UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of |
(I.R.S. Employer |
(Address of principal executive offices) (Zip code)
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
None |
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N/A |
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N/A |
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company., or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No
As of November 8, 2021, there were
(Back to Index)
RESOURCE REIT, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
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PAGE |
PART I |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Consolidated Balance Sheets – September 30, 2021 (unaudited) and December 31, 2020 |
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4 |
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5 |
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6 |
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Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2021 and 2020 (unaudited) |
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8 |
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Notes to Consolidated Financial Statements – September 30, 2021 (unaudited) |
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9 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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39 |
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Item 3. |
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53 |
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Item 4. |
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53 |
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PART II |
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OTHER INFORMATION |
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Item 2. |
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54 |
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Item 3. |
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55 |
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Item 6. |
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56 |
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57 |
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Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q 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. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events. Factors that could cause actual results to differ materially from these expectations include, but are not limited to, the continuing adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on our financial condition, results of operations, cash flows and performance, particularly our ability to collect rent, the personal financial condition of our tenants and their ability to pay rent, and the real estate market and the global economy and financial markets. The extent to which COVID-19 impacts us and our tenants will depend 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, among others. Moreover, you should interpret many of the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2020 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Actual results may differ materially from those contemplated by such forward-looking statements. 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.
See the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC for a discussion of some, although not all, of the risks and uncertainties that could cause actual results to differ materially from those presented in our forward-looking statements.
Explanatory Note Regarding Financial Information
In connection with the REIT I Merger described below in Note 1, Resource REIT, Inc. (f/k/a Resource Real Estate Opportunity REIT II, Inc.) (“REIT II”) was the legal acquirer and Resource Real Estate Opportunity REIT, Inc. (“REIT I”) was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the REIT I Merger reflects results of the combined entity, and the financial information set forth herein prior to the REIT I Merger reflects REIT I’s results. For this reason, period to period comparisons may not be meaningful. 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 Mergers, and REIT II and one or more of REIT II’s subsidiaries for periods following the Mergers. Certain historical information of REIT II is included for background purposes. See Note 1, Nature of Business and Organization, for defined terms.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESOURCE REIT, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share data)
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September 30, 2021 |
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December 31, 2020 |
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ASSETS |
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Investments: |
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Rental properties, net |
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$ |
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$ |
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Identified intangible assets, net |
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— |
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Assets held for sale - rental properties |
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— |
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Total investments |
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Cash |
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Restricted cash |
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Subtotal- cash and restricted cash |
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Due from related parties |
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— |
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Tenant receivables, net of allowance of $ |
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Prepaid expenses and other assets |
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Goodwill |
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Operating lease right-of-use assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Mortgage notes payable, net |
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$ |
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$ |
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Accounts payable and accrued expenses |
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Accrued real estate taxes |
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Due to related parties |
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— |
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Tenant prepayments |
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Security deposits |
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Operating lease liabilities |
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Total liabilities |
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$ |
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$ |
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Equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Convertible stock; par value $ |
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Additional paid-in capital |
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Accumulated other comprehensive income (loss) |
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( |
) |
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( |
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Accumulated deficit |
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( |
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( |
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Total stockholders' equity |
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Noncontrolling interest |
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— |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
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3
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RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenues: |
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Rental income |
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$ |
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$ |
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$ |
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$ |
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Property management fee income - related parties |
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— |
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Asset management fee income - related parties |
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— |
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Other revenue |
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— |
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— |
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— |
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Total revenues |
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Expenses: |
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Property operating expenses |
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Real estate taxes |
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Acquisition costs |
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— |
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— |
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— |
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Property management fees - third party |
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Property management fees- related party |
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— |
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— |
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Asset Management fees - related party |
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— |
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— |
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Transaction costs |
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— |
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— |
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Casualty loss |
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General and administrative- Property related |
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General and administrative- Corporate |
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Loss on disposal of assets |
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Depreciation and amortization expense |
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Total expenses |
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Income (loss) before other income (expense) |
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( |
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Other income (expense): |
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Interest expense |
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( |
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( |
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( |
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( |
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Interest income |
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— |
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Gain on sale of rental property |
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— |
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— |
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— |
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Gain on sale of land easement |
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— |
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— |
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Insurance proceeds in excess of cost basis |
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Total other income (expense) |
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( |
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( |
) |
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( |
) |
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( |
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Loss before income taxes |
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( |
) |
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( |
) |
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( |
) |
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( |
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Provision for income taxes |
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— |
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— |
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( |
) |
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— |
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Net loss |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
( |
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Redemption of preferred OP units |
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( |
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— |
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( |
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— |
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Preferred return to preferred OP unit holders |
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( |
) |
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( |
) |
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( |
) |
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( |
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Net loss after preferred return |
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( |
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( |
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( |
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( |
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Less: Allocation of income to preferred unit holders attributable to noncontrolling interest |
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Less: Net loss attributable to noncontrolling interest |
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Net loss attributable to common stockholders |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Weighted average common shares outstanding- basic |
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Weighted average common shares outstanding- diluted |
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Net loss per common share- BASIC |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
Net loss per common share- DILUTED |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
The accompanying notes are an integral part of these consolidated financial statements
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4
(Back to Index)
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net loss |
$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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Other comprehensive income (loss): |
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Reclassification adjustment for realized loss on designated derivatives |
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Designated derivatives, fair value adjustments |
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( |
) |
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( |
) |
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( |
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Total comprehensive loss |
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( |
) |
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( |
) |
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( |
) |
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( |
) |
Redemption of preferred OP units |
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( |
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— |
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( |
) |
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— |
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Preferred return to preferred OP unit holders |
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( |
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( |
) |
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( |
) |
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( |
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Total comprehensive loss after preferred return to preferred OP unit holders |
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( |
) |
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( |
) |
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( |
) |
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( |
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Net loss attributable to noncontrolling interest |
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Allocation of income to preferred unit holders attributable to noncontrolling interest |
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Total other comprehensive loss (income) attributable to noncontrolling interest |
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( |
) |
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Comprehensive (income) loss attributable to noncontrolling interest |
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Comprehensive loss attributable to common stockholders |
$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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The accompanying notes are an integral part of these consolidated financial statements.
(Back to Index)
5
(Back to Index)
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
(in thousands)
(unaudited)
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Common Stock |
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Convertible Stock |
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Additional Paid-in Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Total Stockholders’ Equity |
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Noncontrolling Interest |
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Total Equity |
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Shares |
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Amount |
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Shares |
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Amount |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
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$( |
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$( |
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$ |
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$ |
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$ |
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Merger |
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— |
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— |
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— |
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— |
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— |
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Common stock issued through the distribution reinvestment plan |
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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— |
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— |
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( |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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( |
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Common stock redemptions |
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( |
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( |
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— |
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— |
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( |
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— |
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— |
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( |
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— |
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( |
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Preferred return to preferred OP unit holders |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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( |
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Other comprehensive income |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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( |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$( |
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$ |
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$ |
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$ |
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Common stock issued through the distribution reinvestment plan |
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|
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— |
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— |
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— |
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— |
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— |
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Issuance of restricted stock |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
|||||||||||||||
Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributions declared |
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— |
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— |
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— |
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— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|||||||||||||||
Common stock redemptions |
|
( |
|
( |
|
— |
|
— |
|
( |
|
— |
|
— |
|
( |
|
— |
|
( |
|||||||||||||||
Preferred return to preferred OP unit holders |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|||||||||||||||
Other comprehensive loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
|
|
( |
|
( |
|
( |
|||||||||||||||
Net income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
|
|
|||||||||||||||||||
Balance at June 30, 2021 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$ |
|
$ |
|||||||||||||||||
Common stock issued through the distribution reinvestment plan |
|
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
||||||||||||||||||||
Issuance of restricted stock |
|
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
||||||||||||||||
Stock-based compensation |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
||||||||||||||||||
Distributions declared |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
— |
|
( |
|||||||||||||||
Common stock redemptions |
|
( |
|
( |
|
— |
|
— |
|
( |
|
— |
|
— |
|
( |
|
— |
|
( |
|||||||||||||||
Conversion of common OP Units to common stock |
|
|
|
|
|
— |
|
|
— |
|
— |
|
|
( |
|
— |
|||||||||||||||||||
Redemption of preferred OP units |
|
— |
|
|
|
|
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|||||||||||||||
Preferred return to preferred OP unit holders |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|||||||||||||||
Other comprehensive loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
|
|
( |
|
( |
|
( |
|||||||||||||||
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
|||||||||||||||
Balance at September 30, 2021 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$— |
|
$ |
The accompanying notes are an integral part of these consolidated financial statements.
(Back to Index)
6
(Back to Index)
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020
(in thousands)
(unaudited)
|
|
Common Stock |
|
Convertible Stock |
|
Additional Paid-in Capital |
|
Accumulated Other Comprehensive Loss |
|
Accumulated Deficit |
|
Total Stockholders’ Equity |
|
Noncontrolling Interest |
|
Total Equity |
||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2020 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$— |
|
$ |
||
Common stock issued through the distribution reinvestment plan |
|
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|||||
Distributions declared |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
— |
|
( |
Common stock redemptions |
|
( |
|
( |
|
— |
|
— |
|
( |
|
— |
|
— |
|
( |
|
— |
|
( |
Other comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
|
— |
|
|||
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
— |
|
( |
Balance at March 31, 2020 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$— |
|
$ |
||
Common stock redemptions |
|
( |
|
( |
|
— |
|
— |
|
( |
|
— |
|
— |
|
( |
|
— |
|
( |
Other comprehensive income |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
|
— |
|
|||
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
— |
|
( |
Balance at June 30, 2020 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$— |
|
$ |
||
Issuance of operating partnership units in Self-Management Transaction |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|
||
Issuance of restricted stock |
|
|
|
— |
|
— |
|
( |
|
— |
|
— |
|
— |
|
— |
|
— |
||
Stock-based compensation |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|||
Allocation of income to preferred unit holders |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
Other comprehensive loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
— |
|
( |
|
( |
|
( |
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
( |
|
( |
|
( |
|
( |
Balance at September 30, 2020 |
|
|
$ |
|
|
$ |
|
$ |
|
$( |
|
$( |
|
$ |
|
$ |
|
$ |
The accompanying notes are an integral part of these consolidated financial statements.
(Back to Index)
7
(Back to Index)
RESOURCE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
||
Loss on disposal of assets |
|
|
|
|
|
|
||
Casualty (gains)/ losses, net of insurance proceeds received |
|
|
|
|
|
( |
) |
|
Net gain on disposition of property |
|
|
( |
) |
|
|
— |
|
Net gain on sale of land easement |
|
|
— |
|
|
|
( |
) |
Loss on extinguishment of debt |
|
|
|
|
|
— |
|
|
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of deferred financing costs |
|
|
|
|
|
|
||
Amortization of debt premium (discount) |
|
|
|
|
|
( |
) |
|
Realized loss on change in fair value of interest rate cap |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Accretion of discount and direct loan fees and costs |
|
|
— |
|
|
|
( |
) |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
||
Tenant receivables, net |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other assets |
|
|
|
|
|
( |
) |
|
Due to/from related parties, net |
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
|
|
|
|
( |
) |
|
Tenant prepayments |
|
|
( |
) |
|
|
|
|
Security deposits |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Proceeds from disposal of property, net of closing costs |
|
|
|
|
|
— |
|
|
Cash acquired in connection with the Merger, net of acquisition costs |
|
|
|
|
|
— |
|
|
Proceeds from sale of land easement |
|
|
— |
|
|
|
|
|
Working capital paid in Self-Management Transaction |
|
|
— |
|
|
|
( |
) |
Insurance proceeds received for casualty losses |
|
|
|
|
|
|
||
Capital expenditures |
|
|
( |
) |
|
|
( |
) |
Principal payments received on loans held for investment |
|
|
— |
|
|
|
|
|
Payment of consideration related to Self-Management Transaction |
|
|
( |
) |
|
|
— |
|
Net cash provided by (used in) investing activities |
|
|
|
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Redemptions of common and convertible stock |
|
|
( |
) |
|
|
( |
) |
Redemptions of preferred OP units |
|
|
( |
) |
|
|
— |
|
Payment of deferred financing costs |
|
|
( |
) |
|
|
— |
|
Borrowings on mortgages |
|
|
|
|
|
|
||
Principal repayments on mortgages |
|
|
( |
) |
|
|
( |
) |
Purchase of interest rate caps |
|
|
( |
) |
|
|
( |
) |
Distributions paid on common stock |
|
|
( |
) |
|
|
( |
) |
Distributions paid to preferred OP unit holders |
|
|
( |
) |
|
|
— |
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net increase in cash and restricted cash |
|
|
|
|
|
|
||
Cash and restricted cash at beginning of period |
|
|
|
|
|
|
||
Cash and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
Reconciliation of cash and restricted cash |
|
|
|
|
|
|
||
Cash |
|
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
|
||
Cash and restricted cash at end of period |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these consolidated statements.
(Back to Index)
8
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
(unaudited)
NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource REIT, Inc., 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.
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 and may continue to acquire underperforming apartments which it 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.
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 Resource Real Estate Opportunity REIT, Inc. (“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 Mergers. Each of the 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 Mergers became effective as of January 28, 2021.
REIT I Merger
On
Effective
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
REIT III Merger
On
Effective
(Back to Index)
9
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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
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 self-managed REIT. In connection with the 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 Mergers reflects results of the combined entity, and the financial information set forth herein prior to the 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.
As of September 30, 2021, a total of
The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The REIT I consolidated balance sheet as of December 31, 2020 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2020. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2020, included in the Amended Current Report on Form 8-K/A filed by the Company on April 8, 2021. The results of operations for the nine months ended September 30, 2021 may not necessarily be indicative of the results of operations for the full year ending December 31, 2021. The Company has adopted a fiscal year ending December 31.
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 three and nine months ended September 30, 2021; 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 September 30, 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:
(Back to Index)
10
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with 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.
Concentration of Risk
As of September 30, 2021, the Company's real estate investments in Texas, Georgia, Illinois, and Colorado represented
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 financial statements and the accompanying notes. Actual results could differ from those estimates.
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 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 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. 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.
Accounting Standards Issued But Not Yet Effective
In August 2020, FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. ASU 2020-06 addresses the complexity of guidance for certain financial (convertible) instruments with characteristics of liabilities and equity. ASU No. 2020-06 will be effective for the Company beginning January 1, 2022. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2020-06 to have a material effect on its consolidated financial statements and disclosures.
Assets Held for Sale
The Company presents rental property assets that qualify as held for sale separately in the consolidated balance sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. As of September 30, 2021, the Company had
(Back to Index)
11
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
rental properties included in assets held for sale. As of December 31, 2020, the Company had
Rental Properties
The Company records acquired rental properties at fair value on the 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.
Buildings |
|
|
Building improvements |
|
|
Furniture, fixtures, and equipment |
|
|
Tenant improvements |
|
Shorter of lease term or expected useful life |
Lease intangibles |
|
Weighted average remaining term of related lease |
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 Mergers, and for the Company’s annual estimated value per share calculation of the combined company following the Mergers, a third-party was engaged to provide the estimated fair value of our rental properties as of January 28, 2021. The Company compared these values to its carrying values and concluded that there was
Allocation of the Purchase Price of Acquired and Foreclosed Assets
Acquisitions that do not meet the definition of a business under FASB Accounting Standards Codification ("ASC"), Business Combinations, ("ASC 805") are accounted for as asset acquisitions. In most cases, the Company believes 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 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 Company will then perform an assessment to determine whether the asset 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 relative fair value.
Upon the acquisition of real properties, the Company allocates 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.
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
(Back to Index)
12
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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 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, the Company also considers 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 the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s 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.
The Company amortizes 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 the Company’s reported net income.
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 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 three and nine months ended September 30, 2021 and 2020.
Revenue Recognition and Receivables
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, where collection has been considered probable, on a straight-line basis over the term of the related lease, which is accounted for in accordance with ASC 842, Leases (“ASC 842”).
The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are $
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
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13
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
fees for administration of leases, late payments and 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 revenue sharing arrangements for cable income from contracts with cable providers at the Company’s properties. Included in accounts payable and accrued expenses on the consolidated balance sheets as of September 30, 2021 and December 31, 2020 is a contract liability related to deferred revenue from contracts with cable providers of approximately $
Following the Self- Management Transaction (described in Note 3 below) through the effective date of the Mergers on January 28, 2021, the Company received asset management and property management fees from REIT II and REIT III.
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 September 30, 2021 and December 31, 2020, the Company recorded a $
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
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14
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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 under the Code, the Company is generally required to distribute at least
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. Generally, taxable income differs from GAAP net income because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat any of its subsidiaries as a taxable REIT subsidiary (“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 both September 30, 2021 and December 31, 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.
The Company is subject to examination by the U.S. Internal Revenue Service (“IRS”) and by the taxing authorities in 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 tax return years 2016 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.
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.
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15
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Reclassifications
Certain amounts in the prior years’ financial statements have been reclassified to conform to the current-year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net income (loss).
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 Real Estate LLC (formerly known as 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 “Legacy Co”) 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
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
As part of the Self-Management Transaction, REIT I paid outstanding obligations due to RAI of approximately $
As part of the Self-Management Transaction, Advisor Holdings 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 $
Under the terms of the Self-Management Transaction, the following consideration was given in exchange (in thousands):
Fair value of OP I Units issued |
|
$ |
|
|
Net working capital |
|
|
|
|
Subsequent consideration |
|
|
|
|
Net consideration |
|
$ |
|
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
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16
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
third-party valuation specialist that was subject to management’s review and approval.
Assets: |
|
|
|
|
Due from related parties |
|
$ |
|
|
Prepaid expenses and other assets |
|
|
|
|
Goodwill |
|
|
|
|
Property and equipment |
|
|
|
|
Operating lease right-of-use assets |
|
|
|
|
Total assets acquired |
|
$ |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Other liabilities |
|
$ |
|
|
Operating lease liabilities |
|
|
|
|
Total liabilities assumed |
|
|
|
|
Net assets acquired |
|
$ |
|
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 $
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents the Company's supplemental cash flow information (in thousands):
|
|
Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Non-cash financing and investing activities: |
|
|
|
|
|
|
||
Stock issued from the distribution reinvestment plan |
|
$ |
|
|
$ |
|
||
Repayments on borrowings through refinancing |
|
|
|
|
|
|
||
Accruals for construction in progress |
|
|
|
|
|
|
||
Deferred financing costs funded directly by mortgage notes |
|
|
— |
|
|
|
|
|
Non-cash activity related to dispositions: |
|
|
|
|
|
|
||
Mortgage notes payable settled directly with proceeds from sale of rental property |
|
|
|
|
|
— |
|
|
Non-cash activity related to Self-Management Transaction: |
|
|
|
|
|
|
||
Goodwill - Self-Management Transaction |
|
|
— |
|
|
|
|
|
Due to related parties |
|
|
— |
|
|
|
|
|
Operating Partnership units issued in exchange for net assets acquired |
|
|
— |
|
|
|
|
|
Accrued allocation of income to preferred unit holders |
|
|
— |
|
|
|
|
|
Operating lease right of use assets assumed |
|
|
— |
|
|
|
|
|
Operating lease liabilities assumed |
|
|
— |
|
|
|
|
|
Property and equipment assumed |
|
|
— |
|
|
|
|
|
Non-cash activity related to Merger: |
|
|
|
|
|
|
||
Net assets acquired in REIT II Merger in exchange for common shares |
|
$ |
|
|
$ |
— |
|
|
Net assets acquired in REIT III Merger in exchange for common shares |
|
|
|
|
|
— |
|
|
Implied REIT I common stock issued in exchange for net assets acquired in Merger |
|
|
|
|
|
— |
|
|
Cash paid during the period for: |
|
|
|
|
|
|
||
Interest |
|
$ |
|
|
$ |
|
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17
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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.
|
|
September 30, 2021 |
|
|
December 31, |
|
||
Real estate taxes |
|
$ |
|
|
$ |
|
||
Insurance |
|
|
|
|
|
|
||
Debt service reserve |
|
|
|
|
|
|
||
Capital improvements |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
NOTE 6 - RENTAL PROPERTIES, NET
As of September 30, 2021, the Company's investments in rental properties consisted of
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Land |
|
$ |
|
|
$ |
|
||
Building and improvements |
|
|
|
|
|
|
||
Furniture, fixtures and equipment |
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
Rental properties, net |
|
$ |
|
|
$ |
|
Depreciation expense for the three and nine months ended September 30, 2021 was $
During the three months ended September 30, 2021, the Company entered into agreements to sell four rental properties, The Retreat at Rocky Ridge, Tech Center Square, The Brookwood and Pines of York, with net book values totaling $
The following table summarizes the Company's investments in rental properties held for sale (in thousands):
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18
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
|
|
September 30, 2021 |
|
|
Land |
|
$ |
|
|
Building and improvements |
|
|
|
|
Furniture, fixtures and equipment |
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
Assets held for sale - rental properties |
|
$ |
|
The following table presents the Company's revenues and net income/(loss) attributable to the properties held for sale for the three and nine months ended September 30, 2021 (in thousands):
|
|
Revenues Attributable to Property Held For Sale |
|
|
Net Income/(Loss) Attributable to Property Held For Sale |
|
||||||||||
Multifamily Community |
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||||
The Retreat at Rocky Ridge |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Tech Center Square |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
The Brookwood |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
Pines of York |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Mergers
Both the REIT I Merger and the REIT III Merger (collectively the “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 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 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 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 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 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
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19
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Merged entity estimated net asset value as of merger date |
|
$ |
|
|||
REIT I exchange ratio |
|
|
|
|||
REIT I estimated value per share as of January 28, 2021 |
|
$ |
|
|||
|
|
|
|
|||
REIT II common stock outstanding as of January 28, 2021 |
|
|
|
|||
REIT I exchange ratio |
|
|
|
|||
Implied REIT I common stock issued as consideration |
|
|
|
|||
REIT I estimated value per share as of January 28, 2021 |
|
$ |
|
|||
Value of implied REIT I common stock issued as consideration |
|
$ |
|
The allocation of the values of the real estate and other assets and liabilities as of January 28, 2021, inclusive of $
Assets: |
|
|
|
|
Land |
|
$ |
|
|
Building and improvements |
|
|
|
|
Intangibles |
|
|
|
|
Cash and restricted cash |
|
|
|
|
Other assets |
|
|
|
|
Total assets |
|
$ |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Mortgage notes payable, net of $ |
|
$ |
|
|
Due to related parties |
|
|
|
|
Accounts payable and other liabilities |
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired |
|
$ |
|
|
Less: REIT I's Merger expenses |
|
|
|
|
Fair value of net assets acquired, less REIT I's Merger expenses |
|
$ |
|
Although REIT I is the accounting acquirer, REIT II is the legal acquirer of both REIT III and REIT I. As such, the
(Back to Index)
20
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
REIT III common stock outstanding as of January 28, 2021 |
|
|
|
|
REIT III exchange ratio |
|
|
|
|
REIT II shares issued as consideration |
|
|
|
|
REIT I exchange ratio |
|
|
|
|
Implied REIT I common stock issued as consideration |
|
|
|
|
REIT I estimated value per share as of January 28, 2021 |
|
$ |
|
|
Value of implied REIT I common stock issued as consideration |
|
$ |
|
The allocation of the values of the real estate and other assets and liabilities as of January 28, 2021, inclusive of $
Assets: |
|
|
|
|
Land |
|
$ |
|
|
Building and improvements |
|
|
|
|
Intangibles |
|
|
|
|
Cash and restricted cash |
|
|
|
|
Other assets |
|
|
|
|
Total assets |
|
$ |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
Mortgage notes payable, net of $ |
|
$ |
|
|
Due to related parties |
|
|
|
|
Accounts payable and other liabilities |
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired |
|
$ |
|
|
Less: REIT I's Merger expenses |
|
|
|
|
Fair value of net assets acquired, less REIT I's Merger expenses |
|
$ |
|
Valuation and Purchase Price Allocation
The Company obtained third party appraisals for all properties included in the 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
(Back to Index)
21
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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
|
|
REIT II |
|
|
REIT III |
|
|
Total |
|
|||||||||||||||
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Pro Forma Financial Information (unaudited)
The following condensed pro forma operating information is presented as if the Mergers and the Self–Management Transaction had been included in operations as of January 1, 2020 (in thousands, except per share data):
|
|
Nine Months Ended |
|
|
Year Ended |
|
||
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Revenue |
|
$ |
|
|
$ |
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss attributable to noncontrolling interests |
|
$ |
|
|
$ |
|
||
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss to common stockholders per share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 7 - DISPOSITION OF PROPERTY
The Company disposed of
|
|
|
|
|
|
|
|
|
Net Gain on Disposition of Property |
|
||||||
Multifamily Community |
|
Location |
|
Sale Date |
|
Contract Sales Price |
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
|||
Evergreen at Coursey Place |
|
Baton Rouge, LA |
|
6/29/2021 |
|
$ |
|
|
$ |
- |
|
|
$ |
|
The following table presents the Company's revenues and net income/(loss) attributable to the property sold, excluding gain on sale, for the three and nine months ended September 30, 2021 (in thousands):
|
|
Revenues Attributable to Property Sold |
|
|
Net Income/(Loss) Attributable to Property Sold |
|
||||||||||
Multifamily Community |
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
|
Three Months Ended September 30, 2021 |
|
|
Nine Months Ended September 30, 2021 |
|
||||
Evergreen at Coursey Place |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
(Back to Index)
22
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
NOTE 8 - 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 $
Amortization of the antennae leases for the three and nine months ended September 30, 2021 was approximately $
Amortization of the in-place apartment unit rentals was $
As of September 30, 2021 and December 31, 2020, the Company had approximately $
Balance, January 1, 2021 |
|
$ |
|
|
Sale of Evergreen at Coursey Place |
|
|
( |
) |
Balance, September 30, 2021 |
|
$ |
|
NOTE 9 - DEBT
The following table presents a summary of the Company's debt (in thousands):
|
|
|
|
|
|
|
|
Weighted Average Maturity in Years at |
|
|||
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
|
September 30, 2021 |
|
|||
Mortgage notes payable, net - variable rate |
|
$ |
|
|
$ |
|
|
|
|
|||
Mortgage notes payable, net - fixed rate |
|
|
|
|
|
|
|
|
|
|||
Total mortgage notes payable, net |
|
$ |
|
|
$ |
|
|
|
|
|||
Revolving credit facility |
|
$ |
|
|
$ |
|
|
|
— |
|
||
|
|
|
|
|
|
|
|
|
|
|||
Weighted average interest rate on mortgages - variable |
|
|
% |
|
|
% |
|
|
|
|||
Weighted average interest rate on mortgages - fixed |
|
|
% |
|
|
% |
|
|
|
|||
Weighted average interest rate on revolving credit facility |
|
|
|
|
|
|
|
|
|
|||
Weighted average interest rate on total debt |
|
|
% |
|
|
% |
|
|
|
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
(Back to Index)
23
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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.
The initial advance of $
Additional information about the initial advance on the Facility, which is included in Mortgage notes payable, net on the Consolidated Balance Sheet as of September 30, 2021, is as follows (in thousands):
Collateral |
|
Original Loan Amount |
|
|
Maturity Date |
|
Type |
|
Annual Interest Rate |
|
Fixed Advance 1 |
|
$ |
|
|
|
Fixed |
|
|||
Fixed Advance 2 |
|
$ |
|
|
|
Fixed |
|
|||
Floating Advance |
|
$ |
|
|
|
Floating (1) |
|
(1)
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 $
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
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
(Back to Index)
24
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
2021 and
There were
Other Debt
Mortgage notes payable assumed as part of both the Mergers and the acquisitions of Point Bonita Apartment Homes, Paladin (Pines of York and Evergreen at Coursey, prior to its sale), 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 September 30, 2021 was $
As of September 30, 2021, the Company owned
The following table presents the Company's annual future principal payments on outstanding borrowings as of September 30, 2021 (in thousands):
Remainder 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
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 September 30, 2021, the Company believes that there are no material defaults or instances of noncompliance in regards to any of these mortgages payable.
(Back to Index)
25
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
The Company has a $
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three months ended September 30, 2021 and 2020, $
NOTE 10 - 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
The Company’s lease expense related to the parking lot lease for both three and nine months ended September 30, 2021 and three and nine months ended September 30, 2020 was approximately $
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 September 30, and thereafter (in thousands):
Remainder 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
NOTE 11 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in each component of the Company's accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020 (in thousands):
Balance, January 1, 2021 |
|
$ |
( |
) |
Reclassification adjustment for realized loss on designated derivatives |
|
|
|
|
Designated derivatives, fair value adjustments |
|
|
|
|
Balance before noncontrolling interest |
|
$ |
( |
) |
Noncontrolling interest |
|
|
( |
) |
Balance, September 30, 2021 |
|
$ |
( |
) |
(Back to Index)
26
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Balance, January 1, 2020 |
|
$ |
( |
) |
Reclassification adjustment for realized loss on designated derivatives |
|
|
|
|
Designated derivatives, fair value adjustments |
|
|
( |
) |
Balance before noncontrolling interest |
|
$ |
( |
) |
Noncontrolling interest |
|
|
|
|
Balance, September 30, 2020 |
|
$ |
( |
) |
NOTE 12 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has ongoing relationships with several related parties.
Relationship with C-III and RAI
As of September 30, 2021, C-III and its subsidiary, Legacy Co, collectively own approximately
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
Property loss policy. 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 $
General liability loss policy. The Company (with other properties directly managed by RAI) had an insured and dedicated limit for the general liability of $
Internal audit. Prior to the Self-Management Transaction, RAI performed internal audit services for the Company.
Directors and officers liability 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 Merger, the Company participated in a liability insurance program for directors and officers coverage with REIT II and REIT III.
(Back to Index)
27
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Other expenses. The Company utilizes the services of The Planning and Zoning Resource Company, an affiliate of C-III, for zoning reports for acquisitions.
Relationship with the Former Advisor
In September 2009, the Company entered into an advisory agreement, which has been amended at various times thereafter (the “Advisory Agreement”), pursuant to which the Former Advisor provided the Company with investment management, administrative and related services. The Advisory Agreement has a
Acquisition fees. The Company paid the Former Advisor an acquisition fee of
Asset management fees. The Company paid the Former Advisor a monthly asset management fee equal to -twelfth of
Disposition fees. The Former Advisor earned a disposition fee in connection with the sale of a property equal to the lesser of -half of the aggregate brokerage commission paid, or if none is paid,
Debt financing fees. The Former Advisor earned a debt financing fee equal to
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 Merger in January 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
(Back to Index)
28
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Construction management fees. The Manager earned a construction management fee of
Debt servicing fees. The Manager earned a debt servicing fee of
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):
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||
Due from related parties: |
|
|
|
|
|
|
||
REIT II |
|
|
|
|
|
|
||
Management fees |
|
$ |
— |
|
|
$ |
|
|
Operating expense reimbursements |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
REIT III |
|
|
|
|
|
|
||
Management fees |
|
|
— |
|
|
|
|
|
Deferred organization and offering costs reimbursements |
|
|
— |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
|
|
Due to related parties: |
|
|
|
|
|
|
||
C-III/RAI |
|
|
|
|
|
|
||
Self-Management Transaction consideration |
|
$ |
— |
|
|
$ |
|
|
Allocation of income to preferred unit holders |
|
|
— |
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
|
(Back to Index)
29
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
The following table presents the Company's fees earned by, and expenses paid to, such related parties (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Fees earned / expenses paid to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Former Advisor (prior to 9/8/2020): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Acquisition costs (1) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
Asset management fees (2) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Debt financing fees (4) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Overhead allocation (3) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Internal audit (3) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Manager (prior to 9/8/2020): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property management fees (2) |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Construction management fees (4) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Debt servicing fees (2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
REIT II (prior to 1/28/2021): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset management fee income |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Property management fee income |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Operating expense reimbursements (3) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
Internal audit (3) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
REIT III (prior to 1/28/2021): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asset management fee income |
|
$ |
— |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Property management fee income |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
C-III/RAI: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transition services paid to C-III(3) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
Preferred unit distributions |
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
||
ACR |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Internal audit |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
Sublease rent reimbursement (3) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
(1) Included in Acquisition Costs on the consolidated statements of operations. This amount represents the net acquisition fee paid to the Former Advisor during the nine months ended September 30, 2020 for additional capital funding contributed to the properties.
(2) Included in Management fees - related party on the consolidated statements of operations.
(3) Included in General and administrative on the consolidated statements of operations.
(4) Capitalized and included in Rental Properties, net on the consolidated balance sheets.
NOTE 13 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue
(Back to Index)
30
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Common Stock
As of September 30, 2021, the Company had an aggregate
|
|
Shares |
|
|
Gross |
|
||
Shares issued through private offering |
|
|
|
|
$ |
|
||
Shares issued through primary public offering |
|
|
|
|
|
|
||
Shares issued through stock distributions |
|
|
|
|
|
— |
|
|
Shares issued through distribution reinvestment plan |
|
|
|
|
|
|
||
Restricted shares issued to employees |
|
|
|
|
|
— |
|
|
Shares issued through conversion of common OP units |
|
|
|
|
|
— |
|
|
Shares issued in conjunction with the Merger |
|
|
|
|
|
— |
|
|
Total |
|
|
|
|
$ |
|
||
Shares redeemed and retired |
|
|
( |
) |
|
|
|
|
Total shares issued and outstanding as of September 30, 2021 |
|
|
|
|
|
|
Convertible Stock
As of December 31, 2020, REIT I had
As of September 30, 2021, the Company had
Each of these
(A) the lesser of
(i)
(1) the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds
(2) the sum of the aggregate issue price of those outstanding shares plus a
(Back to Index)
31
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
(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.
As of September 30, 2021,
Redemption of Securities
During the nine months ended September 30, 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 |
|
|
|
|
$ |
|
||
February 2021 |
|
|
|
|
|
|
||
March 2021 |
|
|
|
|
$ |
|
||
April 2021 |
|
|
|
|
|
|
||
May 2021 |
|
|
|
|
|
|
||
June 2021 |
|
|
|
|
$ |
|
||
July 2021 |
|
|
|
|
|
|
||
August 2021 |
|
|
|
|
|
|
||
September 2021 |
|
|
|
|
$ |
|
||
|
|
|
|
|
|
|
(1) The shares redeemed in January 2021 and
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 can have their shares repurchased by the Company. 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 distribution reinvestment plan in the immediately preceding calendar quarter; provided that, for any quarter in which no distribution reinvestment plan proceeds are available, the funding limitation for the quarter will be 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”) will be the 15th day (or the next business day thereafter) of the last month of the calendar quarter. Redemption requests must 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 will be made no later than business days after the Redemption Date. In addition, the Amended SRP clarifies that stockholders eligible to have their shares repurchased by the Company include 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 removes any reference to the Former Advisor and its affiliates as the Company is now self-managed.
The share redemption program remains partially suspended and, until the Board determines otherwise, the Company will continue to only consider redemption requests submitted 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”). All other requests will not be honored or retained, but will be cancelled with the ability to resubmit when, if ever, the share redemption program is fully resumed.
Distributions Paid to Common Stockholders
For the nine months ended September 30, 2021, the Company paid common stockholders aggregate distributions of $
(Back to Index)
32
(Back to Index)
RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Record Date |
|
Per Common |
|
|
Distribution Date |
|
Net Cash Distribution |
|
|
Distributions Reinvested in Shares of Common Stock |
|
|
Total Aggregate Distribution |
|
||||
March 30, 2021 |
|
$ |
|
|
March 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
||||
June 29, 2021 |
|
|
|
|
June 30, 2021 |
|
|
|
|
|
|
|
|
|
||||
September 29, 2021 |
|
|
|
|
September 30, 2021 |
|
|
|
|
|
|
|
|
|
||||
|
|
$ |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
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 to 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
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
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.
The awards were granted effective
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.
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33
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
Employees were awarded
|
|
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 |
|
|
|
|
|
|
|
|||
Granted |
|
|
$ |
|
|
$ |
|
|||
Forfeited |
|
- |
|
|
|
( |
|
|
|
( |
Vested |
|
( |
|
|
|
( |
|
|
|
( |
Unvested restricted shares, end of period |
|
|
|
|
|
|
|
Noncontrolling Interests
Noncontrolling interests represent limited partnership interests in the Operating Partnership, or OP Units, in which the Company is 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
Each OP Preferred Unit was entitled to a
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
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34
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
become effective 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 nine months ended September 30, 2021, noncontrolling interests were approximately
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 three and nine months ended September 30, 2021, the Company redeemed the OP Preferred Units and recognized a $
NOTE 14 - 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 value of cash, restricted cash, tenant receivables and accounts payable, approximate their carrying value 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 (in thousands):
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate caps |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate caps |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
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35
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
The following table presents the carrying amount and estimated fair value of the Company’s mortgage notes payable-outstanding borrowings (in thousands):
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
||||||||||
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
||||
Mortgage notes payable- outstanding borrowings |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
NOTE 15 - 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 to certain 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
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 three and nine months ended September 30, 2021, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR and one loan indexed to SOFR, associated with existing variable-rate loan agreements. During the three and nine months ended September 30, 2021, the Company repaid or refinanced
During the three and nine months ended September 30, 2021, the Company recorded expenses of approximately $
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36
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
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 approximate $
The following table presents the Company's outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of September 30, 2021 and December 31, 2020 (dollars in thousands):
|
Interest Rate Derivative |
|
Number of |
|
|
Notional |
|
|
Maturity Dates |
||
September 30, 2021 |
Interest Rate Caps |
|
|
|
|
$ |
|
|
|||
December 31, 2020 |
Interest Rate Caps |
|
|
|
|
$ |
|
|
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of September 30, 2021 and December 31, 2020 (in thousands):
Asset Derivatives |
|
|
Liability Derivatives |
|
||||||||||||||||||||||
September 30, 2021 |
|
|
December 31, 2020 |
|
|
September 30, 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 |
|
$ |
|
|
Prepaid expenses and other assets |
|
$ |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
NOTE 16 - SUBSEQUENT EVENTS
On October 12, 2021, the Company sold The Retreat at Rocky Ridge in Hoover, Alabama for $
In conjunction with the sale of The Retreat at Rocky Ridge, the Company repaid in full the loan secured by Bay Club Apartments and replaced The Retreat at Rocky Ridge with Bay Club Apartments as collateral for the Credit Facility.
On October 21, 2021, the Company sold Tech Center Square in Newport News, Virginia for $
In conjunction with the sale of Tech Center Square, the Company repaid in full the loan secured by Perimeter 5550 and replaced Tech Center Square with Perimeter 5550 as collateral for the Credit Facility.
On October 26, 2021, the Company sold The Brookwood in Homewood, Alabama for $
The Company repaid in full the loan secured by Windbrooke Crossing for $
On October 20, 2021, the Company entered into an agreement to sell Maxwell Townhomes, located in San Antonio, Texas with an expected closing in the first quarter of 2022. The Company expects to recognize a gain on sale during the three months ended March 31, 2022.
On October 27, 2021, the Company entered into an agreement to sell The Bryant at Yorba Linda, located in Yorba Linda, California with an expected closing in the first quarter of 2022. The Company expects to recognize a gain on sale upon sale in the three months ended March 31, 2022.
On November 2, 2021, the Company sold Pines of York in Yorktown, Virginia for $
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37
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RESOURCE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
SEPTEMBER 30, 2021
(unaudited)
The Company has evaluated subsequent events and determined that no events have occurred, other than as disclosed above or elsewhere in the financial statements, which would require an adjustment to or additional disclosure in the consolidated financial statements.
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38
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource REIT, Inc. (f/k/a Resource Real Estate Opportunity REIT II, Inc. or REIT II) 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 were formed on September 28, 2012. We are a public, self-managed, non-traded REIT that has acquired a diversified portfolio of U.S. commercial real estate and real estate-related debt. As of September 30, 2021, our portfolio consisted of 49 multifamily properties in 14 states that contain 14,643 units. In October and November 2021, we sold four properties that contained 936 units and subsequent to September 30, 2021, we went under contract to sell an additional two properties with 716 units. As of September 30, 2021, we had 43 employees and conduct our operations through OP II, our operating partnership. We have 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.
Merger
On September 8, 2020, Resource Real Estate Opportunity REIT, Inc. (“REIT I”), REIT II, RRE Opportunity OP II, LP, REIT II’s operating partnership (“REIT II OP” or “OP II”), Resource Real Estate Opportunity OP, LP, a Delaware limited partnership (“REIT I OP” or “OP I”), and Revolution I Merger Sub, LLC, a wholly owned subsidiary of REIT II (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement” pursuant to which REIT I was to be merged with and into Merger Sub, with Merger Sub surviving as a direct wholly owned subsidiary of REIT II, in a stock-for-stock business combination (the “REIT I Company Merger”).
On January 26, 2021, at a special meeting of our stockholders, our stockholders approved Articles of Amendment to our charter (the “Articles of Amendment”) to remove certain provisions related to “Roll-Up Transactions” (and the associated definitions) from our charter in connection with the REIT I Company Merger. On January 27, 2021, we filed the Articles of Amendment with the State Department of Assessments and Taxation of Maryland, and the Articles of Amendment became effective on January 28, 2021.
Effective January 28, 2021, REIT I merged with and into Merger Sub, with Merger Sub surviving as a direct wholly owned subsidiary of Resource REIT, Inc. (the “Company Merger”) and OP I merged with and into OP II, with OP II surviving (the “Partnership Merger” and, together with the Company Merger, the “Mergers”). At such time, in accordance with the applicable provisions of the Maryland General Corporation Law, the Maryland Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, the separate existence of both the Company and OP I ceased.
At the effective time of the Company Merger, each issued and outstanding share of our common stock (or a fraction thereof), $0.01 par value per share (“REIT I Common Stock”), converted into 1.22423 shares of Resource REIT’s common stock, $0.01 par value per share (“Resource REIT Common Stock”) and each issued and outstanding share of our convertible stock, $0.01 par value per share (“REIT I Convertible Stock”), converted into the right to receive $0.02 in cash, without interest.
At the effective time of the Partnership Merger, each common unit of partnership interests in OP I outstanding immediately prior to the effective time of the Partnership Merger converted into the right to receive 1.22423 common units of partnership interest in OP II and each Series A Cumulative Participating Redeemable Preferred Unit in OP I issued and outstanding immediately prior to the effective time of the Partnership Merger converted into the right to receive one Series A Cumulative Participating Redeemable Preferred Unit in OP II.
Resource Apartment REIT III, Inc. (“REIT III”) Merger
On September 8, 2020, REIT II, OP II, Revolution III Merger Sub, LLC, REIT II’s wholly-owned subsidiary (“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”).
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39
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Effective January 28, 2021, REIT III merged with and into Merger Sub III, with Merger Sub III surviving as REIT II’s direct, wholly-owned subsidiary (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 “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 the 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’s common stock issued in the REIT III Company Merger, a common unit of partnership interest was issued to the Company by OP II.
The combined company after the Mergers is known as “Resource REIT, Inc.” The Mergers are intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended.
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 and became a self-managed REIT. In connection with the Mergers, REIT II was the legal acquirer of both REIT I and REIT II, however, REIT I was the accounting acquirer for financial reporting purposes. Thus, the financial information set forth herein subsequent to the Mergers reflects results of the combined entity, and the financial information set forth herein prior to the Mergers reflects REIT I’s results. For this reason, period to period comparisons may not be meaningful.
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 Mergers, and REIT II and one or more of REIT II’s subsidiaries for periods following the Mergers. Certain historical information of REIT II is included for background purposes.
Self-Management Transaction
On September 8, 2020, OP I entered into a transaction (the “Self-Management Transaction”) with Resource PM Holdings LLC (“PM Holdings”), Resource Real Estate LLC (formerly known as Resource NewCo LLC (“Advisor Holdings”), C-III Capital Partners LLC ("C-III"), RRE Legacy Co, LLC ("Legacy Co") 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 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. 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 Mergers and succeeded to the advisory, asset management and property management arrangements formerly in place with REIT II and REIT III until the Mergers. At the time of the 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 13, 2021, we 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, collectively held by C-III and Legacy Co. C-III and Legacy Co provided their consent and waiver to the early redemption by the OP of the Series A Preferred Units at the Redemption Price (as defined in the limited partnership agreement for the OP (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, we 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 the OP and us.
In accordance with the letter agreement, on September 14, 2021, the Company redeemed 319,965 outstanding Series A Preferred Units collectively held by C-III and Legacy Co for $67.5 million and exchanged 7,539,737.53 common units collectively held by C-III and Legacy Co for an equivalent number of shares of our common stock.
COVID-19 Pandemic and Portfolio Outlook
As of September 30, 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 nine months ended September 30, 2021, the
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40
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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 and nine months ended September 30, 2021, our 30-day collection rate was approximately 95.3% and 95.4%, respectively, 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. The impact of the COVID-19 pandemic on our rental revenue for the nine months ended September 30, 2021 and thereafter cannot, however, be determined at present. 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, 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 September 30, 2021, we owned interests in a total of 49 multifamily properties. The three combined REITs have acquired interests in 78 multifamily properties and as of September 30, 2021, have sold interests in 29 of these properties.
Through September 30, 2021, the COVID-19 pandemic has not significantly impacted our operating results; however, we have experienced some reductions in revenue during both the quarter and year to date as a result of waiving late fees and the suspension of evictions at our properties. We expect that as the impact of COVID-19 continues to be felt, the COVID-19 outbreak may 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.
Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020
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41
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The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined below) for the three months ended September 30, 2021 and 2020 for our Same Store and Non-Same Store properties (as defined below) (dollars in thousands, except per unit):
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
September 30, 2021 (2) |
|
|
September 30, 2020 |
|
|
Increase / (Decrease) |
|
|
% Change (1) |
|
||||
Number of properties: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
26 |
|
|
|
27 |
|
|
|
(1 |
) |
|
|
-4 |
% |
Non-Same Store |
|
|
23 |
|
|
|
1 |
|
|
|
22 |
|
|
N/M |
|
|
Total |
|
|
49 |
|
|
|
28 |
|
|
|
21 |
|
|
|
75 |
% |
Number of Units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
8,135 |
|
|
|
8,135 |
|
|
|
— |
|
|
|
|
|
Non-Same Store |
|
|
6,508 |
|
|
|
352 |
|
|
|
6,156 |
|
|
N/M |
|
|
Total |
|
|
14,643 |
|
|
|
8,487 |
|
|
|
6,156 |
|
|
|
73 |
% |
Average Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
94.6 |
% |
|
|
93.2 |
% |
|
|
|
|
|
1.4 |
% |
|
Non-Same Store |
|
|
95.8 |
% |
|
|
96.3 |
% |
|
|
|
|
|
-0.5 |
% |
|
Total |
|
|
95.1 |
% |
|
|
93.3 |
% |
|
|
|
|
|
1.8 |
% |
|
Net effective rent, per occupied unit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
$ |
1,342 |
|
|
$ |
1,271 |
|
|
$ |
71 |
|
|
|
6 |
% |
Non-Same Store |
|
$ |
1,402 |
|
|
$ |
995 |
|
|
$ |
407 |
|
|
|
41 |
% |
All properties |
|
$ |
1,369 |
|
|
$ |
1,259 |
|
|
$ |
110 |
|
|
|
9 |
% |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store revenues |
|
$ |
34,109 |
|
|
$ |
32,148 |
|
|
$ |
1,961 |
|
|
|
6 |
% |
Non-Same Store revenues |
|
|
28,852 |
|
|
|
1,110 |
|
|
|
27,742 |
|
|
N/M |
|
|
Total Rental income |
|
|
62,961 |
|
|
|
33,258 |
|
|
|
29,703 |
|
|
|
89 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property operating expenses, including real estate taxes |
|
|
13,474 |
|
|
|
14,207 |
|
|
|
(733 |
) |
|
|
-5 |
% |
Property management fees - third party |
|
|
928 |
|
|
|
212 |
|
|
|
716 |
|
|
|
338 |
% |
Property management fees - related party |
|
|
— |
|
|
|
1,086 |
|
|
|
(1,086 |
) |
|
|
-100 |
% |
General and administrative - property |
|
|
756 |
|
|
|
930 |
|
|
|
(174 |
) |
|
|
-19 |
% |
Same Store operating expenses |
|
|
15,158 |
|
|
|
16,435 |
|
|
|
(1,277 |
) |
|
|
-8 |
% |
Non-Same Store |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property operating expenses, including real estate taxes |
|
|
10,831 |
|
|
|
478 |
|
|
|
10,353 |
|
|
N/M |
|
|
Property management fees - third party |
|
|
768 |
|
|
|
7 |
|
|
|
761 |
|
|
N/M |
|
|
Property management fees - related party |
|
|
— |
|
|
|
38 |
|
|
|
(38 |
) |
|
|
-100 |
% |
General and administrative - property |
|
|
579 |
|
|
|
24 |
|
|
|
555 |
|
|
N/M |
|
|
Non-Same Store operating expenses |
|
|
12,178 |
|
|
|
547 |
|
|
|
11,631 |
|
|
N/M |
|
|
Total operating expenses |
|
|
27,336 |
|
|
|
16,982 |
|
|
|
10,354 |
|
|
|
61 |
% |
Net Operating Income "NOI" |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
18,951 |
|
|
|
15,713 |
|
|
|
3,238 |
|
|
|
21 |
% |
Non-Same Store |
|
|
16,674 |
|
|
|
563 |
|
|
|
16,111 |
|
|
N/M |
|
|
Total NOI |
|
$ |
35,625 |
|
|
$ |
16,276 |
|
|
$ |
19,349 |
|
|
|
119 |
% |
(1) N/M- result not meaningful
(2) We have combined two properties; Adair off Addison and Adair off Addison II.
See reconciliation of Total NOI to Net loss attributable to common stockholders table below:
(Back to Index)
42
(Back to Index)
|
|
For the Three Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
Increase / (Decrease) |
|
|
% Change |
|
||||
Total NOI |
|
$ |
35,625 |
|
|
$ |
16,276 |
|
|
|
19,349 |
|
|
|
119 |
% |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Casualty loss |
|
|
454 |
|
|
|
18 |
|
|
|
436 |
|
|
N/M |
|
|
Transaction expenses |
|
|
— |
|
|
|
1,849 |
|
|
|
(1,849 |
) |
|
|
-100 |
% |
Property management fees - third party |
|
|
— |
|
|
|
173 |
|
|
|
(173 |
) |
|
|
-100 |
% |
Asset Management fees - related party |
|
|
— |
|
|
|
2,335 |
|
|
|
(2,335 |
) |
|
|
-100 |
% |
General and administrative - corporate |
|
|
5,207 |
|
|
|
1,972 |
|
|
|
3,235 |
|
|
|
164 |
% |
Loss on disposal of assets |
|
|
188 |
|
|
|
142 |
|
|
|
46 |
|
|
|
32 |
% |
Depreciation and amortization expense |
|
|
24,128 |
|
|
|
12,760 |
|
|
|
11,368 |
|
|
|
89 |
% |
Total other expenses |
|
|
29,977 |
|
|
|
19,249 |
|
|
|
10,728 |
|
|
|
56 |
% |
Income (loss) before other income (expense) |
|
|
5,648 |
|
|
|
(2,973 |
) |
|
|
8,621 |
|
|
|
-290 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
10,774 |
|
|
|
5,632 |
|
|
|
5,142 |
|
|
|
91 |
% |
Interest income |
|
|
— |
|
|
|
(42 |
) |
|
|
42 |
|
|
|
-100 |
% |
Gain on sale of land easement |
|
|
— |
|
|
|
(20 |
) |
|
|
20 |
|
|
|
-100 |
% |
Management fee and other income |
|
|
— |
|
|
|
(991 |
) |
|
|
991 |
|
|
|
100 |
% |
Insurance proceeds in excess of cost basis |
|
|
(80 |
) |
|
|
(3 |
) |
|
|
(77 |
) |
|
N/M |
|
|
Total other expense (income) |
|
|
40,671 |
|
|
|
23,825 |
|
|
|
16,846 |
|
|
|
71 |
% |
Net income (loss) |
|
$ |
(5,046 |
) |
|
$ |
(7,549 |
) |
|
$ |
2,503 |
|
|
N/M |
|
|
Preferred return to preferred OP unit holders |
|
|
(921 |
) |
|
|
(286 |
) |
|
|
(635 |
) |
|
|
222 |
% |
Redemption of preferred OP units |
|
|
(342 |
) |
|
|
— |
|
|
|
(342 |
) |
|
|
100 |
% |
Net income (loss) after preferred unit distributions |
|
|
(6,309 |
) |
|
|
(7,835 |
) |
|
|
1,526 |
|
|
N/M |
|
|
Less: Allocation of income to preferred unit holders attributable to noncontrolling interests |
|
|
47 |
|
|
|
6 |
|
|
|
41 |
|
|
|
683 |
% |
Less: Net (income) loss attributable to noncontrolling interests |
|
|
188 |
|
|
|
171 |
|
|
|
17 |
|
|
|
10 |
% |
Net loss attributable to common stockholders |
|
$ |
(6,074 |
) |
|
$ |
(7,658 |
) |
|
$ |
1,584 |
|
|
|
-21 |
% |
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 Mergers are included in Non-Same Store results and statistics for the three and nine months ended September 30, 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 $2.0 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. The increase was principally due to an approximately $1.4 million increase in rental income resulting from a 1.4% increase in average occupancy as well as a $71 increase in net effective monthly rent, per occupied unit. In addition, bad debt expense, net of recoveries decreased by approximately $254,000 for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Utility income increased by approximately $131,000 due to increased utility charges to tenants. Non-same store results include the former REIT II and REIT III properties for the period from July 1, 2021 through September 30, 2021 due to the Mergers.
Property operating expenses. Same store property operating expenses decreased by approximately $733,000 primarily due to an approximately $155,000 decrease in insurance, an approximately $76,000 decrease in turnover costs and an approximately
(Back to Index)
43
(Back to Index)
$465,000 decrease in other expenses. There was a $370,000 net decrease in property management fees for same store for the three months ended September 30, 2021 as compared the three months ended September 30, 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.
Transaction expenses. In the three months ended September 30, 2020, we completed the Self-Management transaction and incurred $1.8 million of transaction related expenses.
Management Fees. Asset management fees- related party decreased by approximately $2.3 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 as a result of these fees no longer being paid as of September 8, 2020. In addition, for the three months ended September 30, 2020, we paid $173,000 to Greystar to manage REIT II and REIT III properties from September 8, 2020 to September 30, 2020.
General and Administrative. Corporate general and administrative expenses increased by approximately $3.2 million for the three months ended September 30, 2021 as compared the three months ended September 30, 2020 including an increase in payroll and benefit costs of approximately $2.3 million (including approximately $400,000 of compensation expense for restricted stock awards), proxy related professional fees of approximately $168,000, transfer agent fees of approximately $124,000, rent expense of $111,000 and insurance expense of approximately $199,000. The three months ended September 30, 2020 included primarily allocations from our former Advisor to reimburse for costs incurred to manage assets of REIT I. Following the Self-Management transaction, as of September 30, 2021, we employed 43 employees.
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 Mergers and in-place antennae leases. The increase in depreciation and amortization expense during the three months ended September 30, 2021, as compared to the three months ended September 30, 2020, was comprised as follows (in thousands):
|
|
Same Store |
|
|
Non-Same Store |
|
|
Corporate |
|
|
Total |
|
||||
Depreciation |
|
$ |
(967 |
) |
|
$ |
11,263 |
|
|
$ |
30 |
|
|
$ |
10,326 |
|
Amortization of intangibles |
|
|
1 |
|
|
|
1,041 |
|
|
|
— |
|
|
|
1,042 |
|
|
|
$ |
(966 |
) |
|
$ |
12,304 |
|
|
$ |
30 |
|
|
$ |
11,368 |
|
Interest Expense. Interest expense increased by approximately $5.1 million for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 and the increase was comprised as follows (in thousands):
|
|
Same Store |
|
|
Non-Same Store |
|
|
Revolving Credit Facility |
|
|
Total |
|
||||
Interest payable to banks |
|
$ |
(285 |
) |
|
$ |
5,294 |
|
|
$ |
77 |
|
|
$ |
5,086 |
|
Deferred finance cost amortization |
|
|
(69 |
) |
|
|
42 |
|
|
|
93 |
|
|
|
66 |
|
Fair value amortization |
|
|
53 |
|
|
|
(94 |
) |
|
|
— |
|
|
|
(41 |
) |
Interest rate cap adjustments |
|
|
15 |
|
|
|
16 |
|
|
|
— |
|
|
|
31 |
|
|
|
$ |
(286 |
) |
|
$ |
5,258 |
|
|
$ |
170 |
|
|
$ |
5,142 |
|
Management fee and other income. Income for the three months ended September 30, 2020 includes asset and property management fees earned from managing REIT II and REIT III from September 8, 2020 to September 30, 2020. Upon effectiveness of the Mergers, these fees are no longer earned.
Preferred return and redemption of preferred OP units. We paid the 7% preferred return to the preferred OP unit holders from July 1, 2021 until their redemption on September 14, 2021. For the three months ended September 30, 2020, the preferred return was paid following the Self-Management transaction on September 8, 2020 to September 30, 2020. During the three months ended September 30, 2021, we recorded a $342,000 charge representing the change in the redemption value of the preferred OP units.
Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020
(Back to Index)
44
(Back to Index)
The following table reflects the revenues, property operating expenses and net operating income, or NOI, (as defined above) for the nine months ended September 30, 2021 and 2020 for our Same Store and Non-Same Store properties (as defined above) (dollars in thousands):
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
September 30, 2021 (2) |
|
|
September 30, 2020 |
|
|
Increase / (Decrease) |
|
|
% Change (1) |
|
||||
Number of properties: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
26 |
|
|
|
27 |
|
|
|
(1 |
) |
|
|
-4 |
% |
Non-Same Store |
|
|
23 |
|
|
|
1 |
|
|
|
22 |
|
|
N/M |
|
|
Total |
|
|
49 |
|
|
|
28 |
|
|
|
21 |
|
|
|
75 |
% |
Number of Units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
8,135 |
|
|
|
8,135 |
|
|
|
— |
|
|
|
|
|
Non-Same Store |
|
|
6,508 |
|
|
|
352 |
|
|
|
6,156 |
|
|
N/M |
|
|
Total |
|
|
14,643 |
|
|
|
8,487 |
|
|
|
6,156 |
|
|
|
73 |
% |
Average Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
94.6 |
% |
|
|
92.7 |
% |
|
|
|
|
|
1.9 |
% |
|
Non-Same Store |
|
|
95.6 |
% |
|
|
95.3 |
% |
|
|
|
|
|
0.3 |
% |
|
Total |
|
|
95.1 |
% |
|
|
92.8 |
% |
|
|
|
|
|
2.3 |
% |
|
Net effective rent, per occupied unit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
$ |
1,317 |
|
|
$ |
1,280 |
|
|
$ |
37 |
|
|
|
3 |
% |
Non-Same Store |
|
$ |
1,358 |
|
|
$ |
978 |
|
|
$ |
380 |
|
|
|
39 |
% |
All properties |
|
$ |
1,320 |
|
|
$ |
1,267 |
|
|
$ |
53 |
|
|
|
4 |
% |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store revenues |
|
$ |
100,017 |
|
|
$ |
96,331 |
|
|
$ |
3,686 |
|
|
|
4 |
% |
Non-Same Store revenues |
|
|
78,449 |
|
|
|
3,294 |
|
|
|
75,155 |
|
|
N/M |
|
|
Total Rental income |
|
|
178,466 |
|
|
|
99,625 |
|
|
|
78,841 |
|
|
|
79 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property operating expenses, including real estate taxes |
|
|
41,126 |
|
|
|
40,556 |
|
|
|
570 |
|
|
|
1 |
% |
Property management fees - third party |
|
|
2,731 |
|
|
|
212 |
|
|
|
2,519 |
|
|
N/M |
|
|
Property management fee - related party |
|
|
— |
|
|
|
3,937 |
|
|
|
(3,937 |
) |
|
|
-100 |
% |
General and administrative - property |
|
|
2,306 |
|
|
|
2,572 |
|
|
|
(266 |
) |
|
|
-10 |
% |
Same Store operating expenses |
|
|
46,163 |
|
|
|
47,277 |
|
|
|
(1,114 |
) |
|
|
-2 |
% |
Non-Same Store |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Property operating expenses, including real estate taxes |
|
|
30,175 |
|
|
|
1,219 |
|
|
|
28,956 |
|
|
N/M |
|
|
Property management fees - third party |
|
|
2,286 |
|
|
|
7 |
|
|
|
2,279 |
|
|
N/M |
|
|
Property management fee - related party |
|
|
— |
|
|
|
134 |
|
|
|
(134 |
) |
|
|
-100 |
% |
General and administrative - property |
|
|
1,676 |
|
|
|
68 |
|
|
|
1,608 |
|
|
N/M |
|
|
Non-Same Store operating expenses |
|
|
34,137 |
|
|
|
1,428 |
|
|
|
32,709 |
|
|
N/M |
|
|
Total operating expenses |
|
|
80,300 |
|
|
|
48,705 |
|
|
|
31,595 |
|
|
|
65 |
% |
Net Operating Income "NOI" |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Same Store |
|
|
53,854 |
|
|
|
49,054 |
|
|
|
4,800 |
|
|
|
10 |
% |
Non-Same Store |
|
|
44,312 |
|
|
|
1,866 |
|
|
|
42,446 |
|
|
N/M |
|
|
Total NOI |
|
$ |
98,166 |
|
|
$ |
50,920 |
|
|
$ |
47,246 |
|
|
|
93 |
% |
(1) N/M- result not meaningful
(2) We have combined two properties; Adair off Addison and Adair off Addison II.
See reconciliation of Total NOI to Net loss attributable to common stockholders table below:
(Back to Index)
45
(Back to Index)
|
|
For the Nine Months Ended |
|
|
|
|
|
|
|
|||||||
|
|
September 30, 2021 |
|
|
September 30, 2020 |
|
|
Increase / (Decrease) |
|
|
% Change |
|
||||
Total NOI |
|
$ |
98,166 |
|
|
$ |
50,920 |
|
|
|
47,246 |
|
|
|
93 |
% |
Other expense (income): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Casualty loss |
|
|
1,372 |
|
|
|
221 |
|
|
|
1,151 |
|
|
|
521 |
% |
Acquisition fees |
|
|
— |
|
|
|
113 |
|
|
|
(113 |
) |
|
|
-100 |
% |
Transaction expenses |
|
|
— |
|
|
|
1,849 |
|
|
|
(1,849 |
) |
|
|
-100 |
% |
Property management fees - third party |
|
|
— |
|
|
|
173 |
|
|
|
(173 |
) |
|
|
-100 |
% |
Asset Management fees - related party |
|
|
— |
|
|
|
8,518 |
|
|
|
(8,518 |
) |
|
|
-100 |
% |
General and administrative - corporate |
|
|
18,454 |
|
|
|
5,332 |
|
|
|
13,122 |
|
|
|
246 |
% |
Loss on disposal of assets |
|
|
606 |
|
|
|
363 |
|
|
|
243 |
|
|
|
67 |
% |
Depreciation and amortization expense |
|
|
75,178 |
|
|
|
38,927 |
|
|
|
36,251 |
|
|
|
93 |
% |
Total other expenses |
|
|
95,610 |
|
|
|
55,496 |
|
|
|
40,114 |
|
|
|
72 |
% |
Income (loss) before other income (expense) |
|
|
2,556 |
|
|
|
(4,576 |
) |
|
|
7,132 |
|
|
|
-156 |
% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
36,204 |
|
|
|
19,772 |
|
|
|
16,432 |
|
|
|
83 |
% |
Interest income |
|
|
(21 |
) |
|
|
(141 |
) |
|
|
120 |
|
|
|
-85 |
% |
Gain on sale of land easement |
|
|
— |
|
|
|
(310 |
) |
|
|
310 |
|
|
|
-100 |
% |
Gain on sale of rental property |
|
|
(18,734 |
) |
|
|
— |
|
|
|
(18,734 |
) |
|
|
100 |
% |
Management fee and other income |
|
|
(1,212 |
) |
|
|
(991 |
) |
|
|
(221 |
) |
|
|
22 |
% |
Insurance proceeds in excess of cost basis |
|
|
(241 |
) |
|
|
(39 |
) |
|
|
(202 |
) |
|
|
518 |
% |
Total other expense (income) |
|
|
111,606 |
|
|
|
73,787 |
|
|
|
37,819 |
|
|
|
51 |
% |
Loss before provision for income taxes |
|
|
(13,440 |
) |
|
|
(22,867 |
) |
|
|
9,427 |
|
|
|
-41 |
% |
Provision for income taxes |
|
|
(206 |
) |
|
|
— |
|
|
|
(206 |
) |
|
|
100 |
% |
Net loss |
|
$ |
(13,646 |
) |
|
$ |
(22,867 |
) |
|
$ |
9,221 |
|
|
|
-40 |
% |
Preferred return to preferred OP unit holders |
|
|
(3,161 |
) |
|
|
(286 |
) |
|
|
(2,875 |
) |
|
|
1005 |
% |
Redemption of preferred OP units |
|
|
(342 |
) |
|
|
— |
|
|
|
(342 |
) |
|
|
100 |
% |
Net loss after preferred unit distributions |
|
|
(17,149 |
) |
|
|
(23,153 |
) |
|
|
6,004 |
|
|
|
-26 |
% |
Less: Allocation of income to preferred unit holders attributable to noncontrolling interests |
|
|
158 |
|
|
|
6 |
|
|
|
152 |
|
|
N/M |
|
|
Less: Net loss attributable to noncontrolling interests |
|
|
696 |
|
|
|
171 |
|
|
|
525 |
|
|
|
307 |
% |
Net loss attributable to common stockholders |
|
$ |
(16,295 |
) |
|
$ |
(22,976 |
) |
|
$ |
6,681 |
|
|
|
-29 |
% |
Rental and other property revenue. Same store property revenue of the former REIT I portfolio, increased by approximately $3.7 million for the nine months ended September 30, 2021 as compared to nine months ended September 30, 2020. The increase was principally due to an approximately $3.5 million increase in rental income resulting from a 1.9% increase in average occupancy as well as a $37 increase in net effective rent, per occupied unit. This increase was offset by an increase in bad debt expense of approximately $723,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020. In addition, utility income increased by approximately $420,000 due to increased utility charges to tenants and a $468,000 increase in ancillary fees. Non-same store results include the former REIT II and REIT III properties for the period from January 28, 2021 through September 30, 2021 due to the Mergers as well as Evergreen at Coursey Place, a property we sold on June 29, 2021.
Property operating expenses. Same store property operating expenses increased by approximately $570,000 primarily due to an approximately $342,000 increase in utilities, an approximately $308,000 increase in payroll, and an approximately $218,000 increase in real estate taxes offset by an approximate $172,000 decrease in insurance costs. There was a $1.4 million net decrease in property management fees for same store for the nine months ended September 30, 2021 as compared the nine months ended September 30, 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.
Casualty loss. We are self-insured for property related casualties up to $1.1 million and as of September 30, 2021, we had incurred $584,000 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. In the three months ended September 30, 2020, we completed the Self-Management transaction and incurred $1.8 million of transaction related expenses.
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 Mergers. Upon effectiveness of the Mergers, these fees are no longer earned.
(Back to Index)
46
(Back to Index)
Management Fees. Asset management fees- related party decreased by approximately $8.5 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 as a result of these fees no longer being paid as of September 8, 2020.
General and Administrative. Corporate general and administrative expenses increased by approximately $13.1 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 including an increase in payroll and benefit costs of approximately $5.7 million, $3.8 million of restricted stock expense, professional fees of approximately $295,000, transfer agent fees of approximately $471,000, insurance expense of approximately $597,000, and rent expense of approximately $273,000. The nine months ended September 30, 2020 included primarily allocations from our former Advisor to reimburse for costs incurred to manage assets of REIT I. Following the Self-Management transaction, as of September 30, 2021, we had 43 employees.
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 Mergers and in-place antennae leases. The increase in depreciation and amortization expense during the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020 , was comprised as follows (in thousands):
|
|
Same Store |
|
|
Non-Same Store |
|
|
Corporate |
|
|
Total |
|
||||
Depreciation |
|
$ |
(2,804 |
) |
|
$ |
30,582 |
|
|
$ |
102 |
|
|
$ |
27,880 |
|
Amortization of intangibles |
|
|
(3 |
) |
|
|
8,374 |
|
|
|
— |
|
|
|
8,371 |
|
|
|
$ |
(2,807 |
) |
|
$ |
38,956 |
|
|
$ |
102 |
|
|
$ |
36,251 |
|
Interest Expense. Interest expense increased by approximately $16.4 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 and the increase was comprised as follows (in thousands):
|
|
Same Store |
|
|
Non-Same Store |
|
|
Revolving Credit Facility |
|
|
Total |
|
||||
Interest payable to banks |
|
$ |
(3,089 |
) |
|
$ |
14,244 |
|
|
$ |
112 |
|
|
$ |
11,267 |
|
Deferred finance cost amortization |
|
|
(202 |
) |
|
|
123 |
|
|
|
136 |
|
|
|
57 |
|
Fair value amortization |
|
|
91 |
|
|
|
396 |
|
|
|
— |
|
|
|
487 |
|
Interest rate cap adjustments |
|
|
(16 |
) |
|
|
27 |
|
|
|
— |
|
|
|
11 |
|
Interest rate cap adjustments |
|
|
1,403 |
|
|
|
1,033 |
|
|
|
— |
|
|
|
2,436 |
|
Prepayment penalties |
|
|
1,942 |
|
|
|
232 |
|
|
|
— |
|
|
|
2,174 |
|
|
|
$ |
129 |
|
|
$ |
16,055 |
|
|
$ |
248 |
|
|
$ |
16,432 |
|
Gain on sale of rental properties. We sold Evergreen at Coursey Place on June 29, 2021 for $49.8 million realizing an approximately $18.7 million gain on sale. We bought the property as a part of the acquisition of the Paladin portfolio in January 2014.
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 nine months ended September 30, 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
(Back to Index)
47
(Back to Index)
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.
Capital Expenditures
We deployed approximately $18.3 million during the nine months ended September 30, 2021 for capital expenditures. The properties in which we deployed the most capital during the nine months ended September 30, 2021 are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):
Multifamily Community |
|
Capital deployed |
|
|
Remaining |
|
||
Skyview Apartment Homes |
|
$ |
2,609 |
|
|
$ |
5,253 |
|
Calloway at Las Colinas |
|
|
2,343 |
|
|
|
612 |
|
Maxwell Townhomes |
|
|
1,485 |
|
|
|
539 |
|
Meridian Pointe |
|
|
1,301 |
|
|
|
564 |
|
The Palmer at Last Colinas |
|
|
721 |
|
|
|
118 |
|
Providence in the Park |
|
|
665 |
|
|
|
321 |
|
The Westside Apartment Homes |
|
|
543 |
|
|
|
652 |
|
Crosstown at Chapel Hill |
|
|
528 |
|
|
|
591 |
|
Verona Apartment Homes |
|
|
515 |
|
|
|
299 |
|
The Adairs |
|
|
417 |
|
|
|
399 |
|
Wimbledon Oaks |
|
|
414 |
|
|
|
104 |
|
Estates at Johns Creek |
|
|
349 |
|
|
|
175 |
|
All other properties |
|
|
6,370 |
|
|
|
4,840 |
|
|
|
$ |
18,260 |
|
|
$ |
14,467 |
|
Distribution Reinvestment Plan
We continue to offer shares of our common stock pursuant to our distribution reinvestment plan ("DRP') under which our stockholders may elect to have distributions reinvested in additional shares of our common stock at a purchase price equal to 95% of the estimated net asset value per share.
Gross Offering Proceeds
As of September 30, 2021, we had an aggregate of 165.6 million shares of our $0.01 par value common stock outstanding including 1.0 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 |
|
|
28,728,077 |
|
|
|
276,812 |
|
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 Merger |
|
|
14,724,323 |
|
|
|
— |
|
Total |
|
|
185,972,657 |
|
|
$ |
1,579,394 |
|
Shares redeemed and retired |
|
|
(20,336,051 |
) |
|
|
|
|
Total shares issued and outstanding as of September 30, 2021 |
|
|
165,636,606 |
|
|
|
|
(Back to Index)
48
(Back to Index)
Debt
The following table presents a summary of our debt (in thousands):
|
|
|
|
|
|
|
|
Weighted Average Maturity in Years at |
|
|||
|
|
September 30, 2021 |
|
|
December 31, 2020 |
|
|
September 30, 2021 |
|
|||
Mortgage notes payable, net - variable rate |
|
$ |
704,144 |
|
|
$ |
675,791 |
|
|
|
3.93 |
|
Mortgage notes payable, net - fixed rate |
|
|
846,320 |
|
|
|
150,195 |
|
|
|
6.20 |
|
Total mortgage notes payable, net |
|
$ |
1,550,464 |
|
|
$ |
825,986 |
|
|
|
5.16 |
|
Revolving credit facility |
|
$ |
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|||
Weighted average interest rate on mortgages - variable |
|
|
2.06 |
% |
|
|
2.12 |
% |
|
|
|
|
Weighted average interest rate on mortgages - fixed |
|
|
3.04 |
% |
|
|
4.03 |
% |
|
|
|
|
Weighted average interest rate on revolving credit facility |
|
|
— |
|
|
|
— |
|
|
|
|
|
Weighted average interest rate on total debt |
|
|
2.60 |
% |
|
|
2.46 |
% |
|
|
|
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 Financial Conduct Authority of the U.K. (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.
Distributions Paid to Common Stockholders
For the nine months ended September 30, 2021, we paid aggregate distributions to our common stockholders of $33.6 million, including $25.8 million of distributions paid in cash and $7.9 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows (in thousands, except per share data):
Record Date |
|
Per Common |
|
|
Distribution Date |
|
Net Cash Distribution |
|
|
Distributions Reinvested in Shares of Common Stock |
|
|
Total Aggregate Distribution |
|
||||
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 |
|
|
|
$ |
0.21 |
|
|
|
|
$ |
25,772 |
|
|
$ |
7,868 |
|
|
$ |
33,640 |
|
Distributions paid, distributions declared and sources of distributions paid were as follows for the nine months ended September 30, 2021 (dollars in thousands):
|
|
Common Distributions Paid |
|
|
|
Distributions Declared |
|
Sources of Distributions Paid |
|||||
2021 |
|
Cash |
Distributions Reinvested in Shares of Common Stock |
Total |
|
Cash Provided by Operating Activities |
|
Total |
Per Share |
|
Operating Activities Amount Paid/Percent of Total |
Debt Financing Amount Paid/Percent of Total |
Property Dispositions Amount Paid/Percent of Total |
1st Quarter |
|
$8,539 |
$2,490 |
$11,029 |
|
$12,101 |
|
$11,029 |
$0.07 |
|
$11,029 / 100% |
- / - |
- / - |
2nd Quarter |
|
8,365 |
2,674 |
11,039 |
|
22,269 |
|
11,039 |
$0.07 |
|
$11,039 / 100% |
- / - |
- / - |
3rd Quarter |
|
8,868 |
2,704 |
11,572 |
|
25,182 |
|
11,572 |
$0.07 |
|
$11,572 / 100% |
- / - |
- / - |
|
|
$25,772 |
$7,868 |
$33,640 |
|
$59,552 |
|
$33,640 |
|
|
|
|
|
(Back to Index)
49
(Back to Index)
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.
(Back to Index)
50
(Back to Index)
The following table reconciles net loss attributable to common shareholders to FFO and Core FFO for the three and nine months ended September 30, 2021 and 2020 (in thousands, except per share amounts). Amounts reported in the tables below include adjustments attributable to noncontrolling interests:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Net loss attributable to common stockholders – GAAP |
|
$ |
(6,074 |
) |
|
$ |
(7,658 |
) |
|
$ |
(16,295 |
) |
|
$ |
(22,976 |
) |
Depreciation expense (1) |
|
|
22,222 |
|
|
|
12,469 |
|
|
|
63,791 |
|
|
|
38,630 |
|
Net gain on disposition of rental property (2) |
|
|
— |
|
|
|
— |
|
|
|
(17,874 |
) |
|
|
— |
|
FFO attributable to common stockholders |
|
|
16,148 |
|
|
|
4,811 |
|
|
|
29,622 |
|
|
|
15,654 |
|
Stock compensation expense (3) |
|
|
385 |
|
|
|
2 |
|
|
|
3,609 |
|
|
|
2 |
|
Redemption of preferred units (4) |
|
|
329 |
|
|
|
— |
|
|
|
329 |
|
|
|
— |
|
Debt prepayment costs (5) |
|
|
— |
|
|
|
— |
|
|
|
2,307 |
|
|
|
— |
|
Acquisition fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
113 |
|
Amortization of intangible lease assets (6) |
|
|
1,004 |
|
|
|
2 |
|
|
|
7,983 |
|
|
|
8 |
|
Realized loss on change in fair value of interest rate cap(7) |
|
|
59 |
|
|
|
29 |
|
|
|
115 |
|
|
|
108 |
|
Debt premium (discount) amortization (8) |
|
|
(142 |
) |
|
|
(80 |
) |
|
|
201 |
|
|
|
(244 |
) |
Deferred financing costs amortization (9) |
|
|
413 |
|
|
|
355 |
|
|
|
3,180 |
|
|
|
1,109 |
|
Casualty losses, net of casualty gains (10) |
|
|
360 |
|
|
|
14 |
|
|
|
1,080 |
|
|
|
182 |
|
Transaction expenses (11) |
|
|
— |
|
|
|
1,807 |
|
|
|
— |
|
|
|
1,807 |
|
Core FFO attributable to common stockholders |
|
$ |
18,556 |
|
|
$ |
6,940 |
|
|
$ |
48,426 |
|
|
$ |
18,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic net loss per common share - GAAP |
|
$ |
(0.04 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.27 |
) |
FFO per diluted share (12) |
|
$ |
0.10 |
|
|
$ |
0.06 |
|
|
$ |
0.20 |
|
|
$ |
0.18 |
|
Core FFO per diluted share (12) |
|
$ |
0.12 |
|
|
$ |
0.08 |
|
|
$ |
0.32 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - basic |
|
|
158,320 |
|
|
|
85,598 |
|
|
|
150,202 |
|
|
|
85,533 |
|
Weighted average shares outstanding - diluted (12) |
|
|
158,404 |
|
|
|
85,598 |
|
|
|
150,245 |
|
|
|
85,533 |
|
(1) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $863,000 and $3.0 million, respectively and $289,000 for the three and nine months ended September 30, 2020.
(2) Includes allocation for noncontrolling interests for both the three and nine months ended September 30, 2021 of approximately $0 and $860,000. There was no allocation for the three and nine months ended September 30, 2020.
(3) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $15,000 and $192,000, respectively. There was no allocation for the three and nine months ended September 30, 2020.
(4) Includes allocation for noncontrolling interests for both the three and nine months ended September 30, 2021 of approximately $13,000. There was no allocation for the three months ended September 30, 2020.
(5) Includes allocation for noncontrolling interests for the nine months ended September 30, 2021 of approximately $129,000. There was no allocation for the three and nine months ended September 30, 2020.
(6) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $39,000 and $396,000, respectively. There was no allocation for the three and nine months ended September 30, 2020.
(7) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $2,000 and $5,000, respectively and $1,000 for the three and nine months ended September 30, 2020.
(8) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $6,000 and $15,000, respectively and $2,000 for the three and nine months ended September 30, 2020.
(9) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $16,000 and $168,000, respectively and $8,000 for the three and nine months ended September 30, 2020. .
(10) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2021 of approximately $14,000 and $51,000, respectively.
(11) Includes allocation for noncontrolling interests for the three and nine months ended September 30, 2020 of approximately $42,000.
(12) Calculated using weighted average shares outstanding – diluted.
(13) None of the shares of convertible stock and 602,506 unvested performance based restricted stock awards are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of either September 30, 2021 or 2020. Weighted average shares outstanding – diluted in this table, which was used to calculate FFO per share and Core FFO per share, includes 84,290 and 43,492 weighted average unvested restricted shares outstanding for the three and nine months ended September 30, 2021 however, these restricted shares were excluded from the calculation of diluted net loss per common share – GAAP because their effect would be antidilutive for the three and nine months ended September 30, 2021. 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.
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51
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2020 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”
Off-Balance Sheet Arrangements
As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements or obligations.
Subsequent Events
On October 12, 2021, we sold The Retreat at Rocky Ridge in Hoover, Alabama for $25.4 million. We expect to recognize a gain on the sale during the quarter ending December 31, 2021.
In conjunction with the sale of The Retreat at Rocky Ridge, we repaid in full the loan secured by Bay Club Apartments and replaced The Retreat at Rocky Ridge with Bay Club Apartments as collateral for the Credit Facility.
On October 21, 2021, we sold Tech Center Square in Newport News, Virginia for $36.7 million. We expect to recognize a gain on the sale during the quarter ending December 31, 2021.
In conjunction with the sale of Tech Center Square, we repaid in full the loan secured by Perimeter 5550 and replaced Tech Center Square with Perimeter 5550 as collateral for the Credit Facility.
On October 26, 2021, we sold The Brookwood in Homewood, Alabama for $45.3 million. We expect to recognize a gain on the sale during the quarter ending December 31, 2021.
We repaid in full the loan secured by Windbrooke Crossing for $36.1 million on October 28, 2021 and Trailpoint at the Woodlands on October 29, 2021 for $16.8 million. Windbrooke Crossing was added as collateral on the Credit Facility.
On October 20, 2021, we entered into an agreement to sell Maxwell Townhomes, located in San Antonio, Texas with an expected closing in the first quarter of 2022. We expect to recognize a gain on sale during the three months ended March 31, 2022.
On October 27, 2021, we entered into an agreement to sell The Bryant at Yorba Linda, located in Yorba Linda, California with an expected closing in the first quarter of 2022. We expect to recognize a gain on sale during the three months ended March 31, 2022.
On November 2, 2021, we sold Pines of York in Yorktown, Virginia for $45.0 million. We expect to recognize a gain on the sale during the quarter ending December 31, 2021.
We have evaluated subsequent events and determined that no events have occurred, other than as disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.
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52
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ITEM 3. 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 21 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 September 30, 2021 and December 31, 2020, we had $710.0 million and $680.9 million, respectively, in variable rate outstanding borrowings. If interest rates on the variable rate outstanding borrowings had been 100 basis points higher during the nine months ended September 30, 2021 and the year ended December 31, 2020, our interest expense would have increased by $5.4 million and $6.7 million, respectively.
In addition, changes in interest rates affect the fair value of our fixed rate outstanding borrowings. As of September 30, 2021 and December 31, 2020, the face value of fixed rate outstanding borrowings was $847.3 million and $150.1 million, respectively. As of September 30, 2021 and December 31, 2020, our fixed rate outstanding borrowings had an estimated aggregate fair value of $841.4 million and $151.0 million, respectively. Fair value is computed using rates available to us for debt with similar terms and remaining maturities. If interest rates had been 100 basis points higher during the nine months ended September 30, 2021 and the year ended December 31, 2020, the fair value of these fixed rate outstanding borrowings would have decreased by $46.2 million and $4.4 million, respectively.
ITEM 4. 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 as of September 30, 2021.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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53
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sale of Equity Securities
All securities sold by us during the three months ended September 30, 2021 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").
Redemption of Securities
During the nine months ended September 30, 2021, we redeemed shares of our common stock as follows:
Period |
|
Total Number |
|
|
Average Price |
|
|
Year-to-Date Number |
|
|
Approximate Dollar |
|||
January 2021 |
|
|
136,685 |
|
|
$ |
9.08 |
|
|
— |
|
|
(4) |
|
February 2021 |
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|||
March 2021 |
|
|
169,112 |
|
|
|
9.08 |
|
|
|
305,797 |
|
|
(4) |
April 2021 |
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|||
May 2021 |
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|||
June 2021 |
|
|
148,989 |
|
|
|
9.06 |
|
|
|
454,786 |
|
|
(4) |
July 2021 |
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|||
August 2021 |
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|||
September 2021 |
|
|
240,767 |
|
|
|
9.06 |
|
|
|
695,553 |
|
|
(4) |
|
|
|
695,553 |
|
|
|
|
|
|
|
|
|
(1) The shares redeemed in January 2021 were repurchased from employees upon vesting of restricted stock awards in order to facilitate the payment of taxes by the employees.
(2) The share redemption program commenced on June 16, 2010 and was subsequently amended on September 29, 2011, March 28, 2018, and February 3, 2021.
(3) 1,147 shares redeemed in September were repurchased from employees upon vesting of restricted stock awards in order to facilitate the payment of taxes by the employees.
(4) We currently limit the dollar value and number of shares that may yet be redeemed under our program as described below.
On September 8, 2020, the share redemption program was fully suspended in connection with signing the merger agreements with respect to the REIT I Merger and the REIT III Merger. Effective November 22, 2020, the share redemption program was partially resumed only for redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility (collectively, “special redemptions”). While the partial suspension of the share redemption program is in effect, we will only accept requests for redemption in connection with a special redemption and all other pending or new requests will not be honored or retained, but will be cancelled with the ability to resubmit when, if ever, the share redemption program is fully resumed.
Our board of directors, in its sole discretion, may suspend, terminate or amend our share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.
Amended and Restated 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 our board of
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54
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directors upon ten business days’ notice to stockholders. As there were no DRP proceeds for the fourth quarter of 2020, our board of directors had set the funding limitation for redemptions in the first quarter of 2021 at $2.0 million. 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).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) There have been no defaults with respect to any of our indebtedness.
(b) Not applicable.
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55
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ITEM 6. EXHIBITS
Exhibit No. |
|
Description |
|
|
|
2.1 |
|
|
|
|
|
2.2 |
|
|
|
|
|
3.1 |
|
Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed February 5, 2021) |
|
|
|
3.2 |
|
|
|
|
|
4.1 |
|
|
|
|
|
4.2 |
|
|
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
99.1 |
|
|
|
|
|
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) |
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56
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SIGNATURES
Pursuant to the requirements of Section 12 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. |
||
|
|
|
|
November 12, 2021 |
By: |
|
/s/ Alan F. Feldman |
|
|
|
ALAN F. FELDMAN |
|
|
|
Chief Executive Officer, President and Director |
|
|
|
(Principal Executive Officer) |
|
|
|
|
November 12, 2021 |
By: |
|
/s/ Thomas C. Elliott |
|
|
|
THOMAS C. ELLIOTT |
|
|
|
Chief Financial Officer, Executive Vice |
|
|
|
President and Treasurer (Principal Financial Officer)
|
November 12, 2021 |
By: |
|
/s/ Steven R. Saltzman |
|
|
|
STEVEN R. SALTZMAN |
|
|
|
Chief Accounting Officer and Vice President |
|
|
|
(Principal Accounting Officer) |
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57