Filed Pursuant to Rule 424(b)(3)
Registration No. 333-215272
COTTONWOOD COMMUNITIES, INC.
SUPPLEMENT NO. 11 DATED NOVEMBER 17, 2020
TO THE PROSPECTUS DATED OCTOBER 15, 2019
This document supplements, and should be read in conjunction with, the prospectus of Cottonwood Communities, Inc. dated October 15, 2019, as supplemented by supplement no. 7 dated April 17, 2020, supplement no. 8 dated May 18, 2020, supplement no. 9 dated August 3, 2020 and supplement no. 10 dated August 18, 2020. As used herein, the terms “we,” “our” and “us” refer to Cottonwood Communities, Inc. and, as required by context, Cottonwood Communities O.P., LP, which we refer to as our “Operating Partnership,” and to their subsidiaries. Capitalized terms used in this supplement have the same meanings as set forth in the prospectus. The purpose of this supplement is to disclose:
•the status of the offering;
•updated risks related to an investment in us;
•information regarding distributions;
•information regarding our share repurchase program;
•“Management’s Discussion and Analysis of Financial Condition and Results of Operations” similar to that filed in our quarterly report on Form 10-Q for the period ended September 30, 2020; and
•our unaudited financial statements and the notes thereto as of and for the period ended September 30, 2020.
Status of the Offering
We commenced this offering of $750.0 million of shares of common stock on August 13, 2018. As of November 10, 2020, we had sold 11,799,847 shares of our Class A common stock and 17,516 shares of our Class T common stock in this offering for aggregate gross offering proceeds of $117,566,430. Included in these amounts were 140,781 shares of common stock sold pursuant to our distribution reinvestment plan for aggregate gross offering proceeds of $1,407,811. Accordingly, as of November 10, 2020, there was $632,433,570 of shares available for sale in this offering.
Risk Factors
The following risk factor supplements the risk factors appearing in the prospectus.
We have paid distributions from offering proceeds. In the future we may continue to fund distributions with offering proceeds. To the extent we fund distributions from sources other than our cash flow from operations, we will have less funds available for investment in multifamily apartment communities and multifamily real estate-related assets and the overall return to our shareholders may be reduced.
Our charter permits us to make distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We intend to make distributions on our common stock on a per share basis with each share receiving the same distribution. If we fund distributions from financings, the proceeds from this or future offerings or other sources, we will have less funds available for investment in multifamily apartment communities and other multifamily real estate-related assets and the number of real estate properties that we invest in and the overall return to our shareholders may be reduced. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operations available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of multifamily real estate-related assets, this will affect our ability to generate cash flows from operations in future periods.
We expect to have little, if any, cash flow from operations available for distribution until we make substantial investments. During the early stages of our operations, it is likely that we will use sources of funds which may constitute a return of capital to fund distributions. During this offering stage, when we may raise capital more quickly than we acquire income-producing assets, and for some period after this offering stage, we may not be able to make distributions solely from our cash flow from operations. Further, because we may receive income from our investments at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our existence and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period and we will make these distributions in advance of our actual receipt of these funds. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation. In these instances, we expect to look to third party borrowings to fund our distributions. We may also fund such distributions from the sale of assets. To the extent that we pay
distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our shareholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, a shareholder’s basis in our stock will be reduced and, to the extent distributions exceed a shareholder’s basis, the shareholder may recognize capital gain.
For the nine months ended September 30, 2020, we paid aggregate distributions of $3,802,139, including $2,997,008 distributions paid in cash and $805,131 distributions reinvested through our distribution reinvestment plan. Our net loss for the nine months ended September 30, 2020 was $6,756,268. Cash flows provided by operating activities were $175,357 during the nine months ended September 30, 2020. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by shareholders, with $571,878 prior period cash provided by operating activities and $3,230,261 of offering proceeds. Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.
Information Regarding Distributions
Common Stock
On September 8, 2020, we paid distributions of $475,551, which related to distributions declared for daily record dates for each day in the period from August 1, 2020 through August 31, 2020. On October 8, 2020, we paid distributions of $469,341, which related to distributions declared for daily record dates for each day in the period from September 1, 2020 through September 30, 2020. On November 9, 2020, we paid distributions of $493,226, which related to distributions declared for daily record dates for each day in the period from October 1, 2020 through October 31, 2020.
On November 11, 2020, our board of directors declared cash distributions on the outstanding shares of our common stock based on daily record dates for the period from December 1, 2020 through December 31, 2020, which we expect to pay in January 2021; the period from January 1, 2021 through January 31, 2021, which we expect to pay in February 2021; and the period from February 1, 2021 through February 28, 2021, which we expect to pay in March 2021. Investors may choose to receive cash distributions or purchase additional shares through our distribution reinvestment plan. Distributions for the period from December 1, 2020 through December 31, 2020 and for the period from January 1, 2021 through February 28, 2021 will be calculated based on shareholders of record each day during these periods at a rate of $0.00136612 and $0.00136986, respectively, per share per day. Distributions declared at this daily rate equal an annualized rate of 5.0% based on a $10.00 purchase price per share and assuming distributions are paid every day for a year at the current daily distribution rate.
For more information regarding distributions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Distributions” below.
Preferred Stock
Subsequent to September 30, 2020 through the date of this supplement, we have paid aggregate dividends of $190,539 to holders of our preferred stock based on daily record dates for the period from September 1, 2020 through October 31, 2020.
On November 11, 2020, our board of directors declared cash distributions on the outstanding shares of our preferred stock based on daily record dates for the period from December 1, 2020 through December 31, 2020, which we expect to pay in January 2021; the period from January 1, 2021 through January 31, 2021, which we expect to pay in February 2021; and the period from February 1, 2021 through February 28, 2021, which we expect to pay in March 2021. Distributions for the period from December 1, 2020 through December 31, 2020 and for the period from January 1, 2021 through February 28, 2021 will be calculated based on shareholders of record each day during these periods at a rate of $0.00150273 and $0.00150685, respectively, per share per day.
Share Repurchase Program
During the year ended December 31, 2019, we did not repurchase any shares of our common stock as no shares were submitted for repurchase. During the three and nine months ended September 30, 2020, we redeemed 31,307 and 0 shares of Class A and Class T common stock, respectively, pursuant to our share redemption program for $268,613, which was an average repurchase price of $8.58. During the nine months ended September 30, 2020, we fulfilled all redemption requests eligible for redemption under our share repurchase program and received in good order. We funded redemptions under our share repurchase program with the proceeds from our distribution reinvestment plan.
During any calendar year, we may repurchase only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our distribution reinvestment plan during the prior calendar year. For the year ended December 31, 2019, we raised $401,603 proceeds in our distribution reinvestment plan, all of which is available to fund eligible redemptions for the 2020 calendar year. Following the redemptions during the nine months ended September 30, 2020, we have $132,990 available for redemption of shares eligible for redemption for the remainder of 2020. Our board of directors may, in its sole discretion, amend, suspend or terminate our share repurchase program for any reason upon 15 days’ notice to our shareholders.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and the related notes included in this supplement.
This discussion contains forward-looking statements that can be identified with the use of forward-looking terminology such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ from those described in forward-looking statements. For a discussion of the factors that could cause actual results to differ from those anticipated, see “Risk Factors” in the prospectus as supplemented to date.
Overview
Cottonwood Communities, Inc. invests in multifamily apartment communities and multifamily real estate-related assets throughout the United States. We seek to invest at least 65% of our assets in stabilized multifamily apartment communities and up to 35% in mortgage loans, preferred equity investments, mezzanine loans or equity investments in property or land which will be developed into a multifamily apartment community (including, by way of example, an existing multifamily apartment community that may require redevelopment capital for strategic repositioning within its market).
Our investment objectives are to:
•preserve, protect and return invested capital;
•pay stable cash distributions to stockholders;
•realize capital appreciation in the value of our investments over the long term; and
•provide a real estate investment alternative with lower expected volatility relative to public real estate companies whose securities trade daily on a stock exchange.
On August 13, 2018, we commenced a best-efforts initial public offering (the "Offering") that consists of $750,000,000 in shares of common stock, made up of $675,000,000 in shares through our primary offering and $75,000,000 in shares through the distribution reinvestment plan (the "DRP Program") at a purchase price of $10.00 per share (with discounts available to certain categories of purchasers in the primary offering) in both offerings. Effective October 15, 2019, we commenced offering two classes of our common stock: Class A and Class T. The share classes have a different selling commission structure; however, these offering-related expenses are being paid by our advisor. We are offering to sell any combination of Class A and Class T common stock in this offering, with a dollar value up to the maximum offering amount.
On November 8, 2019, we launched a best-efforts private placement offering pursuant to which we are offering a maximum of $50,000,000 in shares of Series 2019 Preferred Stock to accredited investors at a purchase price of $10.00 per share (the "Private Offering"). Offering-related expenses in the Private Offering are paid by us.
We elected to be taxed as a REIT beginning with our taxable year ended December 31, 2019. We utilize an UPREIT organizational structure to hold all or substantially all of our assets through the Operating Partnership. We are the general partner of the Operating Partnership.
As of September 30, 2020, we have raised gross proceeds of $20,561,909 from the sale of Series 2019 Preferred Stock in the Private Offering and $115,461,306 from the sale of our common stock in this offering. We have primarily used the net proceeds to make investments in real estate related assets as further described below under Our Investments.
COVID-19 Pandemic and Multifamily Real Estate Outlook
The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The United States has reacted with various containment and mitigation efforts including quarantines, mandated business and school closures and travel restrictions. As a result, the COVID-19 pandemic is negatively impacting the real estate industry. The fluidity of the COVID-19 pandemic continues to preclude any prediction as to the ultimate adverse impact the pandemic may have on our business, financial condition, results of operations and cash flows.
Some of our tenants have suffered difficulties with their personal financial situations as a result of job loss or reduced income and a small percent of the multifamily tenants at our stabilized multifamily apartment communities have sought rent deferrals. Not all tenant requests will ultimately result in rent deferrals and rent deferrals to date have not had a significant
impact on our operations. To date, the impact of COVID-19 on our stabilized multifamily apartment communities has been minimal. As of the end of October 2020, we had received tenant payments equal to 93.8% of the monthly tenant charges billed for the three months ended September 30, 2020. Collections and rent relief requests to date may not be indicative of collections or requests in any future period. 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, although the development projects in which we have invested are currently proceeding on schedule, as a result of shutdowns, quarantines or actual viral health issues, construction and completion of the development projects in which we have invested may be delayed or may incur additional costs which would have an adverse impact on our income from real estate note and investment returns.
The extent to which the COVID-19 pandemic or any other pandemic, epidemic or disease impacts our operations, the personal financial position of our tenants, and the development projects in which we have invested remains 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 and the quality of the assets in our portfolio 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. Further, we believe that factors impacting the prime United States renter demographic such as delayed major life decisions, increased levels of student debt and tight credit standards in the single-family home mortgage market continue to support the value proposition for owning multifamily apartment communities and related investments. We note that our stabilized multifamily apartment communities on a combined basis averaged higher than 90% occupancy as of September 30, 2020. Further, we have no debt maturing until March 2023 and are conservatively leveraged on our stabilized multifamily apartment communities with a total secured debt-to-total assets ratio of 41.2%.
Our Investments
At September 30, 2020, we had the following investments in multifamily apartment communities:
| | | | | | | | | | | | | | |
| Investment Type | Multifamily Community Name | Status | Location | Units |
| Wholly-Owned | Cottonwood West Palm | Stabilized community | West Palm Beach, FL | 245 |
| Wholly-Owned | Cottonwood One Upland | Stabilized community | Greater Boston, MA | 262 |
| B Note | Dolce Twin Creeks, Phase II | Development project | Allen, TX | 366 |
| Preferred Equity | Lector85 | Development project | Ybor City, FL | 254 |
| Preferred Equity | Vernon Boulevard | Development project | Queens, NY | 534 |
We have also entered into an agreement to potentially provide a preferred equity investment for the 2980 Huron Project, a multifamily development in Denver, Colorado.
Investment Activity
On March 19, 2020, we acquired Cottonwood One Upland for $103,600,000, excluding closing costs. We funded the purchase with an initial draw of $50,000,000 from our $67,600,000 credit facility and proceeds from our offerings. Cottonwood One Upland was constructed in 2016 and encompasses 303,840 rentable square feet. Amenities include a swimming pool, clubhouse, outdoor amphitheater, and a dog park.
During the three and nine months ended September 30, 2020, we issued approximately $1,488,000 and $4,942,000, respectively, of our $10,000,000 B note commitment with the developer of Dolce Twin Creeks, Phase II, bringing the total amount issued to approximately $6,736,000.
During the three months ended March 31, 2020, we issued approximately $5,211,000 to our joint venture with Milhaus, LLC for the development of Lector85, a 254-unit multifamily project in Ybor City, Florida. This constituted the remaining amount of our $9,900,000 commitment and as such, no additional funding was required subsequent to March 31, 2020.
On July 24, 2020, we and a publicly-traded multifamily REIT (the “Preferred Co-Investor”) made a preferred equity investment in an entity that is developing a three-building multifamily apartment community in the Astoria neighborhood of Queens, New York (the “Project”). Our preferred contribution was $15,000,000 (the “Vernon Boulevard Investment”). The Preferred Co-Investor contributed $40,000,000. In connection with our investment, we entered a joint venture agreement with the Preferred Co-Investor as well as an entity owned by a New York-based real estate development, investment and management firm (the “Developer”) and a foreign fund. The Developer contributed approximately $62,000,000 in common equity and is the manager of the joint venture.
Pursuant to the terms of the joint venture agreement, the Vernon Boulevard Investment has a preferred return of 13% per annum and receives a profit participation upon a liquidity event, pari passu alongside the preferred equity contribution from the Preferred Co-Investor. Decisions of the members require approval of a majority in interest of the preferred equity holders and a majority in interest of the common holders. The Vernon Boulevard Investment has an expected redemption of July 2025 and is senior to the common equity. Additional funding for the Project will come from a $225,000,000 construction loan. The total development cost is estimated to be $342,000,000.
The Project is located on a 2.5 acre waterfront site and is expected to have 534 units with approximately 500 net rentable square feet of retail space. The Project will feature a central courtyard/green space and rooftop amenities including a 3,962-square-foot pool deck, outdoor barbecues and lounge areas. Indoor amenities will include a golf room, a music room, an arcade and party room, coworking spaces, and a communal lounge with unobstructed views of the East River and Manhattan skyline. The Project is located within a few blocks of the Astoria Ferry station and less than a mile from the nearest subway station. Construction has commenced on the Project with the majority of the foundation work already complete. The first units are scheduled for delivery in the second quarter of 2022.
Results of Operations
We commenced real estate operations on May 30, 2019 with the acquisition of Cottonwood West Palm and, as a result, we have omitted a comparison of the periods for the nine months ended September 30, 2020 as we do not believe this comparison is meaningful. Our results of operations for the three months ended September 30, 2020 and 2019 are as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Revenues | | | |
| Rental and other property revenues | $ | 3,054,823 | | | $ | 1,180,972 | |
| Real estate note investment interest | 171,746 | | | 16,699 | |
| Total revenues | 3,226,569 | | | 1,197,671 | |
| Expenses | | | |
| Property operations expense | 1,358,507 | | | 661,181 | |
| Reimbursable operating expenses to related parties | 263,915 | | | 148,906 | |
| Asset management fee to related party | 811,233 | | | 296,126 | |
| Depreciation and amortization | 2,295,445 | | | 1,270,577 | |
| General and administrative expenses | 1,534,590 | | | 210,700 | |
| Total operating expenses | 6,263,690 | | | 2,587,490 | |
| Other (expense) income | | | |
| Equity in earnings of unconsolidated real estate entities | 708,067 | | | — | |
| Interest income | 6,887 | | | 137,543 | |
| Interest expense | (1,045,464) | | | (388,186) | |
| Total other expense | (330,510) | | | (250,643) | |
| Total expenses before asset management fee waiver | (6,594,200) | | | (2,838,133) | |
| Asset management fee waived by Advisor | 48,543 | | | 310,484 | |
| Net expenses after asset management fee waiver | (6,545,657) | | | (2,527,649) | |
| Net loss | $ | (3,319,088) | | | $ | (1,329,978) | |
| | | |
| Weighted-average shares outstanding | 11,225,384 | | | 6,091,617 | |
| Net loss per common share - basic and diluted | $ | (0.30) | | | $ | (0.22) | |
We incurred net losses of $3,319,088 and $1,329,978 for the three months ended September 30, 2020 and 2019, respectively. The change was primarily driven by additional operating activity and asset management fees resulting from the acquisition of One Upland in March 2020. General and administrative expenses for the three months ended September 30, 2020 also increased compared to the same period in the prior year primarily due to non-recurring legal and financial advisor costs in connection with our evaluation of a strategic transaction. These increases in net losses were partially offset by $708,067 of equity in earnings related to our Vernon Boulevard and Lector85 investments which were funded after September 30, 2019.
We expect our results of operations in future periods to fluctuate as we continue to deploy capital in strategic real estate investments. Changes in occupancy, fluctuations due to changes in the variable interest rate on our JP Morgan Credit Facility and impacts of the COVID-19 pandemic as discussed above could also affect our operating results
As of September 30, 2020, West Palm was occupied at a rate of 91.8% and One Upland was occupied at a rate of 93.9%.
Funds from Operations
Funds from operations, or FFO, is a measure of the operating performance of a REIT and of our company. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for our share of unconsolidated partnerships and joint ventures.
Our management also uses Core FFO as a measure of our operating performance. Core FFO is further adjusted from FFO for the following items included in the determination of GAAP net income: amortization of issuance costs associated with real estate note investments and debt, accretion of discounts on preferred stock, acquisition fees and expenses, and amortization of above or below intangible lease assets and liabilities. Our calculation of Core FFO may differ from the methodology used for calculating Core FFO by other REITs and, accordingly, our Core FFO may not be comparable. We believe these measures are useful to investors because they facilitate an understanding of our operating performance after adjusting for non-cash expenses and other items not indicative of ongoing operating performance.
Neither FFO nor Core FFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and Core FFO do not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor Core FFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.
The following table presents the calculation of FFO and Core FFO:
| | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| Net loss | $ | (3,319,088) | | | $ | (1,329,978) | |
| Adjustments: | | | |
| Real estate-related depreciation and amortization | 2,295,445 | | | 1,270,577 | |
| FFO | (1,023,643) | | | (59,401) | |
| Adjustments: | | | |
| Amortization of real estate note investment issuance costs | 12,218 | | | — | |
| Accretion of discount on preferred stock | 133,597 | | | — | |
| Amortization of debt issuance costs | 58,637 | | | 26,677 | |
| Acquisition fees and expenses | 1,187,131 | | | 11,852 | |
| Accretion of below market leases | (22,310) | | | — | |
| Core FFO | $ | 345,630 | | | $ | (20,872) | |
| | | |
| FFO per share - basic and diluted | $ | (0.09) | | | $ | (0.01) | |
| Core FFO per share - basic and diluted | $ | 0.03 | | | $ | 0.00 | |
| Weighted average shares outstanding | 11,225,384 | | | 6,091,617 | |
Policies Regarding Operating Expenses
Commencing with the quarter ended March 31, 2020, our advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors.
Our conflicts committee determined that the relationship of our total operating expenses and its net assets was justified for the four fiscal quarters ended September 30, 2020 given the costs of operating a public company and the early stage of our operations and approved total operating expenses in excess of the operating expense reimbursement obligation in the third quarter of 2020.
Liquidity and Capital Resources
Our principal demands for funds during the short and long-term are and will be for the acquisition of multifamily apartment communities and investments in multifamily real estate-related assets; operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common and preferred stock; and payments of distributions to stockholders. We will obtain the capital required to purchase multifamily apartment communities and make investments in multifamily real estate-related assets and conduct our operations from the proceeds of the Private Offering, the Offering, from our credit facilities, other secured or unsecured financings from banks and other lenders, and from any undistributed funds from our operations, all of which may be adversely effected by the impact of the COVID-19 pandemic as discussed above.
At September 30, 2020, we had the Berkadia Credit Facility, secured by Cottonwood West Palm, and the JP Morgan Credit Facility, secured by Cottonwood One Upland, for which we have advances of $35,995,000 and $48,500,000, respectively. There is no limit on the amount that we can draw on the Berkadia Credit Facility so long as we maintain the loan-to-value ratio and other requirements as set forth in the loan documents. We may obtain advances secured against One Upland up to $67,600,000 on the JP Morgan Credit Facility, as well as finance other future acquisitions up to $125,000,000. We can draw upon or pay down these credit facilities at our discretion, subject to loan-to-value requirements, debt service coverage ratios and other covenants and restrictions as set forth in the loan documents.
We must also redeem the Series 2019 Preferred Stock for cash at a redemption price per share equal to $10.00 plus any accrued and unpaid dividends, to the extent there are funds legally available, on December 31, 2023. This date may be extended by two one-year extension options.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to pay offering costs in connection with the Private Offering as well as make certain payments to our advisor and our affiliated property manager pursuant to the terms of our advisory and property management agreements.
We elected to be taxed as a REIT under the Internal Revenue Code beginning with our taxable year ended December 31, 2019. To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our 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.
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents and restricted cash:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| Net cash provided by operating activities | | $ | 175,357 | | | $ | 192,451 | |
| Net cash used in investing activities | | (79,053,573) | | | (32,364,478) | |
| Net cash provided by financing activities | | 39,192,488 | | | 65,502,776 | |
| Net (decrease) increase in cash and cash equivalents and restricted cash | | $ | (39,685,728) | | | $ | 33,330,749 | |
Cash flows provided by operating activities were $175,357 during the nine months ended September 30, 2020, primarily as a result of tenant receipts, interest income received on the Dolce B-Note, and interest received for cash on deposit
combined with the deferral of payment on accounts payable, accrued expenses, and other liabilities. Cash flows provided by operating activities during the nine months ended September 30, 2019 were $192,451, primarily as a result of four months of real estate income since the acquisition of Cottonwood West Palm combined with the deferral of payment on accounts payable, accrued expenses and other liabilities.
Cash flows used in investing activities were $79,053,573 during the nine months ended September 30, 2020, due to our purchase of Cottonwood One Upland, the Vernon Boulevard Investment, the Lector85 Investment, and the Dolce B-Note, as well as cash invested in capital improvements. Cash flows used in investing activities were $32,364,478 during the nine months ended September 30, 2019, primarily due to our purchase of Cottonwood West Palm and draws on the Dolce B-Note.
Cash flows provided by financing activities were $39,192,488 during the nine months ended September 30, 2020, driven mainly by the net proceeds we received from the issuance of our common stock and our Series 2019 Preferred Stock, offset partially by distributions paid to common stockholders and net repayments made on our JP Morgan Credit Facility. Cash flows provided by financing activities were $65,502,776 during the nine months ended September 30, 2019, due to the net proceeds we received from the issuance of our common stock, which were offset partially by distributions paid to common stockholders.
Distributions
Distributions declared, distributions paid and cash flow used in operating activities were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Distributions Paid(3) | |
| Three Months Ended | Distributions Declared(1) | Distributions Declared Per Share(1)(2) | Cash | Reinvested (DRP) | Total | Cash Provided By
(Used In) Operating Activities |
| March 31, 2020 | $ | 1,183,119 | | 0.11648918 | | $ | 888,805 | | $ | 237,326 | | $ | 1,126,131 | | $ | 571,878 | |
| June 30, 2020 | 1,309,923 | | 0.12054900 | | 1,017,593 | | 274,570 | | 1,292,163 | | (32,296) | |
| September 30, 2020 | 1,412,921 | | 0.12205853 | | 1,090,610 | | 293,235 | | 1,383,845 | | (364,225) | |
| Total | $ | 3,905,963 | | | $ | 2,997,008 | | $ | 805,131 | | $ | 3,802,139 | | $ | 175,357 | |
(1) Distributions for the periods from January 1, 2020 through September 30, 2020 were based on daily record dates and were calculated at a rate of $0.00136612 per share per day.
(2) Assumes share was issued and outstanding each day during the period presented.
(3) Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the fifth business day of the following month.
For the three months ended September 30, 2020, we paid aggregate distributions of $1,383,845, including $1,090,610 distributions paid in cash and $293,235 of distributions reinvested through our distribution reinvestment plan. For the nine months ended September 30, 2020, we paid aggregate distributions of $3,802,139, including $2,997,008 distributions paid in cash and $805,131 of distributions reinvested through our distribution reinvestment plan. Our net loss for the nine months ended September 30, 2020 was $6,756,268. Cash flows provided by operating activities for the nine months ended September 30, 2020 was $175,357. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by shareholders, with $571,878 prior period cash provided by operating activities and $3,230,261 of offering proceeds. Generally, for purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, 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.
Critical Accounting Policies
Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the period ending December 31, 2019 for discussions of our critical accounting policies. As of September 30, 2020, our critical accounting policies have not changed from those described in that report.
Index to Condensed Consolidated Financial Statements
| | | | | |
| Condensed Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019 | |
| Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) | |
| Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (Unaudited) | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
| | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Condensed Consolidated Balance Sheets |
| | | | |
| | September 30, 2020 | | December 31, 2019 |
| Assets | | (Unaudited) | | |
| Real estate assets, net | | $ | 162,382,984 | | | $ | 63,905,651 | |
| Investments in unconsolidated real estate entities | | 26,446,293 | | | 4,961,868 | |
| Real estate note investment, net | | 6,796,623 | | | 2,059,309 | |
| Cash and cash equivalents | | 7,775,107 | | | 47,549,804 | |
| Restricted cash | | 281,159 | | | 192,190 | |
| Related party receivables | | 61,109 | | | — | |
| Other assets | | 1,099,839 | | | 707,524 | |
| Total assets | | 204,843,114 | | | 119,376,346 | |
| Liabilities and equity | | | | |
| Liabilities | | | | |
| Credit facilities, net | | 83,261,231 | | | 34,990,146 | |
| Preferred stock, net | | 18,525,195 | | | 809,478 | |
| Related party payables | | 319,756 | | | 287,561 | |
| Accounts payable, accrued expenses and other liabilities | | 3,923,465 | | | 992,689 | |
| Total liabilities | | 106,029,647 | | | 37,079,874 | |
| Commitments and contingencies (Note 11) | | | | |
| Stockholders' equity | | | | |
| Common stock, $0.01 par value, 1,000,000,000 shares authorized; 11,575,766 shares issued and outstanding at September 30, 2020; 8,851,759 shares issued and outstanding at December 31, 2019 | | 115,758 | | | 88,518 | |
| Additional paid-in capital | | 115,125,935 | | | 87,973,949 | |
| Accumulated distributions | | (6,275,555) | | | (2,369,592) | |
| Accumulated deficit | | (10,152,671) | | | (3,396,403) | |
| Total stockholders' equity | | 98,813,467 | | | 82,296,472 | |
| Total liabilities and stockholders' equity | | $ | 204,843,114 | | | $ | 119,376,346 | |
| | | | |
| See accompanying notes to condensed consolidated financial statements |
| | | | | | | | | | | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Condensed Consolidated Statements of Operations |
| (Unaudited) |
| | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Revenues | | | | | | | |
| Rental and other property revenues | $ | 3,054,823 | | | $ | 1,180,972 | | | $ | 7,605,791 | | | $ | 1,548,514 | |
| Real estate note investment interest | 171,746 | | | 16,699 | | | 360,874 | | | 16,699 | |
| Total revenues | 3,226,569 | | | 1,197,671 | | | 7,966,665 | | | 1,565,213 | |
| Expenses | | | | | | | |
| Property operations expense | 1,358,507 | | | 661,181 | | | 3,282,037 | | | 883,822 | |
| Reimbursable operating expenses to related parties | 263,915 | | | 148,906 | | | 732,998 | | | 399,391 | |
| Asset management fee to related party | 811,233 | | | 296,126 | | | 1,941,542 | | | 453,851 | |
| Depreciation and amortization | 2,295,445 | | | 1,270,577 | | | 5,629,247 | | | 1,716,528 | |
| General and administrative expenses | 1,534,590 | | | 210,700 | | | 2,315,303 | | | 463,058 | |
| Total operating expenses | 6,263,690 | | | 2,587,490 | | | 13,901,127 | | | 3,916,650 | |
| Other (expense) income | | | | | | | |
| Equity in earnings of unconsolidated real estate entities | 708,067 | | | — | | | 1,273,488 | | | — | |
| Interest income | 6,887 | | | 137,543 | | | 196,821 | | | 299,574 | |
| Interest expense | (1,045,464) | | | (388,186) | | | (2,480,448) | | | (522,822) | |
| Total other expense | (330,510) | | | (250,643) | | | (1,010,139) | | | (223,248) | |
| Total expenses before asset management fee waiver | (6,594,200) | | | (2,838,133) | | | (14,911,266) | | | (4,139,898) | |
| Asset management fee waived by Advisor | 48,543 | | | 310,484 | | | 188,333 | | | 310,484 | |
| Net expenses after asset management fee waiver | (6,545,657) | | | (2,527,649) | | | (14,722,933) | | | (3,829,414) | |
| Net loss | $ | (3,319,088) | | | $ | (1,329,978) | | | $ | (6,756,268) | | | $ | (2,264,201) | |
| | | | | | | |
| Weighted-average shares outstanding | 11,225,384 | | | 6,091,617 | | | 10,412,719 | | | 3,613,382 | |
| Net loss per common share - basic and diluted | $ | (0.30) | | | $ | (0.22) | | | $ | (0.65) | | | $ | (0.63) | |
| | | | | | | |
| See accompanying notes to condensed consolidated financial statements |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Condensed Consolidated Statements of Stockholders' Equity |
| (Unaudited) |
| | | | | | | | | | | | |
| | Stockholders' Equity | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Distributions | | Accumulated Deficit | | Total Equity |
| | Shares | | Amount | | | | |
| Balance at January 1, 2020 | | 8,851,759 | | | $ | 88,518 | | | $ | 87,973,949 | | | $ | (2,369,592) | | | $ | (3,396,403) | | | $ | 82,296,472 | |
| Issuance of common stock | | 1,304,712 | | | 13,047 | | | 12,963,697 | | | — | | | — | | | 12,976,744 | |
| Distributions to investors | | — | | | — | | | — | | | (1,183,119) | | | — | | | (1,183,119) | |
| Net loss | | — | | | — | | | — | | | — | | | (790,050) | | | (790,050) | |
| Balance at March 31, 2020 | | 10,156,471 | | | 101,565 | | | 100,937,646 | | | (3,552,711) | | | (4,186,453) | | | 93,300,047 | |
| Issuance of common stock | | 709,841 | | | 7,098 | | | 7,042,267 | | | — | | | — | | | 7,049,365 | |
| Share based compensation | | — | | | — | | | 27,000 | | | — | | | — | | | 27,000 | |
| Distributions to investors | | — | | | — | | | — | | | (1,309,923) | | | — | | | (1,309,923) | |
| Net loss | | — | | | — | | | — | | | — | | | (2,647,130) | | | (2,647,130) | |
| Balance at June 30, 2020 | | 10,866,312 | | | 108,663 | | | 108,006,913 | | | (4,862,634) | | | (6,833,583) | | | 96,419,359 | |
| Issuance of common stock | | 740,761 | | | 7,408 | | | 7,365,322 | | | — | | | — | | | 7,372,730 | |
| Common stock repurchases | | (31,307) | | | (313) | | | (268,300) | | | — | | | — | | | (268,613) | |
| Share based compensation | | — | | | — | | | 22,000 | | | — | | | — | | | 22,000 | |
| Distributions to investors | | — | | | — | | | — | | | (1,412,921) | | | — | | | (1,412,921) | |
| Net loss | | — | | | — | | | — | | | — | | | (3,319,088) | | | (3,319,088) | |
| Balance at September 30, 2020 | | 11,575,766 | | | $ | 115,758 | | | $ | 115,125,935 | | | $ | (6,275,555) | | | $ | (10,152,671) | | | $ | 98,813,467 | |
| | | | | | | | | | | | |
| | Stockholders' Equity | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Distributions | | Accumulated Deficit | | Total Equity |
| | Shares | | Amount | | | | |
| Balance at January 1, 2019 | | 366,654 | | | $ | 3,667 | | | $ | 3,662,233 | | | $ | — | | | $ | (100,209) | | | $ | 3,565,691 | |
| Issuance of common stock | | 1,523,319 | | | 15,233 | | | 15,186,682 | | | — | | | — | | | 15,201,915 | |
| Distributions to investors | | — | | | — | | | — | | | (58,045) | | | — | | | (58,045) | |
| Net loss | | — | | | — | | | — | | | — | | | (231,511) | | | (231,511) | |
| Balance at March 31, 2019 | | 1,889,973 | | | 18,900 | | | 18,848,915 | | | (58,045) | | | (331,720) | | | 18,478,050 | |
| Issuance of common stock | | 3,169,474 | | | 31,695 | | | 31,525,121 | | | — | | | — | | | 31,556,816 | |
| Distributions to investors | | — | | | — | | | — | | | (537,172) | | | — | | | (537,172) | |
| Net loss | | — | | | — | | | — | | | — | | | (702,712) | | | (702,712) | |
| Balance at June 30, 2019 | | 5,059,447 | | | 50,595 | | | 50,374,036 | | | (595,217) | | | (1,034,432) | | | 48,794,982 | |
| Issuance of common stock | | 2,030,747 | | | 20,307 | | | 20,110,906 | | | — | | | — | | | 20,131,213 | |
| Distributions to investors | | — | | | — | | | — | | | (767,563) | | | — | | | (767,563) | |
| Net loss | | — | | | — | | | — | | | — | | | (1,329,978) | | | (1,329,978) | |
| Balance at September 30, 2019 | | 7,090,194 | | | $ | 70,902 | | | $ | 70,484,942 | | | $ | (1,362,780) | | | $ | (2,364,410) | | | $ | 66,828,654 | |
| | | | | | | | | | | | |
| See accompanying notes to condensed consolidated financial statements |
| | | | | | | | | | | | | | |
| Cottonwood Communities, Inc. |
| Condensed Consolidated Statements of Cash Flows |
| (Unaudited) |
| | | | |
| | Nine Months Ended September 30, |
| | 2020 | | 2019 |
| Cash flows from operating activities: | | | | |
| Net loss | | $ | (6,756,268) | | | $ | (2,264,201) | |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 5,629,247 | | | 1,716,528 | |
| Equity in earnings | | (1,273,488) | | | — | |
| Amortization of real estate note investment issuance cost | | 36,547 | | | — | |
| Amortization of debt issuance costs | | 154,606 | | | 35,570 | |
| Noncash interest expense on preferred stock | | 270,216 | | | — | |
| Share based compensation | | 49,000 | | | — | |
| Changes in operating assets and liabilities: | | | | |
| Related party receivables | | (61,109) | | | (312,846) | |
| Other assets | | (311,215) | | | 1,413 | |
| Related party payables | | 32,195 | | | 302,861 | |
| Accounts payable, accrued expenses and other liabilities | | 2,405,626 | | | 713,126 | |
| Net cash provided by operating activities | | 175,357 | | | 192,451 | |
| Cash flows from investing activities: | | | | |
| Acquisitions of real estate | | (53,904,597) | | | (31,171,298) | |
| Capital improvements to real estate | | (164,178) | | | (73,186) | |
| Investments in unconsolidated real estate entities | | (20,210,937) | | | — | |
| Issuance of real estate note investment including issuance costs | | (4,773,861) | | | (1,119,994) | |
| Net cash used in investing activities | | (79,053,573) | | | (32,364,478) | |
| Cash flows from financing activities: | | | | |
| Proceeds from line of credit | | 12,000,000 | | | — | |
| Repayments of line of credit | | (13,500,000) | | | — | |
| Proceeds from issuance of preferred stock, net of issuance costs | | 17,445,501 | | | — | |
| Proceeds from issuance of common stock | | 26,512,608 | | | 66,377,134 | |
| Common stock repurchases | | (268,613) | | | — | |
| Distributions to common stockholders | | (2,997,008) | | | (874,358) | |
| Net cash provided by financing activities | | 39,192,488 | | | 65,502,776 | |
| Net (decrease) increase in cash and cash equivalents and restricted cash | | (39,685,728) | | | 33,330,749 | |
| Cash and cash equivalents and restricted cash, beginning of period | | 47,741,994 | | | 3,406,175 | |
| Cash and cash equivalents and restricted cash, end of period | | $ | 8,056,266 | | | $ | 36,736,924 | |
| | | | |
Reconciliation of cash and cash equivalents and restricted cash to
the condensed consolidated balance sheets: | | | | |
| Cash and cash equivalents | | $ | 7,775,107 | | | $ | 36,549,491 | |
| Restricted cash | | 281,159 | | | 187,433 | |
| Total cash and cash equivalents and restricted cash | | $ | 8,056,266 | | | $ | 36,736,924 | |
| | | | |
| Supplemental disclosure of non-cash investing and financing activities: | | | | |
| Credit facilities entered into in conjunction with acquisition of real estate | | $ | 49,616,479 | | | $ | 35,995,000 | |
| | | | |
| See accompanying notes to condensed consolidated financial statements |
Cottonwood Communities, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.Organization and Business
Cottonwood Communities, Inc. is a Maryland corporation formed to invest in multifamily apartment communities and real estate related assets located throughout the United States. The Company elected to be taxed as a real estate investment trust or REIT beginning with the taxable year ending December 31, 2019. The Company holds real estate interests and conducts its business through its operating partnership, Cottonwood Communities O.P., LP (the “Operating Partnership”). Unless the context indicates otherwise, the “Company,” “we,” “our” or “us” refers to Cottonwood Communities, Inc. and its consolidated subsidiaries, including the Operating Partnership.
We are externally managed and have no employees. CC Advisors III, LLC is our advisor. Cottonwood Communities Management, LLC is the property manager for our stabilized multifamily apartment communities.
We are offering $750,000,000 in shares of common stock in an initial public offering (the “Offering”), made up of $675,000,000 in shares through our primary offering and $75,000,000 in shares through our distribution reinvestment plan (the "DRP Program”) at a purchase price of $10.00 per share (with discounts available to certain categories of purchasers in the primary offering) in both offerings. Our common stock has two classes, Class A and Class T. The share classes have a different selling commission structure; however, these offering-related expenses are being paid by our advisor. We are offering to sell any combination of Class A and Class T common stock in this offering, with a dollar value up to the maximum offering amount.
We are also offering a maximum of $50,000,000 in shares of Series 2019 Preferred Stock to accredited investors at a purchase price of $10.00 per share in a private offering (the "Private Offering"). Offering-related expenses in the Private Offering are paid by us.
At September 30, 2020, we owned two multifamily apartment communities, one in West Palm Beach, Florida and the second in the Greater Boston, Massachusetts area; have issued a B Note secured by a deed of trust on a multifamily development project in Allen, Texas; have made two preferred equity investments in multifamily development projects, one in Ybor City, Florida and the second in the Astoria neighborhood of Queens, New York; and have entered into an agreement to provide a preferred equity investment for a multifamily development project in Denver, Colorado.
COVID-19 Pandemic
One of the most significant risks and uncertainties facing the real estate industry generally continues to be the effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. During the nine months ended September 30, 2020, we did not experience significant disruptions in our operations from the COVID-19 pandemic; however we continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business, including how the pandemic will impact our tenants and multifamily communities.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements, including the condensed notes thereto, are unaudited and exclude some of the disclosures required in audited financial statements. The condensed consolidated balance sheet as of December 31, 2019 has been derived from the Company’s audited financial statements as of that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments and eliminations, consisting only of normal recurring adjustments necessary for a fair presentation in conformity with GAAP. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the period ending December 31, 2019 filed with the SEC.
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries for which we have a controlling interest. All intercompany balances and transactions have been eliminated in consolidation.
Organization and Offering Costs
All organization and offering costs in connection with the offering of our common stock are paid by our advisor. We will not incur any liability for or reimburse our advisor for any of these organizational and offering costs. As of September 30, 2020, our advisor incurred approximately $13,341,000 in organizational and offering costs from the issuance of common stock.
3. Real Estate Assets, Net
The following table summarizes the carrying amounts of our consolidated real estate assets:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Building and building improvements | $ | 134,776,296 | | | $ | 52,466,583 | |
| Land and land improvements | 28,182,025 | | | 10,658,155 | |
| Furniture, fixtures and equipment | 3,983,344 | | | 2,015,778 | |
| Intangible assets | 3,808,756 | | | 1,503,325 | |
| 170,750,421 | | | 66,643,841 | |
| Less: Accumulated depreciation and amortization | (8,367,437) | | | (2,738,190) | |
| Real estate assets, net | $ | 162,382,984 | | | $ | 63,905,651 | |
Asset acquisition
On March 19, 2020, we acquired Cottonwood One Upland, a multifamily community in the Greater Boston area for $103,600,000, excluding closing costs. We funded the purchase with an initial draw of $50,000,000 from our $67,600,000 credit facility with JP Morgan and proceeds from our offerings. Acquired assets and liabilities were recorded at relative fair value as an asset acquisition.
The following table summarizes the purchase price allocation of the real estate assets acquired during the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
| Allocated Amounts |
| Property | Building | Land | Land Improvements | Personal Property | Intangible | Total |
| Cottonwood One Upland | $ | 82,145,536 | | $ | 14,514,535 | | $ | 3,009,335 | | $ | 1,967,566 | | $ | 2,305,430 | | $ | 103,942,402 | |
The weighted-average amortization period for the intangible lease assets acquired in connection with the Cottonwood One Upland acquisition was 0.5 years.
4. Investments in Unconsolidated Real Estate Entities
Lector85 Investment
During the nine months ended September 30, 2020, we contributed $5,210,937 to our joint venture with Milhaus, LLC for the development of Lector85, a 254-unit multifamily project in Ybor City, Florida. This constituted the remaining amount of our $9,900,000 commitment. During the three and nine months ended September 30, 2020, we recorded equity in earnings of $328,900 and $894,321, respectively, from the Lector85 Investment under the hypothetical liquidation book value method.
Vernon Boulevard Investment
On July 24, 2020, we and a publicly-traded multifamily REIT (the “Preferred Co-Investor”) made a preferred equity investment in an entity that is developing a three-building multifamily apartment community in the Astoria neighborhood of Queens, New York (the “Project”). Our preferred contribution was $15,000,000 (the “Vernon Boulevard Investment”). The Preferred Co-Investor contributed $40,000,000. In connection with our investment, we entered a joint venture agreement with the Preferred Co-Investor as well as an entity owned by a New York-based real estate development, investment and management firm (the “Developer”) and a foreign fund. The Developer contributed approximately $62,000,000 in common equity and is the manager of the joint venture.
Pursuant to the terms of the joint venture agreement, the Vernon Boulevard Investment has a preferred return of 13% per annum and receives a profit participation upon a liquidity event, pari passu alongside the preferred equity contribution from the Preferred Co-Investor. Decisions of the members require approval of a majority in interest of the preferred equity holders and a majority in interest of the common holders. The Vernon Boulevard Investment has an expected redemption of July 2025 and is senior to the common equity. Additional funding for the Project will come from a $225,000,000 construction loan. The total development cost is estimated to be $342,000,000.
The $15,000,000 investment constitutes the full amount of our commitment. During the three and nine months ended September 30, 2020, we recorded equity in earnings of $379,167 from the Vernon Boulevard Investment under the hypothetical liquidation book value method.
5. Real Estate Note Investment
During the three and nine months ended September 30, 2020, we issued approximately $1,488,000 and $4,942,000, respectively, of our $10,000,000 B note with the developer of Dolce Twin Creeks, Phase II, a 366-unit multifamily project in Allen Texas, bringing the total amount issued to approximately $6,736,000.
Net interest income from the Dolce B Note was $171,746 and $360,874 for the three and nine months ended September 30, 2020, respectively. No allowance was recorded on the Dolce B Note during this period.
6. Credit Facilities
We have a credit facility agreement with Berkadia Commercial Mortgage, LLC (the "Berkadia Credit Facility"), for which we have an advance of $35,995,000 secured by Cottonwood West Palm. The advance is interest-only until maturity and bears a fixed interest rate of 3.93%. The advance matures on May 30, 2029 and can be prepaid subject to certain fees and conditions. There is no limit on the amount that we can draw on the Berkadia Credit Facility so long as we maintain the loan-to-value ratio and other requirements set forth in the loan documents.
On March 19, 2020, in conjunction with the acquisition of Cottonwood One Upland, we entered a secured revolving credit facility agreement with J.P. Morgan Chase Bank, N.A., an unaffiliated lender (the “JP Morgan Credit Facility”). Pursuant to the terms of the JP Morgan Credit Facility, we may obtain advances secured against Cottonwood One Upland up to the amount of $67,600,000, subject to certain debt service coverage ratio requirements. Upon the closing of Cottonwood One Upland, our initial advance was $50,000,000. During the three months ended September 30, 2020, our total borrowings on this credit facility decreased to $48,500,000.
The JP Morgan Credit Facility has an initial maturity date of March 19, 2023 with the option to extend for two one-year periods subject to the satisfaction of certain conditions set forth in the loan agreement. The advances carry an interest-only term and bear floating interest rates of 1-month LIBOR plus a spread ranging from 1.50% to 1.75%, depending on certain debt yield metrics set forth in the loan agreement and as evidenced by a promissory note. We have the right to prepay all or a portion of the JP Morgan Credit Facility at any time subject to certain conditions contained in the loan documents.
We may finance other future acquisitions through the JP Morgan Credit Facility. The aggregate loan-to-value ratio for all advances made with respect to the JP Morgan Credit Facility cannot exceed 65% at the time any advance is made. The limit on the amount that we can borrow under the JP Morgan Credit Facility is $125,000,000 so long as we maintain the loan-to-value and debt coverage ratios, and other requirements set forth in the JP Morgan Credit Facility loan documents. Each advance will be cross-collateralized with the other advances. The JP Morgan Credit Facility permits us to sell the multifamily apartment communities that are secured by the JP Morgan Credit Facility individually provided that certain loan-to-value and debt coverage ratios, and other requirements, are met.
We were in compliance with all covenants associated with our outstanding credit facilities as of September 30, 2020.
7. Fair Value of Financial Instruments
We estimate the fair value of our financial instruments using available market information and valuation methodologies we believe to be appropriate. As of September 30, 2020 and December 31, 2019, the fair values of cash and cash equivalents, restricted cash, other assets, related party payables, and accounts payable, accrued expenses and other liabilities approximate their carrying values due to the short-term nature of these instruments.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. Fair value measurements are categorized into one of three levels of the fair value hierarchy based on the lowest level of significant input used. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. These estimates may differ from the actual amounts that we could realize upon settlement.
The fair value hierarchy is as follows:
Level 1 - Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 - Other observable inputs, either directly or indirectly, other than quoted prices included in Level 1, including:
•Quoted prices for similar assets/liabilities in active markets;
•Quoted prices for identical or similar assets/liabilities in non-active markets (e.g., few transactions, limited information, non-current prices, high variability over time);
•Inputs other than quoted prices that are observable for the asset/liability (e.g., interest rates, yield curves, volatilities, default rates); and
•Inputs that are derived principally from or corroborated by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data.
The table below includes the carrying value and fair value for our financial instruments for which it is practicable to estimate fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial Asset: | | | | | | | | |
| Real estate note investment | | $ | 6,735,530 | | | $ | 6,735,530 | | | $ | 1,793,771 | | | $ | 1,793,771 | |
| | | | | | | | |
| Financial Liability: | | | | | | | | |
| Berkadia Credit Facility | | $ | 35,995,000 | | | $ | 39,603,000 | | | $ | 35,995,000 | | | $ | 37,410,000 | |
| JP Morgan Credit Facility | | $ | 48,500,000 | | | $ | 48,500,000 | | | $ | — | | | $ | — | |
| Series 2019 Preferred Stock | | $ | 20,561,909 | | | $ | 20,561,909 | | | $ | 1,198,000 | | | $ | 1,198,000 | |
Our real estate note investment, Berkadia Credit Facility, JP Morgan Credit Facility and Series 2019 Preferred Stock are categorized as Level 3 in the fair value hierarchy.
8. Preferred Stock
The Series 2019 Preferred Stock has a fixed redemption date and is classified as a liability on the condensed consolidated balance sheet. Dividends to preferred stockholders, paid at an annual rate of 5.5%, are classified as interest expense on the condensed consolidated statement of operations.
During the nine months ended September 30, 2020 we raised approximately $19,364,000 of Series 2019 Preferred Stock. We incurred approximately $451,000 in dividends on our Series 2019 Preferred Stock for the nine months ended September 30, 2020. We had 2,063,146 and 119,800 shares of Series 2019 Preferred Stock outstanding as of September 30, 2020 and December 31, 2019, respectively.
9. Stockholders' Equity
During the three months ended September 30, 2020 and 2019 we raised approximately $7,373,000 and $20,131,000 of common stock and paid approximately $1,091,000 and $563,000 in distributions to common stockholders, respectively. During the nine months ended September 30, 2020 and 2019 we raised approximately $27,399,000 and $66,890,000 of common stock and paid approximately $2,997,000 and $874,000 in distributions to common stockholders, respectively. As of September 30, 2020, we had 11,575,766 of common stock outstanding, of which 11,558,254 was Class A common stock and 17,512 was Class T common stock.
LTIP Unit Awards
On March 25, 2020, we amended the agreement of our Operating Partnership effective February 1, 2020 to establish LTIP Units, a new series of partnership units, and to permit the admission of additional limited partners.
We also entered into LTIP Unit Award Agreements with certain executive officers and a person associated with the dealer manager for our Offering, awarding 12,438 time-based LTIP Units and a target total of 37,312 performance-based LTIP Units. The time-based LTIP Units vest over a four year period at a rate of 25% each on January 1 of the following years: 2021, 2022, 2023 and 2024. The actual amount of each performance-based award is determined at the conclusion of the performance period, which is December 31, 2022 and will depend on the internal rate of return as defined in the award agreement. The earned performance-based LTIP Units will become fully vested on the first anniversary of the last day of the performance period, subject to continued employment with the advisor or its affiliates.
The number of units was awarded at the estimated value per share of our common stock of $10.00. Time based LTIP Units, whether vested or unvested, receive the same distribution per unit as common stockholders. Performance based LTIP units receive 10% of that amount per unit on the total target units during the performance period, whereupon the participant receives an additional grant of LTIP Units the equivalent of 90% of distributions that would have been paid on the earned units during the performance period. Share based compensation for these awards during the three and nine months ended September 30, 2020 was approximately $22,000 and $49,000, respectively.
10. Related-Party Transactions
Asset management fees to our advisor for the three months ended September 30, 2020 and 2019 were $811,233 and $296,126, respectively. Asset management fees to our advisor for the nine months ended September 30, 2020 and 2019 were $1,941,542 and $453,851, respectively. Asset management fees waived by our advisor during the three and nine months ended September 30, 2020 were $48,543 and $188,333, respectively. There were $310,484 of asset management fees waived during the three and nine months ended September 30, 2019.
Acquisition expenses reimbursed to our advisor for the three and nine months ended September 30, 2020 and 2019 were not significant, as we have generally incurred and paid such expenses directly.
Reimbursable company operating expenses to our advisor or its affiliates for the three months ended September 30, 2020 and 2019 were $263,915 and $148,906, respectively. Reimbursable company operating expenses to our advisor or its affiliates for the nine months ended September 30, 2020 and 2019 were $732,998 and $399,391, respectively.
Property management fees to our property manager for the three months ended September 30, 2020 and 2019 were $108,067 and $38,753, respectively. Property management fees to our property manager for the nine months ended September 30, 2020 and 2019 were $269,525 and $53,297, respectively. Property management fees to our property manager are classified as property operations expense on the condensed consolidated statements of operations.
11. Commitments and Contingencies
Dolce B Note
As of September 30, 2020, we had a remaining commitment of up to approximately $3,264,000 on the Dolce B-Note.
2980 Huron Investment
On October 25, 2019, we entered into a joint venture to provide $20,000,000 of preferred equity in an entity that has purchased and intends to develop 0.84 acres in the Union Station North neighborhood in downtown Denver, Colorado (the "2980 Huron Project"). Our contributions will only be made following the contribution of the full $17,500,000 of common equity by our joint venture partner. As of September 30, 2020, no draws have been made on our $20,000,000 commitment and we do not have commencement or completion dates for the 2980 Huron Project.
Pursuant to the joint venture agreement, our obligation to advance the funds for our preferred equity membership interest is subject to the satisfaction of certain conditions which have not been satisfied. Further, our contractual obligation to fund our preferred equity investment has expired. We can provide no assurance we will ultimately advance funds for the 2980 Huron Investment.
Litigation
As of September 30, 2020, we were not subject to any material litigation nor were we aware of any material litigation threatened against us.
Distribution Reinvestment Plan
We have adopted a distribution reinvestment plan whereby stockholders may elect to have us apply their dividends and other distributions to the purchase of additional shares of common stock. Participants in the plan will acquire common stock at the per share price effective on the date of purchase (currently $10.00).
Share Repurchase Programs
Series 2019 Preferred Stock
Upon the request of a holder of Series 2019 Preferred Stock, we may, at the sole discretion of the board of directors, repurchase their shares at the following prices, which are dependent on how long a redeeming stockholder has held each share:
| | | | | | | | | |
| Share Purchase Anniversary | Repurchase Price |
| Less than 1 year | $8.80 | |
| 1 year | $9.00 | |
| 2 years | $9.20 | |
| 3 years | $9.40 | |
| 4 years | $9.60 | |
| 5 years | $9.80 | |
| A stockholder’s death or complete disability, 2 years or more | $10.00 | |
No Series 2019 Preferred Stock shares were redeemed during the three or nine months ended September 30, 2020.
Common Stock
Our board of directors has adopted a share repurchase program that permits holders of common stock to request, on a quarterly basis, that we repurchase all or any portion of their shares. We may choose to repurchase all, some or none of the shares that have been requested to be repurchased at our discretion, subject to limitations in the share repurchase plan. The total amount of aggregate repurchased shares will be limited to 5% of the weighted average number of shares of common stock outstanding during the prior calendar year. In addition, during any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our distribution reinvestment plan during the prior calendar year.
The repurchase price is subject to the following discounts, depending on how long a redeeming stockholder has held each share:
| | | | | |
| Share Purchase Anniversary | Repurchase Price as a Percentage of Estimated Value (1) |
| Less than 1 year | No repurchase allowed |
| 1 year - 2 years | 85% |
| 3 years - 4 years | 90% |
| 5 years and thereafter | 95% |
| A stockholder’s death or complete disability, less than 2 years | 95% |
| A stockholder’s death or complete disability, 2 years or more | 100% |
| | | | | |
| (1) | For the purposes of the share repurchase program, the “estimated value per share” will initially be equal to the purchase price per share at which the original purchaser or purchasers of the shares bought its shares from us, and the purchase price per share will be adjusted to reflect any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares outstanding.
We plan to establish an estimated net asset value (“NAV”) per share of our common stock based on valuations of our assets and liabilities no later than May 17, 2021 and annually thereafter. Upon our establishment of an estimated NAV per share, the estimated NAV per share will be the estimated value per share pursuant to the share repurchase program. |
During the three and nine months ended September 30, 2020, we redeemed 31,307 and 0 shares of Class A and Class T common stock, respectively, pursuant to our share redemption program for $268,613, which was an average repurchase price of $8.58.
Our board of directors may, in its sole discretion, amend, suspend or terminate our share repurchase program for any reason upon 15 days’ notice to our stockholders.
12. Subsequent Events
We evaluate subsequent events up until the date the condensed consolidated financial statements are issued and have determined there are none to be reported or disclosed in the condensed consolidated financial statements other than those mentioned below.
Status of the Private Offering
As of November 10, 2020, we had sold 2,620,480 shares of Series 2019 Preferred Stock for aggregate gross offering proceeds of $26,088,409. In connection with the sale of these shares in the Private Offering, the Company paid aggregate selling commissions of $1,704,428 and placement fees of $506,930.
Status of the Offering
As of November 10, 2020, we had sold 11,799,847 shares of our Class A common stock and 17,516 shares of our Class T common stock in this offering for aggregate gross offering proceeds of $117,566,430. Included in these amounts were 140,781 shares of common stock sold pursuant to the DRP Program for aggregate gross offering proceeds of $1,407,811.
Dividends Paid - Series 2019 Preferred Stock
Subsequent to September 30, 2020 and through the date of this report, we paid $190,539 of dividends to holders of record of Series 2019 Preferred Stock at an effective annual rate of 5.5% on the $10.00 purchase price, assuming distributions are paid every day for a year at the daily distribution rate.
Dividends Declared - Series 2019 Preferred Stock
On November 11, 2020, our board of directors declared cash distributions at a daily distribution rate of $0.00150273 for December 2020 and declared cash distributions at a daily distribution rate of $0.00150685 for January and February 2021, or 5.5% annually on the $10.00 purchase price, to holders of record of our Series 2019 Preferred Stock for the months of December 2020, January 2021 and February 2021.
Distributions Paid - Common Stock
Subsequent to September 30, 2020 and through the date of this report, we paid $962,567 of distributions to our common stockholders at an effective annual rate of 5.0% on the $10.00 purchase price, assuming distributions are paid every day for a year at the daily distribution rate.
Distributions Declared - Common Stock
Our board of directors has authorized cash distributions on the outstanding shares of our common stock based on daily record dates as follows:
| | | | | | | | | | | | | | |
| Authorization Date | Period | Daily Distribution Amount | Annualized Rate (1) | Expected Payment |
| October 25, 2020 | November 1, 2020 – November 30, 2020 | $0.00136612 | 5% | December 2020 |
| November 11, 2020 | December 1, 2020 – December 31, 2020 | $0.00136612 | 5% | January 2021 |
| November 11, 2020 | January 1, 2021 – January 31, 2021 | $0.00136986 | 5% | February 2021 |
| November 11, 2020 | February 1, 2021 – February 28, 2021 | $0.00136986 | 5% | March 2021 |
(1) Annualized rate is based on the $10.00 purchase price and assumes distributions are paid every day for a year at the daily distribution amount. |
Holders of our common stock may choose to receive cash distributions or purchase additional shares.
