including the value of all accrued and unpaid cash dividends that would have been paid with respect to the time-vested restricted stock and performance-based restricted stock, as applicable, for each named executive officer. With respect to the pro-rated performance-based restricted stock, any performance-based restricted stock awards shall remain outstanding and eligible to vest based on actual performance through the last day of
64
the performance period, based on the number of days during the performance period, the named executive officer was employed. For purposes of this table each restricted share of common stock was valued at $9.06 based on the estimated value per share of our common stock approved by our board of directors on March 24, 2021. For a full description of the methodologies used to calculate the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information" our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 25, 2021.
(3) This figure represents the sum of the amount needed to pay for then current health, dental, disability and life insurance benefits for 18 months for Messrs. Feldman and Elliott and Ms. Weisbaum, with such amounts payable following the named executive officer’s termination of employment at the same level as in effect immediately preceding his termination of employment. The health insurance benefits amounts were determined using the estimated premiums currently in effect.
(4) Cash payments in this column reflect a cash severance payment, and an incentive bonus (assuming target performance) for the calendar year in which the termination occurs, pro-rated for the amount of time the named executive officer was employed by the company during such calendar year.
(5) The cash severance payment is an amount equal to the sum of the named executive officer’s annual base salary then in effect, plus the average of the incentive bonus paid to the named executive officer for the prior three calendar years (as adjusted for such lesser number of years that the named executive officer has been employed by us), multiplied by (a) 1.5 for Messrs. Feldman and Elliott and (b) 1.0 times for Ms. Weisbaum.
(6) The cash severance payment is an amount equal to the sum of the named executive officer’s annual base salary then in effect, plus the average of the incentive bonus paid to the named executive officer for the prior three calendar years (as adjusted for such lesser number of years that the named executive officer has been employed by us), multiplied by (a) 2.0 for Messrs. Feldman and Elliott and (b) 1.5 times for Ms. Weisbaum.
(7) The cash severance payment is an amount equal to the sum of the named executive officer’s annual base salary then in effect, plus the average of the incentive bonus paid to the named executive officer for the prior three calendar years (as adjusted for such lesser number of years that the named executive officer has been employed by us), multiplied by (a) 3.0 for Messrs. Feldman and Elliott and (b) 2.0 times for Ms. Weisbaum.
(8) With respect to Messrs. Feldman and Elliott and Ms. Weisbaum, upon death or disability of the named executive officer, the executive officer will receive a prorated bonus for services performed during the year, assuming target performance. With respect to all named executive officers, unvested time-based restricted stock awards will vest and performance-based restricted stock awards will remain outstanding and eligible to vest based on actual performance through the last day of the performance period, based on the number of days during the performance period, the named executive officer was employed.
2021 Director Compensation Table
We pay an annual cash retainer of $65,000 to each independent director for services as a director, as well as an annual grant of equity with a value of approximately $65,000 at the time of grant. The equity has a one year vesting schedule. For service on the audit committee, compensation committee, nominating and governance committee and investment committee we pay an annual cash retainer of $7,500; provided that the chair of each of these committees will receive an additional annual cash retainer as follows: $15,000 to the chair of the audit committee and the chair of the compensation committee, and $12,500 to the chair of the nominating and governance committee and the chair of the investment committee. All members of the board of directors are reimbursed for their costs and expenses in attending our board meetings.
The table below provides information regarding compensation paid to or earned by our directors during the year ended December 31, 2021 as required by Item 402(k) of Regulation S-K.
Name |
| Fees Earned or Paid in Cash |
|
| Stock Awards (1) |
|
| All Other Compensation |
|
| Total |
| ||||
Alan F. Feldman (2) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Robert C. Lieber (2) (3) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Thomas J. Ikeler |
|
| 84,792 |
|
|
| 65,000 |
|
|
| 2,004 |
|
|
| 151,796 |
|
Gary Lichtenstein |
|
| 93,583 |
|
|
| 65,000 |
|
|
| 2,004 |
|
|
| 160,587 |
|
Paula Baiman Brown |
|
| 47,083 |
|
|
| 65,000 |
|
|
| 1,004 |
|
|
| 113,087 |
|
Alan F. Riffkin |
|
| 47,083 |
|
|
| 65,000 |
|
|
| 1,004 |
|
|
| 113,087 |
|
Andrew Ceitlin |
|
| 84,792 |
|
|
| 65,000 |
|
|
| 2,004 |
|
|
| 151,796 |
|
Lee F. Shlifer |
|
| 87,083 |
|
|
| 65,000 |
|
|
| 2,004 |
|
|
| 154,087 |
|
David Spoont (4) |
|
| 12,333 |
|
|
| — |
|
|
| — |
|
|
| 12,333 |
|
(1) Represents the total grant date fair value of 7,158 shares of restricted stock granted on February 17, 2021 under the Incentive Plan, determined in accordance with ASC Topic 718. See Note 12 to our consolidated financial statements herein, for a discussion of our accounting of share-based compensation and the assumptions used. The grant date fair value of each award granted on February 17, 2021 was $9.08 based on the estimated value per share of our common stock approved by our board of directors on March 19, 2020. For a full description of the methodologies used to calculate the estimated value per share, see Part II, Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Market Information" our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on March 20, 2020. As of December 31, 2021, Messrs. Ikeler, Lichtenstein, Ceitlin and Shlifer each held 7,158 shares of unvested restricted stock and Mr. Riffkin and Ms. Brown each held 7,174 shares of unvested restricted stock.
(2) Directors who are not independent of us do not receive compensation for their services as a director.
65
(3) Mr. Lieber resigned effective September 14, 2021.
(4) Mr. Spoont resigned effective January 28, 2021.
Pay Ratio Disclosure
As required by Item 402(u) of Regulation S-K, we are providing the following information about the ratio of the median employee’s total annual compensation to the total annual compensation of our chief executive officer for the year ended December 31, 2021:
In determining the median employee, we prepared a list of all employees as of December 31, 2021 and reviewed the amount of salary, wages and equity awards of all such employees reported to the Internal Revenue Service on Form W-2 for 2021. We also reviewed pre-tax wages that were contributed by employees to a pre-tax parking program, a flexible spending account program and supplemental insurance policy premiums. More specifically, for each employee, we aggregated the amounts indicated on the face of his or her Form W-2 and pre-tax wages allocated to commuting costs, flexible spending accounts and supplemental insurance policy premiums. We had 44 employees as of December 31, 2021. Salaries, wages and bonuses were annualized for those employees that were not employed for the full year of 2021. In addition, bonuses for employees who were not employed for the full year of 2021 were annualized because the Form W-2 amounts reflect bonuses paid in 2021 for 2020 employment. We identified the median employee using this compensation measure, which was consistently applied to all employees included in the calculation. Because all employees are located in the United States, we did not make any cost-of-living adjustments in identifying the median employee.
Once the median employee was identified, we combined all of the elements of such employee’s compensation for 2021 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K promulgated by the SEC, resulting in median employee total annual compensation of approximately $178,000. Given the different methodologies that various public companies will use to determine an estimate of their pay ratio, the estimated ratio reported above should not be used as a basis for comparison between companies.
Compensation Committee Interlocks and Insider Participation
The members of our compensation committee are Lee F. Shlifer (Chairman), Gary Lichtenstein, and Thomas J. Ikeler. None of the members of the compensation committee is or has been employed by us. With the exception of Alan F. Feldman, who serves as our Chief Executive Officer and President as well as a director and served in similar positions for REIT I and REIT III prior to their acquisition by us, none of our executive officers currently serves, or in the past three years has served, as a member of the board of directors or compensation committee of another entity that has one or more executive officers serving on the board of directors or compensation committee. No member of the compensation committee has any other business relationship or affiliation with us other than his or her service as a director.
Compensation Committee Report
The following is a report by the compensation committee regarding its review of the foregoing Compensation Discussion and Analysis section:
The compensation committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on such review and discussion, the compensation committee recommended to the board of directors, and the board has approved, that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K for the year ended December 31, 2021 for filing with the SEC.
March 25, 2022 The Compensation Committee of the Board of Directors: Lee F. Shlifer (Chairman), Gary Lichtenstein, and Thomas J. Ikeler
66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table summarizes information, as of December 31, 2021, relating to our equity compensation plan pursuant to which we grant restricted stock from time to time.
Plan Category |
| Number of securities to be issued upon exercise of outstanding options, warrants and rights |
|
| Weighted-average exercise price of outstanding options, warrants and rights |
|
| Number of securities remaining available for future issuance under equity compensation plans |
| |||
Equity compensation plans approved by security holders (1) |
|
| - |
|
|
| - |
|
|
| 2,132,770 |
|
Equity compensation plans not approved by security holders |
|
| - |
|
|
| - |
|
|
| - |
|
Total |
|
| - |
|
|
| - |
|
|
| 2,132,770 |
|
(1) Resource REIT, Inc. 2020 Long-Term Incentive Plan (the “Incentive Plan”). The Incentive Plan was approved by our board of directors on September 8, 2020 in connection with our entry into the merger agreement with REIT I as we agreed to assume the REIT I incentive plan at the time of the REIT I Merger. As of January 28, 2021, the effective time of the REIT I Merger, we assumed the incentive plan of REIT I and the awards thereunder. On July 21, 2021, at our annual meeting, our stockholders approved the Incentive Plan. Prior to stockholder approval of the Incentive Plan, we had granted 567,983 shares of restricted stock, including 135,045 shares of performance-based restricted stock based on target levels of performance. A recipient of performance-based restricted stock may receive as few as zero shares or as many as 125% the target number of shares.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of March 22, 2022, except as otherwise set forth in the footnotes to the table, the beneficial ownership of our common stock and convertible stock, for (1) each person who is a beneficial owner of 5% or more of our outstanding common stock, (2) each director, (3) each named executive officer and (4) our directors and named executive officers as a group.
In accordance with SEC rules, each listed person’s beneficial ownership includes all shares the person actually owns beneficially or of record, all shares over which the person has or shares voting or dispositive control (such as in the capacity as a general partner of an investment fund), and all shares the person has the right to acquire within 60 days, except as otherwise set forth in the footnotes to the table.
Unless otherwise indicated, each person named in the table has sole voting and investment power with respect to all of the shares of common stock shown as beneficially owned by such person and none of our directors or executive officers has pledged shares of common stock as collateral. Unless otherwise noted, the address for each beneficial owner is 1845 Walnut Street, 17th Floor, Philadelphia, Pennsylvania 19103.
|
| Common Stock Beneficially Owned |
| Convertible Stock Beneficially Owned |
| |||||||||
Name of Beneficial Owners |
| Number |
|
| Percent of Total (1) |
| Number |
|
| Percent of Total (2) |
| |||
Alan F. Feldman (3)(5) |
|
| 660,508 |
|
| * |
|
| 4,200 |
|
|
| 22.5 | % |
Paula Baiman Brown (4) |
|
| 7,174 |
|
| * |
|
| — |
|
|
| — |
|
Andrew Ceitlin (4) |
|
| 14,332 |
|
| * |
|
| — |
|
|
| — |
|
Thomas J. Ikeler (4) |
|
| 14,332 |
|
| * |
|
| — |
|
|
| — |
|
Gary Lichtenstein (4)(6) |
|
| 17,773 |
|
| * |
|
| — |
|
|
| — |
|
Alan F. Riffkin (4) |
|
| 7,174 |
|
| * |
|
| — |
|
|
| — |
|
Lee F. Shlifer (4) |
|
| 14,332 |
|
| * |
|
| — |
|
|
| — |
|
Thomas C. Elliott (3) |
|
| 351,191 |
|
| * |
|
| 798 |
|
|
| 4.3 | % |
Marshall Hayes (3) |
|
| 166,754 |
|
| * |
|
| 1,398 |
|
|
| 7.5 | % |
Shelle Weisbaum (3) |
|
| 121,962 |
|
| * |
|
| 600 |
|
|
| 3.2 | % |
All directors and executive officers as a group (10 persons) |
|
| 1,375,532 |
|
| * |
|
| 6,996 |
|
|
| 37.60 | % |
* Represents ownership of less than 1.0%.
(1) Based on 166,259,239 shares of common stock outstanding as of March 22, 2022.
(2) Based on 18,628 shares of convertible stock outstanding as of March 22, 2022 (other than excluded convertible stock).
(3) Includes 234,800, 131,874, 65,937 and 45,029 shares of time vested restricted stock held by each of Messrs. Feldman, Elliott and Hayes and Ms. Weisbaum, respectively, and 305,031, 171,686, 75,789 and 56,662 shares of performance restricted stock (assuming target-level
67
performance) held by each of Messrs. Feldman, Elliott and Hayes and Ms. Weisbaum, respectively. The shares of time vested restricted stock and performance restricted stock have not vested.
(4) Includes 7,174 shares of time vested restricted stock held by each of Ms. Brown and Messrs. Ceitlin, Ikeler, Lichtenstein, Riffkin and Shlifer. The shares of time vested restricted stock have not vested.
(5) Includes 12,395 shares of common stock held indirectly by A & M Feldman Foundation, Inc., of which the reporting person is a director and founding member. The reporting person disclaims beneficial ownership of these securities.
(6) Includes 3,441 shares of common stock held indirectly by spouse.
Review and Approval of Transactions with Related Persons
Prior to the amendment of our charter in July 2021 (following our transition to a self-managed structure), our charter required our conflicts committee, which consists of all of our independent directors, to review and approve all transactions between us and our advisor, any of our officers or directors or any of their affiliates. Further, before entering into a transaction with a related party, a majority of the conflicts committee was required to conclude that the transaction was fair and reasonable to us and on terms and conditions not less favorable to us than those available from unaffiliated third parties. Although we have amended our charter to remove references to our conflicts committee due to no longer being externally advised, our independent directors continue to be charged with the responsibility of approving related party transactions consistent with our past charter requirements.
Certain Transactions with Related Persons
In the ordinary course of our business operations, we have had relationships with several related parties. Set forth below is a description of the material transactions between us and these related parties since the beginning of 2021 as well as any such currently proposed transactions.
Relationship with C-III and RAI
As of December 31, 2021, C-III and its subsidiary, Legacy Co, collectively owned approximately 8.3 million common shares. Following the Self-Management Transaction and prior to September 14, 2021, C-III and Legacy Co collectively owned approximately 7.5 million common units in our operating partnership (“OP Common Units”) and 319,965 preferred units in our operating partnership (“OP Preferred Units”) and had the right to designate one individual to be included on our board of directors. Robert C. Lieber, an Executive Management Directors of C-III, was the C-III nominee. In accordance with a letter agreement between the parties, on September 14, 2021, we redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of our common stock. In addition, on that date, Mr. Lieber resigned his position as a member of our board of directors. Prior to the Self-Management Transaction, C-III controlled our former advisor as well as the external advisors to REIT I and REIT III, as indirect subsidiaries of RAI, and owned the property management entities for us, REIT I and REIT III.
On September 8, 2020, we entered into a Transitional Services Agreement with C-III and its affiliates (the “Transitional Services Agreement”), pursuant to which, effective September 8, 2020 and for a one-year period, C-III provided us and our affiliates and subsidiaries certain services in order to ensure an orderly transition and the continued conduct and operation of the advisory and property management business acquired in connection with the Self-Management Transaction. In connection with these services, we have paid C-III an agreed-upon monthly fee for each service provided, as well as reimbursement of out-of-pocket expenses incurred by C-III and RAI as a result of the provision of these services. C-III also reimbursed us for services provided by our employees to C-III during this period.
Property loss pool: We participated (with other properties directly or indirectly managed by RAI and C-III) in a catastrophic insurance policy, which covered claims up to $250.0 million, after either a $25,000 or a $100,000 deductible per incident, depending on location and/or type of loss. Therefore, unforeseen or catastrophic losses in excess of our insured limits could have a material adverse effect on our financial condition and operating results. This policy expired on March 1, 2021 and was replaced with similar coverage in the normal course of business independent of RAI and C-III.
General liability coverage: We (with other properties directly managed by RAI) had an insured and dedicated limit for the general liability of $1,000,000 per occurrence. Total claims were limited to $2.0 million per premium year. In excess of these limits, we participated (with other properties directly or indirectly managed by RAI and C-III) in a $50.0 million per occurrence excess liability program. Therefore, the total insured limit per occurrence was $51.0 million for the general and
68
excess liability program, after a $25,000 deductible per incident. This policy expired on March 1, 2021 and was replaced with similar coverage in the normal course of business independent of RAI and C-III.
Directors and officers insurance: Until the effectiveness of the Resource REIT Mergers, we participated in a liability insurance program for directors and officers coverage with REIT I and REIT III.
Relationship with REIT I and REIT III
Following the Self-Management Transaction, REIT I, as the indirect owner of the advisor to REIT II and REIT III, received asset management fees, property management fees and debt financing fees from REIT II and REIT III until the Resource REIT Mergers in January 2021. All of the same individuals served as officers of REIT I, REIT II and REIT III as well as officers of the external advisor entities.
Relationship with ACRES Commercial Realty Corp. (“ACR”)
We provided office space and other office-related services to ACRES Commercial Realty Corp. (f/k/a Exantas Capital Corp.) under a sublease that was assigned from RAI which terminated on March 31, 2021. In addition, three of our employees provided internal audit services until March 31, 2021 under an internal audit engagement letter that was assigned from RAI to our subsidiary. Our Chief Financial Officer was a director of ACR until June 2021.
The following table presents the our fees earned by, and expenses paid to, such related parties (in thousands):
|
| 2021 |
| |
Fees earned / expenses paid to related parties: |
|
|
| |
REIT II (prior to 1/28/2021): |
|
|
| |
Asset management fee income |
| $ | 669 |
|
Property management fee income |
|
| 275 |
|
Operating expense reimbursements |
|
| 371 |
|
Internal audit |
|
| 8 |
|
REIT III (prior to 1/28/2021): |
|
|
| |
Asset management fee income |
| $ | 164 |
|
Property management fee income |
|
| 67 |
|
C-III/RAI: |
|
|
| |
Transition services paid to C-III |
| $ | 2 |
|
Preferred unit distributions |
|
| 3,161 |
|
Common OP unit distributions |
|
| 1,110 |
|
ACR: |
|
|
| |
Internal audit |
| $ | 37 |
|
Sublease rent reimbursement |
|
| 30 |
|
Director Independence
Under our charter, an independent director is a person who satisfies the independence requirements under the rules and regulations of the New York Stock Exchange (“NYSE”) as in effect from time to time. The NYSE standards provide that to qualify as an independent director, in addition to satisfying certain bright-line criteria, the board of directors must affirmatively determine that a director has no material relationship with us (either directly or as a partner, stockholder or officer of an organization that has a relationship with us). The board of directors has determined that Paula Baiman Brown, Andrew Ceitlin, Thomas J. Ikeler, Gary Lichtenstein, Alan F. Riffkin, and Lee F. Shlifer each satisfies the bright-line criteria and that none has a relationship with us that would interfere with such person’s ability to exercise independent judgment as a director. None of these directors has ever served as (or is related to) an employee of ours or any of our predecessors or acquired companies or received or earned any compensation from us or any such other entities except for compensation directly related to service as a director of us or REIT I. Therefore, we believe that all of these directors are independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During the year ended December 31, 2021, Grant Thornton LLP served as our independent registered public accounting firm and provided certain tax and other services. Grant Thornton has served as our independent registered public accounting firm since our formation. The audit committee reviewed the audit and non-audit services performed by Grant Thornton, as well as the fees charged by Grant Thornton for such services. The aggregate fees billed to us for professional accounting services, including
69
the audit of our annual financial statements by Grant Thornton for the years ended December 31, 2021 and 2020, are set forth in the table below (in thousands).
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Audit fees |
| $ | 524 |
|
| $ | 524 |
|
Audit-related fees |
|
| 598 |
|
|
| 21 |
|
Tax fees |
|
| 419 |
|
|
| 14 |
|
Total |
| $ | 1,541 |
|
| $ | 559 |
|
For purposes of the preceding table, Grant Thornton’s professional fees are classified as follows:
Pre-Approval Policies
In order to ensure that the provision of such services does not impair the auditors’ independence, the audit committee charter imposes a duty on the audit committee to pre-approve all auditing services performed for us by our independent auditors, as well as all permitted non-audit services. In determining whether to pre-approve services, the audit committee will consider whether the service is a permissible service under the rules and regulations promulgated by the SEC. The audit committee has established a pre-approval policy that any audit or non-audit services that do not exceed $15,000 in cost may be presented to and approved by the audit committee at its next scheduled meeting.
All services rendered by Grant Thornton for the year ended December 31, 2021 were pre-approved in accordance with the policies and procedures described above.
70
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report on Form 10-K:
71
Exhibit No. |
| Description |
2.1 |
| |
|
|
|
2.2 |
| |
|
|
|
2.3 |
| |
|
|
|
3.1 |
| |
|
|
|
3.2 |
| Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed February 5, 2021) |
|
|
|
3.3 |
| |
|
|
|
4.1 |
| |
|
|
|
4.2 |
| |
|
|
|
10.1 |
| |
|
|
|
10.2 |
| |
|
|
|
10.3 |
| |
|
|
|
10.4 |
| |
|
|
|
10.5 |
| |
|
|
|
10.6 |
| |
|
|
|
10.7 |
| |
|
|
|
10.8 |
| |
|
|
|
10.9 |
| |
|
|
|
10.10 |
| |
|
|
|
10.11 |
| 2022 Employee Retention/Transaction Bonus Plan, dated as of January 23, 2022 |
|
|
|
21.1 |
| |
|
|
|
23.1 |
| |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
72
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
99.2 |
| |
|
|
|
101.INS |
| Inline XBRL Instance Document |
|
|
|
101.SCH |
| Inline XBRL Taxonomy Extension Schema |
|
|
|
101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase |
|
|
|
101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase |
|
|
|
101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase |
|
|
|
101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase |
|
|
|
104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
ITEM 16. FORM 10-K SUMMARY
None.
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| RESOURCE REIT, INC. | ||
|
|
|
|
|
March 25, 2022 |
| By: |
| /s/ Alan F. Feldman |
|
|
|
| Alan F. Feldman |
|
|
|
| Chief Executive Officer, President and Director |
Pursuant to the requirements of the Securities Act of 1933, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name |
| Title |
| Date |
|
|
|
|
|
/s/ Gary Lichtenstein |
| Director |
| March 25, 2022 |
GARY LICHTENSTEIN |
|
|
| |
|
|
|
|
|
/s/ Thomas J. Ikeler |
| Director |
| March 25, 2022 |
THOMAS J. IKELER |
|
|
| |
|
|
|
|
|
/s/ Lee F. Shlifer |
| Director |
| March 25, 2022 |
LEE F. SHLIFER |
|
|
| |
|
|
|
|
|
/s/ Andrew Ceitlin |
| Director |
| March 25, 2022 |
ANDREW CEITLIN |
|
|
| |
|
|
|
|
|
/s/ Paula Baiman Brown |
| Director |
| March 25, 2022 |
PAULA BAIMAN BROWN |
|
|
|
|
|
|
|
|
|
/s/ Alan F. Riffkin |
| Director |
| March 25, 2022 |
ALAN F. RIFFKIN |
|
|
|
|
|
|
|
|
|
/s/ Alan F. Feldman |
| Chief Executive Officer, President and Director |
| March 25, 2022 |
ALAN F. FELDMAN |
| (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Thomas C. Elliott |
| Chief Financial Officer, Executive Vice President and Treasurer |
| March 25, 2022 |
THOMAS C. ELLIOTT |
| (Principal Financial Officer) |
|
|
|
|
|
|
|
/s/ Steven R. Saltzman |
| Chief Accounting Officer, and Vice President (Principal Accounting Officer) |
| March 25, 2022 |
STEVEN R. SALTZMAN |
|
|
|
74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Resource REIT, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Resource REIT, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule included under Item 15(b) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of events or changes in circumstances that indicate rental properties may be impaired
As discussed in Note 2 to the financial statements, the Company periodically evaluates its investments in rental properties for impairment indicators. The review considers factors such as operating income, market and other applicable trends, as well as the effects of leasing demand. We identified the evaluation of events or changes in circumstances that indicate rental properties may be impaired as of December 31, 2021 as a critical audit matter.
The principal consideration for our determination that the process to evaluate long-lived assets for impairment is a critical audit matter is the high degree of subjectivity and judgment in management’s process for determining whether indicators of impairment were present.
Our audit procedures related to potential rental property impairment included the following, among others. We obtained an understanding and evaluated the reasonableness of management’s impairment indicator analysis through discussions with management. We performed independent testing to identify indicators of impairment including trend analysis on property net
F-1
operating income and occupancy to identify properties with adverse movement and comparison of submarket rent data to actual property performance.
Estimation of fair value of assets acquired and liabilities assumed in the Resource REIT Mergers
As described within Note 6 to the consolidated financial statements, on January 28, 2021, the Company completed the Resource REIT Mergers by acquiring the assets and associated liabilities of the Resource Real Estate Opportunity REIT II, Inc. (“REIT II”) and Resource Apartment REIT III, Inc. (“REIT III”) in a stock-for-stock transaction. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values based on appraisals and other methods. Intangible assets were recognized at their relative fair values in accordance with ASC 805.
The principal consideration for our determination that the fair value estimate of assets acquired and liabilities assumed is a critical audit matter is that management, with the assistance of a third-party appraiser, made significant judgments about the valuation methodology, cash flow projections and the discount rates and overall capitalization rates, which are subjective inputs into the fair value estimates of the REIT II and REIT III properties. Significant management judgments and estimates utilized to determine the fair value of the properties are subject to estimation uncertainty and require significant auditor subjectivity in evaluating the reasonableness of those judgments and estimates.
Our audit procedures related to the valuation of assets acquired and liabilities assumed in the Resource REIT Mergers included the following, among others. We tested management’s process to evaluate the reasonableness and appropriateness of the valuation method, cash flow projections, discount rates and overall capitalization rates utilized by the appraiser, which involved the assistance of valuation specialists.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2012.
Philadelphia, Pennsylvania
March 25, 2022
F-2
RESOURCE REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
ASSETS |
|
|
|
|
|
| ||
Investments in real estate: |
|
|
|
|
|
| ||
Rental properties, net |
| $ | 1,876,047 |
|
| $ | 897,975 |
|
Identified intangible assets, net |
|
| — |
|
|
| 5 |
|
Assets held for sale - rental properties |
|
| 150,176 |
|
|
| — |
|
Total investments in real estate |
|
| 2,026,223 |
|
|
| 897,980 |
|
Cash |
|
| 112,838 |
|
|
| 70,015 |
|
Restricted cash |
|
| 10,420 |
|
|
| 14,769 |
|
Subtotal - cash and restricted cash |
|
| 123,258 |
|
|
| 84,784 |
|
Tenant receivables, net of allowance of $1,621 and $774, respectively |
|
| 1,121 |
|
|
| 516 |
|
Due from related parties |
|
| — |
|
|
| 2,763 |
|
Prepaid expenses and other assets |
|
| 12,143 |
|
|
| 9,180 |
|
Goodwill |
|
| 154,531 |
|
|
| 154,935 |
|
Total assets |
| $ | 2,317,276 |
|
| $ | 1,150,158 |
|
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
|
| ||
Liabilities: |
|
|
|
|
|
| ||
Mortgage notes payable, net |
| $ | 1,408,851 |
|
| $ | 825,986 |
|
Accounts payable and accrued expenses |
|
| 22,664 |
|
|
| 15,867 |
|
Accrued real estate taxes |
|
| 10,960 |
|
|
| 7,370 |
|
Due to related parties |
|
| — |
|
|
| 20,245 |
|
Tenant prepayments |
|
| 2,231 |
|
|
| 1,210 |
|
Security deposits |
|
| 4,975 |
|
|
| 2,860 |
|
Total liabilities |
|
| 1,449,681 |
|
|
| 873,538 |
|
|
|
|
|
|
|
| ||
Equity: |
|
|
|
|
|
| ||
Preferred stock, par value $.01; 10,000,000 shares authorized, NaN issued |
|
| — |
|
|
| — |
|
Common stock, par value $.01; 1,000,000,000 shares authorized; 165,766,753 and 86,075,442 shares issued and outstanding (including 1,055,589 and 790,272 of unvested restricted shares, respectively) |
|
| 1,658 |
|
|
| 861 |
|
Convertible stock; par value $.01; 50,000 shares authorized; 50,000 and 49,935 shares issued and outstanding, respectively |
|
| 1 |
|
|
| 1 |
|
Additional paid-in capital |
|
| 1,328,378 |
|
|
| 618,074 |
|
Accumulated other comprehensive income (loss) |
|
| 262 |
|
|
| (391 | ) |
Accumulated deficit |
|
| (462,704 | ) |
|
| (469,736 | ) |
Total stockholders’ equity |
|
| 867,595 |
|
|
| 148,809 |
|
Noncontrolling interest |
|
| — |
|
|
| 127,811 |
|
Total equity |
|
| 867,595 |
|
|
| 276,620 |
|
Total liabilities and equity |
| $ | 2,317,276 |
|
| $ | 1,150,158 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
| |||
Rental income |
| $ | 240,877 |
|
| $ | 133,242 |
|
| $ | 135,171 |
|
Property management fee income - related parties |
|
| 342 |
|
|
| 1,493 |
|
|
| — |
|
Asset management fee income - related parties |
|
| 833 |
|
|
| 3,571 |
|
|
| — |
|
Other revenue |
|
| 37 |
|
|
| 232 |
|
|
| — |
|
Total revenues |
|
| 242,089 |
|
|
| 138,538 |
|
|
| 135,171 |
|
|
|
|
|
|
|
|
|
|
| |||
Expenses: |
|
|
|
|
|
|
|
|
| |||
Property operating expenses |
|
| 64,845 |
|
|
| 38,786 |
|
|
| 38,480 |
|
Real estate taxes |
|
| 30,355 |
|
|
| 17,210 |
|
|
| 17,036 |
|
Acquisition costs |
|
| — |
|
|
| 113 |
|
|
| — |
|
Property management fees - third party |
|
| 6,690 |
|
|
| 2,023 |
|
|
| — |
|
Property management fees- related party |
|
| — |
|
|
| 4,071 |
|
|
| 6,029 |
|
Asset Management fees - related party |
|
| — |
|
|
| 8,518 |
|
|
| 12,505 |
|
Transaction expenses |
|
| 465 |
|
|
| 2,282 |
|
|
| — |
|
Casualty loss |
|
| 2,359 |
|
|
| 338 |
|
|
| 302 |
|
General and administrative- Property related |
|
| 5,818 |
|
|
| 3,643 |
|
|
| 3,595 |
|
General and administrative- Corporate |
|
| 25,303 |
|
|
| 8,543 |
|
|
| 6,462 |
|
Loss on disposal of assets |
|
| 848 |
|
|
| 656 |
|
|
| 541 |
|
Depreciation and amortization expense |
|
| 96,918 |
|
|
| 51,460 |
|
|
| 53,814 |
|
Total expenses |
|
| 233,601 |
|
|
| 137,643 |
|
|
| 138,764 |
|
Income (loss) before net gains on dispositions |
|
| 8,488 |
|
|
| 895 |
|
|
| (3,593 | ) |
Net gains on dispositions of properties |
|
| 93,665 |
|
|
| — |
|
|
| 38,810 |
|
Income before other income (expense) |
|
| 102,153 |
|
|
| 895 |
|
|
| 35,217 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
| (47,377 | ) |
|
| (25,723 | ) |
|
| (37,908 | ) |
Interest income |
|
| 22 |
|
|
| 217 |
|
|
| 374 |
|
Gain on sale of land easement |
|
| — |
|
|
| 310 |
|
|
| — |
|
Insurance proceeds in excess of cost basis |
|
| 311 |
|
|
| 168 |
|
|
| 570 |
|
Total other income (expense) |
|
| (47,044 | ) |
|
| (25,028 | ) |
|
| (36,964 | ) |
Income (loss) before income taxes |
|
| 55,109 |
|
|
| (24,133 | ) |
|
| (1,747 | ) |
Provision for income taxes |
|
| (206 | ) |
|
| — |
|
|
| — |
|
Net income (loss) |
| $ | 54,903 |
|
| $ | (24,133 | ) |
| $ | (1,747 | ) |
Redemption of preferred OP units |
|
| (342 | ) |
|
| — |
|
|
| — |
|
Preferred return to preferred OP unit holders |
|
| (3,161 | ) |
|
| (1,406 | ) |
|
| — |
|
Net income (loss) after preferred return |
|
| 51,400 |
|
|
| (25,539 | ) |
|
| (1,747 | ) |
Less: Allocation of income to preferred unit holders attributable to noncontrolling interest |
|
| 158 |
|
|
| 101 |
|
|
| — |
|
Less: Net loss attributable to noncontrolling interest |
|
| 696 |
|
|
| 279 |
|
|
| — |
|
Net income (loss) attributable to common stockholders |
| $ | 52,254 |
|
| $ | (25,159 | ) |
| $ | (1,747 | ) |
|
|
|
|
|
|
|
|
|
| |||
Weighted average common shares outstanding- basic |
|
| 153,820 |
|
|
| 85,531 |
|
|
| 85,861 |
|
Weighted average common shares outstanding - diluted |
|
| 153,889 |
|
|
| 85,531 |
|
|
| 85,861 |
|
Net income (loss) per common share- basic and diluted |
| $ | 0.34 |
|
| $ | (0.29 | ) |
| $ | (0.02 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
| For the Years Ended |
| |||||||||
| December 31, |
| |||||||||
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Net income (loss) | $ | 54,903 |
|
| $ | (24,133 | ) |
| $ | (1,747 | ) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
| |||
Reclassification adjustment for realized loss on designated derivatives |
| 42 |
|
|
| 124 |
|
|
| 344 |
|
Designated derivatives, fair value adjustments |
| 620 |
|
|
| (306 | ) |
|
| (88 | ) |
Total comprehensive income (loss) |
| 55,565 |
|
|
| (24,315 | ) |
|
| (1,491 | ) |
Redemption of preferred OP units |
| (342 | ) |
|
| — |
|
|
| — |
|
Preferred return to preferred OP unit holders |
| (3,161 | ) |
|
| (1,406 | ) |
|
| — |
|
Total comprehensive income (loss) after preferred return to preferred OP unit holders |
| 52,062 |
|
|
| (25,721 | ) |
|
| (1,491 | ) |
Net loss attributable to noncontrolling interest |
| 696 |
|
|
| 279 |
|
|
| — |
|
Allocation of income to preferred unit holders attributable to noncontrolling interest |
| 158 |
|
|
| 101 |
|
|
| — |
|
Total other comprehensive loss (income) attributable to noncontrolling interest |
| (9 | ) |
|
| 9 |
|
|
| — |
|
Comprehensive (income) loss attributable to noncontrolling interest |
| 845 |
|
|
| 389 |
|
|
| — |
|
Comprehensive income (loss) attributable to common stockholders | $ | 52,907 |
|
| $ | (25,332 | ) |
| $ | (1,491 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
RESOURCE REIT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019
(in thousands)
|
| Common Stock |
|
| Convertible Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Accumulated Deficit |
|
| Total Stockholders’ Equity |
|
| Noncontrolling Interest |
|
| Total Equity |
| ||||||||||||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance at January 1, 2019 |
|
| 86,220 |
|
| $ | 862 |
|
| $ | 50 |
|
| $ | 500 |
|
| $ | 626,278 |
|
| $ | (474 | ) |
| $ | (390,361 | ) |
| $ | 236,306 |
|
| $ | — |
|
| $ | 236,306 |
|
Common stock issued through distribution reinvestment plan |
|
| 2,916 |
|
|
| 29 |
|
|
| — |
|
|
| — |
|
|
| 24,470 |
|
|
| — |
|
|
| — |
|
|
| 24,499 |
|
|
| — |
|
|
| 24,499 |
|
Distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| - |
|
|
| — |
|
|
| (42,020 | ) |
|
| (42,020 | ) |
|
| — |
|
|
| (42,020 | ) |
Common stock redemptions |
|
| (4,051 | ) |
|
| (41 | ) |
|
| — |
|
|
| — |
|
|
| (34,079 | ) |
|
| — |
|
|
| — |
|
|
| (34,120 | ) |
|
| — |
|
|
| (34,120 | ) |
Rescission redemptions |
|
| (40 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (359 | ) |
|
| — |
|
|
| — |
|
|
| (359 | ) |
|
| — |
|
|
| (359 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 256 |
|
|
| — |
|
|
| 256 |
|
|
| — |
|
|
| 256 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,747 | ) |
|
| (1,747 | ) |
|
| — |
|
|
| (1,747 | ) |
Balance, at December 31, 2019 |
|
| 85,045 |
|
|
| 850 |
|
|
| 50 |
|
|
| 500 |
|
|
| 616,310 |
|
|
| (218 | ) |
|
| (434,128 | ) |
|
| 182,815 |
|
| $ | — |
|
| $ | 182,815 |
|
Issuance of operating partnership units in Self-Management Transaction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 128,200 |
|
|
| 128,200 |
|
Issuance of restricted stock |
|
| 791 |
|
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock based compensation |
|
|
|
|
|
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| — |
|
|
| 10 |
|
|
| — |
|
|
| 10 |
| ||
Common stock issued through distribution reinvestment plan |
|
| 717 |
|
|
| 7 |
|
|
| — |
|
|
| — |
|
|
| 6,078 |
|
|
| — |
|
|
| — |
|
|
| 6,085 |
|
|
| — |
|
|
| 6,085 |
|
Distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,449 | ) |
|
| (10,449 | ) |
|
| — |
|
|
| (10,449 | ) |
True-up of prior year cash distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Common stock redemptions |
|
| (477 | ) |
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| (4,316 | ) |
|
| — |
|
|
| — |
|
|
| (4,320 | ) |
|
| — |
|
|
| (4,320 | ) |
Allocation of income to preferred unit holders |
|
|
|
|
|
|
|
| — |
|
|
|
|
|
| — |
|
|
| — |
|
|
| (1,305 | ) |
|
| (1,305 | ) |
|
| (101 | ) |
|
| (1,406 | ) | |||
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (173 | ) |
|
| — |
|
|
| (173 | ) |
|
| (9 | ) |
|
| (182 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (23,854 | ) |
|
| (23,854 | ) |
|
| (279 | ) |
|
| (24,133 | ) |
Balance at December 31, 2020 |
|
| 86,076 |
|
| $ | 861 |
|
|
| 50 |
|
| $ | 500 |
|
| $ | 618,074 |
|
| $ | (391 | ) |
| $ | (469,736 | ) |
| $ | 148,809 |
|
| $ | 127,811 |
|
| $ | 276,620 |
|
Merger |
|
| 71,222 |
|
|
| 712 |
|
|
| — |
|
|
| — |
|
|
| 644,563 |
|
|
| — |
|
|
| — |
|
|
| 645,275 |
|
|
| — |
|
|
| 645,275 |
|
Common stock issued through the distribution reinvestment plan |
|
| 1,228 |
|
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| 10,563 |
|
|
| — |
|
|
| — |
|
|
| 10,575 |
|
|
| — |
|
|
| 10,575 |
|
Issuance of restricted stock |
|
| 581 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| (5 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,572 |
|
|
| — |
|
|
| — |
|
|
| 4,572 |
|
|
| — |
|
|
| 4,572 |
|
Distributions declared |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (45,222 | ) |
|
| (45,222 | ) |
|
| (1,110 | ) |
|
| (46,332 | ) |
Common stock redemptions |
|
| (880 | ) |
|
| (7 | ) |
|
| — |
|
|
| — |
|
|
| (7,970 | ) |
|
| — |
|
|
| — |
|
|
| (7,977 | ) |
|
| — |
|
|
| (7,977 | ) |
Conversion of common OP units to common stock |
|
| 7,540 |
|
|
| 75 |
|
|
| — |
|
|
| — |
|
|
| 58,581 |
|
|
| — |
|
|
| — |
|
|
| 58,656 |
|
|
| (58,656 | ) |
|
| — |
|
Redemption of preferred OP units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (329 | ) |
|
| (329 | ) |
|
| (67,213 | ) |
|
| (67,542 | ) |
Preferred return to preferred OP unit holders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,016 | ) |
|
| (3,016 | ) |
|
| (145 | ) |
|
| (3,161 | ) |
Other comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 653 |
|
|
| — |
|
|
| 653 |
|
|
| 9 |
|
|
| 662 |
|
Net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 55,599 |
|
|
| 55,599 |
|
|
| (696 | ) |
|
| 54,903 |
|
Balance at December 31, 2021 |
|
| 165,767 |
|
| $ | 1,658 |
|
| $ | 50 |
|
| $ | 500 |
|
| $ | 1,328,378 |
|
| $ | 262 |
|
| $ | (462,704 | ) |
| $ | 867,595 |
|
| $ | — |
|
| $ | 867,595 |
|
The accompanying notes are an integral part of these consolidated financial statement.
F-6
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Years Ended |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 54,903 |
|
| $ | (24,133 | ) |
| $ | (1,747 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
| |||
Loss on disposal of assets |
|
| 848 |
|
|
| 656 |
|
|
| 541 |
|
Net gain on disposition of property |
|
| (93,665 | ) |
|
| — |
|
|
| (38,810 | ) |
Net gain on sale of land easement |
|
| — |
|
|
| (310 | ) |
|
| — |
|
Loss on extinguishment of debt |
|
| 1,462 |
|
|
| 64 |
|
|
| 69 |
|
Casualty gain |
|
| (2,966 | ) |
|
| (703 | ) |
|
| (527 | ) |
Depreciation and amortization |
|
| 96,918 |
|
|
| 51,460 |
|
|
| 53,814 |
|
Amortization of deferred financing costs |
|
| 2,554 |
|
|
| 1,478 |
|
|
| 2,320 |
|
Amortization of debt premium (discount), net |
|
| 23 |
|
|
| (315 | ) |
|
| (333 | ) |
Realized loss on change in fair value of interest rate cap |
|
| 42 |
|
|
| 124 |
|
|
| 344 |
|
Stock based compensation |
|
| 4,572 |
|
|
| 10 |
|
|
| — |
|
Accretion of discount and direct loan fees and costs |
|
| — |
|
|
| (76 | ) |
|
| (43 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| |||
Tenant receivables |
|
| (292 | ) |
|
| (327 | ) |
|
| (6 | ) |
Due to/from related parties, net |
|
| 23 |
|
|
| 1,088 |
|
|
| (349 | ) |
Prepaid expenses and other assets |
|
| 4,975 |
|
|
| (2,008 | ) |
|
| (19 | ) |
Accounts payable and accrued expenses |
|
| 3,400 |
|
|
| 4 |
|
|
| (1,259 | ) |
Tenant prepayments |
|
| (626 | ) |
|
| 122 |
|
|
| (51 | ) |
Security deposits |
|
| 378 |
|
|
| 354 |
|
|
| 120 |
|
Net cash provided by operating activities |
|
| 72,549 |
|
|
| 27,488 |
|
|
| 14,064 |
|
|
|
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| |||
Cash acquired in connection with Merger, net of acquisition costs |
|
| 76,858 |
|
|
| — |
|
|
| — |
|
Proceeds from disposal of property, net of closing costs |
|
| 99,402 |
|
|
| — |
|
|
| 17,532 |
|
Proceeds from sale of land easement |
|
| — |
|
|
| 313 |
|
|
| — |
|
Principal payments received on loans held for investment |
|
| — |
|
|
| 885 |
|
|
| 27 |
|
Working capital pain in Self-Management Transaction |
|
| — |
|
|
| (811 | ) |
|
| — |
|
Payment of consideration in Self-Management Transaction |
|
| (19,125 | ) |
|
| (7,875 | ) |
|
| — |
|
Insurance proceeds received for casualty losses |
|
| 4,011 |
|
|
| 847 |
|
|
| 749 |
|
Capital expenditures |
|
| (28,424 | ) |
|
| (11,297 | ) |
|
| (14,423 | ) |
Net cash provided by (used in) investing activities |
|
| 132,722 |
|
|
| (17,938 | ) |
|
| 3,885 |
|
|
|
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| |||
Redemptions of common and convertible stock |
|
| (7,977 | ) |
|
| (4,320 | ) |
|
| (34,120 | ) |
Recission of common stock |
|
| — |
|
|
| — |
|
|
| (359 | ) |
Redemption of preferred OP units |
|
| (67,542 | ) |
|
| — |
|
|
| — |
|
Payment of deferred financing costs |
|
| (5,523 | ) |
|
| — |
|
|
| (116 | ) |
Borrowings on mortgages |
|
| 33,202 |
|
|
| 34,369 |
|
|
| 26,676 |
|
Repayments on borrowings |
|
| (79,470 | ) |
|
| (11,655 | ) |
|
| (9,230 | ) |
Purchase of interest rate caps |
|
| (569 | ) |
|
| (348 | ) |
|
| (62 | ) |
Distributions paid on common stock and participating OP Units |
|
| (35,757 | ) |
|
| (4,364 | ) |
|
| (17,521 | ) |
Distributions paid to preferred unit holders |
|
| (3,161 | ) |
|
| (286 | ) |
|
| — |
|
Net cash (used in) provided by financing activities |
|
| (166,797 | ) |
|
| 13,396 |
|
|
| (34,732 | ) |
|
|
|
|
|
|
|
|
|
| |||
Net increase (decrease) in cash and restricted cash |
|
| 38,474 |
|
|
| 22,946 |
|
|
| (16,783 | ) |
Cash and restricted cash at beginning of year |
|
| 84,784 |
|
|
| 61,838 |
|
|
| 78,621 |
|
Cash and restricted cash at end of year |
| $ | 123,258 |
|
| $ | 84,784 |
|
| $ | 61,838 |
|
|
|
|
|
|
|
|
|
|
| |||
Reconciliation of cash and restricted cash |
|
|
|
|
|
|
|
|
| |||
Cash |
| $ | 112,838 |
|
| $ | 70,015 |
|
| $ | 49,534 |
|
Restricted cash |
|
| 10,420 |
|
|
| 14,769 |
|
|
| 12,304 |
|
Cash and restricted cash at end of year |
| $ | 123,258 |
|
| $ | 84,784 |
|
| $ | 61,838 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource REIT, Inc., (the “Company”), formerly known as Resource Real Estate Opportunity REIT II, Inc. (“REIT II”) was organized in Maryland on September 28, 2012. REIT II launched an initial public offering in February 2014, the primary portion of which terminated in February 2016. Substantially all of the business of Resource REIT, Inc. is conducted through RRE Opportunity OP II, LP (“OP II” or the “Operating Partnership”) in which Resource REIT, Inc. is the sole general partner. The Company has adopted a fiscal year ending December 31.
Resource REIT, Inc.'s objective is to make investments in apartment communities to provide investors with growing cash flow and increasing asset values. The Company has acquired underperforming apartments which it has or will renovate and stabilize in order to increase rents.
Resource REIT, Inc. elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its taxable year ending December 31, 2014. Resource REIT, Inc. also operates its business in a manner intended to permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes all of its REIT taxable income to its stockholders. The Company also operates its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
Prior to the execution of the REIT I Merger Agreement (as defined below), on September 8, 2020, Resource Real Estate Opportunity REIT, Inc. ("REIT I"), a non-traded real estate investment trust ("REIT") sponsored by Resource America, Inc. (“RAI”), the Company’s initial sponsor, entered into a series of transactions to become self-managed (the “Self-Management Transaction”) and succeeded to the advisory, asset management and property management arrangements in place for the Company. Accordingly, the sponsor of the Company changed from RAI to Resource Real Estate Opportunity OP, LP, the operating partnership of REIT I, while the REIT I Merger (defined below) was pending.
As of December 31, 2021, a total of 165.8 million shares of common stock, including shares issued through the distribution reinvestment plan, remain outstanding.
Blackstone Merger
On January 23, 2022, the Company, Rapids Parent LLC (“Parent”) and Rapids Merger Sub LLC (“Rapids Merger Sub”) entered into an Agreement and Plan of Merger (the “Blackstone Merger Agreement”). The Blackstone Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, the Company will merge with and into Rapids Merger Sub (the “Blackstone Merger”). Upon completion of the Blackstone Merger, Rapids Merger Sub will survive and the separate existence of the Company will cease. The Blackstone Merger and the other transactions contemplated by the Blackstone Merger Agreement were unanimously approved by the Company’s Board of Directors (the “Board”). Parent and Rapids Merger Sub are affiliates of Blackstone Real Estate Income Trust, Inc. (“BREIT”), which is an affiliate of Blackstone Inc.
Pursuant to the terms and conditions in the Blackstone Merger Agreement, at the effective time of the Blackstone Merger (the “Effective Time”), each share of common stock (or fraction thereof), $0.01 par value per share, of the Company that is issued and outstanding immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive an amount in cash equal to $14.75 (the “Common Stock Consideration”), without interest. In addition, at the Effective Time, each share of convertible stock (or fraction thereof), $0.01 par value per share, of the Company that is issued and outstanding immediately prior to the Effective Time will be automatically cancelled and converted into the right to receive an amount in cash equal to $1,846.76, without interest.
The Blackstone Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants by the Company to conduct its business in all material respects in the ordinary course of business and in a manner consistent with past practice, subject to certain exceptions, during the period between the execution of the Blackstone Merger Agreement and the consummation of the Blackstone Merger.
F-8
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The consummation of the Blackstone Merger is subject to certain customary closing conditions, including, among others, approval of the Blackstone Merger by the affirmative vote of the holders of a majority of the outstanding shares of the Company’s common stock entitled to cast a vote on the Blackstone Merger (the “Stockholder Approval”). The Company will hold a special meeting on May 16, 2022 for the purpose of obtaining the Stockholder Approval. In addition, the holders of at least two-thirds of the outstanding shares of the Company’s convertible stock entitled to vote on the Blackstone Merger have approved the Blackstone Merger by written consent in accordance with Maryland law and our charter and bylaws.
Mergers with Resource Real Estate Opportunity REIT, Inc. and Resource Apartment REIT III, Inc.
On September 8, 2020, REIT II entered into merger agreements (as described herein) to acquire each of REIT I and Resource Apartment REIT III, Inc. (“REIT III”) in stock-for-stock transactions whereby each of REIT I and REIT III were to be merged into one of REIT II’s wholly owned subsidiaries. The REIT I Merger (as defined below) and the REIT III Merger (as defined below) are referred to collectively herein as the Resource REIT Mergers. Each of the Resource REIT Mergers was intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended. The Resource REIT Mergers became effective as of January 28, 2021.
REIT I Merger
On September 8, 2020, REIT II, OP II, Revolution I Merger Sub, LLC, a wholly-owned subsidiary of REIT II (“Merger Sub I”), REIT I, and Resource Real Estate Opportunity OP, LP (“OP I”), the operating partnership of REIT I, entered into an Agreement and Plan of Merger (the “REIT I Merger Agreement”).
Effective January 28, 2021, REIT I merged with and into Merger Sub I, with Merger Sub I surviving as direct, wholly-owned subsidiary of REIT II (the “REIT I Company Merger”) and OP I merged with and into OP II (the “REIT I Partnership Merger” and, together with the REIT I Company Merger, the “REIT I Merger”), with OP II surviving. At such time, the separate existence of REIT I and OP I ceased. At the effective time of the REIT I Company Merger, each issued and outstanding share of REIT I’s common stock (or fraction thereof) converted into the right to receive 1.22423 shares of REIT II’s common stock, and each issued and outstanding share of REIT I’s convertible stock converted into the right to receive $0.02 in cash (without interest).
At the effective time of the REIT I Partnership Merger, each common unit of partnership interests in OP I outstanding immediately prior to the effective time of the REIT I Partnership Merger converted into the right to receive 1.22423 common units of partnership interest in OP II ("OP Common Units") and each Series A Cumulative Participating Redeemable Preferred Unit in OP I issued and outstanding immediately prior to the effective time of the REIT I Partnership Merger converted into the right to receive one Series A Cumulative Participating Redeemable Preferred Unit in OP II ("OP Preferred Units").
REIT III Merger
On September 8, 2020, REIT II, OP II, Revolution III Merger Sub, LLC, a wholly-owned subsidiary of REIT II (“Merger Sub III”), REIT III, and Resource Apartment OP III, LP (“OP III”), the operating partnership of REIT III, entered into an Agreement and Plan of Merger (the “REIT III Merger Agreement”).
Effective January 28, 2021, REIT III merged with and into Merger Sub III, with Merger Sub III surviving as a direct, wholly-owned subsidiary of REIT II (the “REIT III Company Merger”) and OP III merged with and into OP II (the “REIT III Partnership Merger” and, together with the REIT III Company Merger, the “REIT III Merger”), with OP II surviving the REIT III Partnership Merger. At such time, the separate existence of REIT III and OP III ceased. The REIT I Merger and the REIT III Merger are hereinafter together referred to as the “Resource REIT Mergers”.
At the effective time of the REIT III Company Merger, each issued and outstanding share of REIT III’s common stock (or fraction thereof) converted into the right to receive 0.925862 shares of REIT II’s common stock. At the effective time of the REIT III Partnership Merger, each common unit of partnership interests in OP III outstanding immediately prior to the effective time of the REIT III Partnership Merger was retired and ceased to exist. In addition, for each share of REIT II common stock issued in the REIT III Company Merger, a common unit of partnership interest was issued to REIT II by OP II.
Effective as of the close of the REIT I Merger, REIT II acquired Resource Real Estate Opportunity Advisor II, LLC and Resource Real Estate Opportunity Advisor, LLC (the “Former Advisor”), Resource Apartment Advisor III, LLC and became a
F-9
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
self-managed REIT. In connection with the Resource REIT Mergers, REIT II was the legal acquirer and REIT I was the accounting acquirer for financial reporting purposes, as discussed in Note 6, Rental Properties. Thus, the financial information set forth herein subsequent to the Resource REIT Mergers reflects results of the combined entity, and the financial information set forth herein prior to the Resource REIT Mergers reflects REIT I’s results. For this reason, period to period comparisons may not be meaningful.
On September 8, 2020, REIT I, entered into a series of transactions to become self-managed (the “Self-Management Transaction”) as further described in Note 3, Self-Management Transaction, and succeeded to the advisory, asset management and property management arrangements in place for the Company.
COVID-19 Pandemic
One of the most significant risks and uncertainties facing the Company and the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus disease (“COVID-19”) pandemic. The Company continues to closely monitor the impact of the COVID-19 pandemic on all aspects of its business, including how the pandemic is impacting its tenants. The Company did not incur significant disruptions from the COVID-19 pandemic during the years ended December 31, 2021 and 2020, however, a small percentage of its tenants requested a rent deferral as a result of the pandemic. The Company evaluates each tenant rent deferral request on an individual basis, considering a number of factors. Not all tenant requests have or will ultimately result in modified agreements, nor is the Company forgoing its contractual rights under its lease agreements. There are no executed short-term rent deferral plans outstanding at December 31, 2021.
The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants depends on future developments, which cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. The Company is unable to predict the ultimate impact that the pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with the accounting principles generally accepted in the United States of America ("GAAP").
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company does not evaluate performance on a relationship specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
F-10
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Financial instruments, which potentially subject the Company to concentration of credit risk, consist of periodic temporary deposits of cash. At December 31, 2021, the Company had $125.3 million of deposits at various banks, $108.1 million of which were over the insurance limit of the Federal Deposit Insurance Corporation. No losses have been experienced on such deposits.
Rental Properties
The Company records acquired real estate at fair value on their acquisition date. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the asset using the straight line method. The Company's estimated useful lives of its assets by class are as follows:
Buildings |
| 27.5 years |
Building improvements |
| 5.0 to 27.5 years |
Furniture and fixtures |
| 2.0 to 5.0 years |
Tenant improvements |
| Shorter of lease term or expected useful life |
Lease intangibles |
| Weighted average remaining term of related lease |
Improvements and replacements are capitalized when they have a useful life greater than or equal to one year. The Company pays a construction management fee of 5.0% of actual aggregate costs to Greystar to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
As of December 31, 2021, the Company's real estate investments located in Texas, Georgia, Illinois, Colorado, and California represent approximately 26%, 13%, 12%, 10%, and 7% of the portfolio. This makes it particularly susceptible to adverse economic developments in these real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could negatively affect the Company's liquidity and adversely affect its ability to fund its ongoing operations.
Impairment of Long Lived Assets
The Company periodically evaluates its long-lived assets, primarily investments in rental properties, for impairment indicators. The review considers factors such as past and expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for permanent impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset.
In conjunction with the Resource REIT Merger and for the Company’s annual estimated value per share calculation in 2020 and 2019, the Company engaged with a third-party to provide the estimated fair value of its rental properties as of January 28, 2021, December 31, 2020 and 2019, respectively. The Company compared these values to its carrying values and concluded that there was no indication that the carrying value of the Company’s investments in real estate were not recoverable as of December 31, 2021, 2020 and 2019. There were 0 impairment losses recorded on long lived assets during the years ended December 31, 2021, 2020 and 2019.
Casualty Loss
The Company carries liability insurance to mitigate its exposure to certain losses, including those relating to property damage and business interruption. The Company records the estimated amount of expected insurance proceeds for property damage and other losses incurred as an asset (typically a receivable from the insurer) and income up to the amount of the losses incurred when receipt of insurance proceeds is deemed probable. Any amount of insurance recovery in excess of the amount of the losses incurred is considered a gain contingency and is recorded in other income when the proceeds are received.
F-11
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Allocation of Purchase Price of Acquired Assets
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU No. 2017-01"). Acquisitions that do not meet the definition of a business under this guidance are accounted for as asset acquisitions. In most cases, the Company believes that acquisitions of real estate will no longer be considered a business combination as in most cases substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if the Company determines that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, the screen is not met, and the Company will then perform an assessment to determine whether the set is a business by using the framework outlined in the ASU. If the Company determines that the acquired asset is not a business, the Company will allocate the cost of the acquisition including transaction costs to the assets acquired or liabilities assumed based on their related fair value.
Upon the acquisition of real properties, the Company allocates the purchase price to acquired tangible assets, consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are determined by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered in the analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does amortization periods for the intangible assets exceed the remaining depreciable life of the building.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the Company's reported net income (loss).
Goodwill
The Company records the excess of the cost of an acquired entity over the difference between the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested
F-12
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
for impairment at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. There have been no such events or changes in circumstances during the years ended December 31, 2021 and 2020.
Revenue Recognition and Receivables
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease, which is accounted for in accordance with Accounting Standards Codification ("ASC") 842, Leases (“ASC 842”).
The future minimum rental payments to be received from noncancelable operating leases are approximately $124.2 million and $1.7 million for the years ending December 31, 2022 and 2023, and 0ne thereafter. These figures include future minimum rentals from noncancelable operating leases for residential real estate properties held for sale of approximately $9.8 million and $130,000 for the years ending December 31, 2022 and 2023, and 0ne thereafter. The future minimum rental payments to be received from noncancelable operating leases for both commercial rental properties and antenna rentals are $423,000, $389,000, $336,000, $253,000, and $184,000 for the years ending December 31, 2022 through December 31, 2026, respectively, and $1.1 million thereafter.
Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents and utility reimbursements pursuant to underlying tenant lease agreements. The Company also receives other ancillary fees for administration of leases, late payments, amenities, and revenue sharing arrangements for cable income from contracts with cable providers at the Company's properties (discussed below). A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company records the utility reimbursement income and ancillary charges in the period when the performance obligation is completed, either at a point in time or on a monthly basis as the service is utilized.
The Company has cable income revenue sharing arrangements from contracts with cable providers at the Company's properties. Included in accrued expenses and other liabilities on the consolidated balance sheets at December 31, 2021 and 2020 is a contract liability related to deferred revenue from contracts with cable providers of approximately $1.7 million and $760,000, respectively. The Company recognizes income from these contracts on a straight line basis over the contract period of 10 years to 12 years. During the years ended December 31, 2021, 2020 and 2019, approximately $275,000, $118,000 and $77,000, respectively of revenue from the contract liability was recognized as income.
The Company evaluates its portfolio of operating leases for collectability at both the onset of the underlying leases and on an ongoing basis. Tenant receivables include amounts for which collectability was assessed as probable in accordance with the guidance in ASC 842-30. For tenant receivables, which include base rents, straight-line rentals, expense reimbursements and other revenue or income, the Company also estimates a general allowance for uncollectible accounts under ASC 450-20. The Company determines the collectability of its receivables related to rental revenue by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, and the condition of the general economy and the industry as a whole. If collectability is not probable, the Company adjusts rental income for the amount of the uncollectible revenue.
Due to the COVID-19 pandemic, some residents have experienced difficulty making rent payments and the Company’s receivables have increased compared to historical levels. As of December 31, 2021 and 2020, the Company recorded a $1.6 million and $774,000, respectively, allowance for bad debts to appropriately reflect management’s estimate for uncollectible accounts. The total adjustment to rental and other property income for the years ended December 31, 2021, 2020 and 2019 were $2.0 million, $1.2 million and $299,000 respectively, for provision for bad debt, net of recoveries. The provision for bad debts was recorded as a reduction to rental income in the Company’s consolidated statements of operations and comprehensive loss. The age of the receivables included in the allowance balance at December 31, 2021 was: 13.1% less than 30 days past due, 11.9% 31-60 days past due, 1.2% 61-90 days past due and 73.8% over 90 days past due.
Following the Self- Management Transaction (described in Note 3 below) through the effective date of the Resource REIT Mergers on January 28, 2021, the Company received asset management and property management fees from REIT II and REIT III. The monthly asset management fee was equal to one-twelfth of 1.0% of the cost of each asset held by REIT II and one-twelfth of 1.0% of the appraised value of each asset held by REIT III, without deduction for depreciation, bad debts or other non-cash reserves. The monthly property management fee was calculated based on 4.5% of the gross monthly receipts from REIT II's
F-13
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
and REIT III’s properties. The Company recognized revenue for both asset and property management fees as earned on a monthly basis. The Company had determined under ASC 606 – Revenue from Contracts with Customers (“ASC 606”), that the performance obligation for asset and property management services are satisfied as the services are rendered. The Company was compensated for its services on a monthly basis and these services represent a series of distinct daily services in accordance with ASC 606. As a result of the Resource REIT Mergers, these fees are no longer being paid.
Leases
For operating leases where the Company is the lessor, the underlying leased asset is recognized as real estate on the balance sheet. The Company, as a lessor of multifamily apartment units, has nonlease components associated with these leases (i.e. common area maintenance, utilities, etc.). The Company combines nonlease component revenue streams and accounts for them as a combined component with leasing revenue.
For leases in which the Company is the lessee, primarily consisting of office leases, a parking lot lease, and office equipment leases, the Company recognizes a right-of-use (“ROU”) asset and a lease liability equal to the present value of the minimum lease payments. Operating leases are included in operating lease ROU assets and operating lease liabilities in the Company’s consolidated balance sheets. The Company uses a market rate for equipment leases, when readily determinable, in calculating the present value of lease payments. Otherwise, the incremental borrowing rate is used. The operating lease ROU asset includes any lease payments and excludes lease incentives. Operating lease terms may include options to extend the lease when it is reasonably certain the lease will be extended. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Income Taxes
The Company elected to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. As of December 31, 2021 and 2020, the Company treated one of its subsidiaries as a TRS.
The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company. The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.
F-14
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations. The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for the tax return years 2017 and prior.
Earnings Per Share
Basic earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. Distributions declared per common share assume each share was issued and outstanding each day during the period or based upon the two-class method, whichever is more dilutive.
The following table sets forth the computation of basic and diluted earnings per share for the periods presented (in thousands, except per share amounts):
|
| Years Ended December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Numerator for earnings per share: |
|
|
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 54,903 |
|
| $ | (24,133 | ) |
| $ | (1,747 | ) |
Redemption of preferred OP units |
|
| (342 | ) |
|
| — |
|
|
| — |
|
Preferred return to preferred OP unit holders |
|
| (3,161 | ) |
|
| (1,406 | ) |
|
| — |
|
Net income (loss) after preferred return |
|
| 51,400 |
|
|
| (25,539 | ) |
|
| (1,747 | ) |
Less: Allocation of income to preferred unit holders attributable to noncontrolling interest |
|
| 158 |
|
|
| 101 |
|
|
| — |
|
Less: Net loss attributable to noncontrolling interest |
|
| 696 |
|
|
| 279 |
|
|
| — |
|
Net income (loss) attributable to common stockholders |
| $ | 52,254 |
|
| $ | (25,159 | ) |
| $ | (1,747 | ) |
|
|
|
|
|
|
|
|
|
| |||
Denominator for earnings per share: |
|
|
|
|
|
|
|
|
| |||
Weighted average common shares outstanding |
|
| 153,820 |
|
|
| 85,531 |
|
|
| 85,861 |
|
Denominator for basic earnings per share |
|
| 153,820 |
|
|
| 85,531 |
|
|
| 85,861 |
|
Weighted average unvested restricted stock |
|
| 69 |
|
|
| — |
|
|
| — |
|
Denominator for diluted earnings per share |
|
| 153,889 |
|
|
| 85,531 |
|
|
| 85,861 |
|
|
|
|
|
|
|
|
|
|
| |||
Earnings per weighted average common share: |
|
|
|
|
|
|
|
|
| |||
Basic |
| $ | 0.34 |
|
| $ | (0.29 | ) |
| $ | (0.02 | ) |
Diluted |
| $ | 0.34 |
|
| $ | (0.29 | ) |
| $ | (0.02 | ) |
NaNne of the shares of convertible stock (see Note 12) or 467,461 unvested performance awards that vest only upon a liquidation event are included in the diluted earnings per share calculations, because the necessary conditions for conversion have not been satisfied as of December 31, 2021 (were such date to represent the end of the contingency period).
Prior to their redemption and/or conversion, net losses attributable to outstanding OP Common Units and OP Preferred Units were included in net (income) loss attributable to noncontrolling interest, and therefore, were excluded from the calculation of income (loss) per common share, basic and diluted, for all periods presented.
Reclassifications
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current-year presentation. On the consolidated statements of operations, Management fees- related party were split into two line items, Property management fees – related party and Asset management fees- related party; certain administrative expenses previously reflected in rental operating expenses are now included in general and administrative expenses; general and administrative is now presented in two line items for corporate and property related; and casualty losses have been broken out from rental operating expenses and presented on a separate line. On the consolidated balance sheet, Operating lease right-of-use assets is included in
F-15
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Prepaid expenses and other assets, and Operating lease liabilities are now included in Accounts payable and accrued expenses. All shares presented for prior periods have been converted based on the exchange ratio of 1.22423 (See REIT I Merger in Note 1). The impact of the reclassifications made to prior year amounts are not material and did not affect net loss.
Adoption of New Accounting Standards
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848).” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. During the year ended December 31, 2021, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
NOTE 3 - SELF-MANAGEMENT TRANSACTION
On September 8, 2020, OP I, entered into the Self-Management Transaction with Resource PM Holdings LLC (“PM Holdings”), Resource NewCo LLC (“Advisor Holdings”), C-III Capital Partners LLC (“C-III” or “PM Contributor”), RRE Legacy Co, LLC (formerly known as Resource Real Estate, LLC) (“Advisor Contributor” or “Resource Real Estate”) and Resource America, Inc. (“RAI”), pursuant to which C-III and RAI contributed to OP I all of the membership interests in PM Holdings and Advisor Holdings and certain assets related to the business of PM Holdings and Advisor Holdings including 100% of the membership interests in PM Holdings and Advisor Holdings and $659,000 of leasehold improvements and furniture in exchange for approximately 6.2 million common operating partnership units in OP I (“OP I Common Units”) and 319,965 Series A Preferred Units in OP I (“OP I Preferred Units”) (collectively “OP I Units”). Additional consideration included the following deferred payments in cash: (i) $7.5 million paid upon the effectiveness of the Resource REIT Merger; (ii) six monthly payments of $2.0 million, totaling $12.0 million, for the six months following the closing of the Self-Management Transaction and (iii) 12 monthly payments of $625,000, totaling $7.5 million, for the 12 months following the closing of the Self-Management Transaction. At the time of the REIT I Partnership Merger, the OP I Common Units converted into approximately 7.5 million OP Common Units; the participation rights of the OP I Preferred Units increased to 391,711 OP Preferred Units.
On September 13, 2021, the Company entered into a letter agreement with C-III and Legacy Co, and on September 14, 2021, the Company redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of common stock of the Company.
As part of the Self-Management Transaction, REIT I paid outstanding obligations due to RAI of approximately $811,000, presented in the table below as “Net working capital” consisting primarily of approximately $4.3 million in accrued management fees transferred to the Company as well as approximately $150,000 of prepaid rent, software subscriptions, and security deposits. Additionally, the Company assumed payroll liabilities of approximately $2.9 million and approximately $684,000 due to the third-party property manager, Greystar. The operating leases for office space in Philadelphia, Pennsylvania and Denver, Colorado were assumed. In accordance with ASC 842, Leases, an operating lease right of use asset and liability were calculated and reflected as part of the Self-Management Transaction.
As part of the Self-Management Transaction, OP I hired the workforce currently responsible for the management and day-to-day real estate and accounting operations of the Company under the various agreements acquired.
As part of the Self-Management Transaction, REIT I recorded approximately $2.3 million of transaction costs during the year ended December 31, 2020.
Under the terms of the Self-Management Transaction, the following consideration was given in exchange (in thousands):
F-16
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Fair value of OP I Units issued |
| $ | 128,200 |
|
Net working capital |
|
| 811 |
|
Subsequent consideration |
|
| 27,000 |
|
Net consideration |
| $ | 156,011 |
|
The Self-Management Transaction was accounted for as a business combination in accordance with ASC 805, which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date and transaction costs to be expensed. The fair value of the OP Units issued was based on a valuation report prepared by a third-party valuation specialist that was subject to management’s review and approval. The following table summarizes the purchase price allocation (dollars in thousands):
Assets: |
|
|
| |
Due from related parties |
| $ | 4,299 |
|
Prepaid expenses and other assets |
|
| 150 |
|
Goodwill |
|
| 154,531 |
|
Property and equipment |
|
| 659 |
|
Operating lease right-of-use assets |
|
| 3,244 |
|
Total assets acquired |
| $ | 162,883 |
|
|
|
|
| |
Liabilities: |
|
|
| |
Other liabilities |
| $ | 3,628 |
|
Operating lease liabilities |
|
| 3,244 |
|
Total liabilities assumed |
|
| 6,872 |
|
Net assets acquired |
| $ | 156,011 |
|
The allocation of the purchase price above required a significant amount of judgment and represented management’s best estimate of the fair value as of the acquisition date.
Goodwill
In connection with the Self-Management Transaction, the Company recorded goodwill of approximately $154.5 million as a result of the consideration exceeding the fair value of the net assets acquired. Goodwill represents the estimated future benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill recorded represents the Company's management structure and the cost savings associated with acquiring the Advisor and eliminating the management fee arrangement.
F-17
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental cash flow information (in thousands):
|
| Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Non-cash financing and investing activities: |
|
|
|
|
|
|
|
|
| |||
Stock issued pursuant to distribution reinvestment plan |
| $ | 10,575 |
|
| $ | 6,085 |
|
| $ | 24,499 |
|
Accrual for construction in process |
|
| 2,237 |
|
|
| 848 |
|
|
| 2,470 |
|
Repayments on borrowings through refinancing |
|
| 461,968 |
|
|
| 130,539 |
|
|
| 58,350 |
|
Lease liabilities arising from obtaining right-of-use assets |
|
| — |
|
|
| — |
|
|
| 526 |
|
Accrued allocation of income to preferred unit holders |
|
| — |
|
|
| 1,120 |
|
|
| — |
|
Deferred financing costs, interest, and fees funded through refinancing |
|
| — |
|
|
| 3,245 |
|
|
| 973 |
|
|
|
|
|
|
|
|
|
|
| |||
Non-cash activity related to sales: |
|
|
|
|
|
|
|
|
| |||
Mortgage notes payable settled directly with proceeds from sale of rental property |
|
| 65,900 |
|
|
| — |
|
|
| 61,041 |
|
Non-cash activity related to Self-Management Transaction: |
|
|
|
|
|
|
|
|
| |||
Due to related parties for acquisition of net assets acquired in Self-Management Transaction |
|
| — |
|
|
| 19,125 |
|
|
| — |
|
Operating Partnership units issued in exchange for net assets acquired in Self-Management Transaction |
|
| — |
|
|
| 128,200 |
|
|
| — |
|
Non-cash activity related to Resource REIT Merger: |
|
|
|
|
|
|
|
|
| |||
Net assets acquired in REIT II Merger in exchange for common shares |
|
| 543,840 |
|
|
| — |
|
|
| — |
|
Net assets acquired in REIT III Merger in exchange for common shares |
|
| 101,435 |
|
|
| — |
|
|
| — |
|
Implied REIT I common stock issued in exchange for net assets acquired in Resource REIT Merger |
|
| 645,275 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
|
|
| |||
Interest |
| $ | 41,865 |
|
| $ | 25,106 |
|
| $ | 35,936 |
|
NOTE 5 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, debt service, and capital improvements. The following table presents a summary of the components of the Company's restricted cash (in thousands):
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Real estate taxes |
| $ | 6,879 |
|
| $ | 7,910 |
|
Insurance |
|
| 1,486 |
|
|
| 1,350 |
|
Debt service reserve |
|
| 157 |
|
|
| 2,045 |
|
Capital improvements |
|
| 1,898 |
|
|
| 3,464 |
|
Total |
| $ | 10,420 |
|
| $ | 14,769 |
|
|
|
|
|
|
|
|
F-18
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
NOTE 6 - INVESTMENTS IN REAL ESTATE
As of December 31, 2021, the Company's investments in rental properties consisted of 45 apartment properties that contain 13,707 units. The following table summarizes the Company’s investments in rental properties (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Land |
| $ | 293,492 |
|
| $ | 196,355 |
|
Building and improvements |
|
| 1,799,028 |
|
|
| 929,323 |
|
Furniture, fixtures and equipment |
|
| 53,438 |
|
|
| 46,879 |
|
Construction in progress |
|
| 8,318 |
|
|
| 1,374 |
|
|
|
| 2,154,276 |
|
|
| 1,173,931 |
|
Less: accumulated depreciation |
|
| (278,229 | ) |
|
| (275,956 | ) |
|
| $ | 1,876,047 |
|
| $ | 897,975 |
|
Depreciation expense for the years ended December 31, 2021, 2020, and 2019 was approximately $88.5 million, $51.5 million, and $53.8 million, respectively.
Assets Held for Sale
During the three months ended December 31, 2021, the Company entered into agreements to sell 3 rental properties, Maxwell Townhomes, The Bryant at Yorba Linda and Sunset Ridge, with net book values totaling approximately $150.2 million. The Company confirmed the intent and ability to sell these properties in their present conditions and these properties qualified for held for sale accounting treatment upon meeting all applicable criteria prior to December 31, 2021, at which time depreciation ceased. As such, the assets associated with these properties were separately classified and included as assets held for sale on the Company's consolidated balance sheet as of December 31, 2021. The Company completed the sales of Maxwell Townhomes and The Bryant at Yorba Linda on January 20, 2022 and Sunset Ridge on March 22, 2022.
The following table summarizes the Company's investments in rental properties held for sale (in thousands):
|
| December 31, 2021 |
| |
Land |
| $ | 58,577 |
|
Building and improvements |
|
| 134,489 |
|
Furniture, fixtures and equipment |
|
| 8,179 |
|
Construction in progress |
|
| 97 |
|
|
|
| 201,342 |
|
Less: accumulated depreciation |
|
| (51,166 | ) |
Assets held for sale - rental properties |
| $ | 150,176 |
|
Resource REIT Mergers
Both the REIT I Merger and the REIT III Merger (collectively the “Resource REIT Mergers”) were accounted for as asset acquisitions under ASC 805 as substantially all of the fair value of the gross assets acquired are Class B multifamily rental properties. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values.
Based on an evaluation of the relevant factors and the guidance in ASC 805, all of which required significant management judgment, the entity in the Resource REIT Mergers considered the acquirer for accounting purposes was not the legal acquirer. In order to make this determination, various factors were analyzed, including which entity issued its equity interests, relative voting rights, existence of minority interests (if any), control of the board of directors, management composition, relative size, transaction initiation, and other factors such as operational structure, and relative composition of employees, and
F-19
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
other factors. The strongest factors identified were the relative size of the companies and management composition. Based on financial measures, REIT I was a larger entity than REIT II and REIT III. REIT I had more common stock outstanding at a higher net asset value than REIT II and REIT III and upon the consummation of the Resource REIT Mergers was issued more shares of REIT II than were held by REIT II stockholders or than were issued to REIT III stockholders in the REIT III Merger. REIT I also contained the management entity. Based on these factors, REIT I was concluded to be the accounting acquirer.
The assets (including identifiable intangible assets) and liabilities of REIT II and REIT III as of the effective time of the respective Resource REIT Mergers were recorded at their respective relative fair values and added to those of REIT I. Transaction costs incurred by REIT I in connection with the Resource REIT Mergers were capitalized in the period in which the costs were incurred and services were received. The total purchase price was allocated to the individual assets acquired and liabilities assumed based upon their relative fair values based on appraisals and other methods. Intangible assets were recognized at their relative fair values in accordance with ASC 805.
The REIT I Merger was effected by each of REIT I’s 70.3 million issued and outstanding shares of common stock being converted into the right to receive 1.22423 shares (“REIT I Exchange Ratio”) of common stock of REIT II (“REIT II Common Stock”), for a total of 86.1 million newly issued shares of REIT II Common Stock. The 60.0 million issued and outstanding shares of REIT II Common Stock that were outstanding at the time of the REIT I Merger remain outstanding. As the REIT I Merger is considered a reverse acquisition, the total consideration transferred was computed on the basis of an estimated net asset value per share of the merged entity of $9.06 per share as of January 28, 2021, divided by the REIT I Exchange Ratio to compute the estimated REIT I value per share as of January 28, 2021 of approximately $11.09 per share. Consideration transferred is calculated as such (in thousands except share and per share data):
Merged entity estimated net asset value as of Resource REIT Merger date |
| $ | 9.06 |
|
REIT I exchange ratio |
|
| 1.22423 |
|
REIT I estimated value per share as of January 28, 2021 |
| $ | 11.09 |
|
|
|
|
| |
REIT II common stock outstanding as of January 28, 2021 |
|
| 60,026,513 |
|
REIT I exchange ratio |
|
| 1.22423 |
|
Implied REIT I common stock issued as consideration |
|
| 49,032,055 |
|
REIT I estimated value per share as of January 28, 2021 |
| $ | 11.09 |
|
Value of implied REIT I common stock issued as consideration |
| $ | 543,840 |
|
The allocation of the values of the real estate and other assets and liabilities as of January 28, 2021, inclusive of $5.0 million in estimated capitalized transaction costs and elimination of intercompany balances between REIT I and REIT II, is as follows (in thousands):
F-20
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Assets: |
|
|
| |
Land |
| $ | 127,920 |
|
Building and improvements |
|
| 940,630 |
|
Intangibles |
|
| 6,765 |
|
Cash and restricted cash |
|
| 67,563 |
|
Other assets |
|
| 6,062 |
|
Total assets |
| $ | 1,148,940 |
|
|
|
|
| |
Liabilities: |
|
|
| |
Mortgage notes payable, net of $3.0 million discount |
| $ | 580,676 |
|
Due to related parties |
|
| 988 |
|
Accounts payable and other liabilities |
|
| 18,456 |
|
Total liabilities |
|
| 600,120 |
|
|
|
|
| |
Fair value of net assets acquired |
| $ | 548,820 |
|
Less: REIT I's Merger expenses |
|
| 4,980 |
|
Fair value of net assets acquired, less REIT I's Merger expenses |
| $ | 543,840 |
|
Although REIT I is the accounting acquirer, REIT II is the legal acquirer of both REIT III and REIT I. As such, the 12.1 million issued and outstanding shares of REIT III common stock were converted into the right to receive 0.925862 newly issued shares of REIT II Common Stock. Consideration transferred is calculated as such (in thousands except share and per share data):
REIT III common stock outstanding as of January 28, 2021 |
|
| 12,092,466 |
|
REIT III exchange ratio |
|
| 0.925862 |
|
REIT II shares issued as consideration |
|
| 11,195,955 |
|
REIT I exchange ratio |
|
| 1.22423 |
|
Implied REIT I common stock issued as consideration |
|
| 9,145,303 |
|
REIT I estimated value per share as of January 28, 2021 |
| $ | 11.09 |
|
Value of implied REIT I common stock issued as consideration |
| $ | 101,435 |
|
The allocation of the values of the real estate and other assets and liabilities as of January 28, 2021, inclusive of approximately $929,000 in estimated capitalized transaction costs and elimination of intercompany balances between REIT I and REIT III, is as follows (in thousands):
F-21
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Assets: |
|
|
| |
Land |
| $ | 43,733 |
|
Building and improvements |
|
| 184,400 |
|
Intangibles |
|
| 1,609 |
|
Cash and restricted cash |
|
| 22,969 |
|
Other assets |
|
| 626 |
|
Total assets |
| $ | 253,337 |
|
|
|
|
| |
Liabilities: |
|
|
| |
Mortgage notes payable, net of $2.1 million premium |
| $ | 147,191 |
|
Due to related parties |
|
| 836 |
|
Accounts payable and other liabilities |
|
| 2,946 |
|
Total liabilities |
|
| 150,973 |
|
|
|
|
| |
Fair value of net assets acquired |
| $ | 102,364 |
|
Less: REIT I's Merger expenses |
|
| 929 |
|
Fair value of net assets acquired, less REIT I's Merger expenses |
| $ | 101,435 |
|
Valuation and Purchase Price Allocation
The Company obtained third party appraisals for all properties included in the Resource REIT Mergers which the Company utilized to allocate the purchase price based on the relative fair value. Land was valued based on similar (but not identical) transactions in the subject properties market with the appraiser making adjustments based on both qualitative and quantitative data (Level 3). The buildings were valued based on the “as-if-vacant” value which is estimated using an income, or discounted cash flow model, using market assumptions pertaining to, among other items, absorption period, lease-up costs, market rent, operating expenses and terminal capitalization and discount rates (Level 3). Capitalization rates used in the analysis ranged from 4.5% to 5.5% and discount rates ranged from 5% to 7.25%. Building improvements and furniture, fixtures and equipment were valued using the cost approach, in which the appraiser utilized Marshall Valuation Service as the source for the replacement cost and life estimates and included soft costs and entrepreneurial incentive. The total cost estimates were depreciated based on the estimated effective ages of each asset compared to their anticipated lives. In place leases were valued using market rent estimates for units based on recently signed leases as well as market rents signed at competing properties. A downtime estimate was then applied to each tenant based upon their market leasing assumption. The lease in place value is calculated as the total market rent multiplied by the downtime of each tenant, aggregated by unit type (Level 3). Assumed debt was valued based on recently closed transactions and investor surveys for spreads and rates applicable to each property. The market interest rate was calculated using the most applicable treasury rate based on the remaining term of the debt and applying a market-derived spread (Level 3).
The revenue and net loss of the 23 properties (6,508 units) acquired in the Resource REIT Mergers is as follows for the year ended December 31, 2021 (in thousands):
|
| REIT II |
|
| REIT III |
|
| Total |
| |||
Revenue |
| $ | 84,212 |
|
| $ | 20,778 |
|
| $ | 104,990 |
|
Net loss |
| $ | (5,696 | ) |
| $ | (2,322 | ) |
| $ | (8,018 | ) |
Pro Forma Financial Information (unaudited)
The following condensed pro forma operating information is presented as if the Resource REIT Mergers and the Self–Management Transaction had been included in operations as of January 1, 2020 (in thousands, except per share data):
F-22
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
|
| Year Ended |
|
| Year Ended |
| ||
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||
Revenue |
| $ | 248,584 |
|
| $ | 239,902 |
|
Net income (loss) |
| $ | 63,457 |
|
| $ | (63,985 | ) |
Net loss attributable to noncontrolling interests |
| $ | 373 |
|
| $ | 3,287 |
|
Net income (loss) attributable to common stockholders |
| $ | 60,327 |
|
| $ | (65,178 | ) |
Net income (loss) to common stockholders per share, basic and diluted |
| $ | 0.38 |
|
| $ | (0.41 | ) |
Dispositions
The Company disposed of 5 properties during the year ended December 31, 2021 and 2 properties during the year ended December 31, 2019. There were 0 dispositions during the years ended December 31, 2020. The following table presents details of the Company’s disposition activity during the years ended December 31, 2021 and December 31, 2019 (in thousands):
Multifamily Community |
| Location |
| Sale Date |
| Contract Sales Price |
|
| Net Gain on Disposition |
|
| Revenue Attributable to Property Sold |
|
| Net (Loss) Income Attributable to Properties Sold |
| ||||
2021 Dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Evergreen at Coursey |
| Baton Rouge, LA |
| June 29, 2021 |
| $ | 49,751 |
|
| $ | 18,734 |
|
| $ | 2,272 |
|
| $ | (107 | ) |
The Retreat at Rocky Ridge |
| Hoover, AL |
| October 12, 2021 |
|
| 25,400 |
|
|
| 17,665 |
|
|
| 1,962 |
|
|
| 384 |
|
Tech Center Square |
| Newport News, VA |
| October 21, 2021 |
|
| 36,700 |
|
|
| 22,949 |
|
|
| 2,407 |
|
|
| 463 |
|
The Brookwood |
| Homewood, AL |
| October 26, 2021 |
|
| 45,300 |
|
|
| 6,385 |
|
|
| 3,134 |
|
|
| (210 | ) |
Pines of York |
| Yorktown, VA |
| November 2, 2021 |
|
| 45,000 |
|
|
| 27,932 |
|
|
| 2,926 |
|
|
| 254 |
|
|
|
|
|
|
| $ | 202,151 |
|
| $ | 93,665 |
|
| $ | 12,701 |
|
| $ | 784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
2019 Dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Williamsburg |
| Cincinnati, OH |
| March 8, 2019 |
| $ | 70,000 |
|
| $ | 34,575 |
|
| $ | 2,151 |
|
| $ | (1,431 | ) |
Pinehurst |
| Kansas City, MO |
| December 20, 2019 |
|
| 12,310 |
|
|
| 4,235 |
|
|
| 1,427 |
|
|
| (460 | ) |
|
|
|
|
|
| $ | 82,310 |
|
| $ | 38,810 |
|
| $ | 3,578 |
|
| $ | (1,891 | ) |
NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET AND GOODWILL
Identified intangible assets, net, relate to in-place apartment unit rental and antennae leases. The net carrying value of the acquired in-place leases totaled 0 and $5,000 as of December 31, 2021 and 2020, respectively, net of accumulated amortization of approximately $32.3 million and $27.1 million, respectively. The net carrying value of acquired in-place leases were fully amortized in the third quarter of 2021.
Amortization of the in-place apartment unit rentals was approximately $8.4 million for the year ended December 31, 2021. There was 0 amortization of in-place apartment unit rentals for the year ended December 31, 2020 and 2019.
As of December 31, 2021 and 2020, the Company had approximately $154.5 million and $154.9 million, respectively, of goodwill included on the consolidated balance sheets. The table below presents the rollforward of activity in goodwill for the year ended December 31, 2021:
F-23
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Balance, January 1, 2021 |
| $ | 154,935 |
|
Sale of Evergreen at Coursey Place |
|
| (268 | ) |
Sale of Pines of York |
|
| (136 | ) |
Balance, December 31, 2021 |
| $ | 154,531 |
|
NOTE 8 - DEBT
The following table presents a summary of the Company's debt, net (in thousands):
|
|
|
|
|
|
|
| Weighted Average Maturity in Years at |
| |||
|
| December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2021 |
| |||
Mortgage notes payable, net - variable rate |
| $ | 607,711 |
|
| $ | 675,791 |
|
|
| 3.86 |
|
Mortgage notes payable, net - fixed rate |
|
| 801,140 |
|
|
| 150,195 |
|
|
| 6.29 |
|
Total mortgage notes payable, net |
| $ | 1,408,851 |
|
| $ | 825,986 |
|
|
| 5.24 |
|
Revolving credit facility |
| $ | 0 |
|
| $ | 0 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
| |||
Weighted average interest rate on mortgages - variable |
|
| 2.05 | % |
|
| 2.12 | % |
|
|
| |
Weighted average interest rate on mortgages - fixed |
|
| 2.96 | % |
|
| 4.03 | % |
|
|
| |
Weighted average interest rate on revolving credit facility |
|
| 0 |
|
|
| 0 |
|
|
|
| |
Weighted average interest rate on total debt |
|
| 2.56 | % |
|
| 2.46 | % |
|
|
|
The following table presents the Company's annual future principal payments on outstanding borrowings as of December 31, 2021 (in thousands):
2022 |
| $ | 38,899 |
|
2023 |
|
| 39,943 |
|
2024 |
|
| 226,578 |
|
2025 |
|
| 191,219 |
|
2026 |
|
| 95,567 |
|
Thereafter |
|
| 823,115 |
|
|
| $ | 1,415,321 |
|
Structured Credit Facility
On January 28, 2021, subsidiaries of the Company (collectively, “Borrower”) entered into a structured credit facility transaction with CBRE Multifamily Capital, Inc. for delivery of loans and/or advances to Fannie Mae (the “Facility”) for a term of 15 years (the “Facility Termination Date”). Pursuant to the terms of the loan documents for the Facility, the lender agreed to make advances at both fixed and variable rates to Borrower during the term of the Facility provided that Borrower satisfies certain customary conditions as set forth in the Facility loan documents (the “Loan Documents”), including debt service coverage tests and loan-to-value tests. The fixed rate advances in the Facility may have terms not less than five or more than 15 years from the closing of such advance and variable rate advances in the Facility may have terms not less than five or more than 10 years from the closing of such advance. All advances must have maturity dates that do not exceed the Facility Termination Date. Borrower has the option to convert variable rate advances to fixed rate advances beginning on the first day of the second year of the variable rate advance term and ending seven years prior to the Facility Termination Date, subject to the satisfaction of customary requirements set forth in the Loan Documents.
The Facility is non-recourse to the Borrower except for the customary exceptions to non-recourse provisions of the Loan Documents (“carve-outs”). The Borrower’s obligations for the carve-outs are guaranteed solely by the Borrowers. The Company is the key principal under the Facility and as such must continue to indirectly own an interest in each Borrower and is subject to certain transfer restrictions with respect to its ownership interest in each Borrower as provided in the Loan Documents. In addition, the Facility contains customary representations and warranties, financial and other covenants, events of default and remedies typical for this type of facility.
F-24
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The initial advance of approximately $495.2 million under the Facility occurred on January 28, 2021 and is secured by the following 12 multifamily properties located in Arizona, Colorado, Georgia, Oregon and Texas (including 5 properties formerly held by REIT II): Estates at Johns Creek, Heritage Pointe, Providence in the Park, South Lamar Village, Verona Apartments, Westside, 81 Fifty at West Hills, Adair off Addison I & II, Montclair Terrace, Palmer at Las Colinas, and Uptown Buckhead. The proceeds from the initial advance were used to refinance or pay off $462.0 million of the Company’s debt. Loans that were repaid in full were loans secured by Vista Apartment Homes, Cannery Lofts, Retreat at Rocky Ridge, Tech Center Square, and Aston at Cinco Ranch. The Company recorded approximately $4.6 million of extinguishment costs upon the refinance for the year ended December 31, 2021 including approximately $2.4 million in prepayment penalties, included in Interest Expense on the Consolidated Statements of Operations.
Additional information about the initial advance on the Facility, which is included in Mortgage notes payable, net on the Consolidated Balance Sheet as of December 31, 2021, is as follows (in thousands):
Collateral |
| Original Loan Amount |
|
| Maturity Date |
| Type |
| Annual Interest Rate |
| ||
Fixed Advance 1 |
| $ | 235,205 |
|
| 2/1/2031 |
| Fixed |
|
| 2.79 | % |
Fixed Advance 2 |
| $ | 235,205 |
|
| 2/1/2028 |
| Fixed |
|
| 2.62 | % |
Floating Advance |
| $ | 24,760 |
|
| 2/1/2031 |
| Floating (1) |
|
| 2.11 | % |
(1) Floating rate based on 30-day average SOFR plus a fixed margin of 2.06%.
Revolving Credit Facility
On May 20, 2021, the Company entered into a Credit Agreement (the “Credit Facility”) for which BofA Securities, Inc. acted as sole book runner and sole lead arranger and Bank of America, N.A. acted as administrative agent and L/C issuer (the “Credit Agreement”). The Credit Facility is a secured revolving credit facility in the initial amount of approximately $100.0 million, including approximately $15.0 million available in letters of credit, subject to the Company's ability to increase the lenders’ aggregate commitment during the term of the Credit Agreement to a maximum of approximately $500.0 million, subject to certain limitations. The availability of borrowings under the Credit Facility will be based on the value of a pool of eligible income-producing multifamily properties owned, directly or indirectly and from time to time, by the Company or subsidiaries of the Company. The Credit Facility is a three-year interest-only facility with all outstanding principal due at maturity, subject to a one-year extension option. The Credit Facility may be prepaid or terminated at any time without penalty. The proceeds of the Credit Facility may be used for general corporate purposes, including refinancing existing indebtedness and working capital. The Credit Facility is guaranteed by the Company and certain subsidiaries of the Company, and secured by a pledge of the equity interests of certain of the Company’s subsidiaries.
Borrowings under the Credit Facility will bear interest, at the Company’s option, at either the Eurodollar Rate (defined as a rate equal to LIBOR or a comparable or successor rate) for a designated interest period plus an applicable margin, or the base rate (as defined as the highest of the Bank of America prime rate, the federal funds rate plus 0.50% or the Eurodollar Rate plus 1.0%) plus an applicable margin. The anticipated applicable margin for borrowings under the Credit Facility for base rate loans will range from 0.60% to 1.20% per annum and the applicable margin for Eurodollar Rate loans will range from 1.60% to 2.20% per annum, depending on the ratio of consolidated total indebtedness to total asset value (as such terms are defined in the Credit Agreement), with the lowest rate applying if such ratio is less than 45%, and the highest rate applying if such ratio is equal to or greater than 60%. The Company is also required to pay a fee to the lenders that is assessed on the unused portion of the facility. A default rate will apply on all obligations in the event of default under the Credit Facility at 2.0% above the otherwise applicable rate.
The Company is also subject to certain financial covenants, including (i) the ratio of the Company’s consolidated indebtedness to total asset value not to exceed 65% as of the last day of each of the first six fiscal quarters ending after May 20, 2021 and 60% as of the last day of each fiscal quarter thereafter; (ii) consolidated secured recourse indebtedness other than the Credit Facility not to exceed 5% of total asset value; (iii) consolidated fixed charge coverage ratio not less than 1.35x to 1.00x as of the last day of each of the first four fiscal quarters ending after May 20, 2021 and 1.50x to 1.00x as of the last day of each
F-25
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
fiscal quarter thereafter; and (iv) tangible net worth of not less $678.8 million, plus 75% of the net proceeds of any future equity issuances by the Company or any of its consolidated subsidiaries. The Company is in compliance with each of the applicable financial covenants as of December 31, 2021.
There were 0 borrowings under the Credit Facility during the year ended December 31, 2021. As of December 31, 2021, availability under the Credit Facility was approximately $100.0 million and was secured by pledges of the ownership interests in the subsidiaries that own 6 apartment communities: Vista Apartment Homes, Cannery Lofts, Aston at Cinco Ranch, Bay Club, Windbrooke and Perimeter 5550. The Company has approximately $1.1 million of deferred finance costs for the Credit Facility which is included in Prepaid Expenses and Other Assets on the Consolidated Balance Sheet as of December 31, 2021, which will be amortized over the term of the Credit Facility. During the year ended December 31, 2021, approximately $230,000 of amortization of deferred financing costs related to the Credit Facility were included in interest expense. Accumulated amortization of deferred financing costs related to the Credit Facility as of December 31, 2021 was approximately $230,000 and the net book value of deferred financing costs related to the Credit Facility as of December 31, 2021 related to mortgage notes payable was approximately $892,000. In addition, the Company paid $188,333 in unused fees for the year ended December 31, 2021 on the Credit Facility.
Other
Mortgage notes payable assumed as part of both the Resource REIT Mergers and the acquisitions of Point Bonita Apartment Homes, Paladin (Pines of York and Evergreen at Coursey (prior to their sales)), and Maxwell were recorded at their fair values. The premium or discount is amortized over the remaining term of the loans and included in interest expense. The net premium or discount included in the consolidated balance sheets as of December 31, 2021 was approximately $162,000. For the years ended December 31, 2021 ,2020 and 2019, interest expense was increased by approximately $21,000 and reduced by approximately $315,000 and $333,000, respectively, for the amortization of the premium or discount.
As of December 31, 2021, the Company owned 37 apartment communities that served as collateral for mortgages payable. All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty on the majority of mortgages held.
The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. These exceptions are referred to as “carveouts.” The Company has guaranteed the carveouts under mortgage notes, other than the notes with respect to the Credit Facility, by executing a guarantee with respect to the properties. In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents. The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. As of December 31, 2021, the Company believes that there are no material defaults or instances of noncompliance in regards to any of these mortgages payable.
The Company had a $74.4 million mortgage note payable secured by The Bryant at Yorba Linda which included net worth, liquidity, and debt service coverage ratio covenants. The Company repaid the debt upon the sale of the property on January 20, 2022.
During the three months ended December 31, 2021, the Company repaid four mortgage notes payable (Perimeter 5550, Bay Club, Windbrooke, and Trailpoint at the Woodlands) and paid approximately $938,000 in prepayment penalties, included in Interest Expense on the Consolidated Statements of Operations.
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the years ended December 31, 2021, 2020 and 2019, $3.8 million, $1.5 million and $2.3 million, respectively, of amortization of deferred financing costs was included in interest expense. Accumulated amortization of deferred financing costs related to mortgages payable as of December 31, 2021 and 2020 was approximately $4.6 million and $6.3 million, respectively and the net book value of deferred financing costs as of December 31, 2021 and 2020 related to mortgage notes payable was $6.3 million and $5.7 million, respectively.
F-26
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
NOTE 9 – LEASES
As the lessee, the Company’s operating leases primarily consist of office leases, a parking lot lease and office equipment leases. These operating leases have remaining terms ranging from less than one year to six years. Some of the leases include options to extend the lease for up to an additional five years. Only those rental periods reasonably certain to be extended beyond the initial term expiration are included within the calculation of the operating lease liability. As of December 31, 2021, the payments due under the contractually obligated portion of these leases totaled $2.8 million. The market rate is used for leases, when readily determinable, in calculating the present value of lease payments for the operating lease liability. Otherwise, the incremental borrowing rate based on the information available at commencement date is used. As of December 31, 2021, the weighted average remaining lease term was 4.69 years and the weighted average discount rate was 2.21% for the Company’s operating leases. As of December 31, 2021, the Company included approximately $2.6 million in its consolidated balance sheet for operating lease right-of-use assets and liabilities.
As a part of the Self-Management Transaction, the Company assumed an office lease in Philadelphia, Pennsylvania (“the Philadelphia office lease”). The Philadelphia office lease has a remaining five-year term expiring September 2026 and requires current monthly minimum rental payments of $45,034 plus a proportionate share of the utilities, taxes and other operating expenses of the building.
The Company’s lease expense related to the parking lot lease for the years ended December 31, 2021, 2020 and 2019 was approximately $36,000, which is included in rental operating expenses in the consolidated statements of operations. The Company’s lease expense related to all other leases for the years ended December 31, 2021, 2020 and 2019 was approximately $624,000, $253,000 and $126,000, respectively, which is included in general and administrative expenses in the consolidated statements of operations.
The following table presents the Company’s annual payments for the operating lease liabilities (including reasonably assured extension periods) for each of the next five 12–month periods ending December 31, and thereafter (in thousands):
Future minimum operating lease payments: |
|
|
| |
2022 |
| $ | 583 |
|
2023 |
|
| 572 |
|
2024 |
|
| 573 |
|
2025 |
|
| 586 |
|
2026 |
|
| 448 |
|
Thereafter |
|
| — |
|
Total future minimum operating lease payments |
|
| 2,762 |
|
Less: imputed interest |
|
| (138 | ) |
Operating lease liabilities |
| $ | 2,624 |
|
F-27
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
NOTE 10 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in each component of the Company's accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Balance, January 1, 2019 |
| $ | (474 | ) |
Reclassification adjustment for realized loss on designated derivatives |
|
| 344 |
|
Designated derivatives, fair value adjustments |
|
| (88 | ) |
Balance, December 31, 2019 |
|
| (218 | ) |
Reclassification adjustment for realized loss on designated derivatives |
|
| 124 |
|
Designated derivatives, fair value adjustments |
|
| (306 | ) |
Noncontrolling interest |
|
| 9 |
|
Balance, December 31, 2020 |
|
| (391 | ) |
Reclassification adjustment for realized loss on designated derivatives |
|
| 42 |
|
Designated derivatives, fair value adjustments |
|
| 620 |
|
Noncontrolling interest |
|
| (9 | ) |
Balance, December 31, 2021 |
| $ | 262 |
|
NOTE 11 – CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company had relationships with several related parties.
Relationship with C-III and RAI
As of December 31, 2021, C-III and its subsidiary, Legacy Co, collectively own approximately 8.3 million common shares. Following the Self-Management Transaction and prior to September 14, 2021, C-III and Legacy Co collectively owned approximately 7.5 million OP Common Units and 319,965 OP Preferred Units and had the right to designate one individual to be included on the board of directors of the Company. In accordance with a letter agreement between the parties, on September 14, 2021, the Company redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of common stock of the Company. In addition, on that date, the board nominee resigned his position as a member of the board of directors of the Company. Prior to the Self-Management Transaction, C-III controlled our Former Advisor as well as the external advisors to REIT II and REIT III, as indirect subsidiaries of RAI, and owned the property management entities for the Company, REIT II and REIT III.
On September 8, 2020, the Company entered into a Transitional Services Agreement with C-III, Advisor Contributor and RAI (the “Transitional Services Agreement”), pursuant to which, effective September 8, 2020 and for a one-year period, C-III provided to the Company and its affiliates and subsidiaries certain services in order to ensure an orderly transition and the continued conduct and operation of the advisory and property management business acquired by the Company in connection with the Self-Management Transaction. In connection with these services, the Company has paid C-III an agreed-upon monthly fee for each service provided, as well as reimbursement of out-of-pocket expenses incurred by C-III and RAI as a result of the provision of these services. C-III also reimbursed the Company for services provided by the Company’s employees to C-III during this period. In addition, C-III sublet from the Company a portion of the office space in Philadelphia until December 31, 2020.
Property loss pool: The Company participated (with other properties directly or indirectly managed by RAI and C-III) in a catastrophic insurance policy, which covered claims up to $250.0 million, after either a $25,000 or a $100,000 deductible per incident, depending on location and/or type of loss. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results. This policy expired on March 1, 2021 and was replaced with similar coverage in the normal course of business independent of RAI and C-III.
F-28
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
General liability coverage: The Company (with other properties directly managed by RAI) had an insured and dedicated limit for the general liability of $1,000,000 per occurrence. Total claims were limited to $2.0 million per premium year. In excess of these limits, the Company participated (with other properties directly or indirectly managed by RAI and C-III) in a $50.0 million per occurrence excess liability program. Therefore, the total insured limit per occurrence was $51.0 million for the general and excess liability program, after a $25,000 deductible per incident. This policy expired on March 1, 2021 and was replaced with similar coverage in the normal course of business independent of RAI and C-III.
Internal audit fees. Prior to the Self-Management Transaction, RAI performed internal audit services for the Company.
Directors and officers insurance: Prior to the Self-Management Transaction in September 2020, the Company participated in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries. Thereafter, until the effectiveness of the Resource REIT Mergers, the Company participated in a liability insurance program for directors and officers coverage with REIT II and REIT III.
Other expenses. The Company utilized the services of The Planning and Zoning Resource Company, a subsidiary of C-III, for zoning reports for acquisitions.
Relationship with the Former Advisor
The Company is party to an advisory agreement (the “Advisory Agreement”), pursuant to which the Former Advisor provided the Company with investment management, administrative and related services. The Advisory Agreement has a one-year term and may be renewed for an unlimited number of successive one-year terms. The current term of the Advisory Agreement expires on September 14, 2022. Under the Advisory Agreement, the Former Advisor received fees and was reimbursed for its expenses as set forth below. Following the Self-Management transaction, the Company is no longer externally advised and these fees are no longer being paid:
Acquisition fees. The Company paid the Former Advisor an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Company paid the Former Advisor a monthly asset management fee equal to one-twelfth of 1.0% of the higher of the cost or the independently appraised value of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee was based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company did not own all or a majority of an asset and does not manage or control the asset.
Disposition fees. The Former Advisor earned a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.75% of the contract sales price.
Debt financing fees. The Former Advisor earned a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also paid directly or reimbursed the Former Advisor for all of the expenses paid or incurred by the Former Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its ongoing distribution reinvestment plan offering.
Reimbursements also included expenses the Former Advisor incurred in connection with providing services to the Company, including the Company’s allocable share of costs for Former Advisor personnel and overhead, out of pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company did not reimburse the Former Advisor or its affiliates for employee costs in connection with services for which the Former Advisor earned acquisition or disposition fees.
Following the Self-Management Transaction, REIT I, as the indirect owner of the advisor to REIT II and REIT III, received asset management fees, property management fees and debt financing fees from REIT II and REIT III until the Resource REIT Merger in January 2021.
F-29
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Relationship with Resource Real Estate Opportunity Manager
Prior to the Self-Management Transaction, Resource Real Estate Opportunity Manager (the “Manager”) managed the Company's real estate properties and real estate-related debt investments and coordinated the leasing of, and managed construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager. On the date of the Self-Management Transaction, the Manager became an indirect subsidiary of the Company.
Property management fees. Prior to the Self-Management Transaction, the Manager earned 4.5% of the gross receipts from the Company's properties, provided that for properties that were less than 75% occupied, the manager received a minimum fee for the first 12 months of ownership for performing certain property management and leasing activities. The Manager subcontracted certain services to an unaffiliated third-party, Greystar, and paid for those services from its property management fee.
Construction management fees. The Manager earned a construction management fee of 5.0% of actual aggregate costs to construct improvements to, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earned a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.
Information technology fees and operating expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI paid certain shared information technology fees and operating expenses on behalf of the Company for which they were reimbursed.
Relationship with ACRES Commercial Realty Corp. (“ACR”)
The Company provided office space and other office-related services to ACRES Commercial Realty Corp. (f/k/a Exantas Capital Corp.) under a sublease that was assigned from RAI which terminated on March 31, 2021. In addition, three employees of the Company provided internal audit services until March 31, 2021 under an internal audit engagement letter that was assigned from RAI to Resource NewCo LLC, a subsidiary of the Company. The Company's Chief Financial Officer was a director of ACR until June 2021.
The following table presents the Company's amounts payable to, and amounts receivable from, such related parties (in thousands):
|
| December 31, |
|
| December 31, |
| ||
Due from related parties: |
|
|
|
|
|
| ||
REIT II |
|
|
|
|
|
| ||
Management fees |
| $ | — |
|
| $ | 327 |
|
Operating expense reimbursements |
|
| — |
|
|
| 1,588 |
|
|
|
| — |
|
|
| 1,915 |
|
REIT III |
|
|
|
|
|
| ||
Management fees |
|
| — |
|
|
| 79 |
|
Deferred organization and offering costs reimbursements |
|
| — |
|
|
| 769 |
|
|
|
| — |
|
|
| 848 |
|
|
| $ | — |
|
| $ | 2,763 |
|
|
|
|
|
|
|
| ||
Due to related parties: |
|
|
|
|
|
| ||
C-III/RAI |
|
|
|
|
|
| ||
Self-Management Transaction consideration |
| $ | — |
|
| $ | 19,125 |
|
Allocation of income to preferred unit holders |
|
| — |
|
|
| 1,120 |
|
|
| $ | — |
|
| $ | 20,245 |
|
|
|
|
|
|
|
|
F-30
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The following table presents the Company's fees earned by, and expenses paid to, such related parties (in thousands):
|
| Years Ended |
| |||||||||
|
| December 31, |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Fees earned / expenses paid to related parties: |
|
|
|
|
|
|
|
|
| |||
Former Advisor (prior to 9/8/2020): |
|
|
|
|
|
|
|
|
| |||
Acquisition costs (1) |
| $ | — |
|
| $ | 113 |
|
| $ | — |
|
Asset management fees (2) |
|
| — |
|
|
| 8,517 |
|
|
| 12,498 |
|
Disposition fees (3) |
|
| — |
|
|
| — |
|
|
| 453 |
|
Debt financing fees (4) |
|
| — |
|
|
| 43 |
|
|
| 116 |
|
Overhead allocation (5) |
|
| — |
|
|
| 2,955 |
|
|
| 3,663 |
|
Internal audit (5) |
|
| — |
|
|
| 75 |
|
|
| 108 |
|
Manager (prior to 9/8/2020): |
|
|
|
|
|
|
|
|
| |||
Property management fees (2) |
| $ | — |
|
| $ | 4,071 |
|
| $ | 6,034 |
|
Construction management fees (1) |
|
| — |
|
|
| 298 |
|
|
| 500 |
|
Construction payroll reimbursements (1) |
|
| — |
|
|
| — |
|
|
| 97 |
|
Operating expense reimbursements (6) |
|
| — |
|
|
| — |
|
|
| 184 |
|
Debt servicing fees (2) |
|
| — |
|
|
| 1 |
|
|
| 2 |
|
REIT II (prior to 1/28/2021): |
|
|
|
|
|
|
|
|
| |||
Asset management fee income |
| $ | 669 |
|
| $ | 2,866 |
|
| $ | — |
|
Property management fee income |
|
| 275 |
|
|
| 1,198 |
|
|
| — |
|
Debt financing fees |
|
| — |
|
|
| 184 |
|
|
| — |
|
Operating expense reimbursements (5) |
|
| 371 |
|
|
| 1,529 |
|
|
| — |
|
Internal audit (5) |
|
| 8 |
|
|
| 33 |
|
|
| — |
|
REIT III (prior to 1/28/2021): |
|
|
|
|
|
|
|
|
| |||
Asset management fee income |
| $ | 164 |
|
| $ | 705 |
|
| $ | — |
|
Property management fee income |
|
| 67 |
|
|
| 295 |
|
|
| — |
|
C-III/RAI: |
|
|
|
|
|
|
|
|
| |||
Transition services paid to C-III (5) |
| $ | 2 |
|
| $ | 182 |
|
| $ | — |
|
Transition services paid to the Company (5) |
|
| — |
|
|
| 17 |
|
|
| — |
|
Sublease rent reimbursement (5) |
|
| — |
|
|
| 15 |
|
|
| — |
|
Preferred unit distributions |
|
| 3,161 |
|
|
| 1,406 |
|
|
| — |
|
Common OP unit distributions |
|
| 1,110 |
|
|
| — |
|
|
| — |
|
ACR: |
|
|
|
|
|
|
|
|
| |||
Internal audit (7) |
| $ | 37 |
|
| $ | 47 |
|
| $ | — |
|
Sublease rent reimbursement (5) |
|
| 30 |
|
|
| 44 |
|
|
| — |
|
Other: |
|
|
|
|
|
|
|
|
| |||
The Planning & Zoning Resource Company (4) |
| $ | — |
|
| $ | — |
|
| $ | 2 |
|
(1) Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.
(2) Included in Management fees on the consolidated statements of operations and comprehensive loss.
(3) Included in Net gain on disposition of property on the consolidated statements of operations and comprehensive loss.
(4) Included in Mortgage notes payable, net on the consolidated balance sheets.
(5) Included in General and administrative costs on the consolidated statements of operations and comprehensive loss.
(6) Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.
(7) Included in Other revenue on the consolidated statements of operations and comprehensive loss.
NOTE 12 – EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock. As of both December 31, 2021 and 2020, 0 shares of preferred stock were issued or outstanding.
F-31
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Common Stock
As of December 31, 2021, the Company had an aggregate of 165.8 million shares of $0.01 par value common stock outstanding, including 1.1 million shares of unvested restricted shares. In accordance with the Company's distribution reinvestment plan ("DRP"), participants in the DRP acquired shares of common stock under the plan at a price equal to 95% of the current estimated value per share of common stock. Commencing on March 31, 2021, participants acquired shares of the Company's common stock under the plan at a price equal to $8.61 per share. In conjunction with the Blackstone Merger, on January 23, 2022, the Board suspended the DRP. The following table summarizes the activity (dollars in thousands):
|
| Shares |
|
| Gross |
| ||
Shares issued through private offering |
|
| 1,279,227 |
|
| $ | 12,737 |
|
Shares issued through primary public offering |
|
| 129,923,354 |
|
|
| 1,289,845 |
|
Shares issued through stock distributions |
|
| 2,406,986 |
|
|
| — |
|
Shares issued through distribution reinvestment plan |
|
| 29,042,460 |
|
|
| 279,519 |
|
Restricted shares issued to employees |
|
| 1,370,952 |
|
|
| — |
|
Shares issued through conversion of common OP units |
|
| 7,539,738 |
|
|
| — |
|
Shares issued in conjunction with the Resource REIT Mergers |
|
| 14,724,323 |
|
|
| — |
|
Total |
|
| 186,287,040 |
|
| $ | 1,582,101 |
|
Shares redeemed and retired |
|
| (20,520,287 | ) |
|
|
| |
Total shares issued and outstanding as of December 31, 2021 |
|
| 165,766,753 |
|
|
|
|
Convertible Stock
As of December 31, 2020, REIT I had 49,935 of $0.01 par value convertible stock outstanding. RAI owned 30,273 shares, affiliated persons owned 18,790 shares and outside investors owned 872 shares at December 31, 2020. The convertible stock would have converted into shares of the Company’s common stock upon the occurrence of certain events. Upon the closing of the REIT I Merger, each share of REIT I Convertible Stock were cancelled and converted into the right to receive $0.02 in cash (without interest).
As of December 31, 2021, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, of which 18,628 were owned by current and former affiliated persons and the remaining were owned by the Company. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 7% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.
Each of these 2 events is a “Triggering Event.” Upon a Triggering Event, the Company's convertible stock will, unless its advisory agreement has been terminated or not renewed on account of a material breach by Resource Real Estate Opportunity Advisor II, LLC, a wholly-owned subsidiary of the Company, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
(A) the lesser of
(i) 15% of the amount, if any, by which
(B) the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.
F-32
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
As of December 31, 2021, 0 Triggering Event had occurred.
Redemption of Securities
During the year ended December 31, 2021, the Company redeemed shares of its outstanding common stock as follows:
Period |
| Total Number of Shares Redeemed (1) |
|
| Average Price Paid per Share |
| ||
January 2021 |
|
| 136,685 |
|
| $ | 9.08 |
|
February 2021 |
|
| 0 |
|
|
| 0 |
|
March 2021 |
|
| 169,112 |
|
| $ | 9.08 |
|
April 2021 |
|
| 0 |
|
|
| 0 |
|
May 2021 |
|
| 0 |
|
|
| 0 |
|
June 2021 |
|
| 148,989 |
|
| $ | 9.06 |
|
July 2021 |
|
| 0 |
|
|
| 0 |
|
August 2021 |
|
| 0 |
|
|
| 0 |
|
September 2021 |
|
| 240,767 |
|
| $ | 9.06 |
|
October 2021 |
|
| 0 |
|
|
| 0 |
|
November 2021 |
|
| 0 |
|
|
| 0 |
|
December 2021 |
|
| 184,236 |
|
| $ | 9.06 |
|
|
|
| 879,789 |
|
|
|
|
Amended Share Redemption Program
On February 3, 2021, the Board of Directors of the Company ("the Board") adopted the Fifth Amended and Restated Share Redemption Program (the “Amended SRP”) pursuant to which, subject to significant conditions and limitations of the program, stockholders of the Company could have their shares repurchased by the Company. The Amended SRP provided that redemptions would continue to be made quarterly but in an amount not to exceed proceeds from the sale of shares in the distribution reinvestment plan in the immediately preceding calendar quarter; provided that, for any quarter in which no distribution reinvestment plan proceeds were available, the funding limitation for the quarter would have been set by the Board upon ten business days’ notice to stockholders.
Additional changes to the share redemption program in the Amended SRP clarify the timing of redemption procedures. The effective date of any redemption (the “Redemption Date”) was the 15th day (or the next business day thereafter) of the last month of the calendar quarter. Redemption requests had to be received by the Company no later than the last business day of the calendar month preceding the month in which the Redemption Date falls. Payment for shares redeemed could be made no later than five business days after the Redemption Date. In addition, the Amended SRP clarified that stockholders eligible to have their shares repurchased by the Company included those who purchased their shares from REIT I or REIT III in their respective initial public offering and distribution reinvestment plans and do not include those stockholders who acquired their shares for value from another stockholder. The Amended SRP also removed any reference to the Former Advisor and its affiliates as the Company is now self-managed.
Until January 2022, the share redemption program remained partially suspended, the Company only approved requests for redemption in connection with a stockholder’s death, qualifying disability, or confinement to a long-term care facility (each as described in the Amended SRP and collectively, “Special Redemptions”).
In conjunction with the Blackstone Merger Agreement, on January 23, 2022, the Board approved the suspension of the Amended SRP.
F-33
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
Distributions Paid to Common Stockholders
For the year ended December 31, 2021, the Company paid aggregate distributions of $45.2 million including $34.6 million of distributions paid in cash and $10.6 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):
Record Date |
| Per Common Share |
|
| Distribution Date |
| Net Cash Distributions |
|
| Distributions reinvested in shares of Common Stock |
|
| Total Aggregate Distributions |
| ||||
March 30, 2021 |
| $ | 0.07 |
|
| March 31, 2021 |
| $ | 8,539 |
|
| $ | 2,490 |
|
| $ | 11,029 |
|
June 29, 2021 |
|
| 0.07 |
|
| June 30, 2021 |
|
| 8,365 |
|
|
| 2,674 |
|
|
| 11,039 |
|
September 29, 2021 |
|
| 0.07 |
|
| September 30, 2021 |
|
| 8,868 |
|
|
| 2,704 |
|
|
| 11,572 |
|
December 28, 2021 |
|
| 0.07 |
|
| December 29, 2021 |
|
| 8,875 |
|
|
| 2,707 |
|
|
| 11,582 |
|
|
| $ | 0.28 |
|
|
|
| $ | 34,647 |
|
| $ | 10,575 |
|
| $ | 45,222 |
|
Share-Based Compensation
On September 8, 2020, the board of directors of REIT I adopted the Resource Real Estate Opportunity REIT, Inc. 2020 Long-Term Incentive Plan (the “2020 LTIP”). At the effective time of the REIT I Merger, the Company assumed the 2020 LTIP as amended to replace all references to REIT I with the Company. The purpose of the 2020 LTIP is to advance the interests of the Company and its stockholders by providing an incentive to attract, retain, and reward certain eligible persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company. The 2020 LTIP allows for grants to the Company’s employees, consultants, and directors of stock options (non-statutory and incentive), restricted stock awards, stock appreciation rights, restricted stock units, performance shares, performance units, cash-based awards, and other stock-based awards. The maximum aggregate number of shares of common stock of the Company that may be issued pursuant to awards granted under the 2020 LTIP is 3.5 million shares.
In conjunction with the Self-Management Transaction in September 2020, officers and certain employees of REIT I were granted awards of restricted stock of REIT I pursuant to the 2020 LTIP in the aggregate amount of 645,526 shares. Upon the REIT I Merger, these grants converted to 790,272 shares of the Company's common stock. The fair value of the shares granted as converted upon the REIT I Merger were estimated to be $9.08 per share. Of the awards granted, 779,102 shares of restricted stock are performance-based awards and vested 40%, or 311,641 shares, upon the completion of the REIT I Merger; and the remaining 60% will vest upon the completion of an initial public offering or a future liquidity event. The remaining 11,170 shares of restricted stock granted are time-based awards and will vest ratably over a three-year period. Dividends on the performance-based awards of restricted stock will not be paid but will be accrued over the vesting period. The accrual as of December 31, 2021 was approximately $169,000 and was included in Accounts payable and accrued expenses on the consolidated balance sheets.
On February 17, 2021, the Compensation Committee (the “Committee”) of the Board of the Company approved performance-based long-term equity incentive awards pursuant to the 2020 LTIP.
After the actual amount of the performance-based award is determined (or earned), the earned shares will be fully vested and generally transferable. Dividends will be deemed to have accrued on all of the earned shares during the measuring period until the determination date. Such accrued dividends on earned shares will be paid to the awardee on the determination date. Thereafter, the awardee is entitled to receive dividends as declared and paid on the earned shares. The awardee will be entitled to vote the shares from the grant date.
The awards were designed to align the executive officers’ interests with those of the Company’s stockholders and are a significant component of overall executive officer compensation.
The awards were granted effective February 17, 2021 (the grant date), and the number of shares of the Company’s common stock (the “Common Stock”) underlying the awards (that is, the number of shares corresponding to the dollar amounts described below) were determined based on the most recently approved estimated value per share of the Common Stock of $9.08 as approved by the Board on March 19, 2020.
F-34
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The Company recorded compensation expense in the years ended December 31, 2021 and 2020 related to these awards of approximately $4.6 million and $11,000. Unrecognized compensation expense at December 31, 2021 was $7.9 million.
Employees were awarded 404,306 shares of three-year vesting restricted stock and the Company’s non-employee directors were awarded 42,980 shares of one-year vesting restricted stock during the year ended December 31, 2021. The following table presents the changes in unvested restricted stock for the year ended December 31, 2021:
|
| Performance Based Awards |
|
| Weighted Average Grant Date Fair Value |
|
| Time-Based Service Awards |
|
| Weighted Average Grant Date Fair Value |
|
| Total Awards |
| |||||
Unvested restricted shares, beginning of period |
|
| 779,102 |
|
| $ | 9.08 |
|
|
| 11,170 |
|
| $ | 9.08 |
|
|
| 790,272 |
|
Granted |
|
| 135,045 |
|
| $ | 9.08 |
|
|
| 447,286 |
|
| $ | 9.08 |
|
|
| 582,331 |
|
Forfeited |
|
| — |
|
|
|
|
|
| (1,651 | ) |
|
|
|
|
| (1,651 | ) | ||
Vested |
|
| (311,641 | ) |
|
|
|
|
| (3,722 | ) |
|
|
|
|
| (315,363 | ) | ||
Unvested restricted shares, end of period |
|
| 602,506 |
|
|
|
|
|
| 453,083 |
|
|
|
|
|
| 1,055,589 |
|
Noncontrolling Interests
Noncontrolling interests represented limited partnership interests in the Operating Partnership, or OP Units, in which the Company was the general partner. General partnership units and limited partnership units of the Operating Partnership were issued as part of the initial capitalization of the Operating Partnership. OP Units were issued as part of the Self-Management Transaction in September 2020.
On September 13, 2021, the Company entered into a letter agreement with C-III and Legacy Co, pursuant to which the parties agreed to the following with respect to all outstanding operating partnership units of OP II, held by C-III and Legacy Co. C-III and Legacy Co provided their consent and waiver to the early redemption by OP II of the Series A Preferred Units at the Redemption Price (as defined in the limited partnership agreement for OP II (the “Partnership Agreement”)), plus all accrued distributions on September 14, 2021, prior to the second anniversary of the original issuance date as contemplated by the Partnership Agreement. In addition, the Company agreed to waive the two-year hold period for the exercise of the exchange right provided to C-III and Legacy Co in the Partnership Agreement with respect to their common units, and C-III and Legacy Co provided notice of exchange to OP II and the Company.
In accordance with the letter agreement, on September 14, 2021, the Company redeemed all of the 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged all of the 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of common stock of the Company. Due to the redemption and conversion as described in Note 3, there are no noncontrolling interests as of December 31, 2021.
Each OP Preferred Unit was entitled to a 7.00% per annum preferred priority return on the stated value of each OP Preferred Unit commencing on the date of issuance and ending on the fifth anniversary of the date of issuance, as well as, with respect to such distribution period, the amount of distributions a holder of such OP Preferred Unit would be entitled to receive if such OP Preferred Units were treated as part of a single class of units with the Common Units with the right to participate in distributions pari passu with the Common Units (the “Preferred Return”).
Investor Rights Agreement
On September 8, 2020, the Company, the OP, C-III and RAI entered into an investor rights agreement (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, C-III and RAI (or any successor holder) has the right (i) with respect to Common Units of the OP, after September 8, 2022, and (ii) with respect to OP Preferred Units, after 180 days from the date the Company lists its common stock on a national securities exchange (the “Lock-Up Expiration”), to request the Company to register for resale under the Securities Act of 1933, as amended, all or part, but not less than 50%, of the shares of the Company’s common stock issued or issuable to such holder. The Company will use commercially reasonable efforts to file a registration statement on Form S-3 within 30 days of such request and within 60 days of such request in the case of a registration statement on Form S-11 or such other appropriate form. The Company will cause such registration statement to become effective
F-35
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
as soon as reasonably practicable thereafter. The Investor Rights Agreement also grants C-III and RAI (or any successor holder) certain “piggyback” registration rights after the Lock-Up Expiration.
For the year ended December 31, 2021, noncontrolling interests were approximately 3.5% of weighted average shares outstanding prior to their conversion to common stock and/or redemption.
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity is reclassified as temporary equity and adjusted to the greater of (a) the carrying amount or (b) its redemption value as of the end of the period in which the determination is made. During the year ended December 31, 2021, the Company redeemed the OP Preferred Units and recognized a $342,000 expense in the Consolidated Statement of Operations to adjust the book value to redemption value.
NOTE 13 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair values of cash, tenant receivables and accounts payable, approximate their carrying values due to their short nature. The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
Derivatives (interest rate caps), which are reported at fair value in the consolidated balance sheets, are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2)
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate caps |
| $ | — |
|
| $ | 1,282 |
|
| $ | — |
|
| $ | 1,282 |
|
|
| $ | — |
|
| $ | 1,282 |
|
| $ | — |
|
| $ | 1,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest rate caps |
| $ | — |
|
| $ | 62 |
|
| $ | — |
|
| $ | 62 |
|
|
| $ | — |
|
| $ | 62 |
|
| $ | — |
|
| $ | 62 |
|
F-36
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The following table presents the carrying amount and estimated fair value of the Company’s mortgage notes payable-outstanding borrowings (in thousands):
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||||||||||
|
| Outstanding |
|
| Estimated |
|
| Outstanding |
|
| Estimated |
| ||||
Mortgage notes payable- outstanding borrowings |
| $ | 1,415,321 |
|
| $ | 1,358,503 |
|
| $ | 830,950 |
|
| $ | 822,859 |
|
The carrying amount of the mortgage notes payable presented is the outstanding borrowings excluding premium or discount and deferred finance costs, net. The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities (Level 3).
NOTE 14 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
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 enters 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 receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into a total of 18 interest rate caps that were designated as cash flow hedges. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2021, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR and one loan indexed to SOFR, associated with an existing variable-rate loan agreement.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional approximately $144,000 will be reclassified as an increase to interest expense. During the year ended December 31, 2021, the Company repaid or refinanced 16 loans for which the associated interest rate caps remain as assets but no longer qualify as effective cash flow hedges with a fair value as of December 31, 2021 of approximately $280,000.
During the years ended December 31, 2021, 2020 and 2019, the Company recorded expenses of approximately $42,000, $124,000 and $344,000, respectively, due to amortization of premiums paid for interest rate caps.
F-37
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
The following table presents the Company's outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of December 31, 2021 and 2020 (dollars in thousands):
|
| Interest Rate Derivative |
| Number of Instruments |
| Notional Amount |
|
| Maturity Dates | |
December 31, 2021 |
| Interest rate caps |
| 18 |
| $ | 626,623 |
|
| January 1, 2022 through February 1, 2026 |
December 31, 2020 |
| Interest rate caps |
| 22 |
| $ | 677,238 |
|
| May 1, 2021 through January 1, 2025 |
Tabular Disclosure of Fair Value of Derivative Instrument on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of December 31, 2021 and 2020 (in thousands):
Asset Derivatives |
|
| Liabilities Derivatives |
| ||||||||||||||||||||||
December 31, 2021 |
|
| December 31, 2020 |
|
| December 31, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||
Balance Sheet |
| Fair Value |
|
| Balance Sheet |
| Fair Value |
|
| Balance Sheet |
|
| Fair Value |
|
| Balance Sheet |
|
| Fair Value |
| ||||||
Prepaid expenses and other assets |
| $ | 1,282 |
|
| Prepaid expenses and other assets |
| $ | 62 |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
NOTE 15 – COMMITMENTS AND CONTINGENCIES
Legal Matters
On June 17, 2021, stockholders Karl R. Wilber and Julia M. Wilber, as co-trustees of the Karl R. and Julia M. Wilber Revocable Trust dtd 2/18/2002 (“Wilber Trust”), sent a letter to Alan F. Feldman alleging breaches of fiduciary duty by the directors of the Company’s predecessor entities arising from the Self-Management Transaction and Resource REIT Mergers and demanding that the board of directors of the Company (the “Board”) take action to remedy such breaches (the “Demand Letter”). On August 3, 2021, the Board formed a special committee to investigate the allegations in the Demand Letter. The special committee engaged independent counsel and conducted a full investigation and, on January 25, 2022, communicated to Wilber Trust its conclusion that the claims in the Demand Letter had no merit and would not be pursued by the Company. On February 7, 2022, the Wilber Trust filed a class action complaint in the Circuit Court for Baltimore City, Maryland (Karl R. Wilber et al. v. Alan F. Feldman et al., Case No. 24-C-22-000531) against the Board, the Company, C-III, and RRE Legacy. The complaint alleges, among other things, that (a) the former REIT II directors breached their fiduciary duties by approving the REIT I Merger given that the Self-Management Transaction provided inadequate value to both REIT I and REIT II, thus diluting the stock value of the purported class; (b) the current Board failed to consider the value of the claims in the Demand Letter when negotiating the proposed transaction with BREIT; and (c) C-III and the sponsor were unjustly enriched by the Self-Management Transaction. Wilber Trust seeks an unspecified award of compensatory damages and invalidation of the stock consideration paid to C-III and the sponsor in the Self-Management Transaction. Defendants’ response is due on April 15, 2022. The Company intends to vigorously defend against the complaint. Based on the early stage of the litigation, it is not possible to estimate the amount or range of possible loss that might result from an adverse judgment or a settlement of this matter.
NOTE 16 – BENEFIT PLAN
Following the Self-Management Transaction in September 2020, the Company sponsors a defined contribution 401(k) plan to provide retirement benefits for employees that meet minimum employment criteria. The Company currently matches 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. Employer matching contributions vest immediately upon contribution to the plan. The Company recognized approximately $272,000 and $36,000, respectively, of expense for the year ended December 31, 2021 and 2020 for employer matching contributions.
F-38
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
DECEMBER 31, 2021
NOTE 15 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing of this report and determined that there have not been any events that have occurred that would require adjustments to or disclosures in the consolidated financial statements, except for the following:
On January 20, 2022, the Company sold The Bryant at Yorba Linda in Yorba Linda, California for $205.5 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 20, 2022, the Company sold Maxwell Townhomes in San Antonio, Texas for $48.0 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2022.
On January 23, 2022, the Company entered into the Blackstone Merger Agreement. In addition, the Company's board of directors suspended the share redemption program and the distribution reinvestment plan offering.
On January 28, 2022, the Company repaid in the full the loans secured by Skyview, Courtney Meadows, Indigo Creek, and Meridian Pointe.
On March 22, 2022, the Company sold Sunset Ridge in San Antonio, Texas for $60.8 million. The Company expects to recognize a gain on the sale during the quarter ending March 31, 2022.
F-39
RESOURCE REIT, INC.
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2021
Property Name |
| Location |
| Encumbrances |
|
| Initial cost to Company |
|
| Cost capitalized subsequent to acquisition |
|
| Gross Amount at which carried at close of period |
|
| Accumulated Depreciation |
|
| Date of Construction |
| Date Acquired | |||||
Iroquois |
| Philadelphia, PA |
| $ | — |
|
| $ | 11,076 |
|
| $ | 6,578 |
|
| $ | 17,654 |
|
| $ | (6,932 | ) |
| 1961 |
| 6/17/2011 |
Cannery |
| Dayton, OH |
|
| — |
|
|
| 8,273 |
|
|
| 2,468 |
|
|
| 10,741 |
|
|
| (4,570 | ) |
| 1838 |
| 5/13/2011 |
Trailpoint at the Woodlands |
| Houston, TX |
|
| — |
|
|
| 26,496 |
|
|
| 5,056 |
|
|
| 31,552 |
|
|
| (11,524 | ) |
| 1981 |
| 6/24/2013 |
The Westside |
| Plano, TX |
|
| 38,805 |
|
|
| 31,001 |
|
|
| 8,556 |
|
|
| 39,557 |
|
|
| (13,292 | ) |
| 1984 |
| 7/25/2013 |
Verona |
| Littleton, CO |
|
| 41,275 |
|
|
| 23,321 |
|
|
| 11,275 |
|
|
| 34,596 |
|
|
| (11,066 | ) |
| 1985 |
| 9/30/2013 |
Skyview |
| Westminster, CO |
|
| 27,750 |
|
|
| 29,509 |
|
|
| 4,425 |
|
|
| 33,934 |
|
|
| (10,102 | ) |
| 1985 |
| 9/30/2013 |
Maxwell Townhomes |
| San Antonio, TX |
|
| — |
|
|
| 21,831 |
|
|
| 7,148 |
|
|
| 28,979 |
|
|
| (11,672 | ) |
| 1982 |
| 12/16/2013 |
Meridian Pointe |
| Burnsville, MN |
|
| 37,414 |
|
|
| 32,142 |
|
|
| 6,644 |
|
|
| 38,786 |
|
|
| (13,377 | ) |
| 1988 |
| 12/20/2013 |
Estates at Johns Creek |
| Alpharetta, GA |
|
| 65,650 |
|
|
| 69,111 |
|
|
| 10,796 |
|
|
| 79,907 |
|
|
| (27,263 | ) |
| 1999 |
| 3/28/2014 |
Perimeter Circle |
| Atlanta, GA |
|
| 26,115 |
|
|
| 28,911 |
|
|
| 3,944 |
|
|
| 32,855 |
|
|
| (10,556 | ) |
| 1995 |
| 5/19/2014 |
Perimeter 5550 |
| Atlanta, GA |
|
| — |
|
|
| 21,796 |
|
|
| 3,732 |
|
|
| 25,528 |
|
|
| (8,326 | ) |
| 1995 |
| 5/19/2014 |
Aston at Cinco Ranch |
| Katy, TX |
|
| — |
|
|
| 31,385 |
|
|
| 3,717 |
|
|
| 35,102 |
|
|
| (10,843 | ) |
| 2000 |
| 6/26/2014 |
Sunset Ridge |
| San Antonio, TX |
|
| 28,600 |
|
|
| 34,554 |
|
|
| 7,266 |
|
|
| 41,820 |
|
|
| (12,346 | ) |
| 1949 |
| 9/4/2014 |
Calloway at Las Colinas |
| Irving, TX |
|
| 51,935 |
|
|
| 47,075 |
|
|
| 12,141 |
|
|
| 59,216 |
|
|
| (18,178 | ) |
| 1984 |
| 9/29/2014 |
South Lamar Village |
| Austin, TX |
|
| 23,140 |
|
|
| 23,370 |
|
|
| 5,888 |
|
|
| 29,258 |
|
|
| (9,331 | ) |
| 1981 |
| 2/26/2015 |
Heritage Pointe |
| Gilbert, AZ |
|
| 60,760 |
|
|
| 35,070 |
|
|
| 8,898 |
|
|
| 43,968 |
|
|
| (13,613 | ) |
| 1986 |
| 3/19/2015 |
The Bryant at Yorba Linda |
| Orange County, CA |
|
| 74,367 |
|
|
| 116,036 |
|
|
| 14,519 |
|
|
| 130,555 |
|
|
| (27,148 | ) |
| 1986 |
| 6/1/2015 |
Point Bonita |
| Chula Vista, CA |
|
| 24,776 |
|
|
| 50,365 |
|
|
| 7,329 |
|
|
| 57,694 |
|
|
| (12,402 | ) |
| 1988 |
| 6/15/2015 |
Providence in the Park |
| Arlington, TX |
|
| 55,250 |
|
|
| 61,490 |
|
|
| 4,702 |
|
|
| 66,192 |
|
|
| (14,064 | ) |
| 1997 |
| 12/22/2016 |
Green Trails |
| Lisle, IL |
|
| 58,125 |
|
|
| 77,128 |
|
|
| 2,732 |
|
|
| 79,860 |
|
|
| (12,996 | ) |
| 1988 |
| 5/31/2017 |
Terraces at Lake Mary |
| Lake Mary, FL |
|
| 30,596 |
|
|
| 43,132 |
|
|
| 2,208 |
|
|
| 45,340 |
|
|
| (7,699 | ) |
| 1998 |
| 8/31/2017 |
Courtney Meadows |
| Jacksonville, FL |
|
| 25,865 |
|
|
| 40,508 |
|
|
| 2,090 |
|
|
| 42,598 |
|
|
| (6,524 | ) |
| 2001 |
| 12/20/2017 |
Addison at Sandy Spring |
| Sandy Springs, GA |
|
| 21,855 |
|
|
| 33,260 |
|
|
| 3,348 |
|
|
| 36,608 |
|
|
| (5,737 | ) |
| 1986 |
| 4/17/2018 |
Bristol Grapevine |
| Grapevine, TX |
|
| 32,443 |
|
|
| 43,626 |
|
|
| 4,452 |
|
|
| 48,078 |
|
|
| (7,796 | ) |
| 1978 |
| 4/25/2018 |
Uptown Buckhead |
| Atlanta, GA |
|
| 25,740 |
|
|
| 42,028 |
|
|
| 245 |
|
|
| 42,273 |
|
|
| (1,278 | ) |
| 1989 |
| 1/28/2021 |
Crosstown at Chapel Hill |
| Chapel Hill, NC |
|
| 42,212 |
|
|
| 76,180 |
|
|
| 843 |
|
|
| 77,023 |
|
|
| (3,013 | ) |
| 1990 |
| 1/28/2021 |
The Adairs |
| Dallas, TX |
|
| 37,115 |
|
|
| 54,696 |
|
|
| 358 |
|
|
| 55,054 |
|
|
| (1,794 | ) |
| 1979 |
| 1/28/2021 |
1000 Spalding |
| Atlanta, GA |
|
| 35,035 |
|
|
| 52,867 |
|
|
| 290 |
|
|
| 53,157 |
|
|
| (1,658 | ) |
| 1995 |
| 1/28/2021 |
Montclair |
| Portland, OR |
|
| 30,420 |
|
|
| 49,510 |
|
|
| 393 |
|
|
| 49,903 |
|
|
| (1,535 | ) |
| 2004 |
| 1/28/2021 |
Grand Reserve |
| Naperville, IL |
|
| 47,845 |
|
|
| 82,389 |
|
|
| 307 |
|
|
| 82,696 |
|
|
| (3,233 | ) |
| 1991 |
| 1/28/2021 |
Verdant |
| Boulder, CO |
|
| 47,146 |
|
|
| 76,848 |
|
|
| 174 |
|
|
| 77,022 |
|
|
| (2,439 | ) |
| 1997 |
| 1/28/2021 |
Arcadia |
| Centennial, CO |
|
| 56,810 |
|
|
| 88,800 |
|
|
| 498 |
|
|
| 89,298 |
|
|
| (2,758 | ) |
| 1984 |
| 1/28/2021 |
Ravina |
| Austin, TX |
|
| 24,740 |
|
|
| 84,400 |
|
|
| 243 |
|
|
| 84,643 |
|
|
| (2,994 | ) |
| 2001 |
| 1/28/2021 |
81 Fifty at West Hills |
| Portland, OR |
|
| 58,500 |
|
|
| 95,088 |
|
|
| 488 |
|
|
| 95,576 |
|
|
| (2,966 | ) |
| 1985 |
| 1/28/2021 |
The Palmer at Las Colinas |
| Irving, TX |
|
| 58,515 |
|
|
| 86,703 |
|
|
| 1,032 |
|
|
| 87,735 |
|
|
| (2,804 | ) |
| 1991 |
| 1/28/2021 |
Windbrooke |
| Buffalo Grove, IL |
|
| — |
|
|
| 52,819 |
|
|
| 296 |
|
|
| 53,115 |
|
|
| (1,810 | ) |
| 1986 |
| 1/28/2021 |
Woods of Burnsville |
| Burnsville, MN |
|
| 35,977 |
|
|
| 68,563 |
|
|
| 430 |
|
|
| 68,993 |
|
|
| (2,269 | ) |
| 1984 |
| 1/28/2021 |
Indigo Creek |
| Glensdale, AZ |
|
| 38,472 |
|
|
| 75,290 |
|
|
| 327 |
|
|
| 75,617 |
|
|
| (2,536 | ) |
| 1998 |
| 1/28/2021 |
Martin's Point |
| Lombard, IL |
|
| 28,531 |
|
|
| 43,188 |
|
|
| 248 |
|
|
| 43,436 |
|
|
| (1,505 | ) |
| 1989 |
| 1/28/2021 |
Bay Club |
| Jacksonville, FL |
|
| — |
|
|
| 34,713 |
|
|
| 250 |
|
|
| 34,963 |
|
|
| (1,136 | ) |
| 1990 |
| 1/28/2021 |
Tramore Village |
| Austell, GA |
|
| 32,090 |
|
|
| 51,788 |
|
|
| 164 |
|
|
| 51,952 |
|
|
| (1,734 | ) |
| 1999 |
| 1/28/2021 |
Matthews Reserve |
| Matthews, NC |
|
| 23,758 |
|
|
| 41,071 |
|
|
| 379 |
|
|
| 41,450 |
|
|
| (1,394 | ) |
| 1998 |
| 1/28/2021 |
Winthrop West |
| Riverview, FL |
|
| 21,704 |
|
|
| 33,790 |
|
|
| 320 |
|
|
| 34,110 |
|
|
| (1,331 | ) |
| 1990 |
| 1/28/2021 |
Wimbledon Oaks |
| Arlington, TX |
|
| 18,410 |
|
|
| 29,023 |
|
|
| 200 |
|
|
| 29,223 |
|
|
| (999 | ) |
| 1986 |
| 1/28/2021 |
The Summit |
| Alexandria, VA |
|
| 27,580 |
|
|
| 37,748 |
|
|
| 251 |
|
|
| 37,999 |
|
|
| (852 | ) |
| 1976 |
| 1/28/2021 |
|
|
|
| $ | 1,415,321 |
|
| $ | 2,197,968 |
|
| $ | 157,650 |
|
| $ | 2,355,618 |
|
| $ | (329,395 | ) |
|
|
|
|
F-40
RESOURCE REIT, INC.
SCHEDULE III- REAL ESTATE AND ACCUMULATED DEPRECIATION - Continued
DECEMBER 31, 2021
|
| Years Ended |
| |||||||||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Investments in real estate: |
|
|
|
|
|
|
|
|
| |||
Balance at beginning of the year |
| $ | 1,173,930 |
|
| $ | 1,163,727 |
|
| $ | 1,212,720 |
|
Resource REIT Mergers |
|
| 1,296,686 |
|
|
| — |
|
|
| — |
|
Improvements, etc. |
|
| 28,424 |
|
|
| 11,297 |
|
|
| 14,423 |
|
Dispositions during the year |
|
| (143,422 | ) |
|
| (1,094 | ) |
|
| (63,416 | ) |
Balance at end of year |
| $ | 2,355,618 |
|
| $ | 1,173,930 |
|
| $ | 1,163,727 |
|
|
|
|
|
|
|
|
|
|
| |||
Accumulated Depreciation: |
|
|
|
|
|
|
|
|
| |||
Balance at beginning of year |
| $ | (275,955 | ) |
| $ | (225,583 | ) |
| $ | (194,777 | ) |
Sales |
|
| 32,221 |
|
|
| 0 |
|
|
| 22,075 |
|
Depreciation |
|
| (88,394 | ) |
|
| (51,411 | ) |
|
| (53,802 | ) |
Disposals |
|
| 2,733 |
|
|
| 1,039 |
|
|
| 921 |
|
Balance at end of year |
| $ | (329,395 | ) |
| $ | (275,955 | ) |
| $ | (225,583 | ) |
F-41