UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-36663

NexPoint Residential Trust, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	47-1881359
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

300 Crescent Court, Suite 700, Dallas, Texas	75201
(Address of Principal Executive Offices)	(Zip Code)

(972) 628-4100

(Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐	Smaller reporting company	☐
Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of April 30, 2019, the registrant had 23,643,277 shares of its common stock, par value $0.01 per share, outstanding.

NEXPOINT RESIDENTIAL TRUST, INC.

Form 10-Q

Quarter Ended March 31, 2019

INDEX

			Page
Cautionary Statement Regarding Forward-Looking Statements			ii
	PART I—FINANCIAL INFORMATION
Item 1.		Financial Statements	1
		Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018	1
		Consolidated Unaudited Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018	2
		Consolidated Unaudited Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018	3
		Consolidated Unaudited Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018	4
		Notes to Consolidated Unaudited Financial Statements	6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.		Controls and Procedures	45
	PART II—OTHER INFORMATION
Item 1.		Legal Proceedings	46
Item 1A.		Risk Factors	46
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.		Defaults Upon Senior Securities	46
Item 4.		Mine Safety Disclosures	46
Item 5.		Other Information	46
Item 6.		Exhibits	47
Signatures			48

i

Cautionary Statement Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties. In particular, statements relating to our liquidity and capital resources, the performance of our properties and results of operations contain forward-looking statements. Furthermore, all of the statements regarding future financial performance (including market conditions and demographics) are forward-looking statements. We caution investors that any forward-looking statements presented in this quarterly report are based on management’s current beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “would,” “result” and similar expressions that do not relate solely to historical matters are intended to identify forward-looking statements. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements are subject to risks, uncertainties and assumptions and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you therefore against relying on any of these forward-looking statements.

Some of the risks and uncertainties that may cause our actual results, performance, liquidity or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

• unfavorable changes in market and economic conditions in the United States and globally and in the specific markets where our properties are located;

• risks associated with ownership of real estate;

• limited ability to dispose of assets because of the relative illiquidity of real estate investments;

• our multifamily properties are concentrated in certain geographic markets in the Southeastern and Southwestern United States, which makes us more susceptible to adverse developments in those markets;

• increased risks associated with our strategy of acquiring value-enhancement multifamily properties rather than more conservative investment strategies;

• potential reforms to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”);

• competition could limit our ability to acquire attractive investment opportunities, which could adversely affect our profitability and impede our growth;

• competition and any increased affordability of residential homes could limit our ability to lease our apartments or increase or maintain rents;

• the relatively low residential mortgage rates may result in potential renters purchasing residences rather than leasing them, and as a result, cause a decline in our occupancy rates;

• the risk that we may fail to consummate future property acquisitions;

• failure of acquisitions to yield anticipated results;

• risks associated with increases in interest rates and our ability to issue additional debt or equity securities in the future;

• risks associated with selling apartment communities, which could limit our operational and financial flexibility;

• contingent or unknown liabilities related to properties or businesses that we have acquired or may acquire;

• lack of or insufficient amounts of insurance;

• the risk that our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be insufficient;

• high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical vapor, subsurface contamination and mold growth;

• high costs associated with the compliance with various accessibility, environmental, building and health and safety laws and regulations, such as the Americans with Disabilities Act of 1990 (the “ADA”) and the Fair Housing Act (the “FHA”);

• risks associated with limited warranties we may obtain when purchasing properties;

• exposure to decreases in market rents due to our short-term leases;

• risks associated with operating through joint ventures and funds;

• our dependence on information systems;

ii

• risks associated with breaches of our data security;

• risks associated with our reduced public company reporting requirements as an “emerging growth company”;

• costs associated with being a public company, including compliance with securities laws;

• the risk that our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting;

• risks associated with our substantial current indebtedness and indebtedness we may incur in the future;

• risks associated with derivatives or hedging activity;

• the relative lack of experience of NexPoint Real Estate Advisors, L.P. (our “Adviser”) and property manager in operating under the constraints imposed on us as a real estate investment trust (“REIT”) may hinder the achievement of our investment objectives;

• loss of key personnel of Highland Capital Management, L.P. (our “Sponsor” or “Highland”), our Adviser and our property manager;

• the risk that we may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser, members of our Adviser’s management team or by our Sponsor or its affiliates;

• risks associated with our Adviser’s ability to terminate the Advisory Agreement (as defined below);

• our ability to change our major policies, operations and targeted investments without stockholder consent;

• the substantial fees and expenses we pay to our Adviser and its affiliates;

• risks associated with any potential internalization of our management functions;

• conflicts of interest and competing demands for time faced by our Adviser, our Sponsor and their officers and employees;

• the risk that we may compete with other entities affiliated with our Sponsor or property manager for properties and tenants;

• failure to maintain our status as a REIT;

• failure of our operating partnership to be taxable as a partnership for federal income tax purposes, possibly causing us to fail to qualify for or to maintain REIT status;

• compliance with REIT requirements, which may limit our ability to hedge our liabilities effectively and cause us to forgo otherwise attractive opportunities, liquidate certain of our investments or incur tax liabilities;

• risks associated with our ownership of interests in taxable REIT subsidiaries;

• the recognition of taxable gains from the sale of properties as a result of the inability to complete certain like-kind exchanges (“1031 Exchanges”) in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”);

• the risk that the Internal Revenue Service (the “IRS”) may consider certain sales of properties to be prohibited transactions, resulting in a 100% penalty tax on any taxable gain;

• the ineligibility of dividends payable by REITs for the reduced tax rates available for some dividends;

• risks associated with the stock ownership restrictions of the Code for REITs and the stock ownership limit imposed by our charter;

• the ability of our board of directors (the “Board”) to revoke our REIT qualification without stockholder approval;

• recent and potential legislative or regulatory tax changes or other actions affecting REITs;

• risks associated with the market for our common stock and the general volatility of the capital and credit markets;

• failure to generate sufficient cash flows to service our outstanding indebtedness or pay distributions at expected levels;

• risks associated with limitations of liability for and our indemnification of our directors and officers; and

• any other risks included under Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 19, 2019 (our “Annual Report”).

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. They are based on estimates and assumptions only as of the date of this quarterly report. We undertake no obligation to update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes, except as required by law.

iii

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Operating Real Estate Investments
Land	$	231,170		$	202,347
Buildings and improvements		1,038,797			935,604
Intangible lease assets		2,438			3,049
Construction in progress		1,594			1,881
Furniture, fixtures, and equipment		66,661			61,456
Total Gross Operating Real Estate Investments		1,340,660			1,204,337
Accumulated depreciation and amortization		(146,473	)		(134,124	)
Total Net Operating Real Estate Investments		1,194,187			1,070,213
Real estate held for sale, net of accumulated depreciation of $897 and $897, respectively		17,347			17,329
Total Net Real Estate Investments		1,211,534			1,087,542
Cash and cash equivalents		20,536			19,864
Restricted cash		17,747			23,265
Accounts receivable		3,418			3,340
Prepaid and other assets		3,807			9,058
Fair market value of interest rate swaps		12,467			18,141
TOTAL ASSETS	$	1,269,509		$	1,161,210
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable, net	$	903,143		$	824,702
Mortgages payable held for sale, net		13,269			13,318
Credit facility, net		51,910			—
Accounts payable and other accrued liabilities		5,795			5,765
Accrued real estate taxes payable		5,480			12,607
Accrued interest payable		3,210			2,852
Security deposit liability		1,955			1,889
Prepaid rents		1,616			1,482
Total Liabilities		986,378			862,615
Redeemable noncontrolling interests in the Operating Partnership		2,808			2,567
Stockholders' Equity:
Preferred stock, $0.01 par value: 100,000,000 shares authorized; 0 shares issued		—			—
Common stock, $0.01 par value: 500,000,000 shares authorized; 23,643,277 and 23,499,635 shares issued and outstanding, respectively		235			234
Additional paid-in capital		286,580			285,511
Accumulated earnings less dividends		(17,891	)		(6,764	)
Accumulated other comprehensive income		11,399			17,047
Total Stockholders' Equity		280,323			296,028
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,269,509		$	1,161,210

See Notes to Consolidated Financial Statements

1

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended March 31,
	2019			2018
Revenues
Rental income	$	36,322		$	30,573
Other income		5,169			4,484
Total revenues		41,491			35,057
Expenses
Property operating expenses		9,639			8,877
Real estate taxes and insurance		5,758			4,856
Property management fees (1)		1,240			1,054
Advisory and administrative fees (2)		1,850			1,838
Corporate general and administrative expenses		2,233			1,813
Property general and administrative expenses		1,658			1,547
Depreciation and amortization		15,398			11,372
Total expenses		37,776			31,357
Operating income before gain on sales of real estate		3,715			3,700
Gain on sales of real estate		—			13,742
Operating income		3,715			17,442
Interest expense		(8,088	)		(6,797	)
Loss on extinguishment of debt and modification costs		—			(551	)
Net income (loss)		(4,373	)		10,094
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(13	)		30
Net income (loss) attributable to common stockholders	$	(4,360	)	$	10,064
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives		(5,665	)		7,761
Total comprehensive income (loss)		(10,038	)		17,855
Comprehensive income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(30	)		53
Comprehensive income (loss) attributable to common stockholders	$	(10,008	)	$	17,802
Weighted average common shares outstanding - basic		23,550			20,987
Weighted average common shares outstanding - diluted		24,044			21,430
Earnings (loss) per share - basic	$	(0.19	)	$	0.48
Earnings (loss) per share - diluted	$	(0.19	)	$	0.47
Dividends declared per common share	$	0.275		$	0.250

(1) Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s operating partnership, NexPoint Residential Trust Operating Partnership, L.P. (see Note 10).

(2) Fees incurred to the Adviser (see Note 11).

See Notes to Consolidated Financial Statements

2

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock				Common Stock				Additional		Accumulated Earnings			Accumulated Other			Common Stock Held in
	Number of Shares		Par Value		Number of Shares		Par Value		Paid-in Capital		Less Dividends			Comprehensive Income (Loss)			Treasury at Cost		Total
Balances, December 31, 2018		—	$	—		23,499,635	$	234	$	285,511	$	(6,764	)	$	17,047		$	—	$	296,028
Net loss attributable to common stockholders										—		(4,360	)		—			—		(4,360	)
Vesting of stock-based compensation						143,642		1		1,069		—			—			—		1,070
Common stock dividends declared										—		(6,641	)		—			—		(6,641	)
Other comprehensive loss										—		—			(5,648	)		—		(5,648	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the Operating Partnership										—		(126	)		—			—		(126	)
Balances, March 31, 2019		—	$	—		23,643,277	$	235	$	286,580	$	(17,891	)	$	11,399		$	—	$	280,323

	Preferred Stock				Common Stock						Additional			Accumulated Earnings			Accumulated Other		Common Stock Held in
	Number of Shares		Par Value		Number of Shares			Par Value			Paid-in Capital			Less Dividends			Comprehensive Income		Treasury at Cost			Total
Balances, December 31, 2017		—	$	—		21,049,565		$	210		$	206,227		$	19,288		$	13,719				$	239,444
Cumulative effect upon adoption of ASU    2017-12 (see Note 2)															(1,403	)		1,403					—
Net income attributable to common stockholders												—			10,064			—		—			10,064
Repurchase of common stock												—			—			—		(5,058	)		(5,058	)
Retirement of common stock held in treasury						(203,953	)		(2	)		(5,056	)		—			—		5,058			—
Vesting of stock-based compensation						80,743			1			914			—			—		—			915
Common stock dividends declared												—			(5,380	)		—		—			(5,380	)
Other comprehensive income												—			—			7,738		—			7,738
Balances, March 31, 2018		—	$	—		20,926,355		$	209		$	202,085		$	22,569		$	22,860	$	—		$	247,723

See Notes to Consolidated Financial Statements

3

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net income (loss)	$	(4,373	)	$	10,094
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sales of real estate		—			(13,742	)
Depreciation and amortization		15,398			11,372
Amortization/write-off of deferred financing costs		432			768
Change in fair value on derivative instruments included in interest expense		(1,854	)		(349	)
Net cash received on derivative settlements		1,810			331
Amortization/write-off of fair market value adjustment of assumed debt		(24	)		(51	)
Vesting of stock-based compensation		1,070			915
Changes in operating assets and liabilities, net of effects of acquisitions:
Operating assets		5,333			(1,036	)
Operating liabilities		(6,416	)		(5,171	)
Net cash provided by operating activities		11,376			3,131
Cash flows from investing activities
Net proceeds from sales of real estate		—			29,553
Additions to real estate investments		(6,897	)		(6,830	)
Acquisitions of real estate investments		(132,482	)		—
Net cash provided by (used in) investing activities		(139,379	)		22,723
Cash flows from financing activities
Mortgage proceeds received		78,987			—
Mortgage payments		(238	)		(17,929	)
Credit facilities proceeds received		52,500			—
Bridge facility payments		—			(8,597	)
Deferred financing costs paid		(1,355	)		—
Interest rate cap fees paid		(20	)		—
Repurchase of common stock		—			(5,058	)
Dividends paid to common stockholders		(6,717	)		(5,325	)
Net cash provided by (used in) financing activities		123,157			(36,909	)
Net decrease in cash, cash equivalents and restricted cash		(4,846	)		(11,055	)
Cash, cash equivalents and restricted cash, beginning of period		43,129			43,248
Cash, cash equivalents and restricted cash, end of period	$	38,283		$	32,193

See Notes to Consolidated Financial Statements

4

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Supplemental Disclosure of Cash Flow Information
Interest paid	$	9,176		$	6,683
Prepayment penalties		—			172
Supplemental Disclosure of Noncash Activities
Capitalized construction costs included in accounts payable and other accrued liabilities		1,542			1,150
Change in fair value on derivative instruments designated as hedges		(5,665	)		7,761
Other assets acquired from acquisitions		87			—
Liabilities assumed from acquisitions		271			—
Increase in dividends payable on restricted stock units		(76	)		55

See Notes to Consolidated Financial Statements

5

NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on September 19, 2014, and has elected to be taxed as a real estate investment trust (“REIT”). The Company is focused on “value-add” multifamily investments primarily located in the Southeastern and Southwestern United States. Substantially all of the Company’s business is conducted through NexPoint Residential Trust Operating Partnership, L.P. (the “OP”), the Company’s operating partnership. The Company owns its properties (the “Portfolio”) through the OP and its wholly owned taxable REIT subsidiary (“TRS”). The OP owns approximately 99.9% of the Portfolio; the TRS owns approximately 0.1% of the Portfolio. The Company’s wholly owned subsidiary, NexPoint Residential Trust Operating Partnership GP, LLC (the “OP GP”), is the sole general partner of the OP. As of March 31, 2019, there were 23,819,402 common units in the OP (“OP Units”) outstanding, of which 23,746,169, or 99.7%, were owned by the Company and 73,233, or 0.3%, were owned by a noncontrolling limited partner (see Note 10).

The Company is externally managed by NexPoint Real Estate Advisors, L.P. (the “Adviser”), through an agreement dated March 16, 2015, as amended, and renewed on February 13, 2019 for a one-year term set to expire on March 16, 2020 (the “Advisory Agreement”), by and among the Company, the OP and the Adviser. The Adviser conducts substantially all of the Company’s operations and provides asset management services for its real estate investments. The Company expects it will only have accounting employees while the Advisory Agreement is in effect. All of the Company’s investment decisions are made by the Adviser, subject to general oversight by the Adviser’s investment committee and the Company’s board of directors (the “Board”). The Adviser is wholly owned by NexPoint Advisors, L.P., which is an affiliate of Highland Capital Management, L.P. (the “Sponsor” or “Highland”). 

The Company’s investment objectives are to maximize the cash flow and value of properties owned, acquire properties with cash flow growth potential, provide quarterly cash distributions and achieve long-term capital appreciation for its stockholders through targeted management and a value-add program. Consistent with the Company’s policy to acquire assets for both income and capital gain, the Company intends to hold at least majority interests in its properties for long-term appreciation and to engage in the business of directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities primarily in the Southeastern and Southwestern United States consistent with its investment objectives. Economic and market conditions may influence the Company to hold properties for different periods of time. From time to time, the Company may sell a property if, among other deciding factors, the sale would be in the best interest of its stockholders.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying unaudited consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. There have been no significant changes to the Company’s significant accounting policies during the three months ended March 31, 2019.

The accompanying unaudited consolidated financial statements have been prepared according to the rules and regulations of the SEC.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, all adjustments and eliminations necessary for the fair presentation of the Company’s financial position as of March 31, 2019 and results of operations for the three months ended March 31, 2019 and 2018 have been included.  Such adjustments are normal and recurring in nature.  The unaudited information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018 and notes thereto included in its annual report on Form 10-K filed with the SEC on February 19, 2019.

6

Principles of Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest. The unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, including the OP and its subsidiaries.

Revenue Recognition

The Company’s primary operations consist of rental income earned from its residents under lease agreements typically with terms of one year or less. Rental income is recognized when earned. This policy effectively results in income recognition on the straight-line method over the related terms of the leases. Resident reimbursements and other income consist of charges billed to residents for utilities, carport and garage rental, and pets, administrative, application and other fees and are recognized when earned.  The Company implemented the provisions of ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) as of January 1, 2019 using the modified retrospective approach.  The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09. 

Purchase Price Allocation

Upon acquisition of a property, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (“ASC 820”) (see Note 7), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related information. The allocation of the total consideration to intangible lease assets represents the value associated with the in-place leases, which may include lost rent, leasing commissions, legal and other related costs, which the Company, as buyer of the property, did not have to incur to obtain the residents. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

Real estate assets, including land, buildings, improvements, furniture, fixtures and equipment, and intangible lease assets are stated at historical cost less accumulated depreciation and amortization. Costs incurred in making repairs and maintaining real estate assets are expensed as incurred. Expenditures for improvements, renovations, and replacements are capitalized at cost. Real estate-related depreciation and amortization are computed on a straight-line basis over the estimated useful lives as described in the following table:

Land	Not depreciated
Buildings	30 years
Improvements	15 years
Furniture, fixtures, and equipment	3 years
Intangible lease assets	6 months

Construction in progress includes the cost of renovation projects being performed at the various properties. Once a project is complete, the historical cost of the renovation is placed into service in one of the categories above depending on the type of renovation project and is depreciated over the estimated useful lives as described in the table above.

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value.

7

The Company periodically classifies real estate assets as held for sale when certain criteria are met, in accordance with GAAP. At that time, the Company presents the net real estate assets and the net debt associated with the real estate held for sale separately in its consolidated balance sheet, and the Company ceases recording depreciation and amortization expense related to that property. Real estate held for sale is reported at the lower of its carrying amount or its estimated fair value less estimated costs to sell.

Income Taxes

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and expects to continue to qualify as a REIT. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute annually at least 90% of its “REIT taxable income,” as defined by the Code, to its stockholders. As a REIT, the Company will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1) 85% of its ordinary income, (2) 95% of its capital gain net income and (3) 100% of its undistributed income from prior years. The Company intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Company will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. The Company had no significant taxes associated with its TRS for the three months ended March 31, 2019 and 2018.

If the Company fails to meet these requirements, it could be subject to federal income tax on all of the Company’s taxable income at regular corporate rates for that year. The Company would not be able to deduct distributions paid to stockholders in any year in which it fails to qualify as a REIT. Additionally, the Company will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Company is entitled to relief under specific statutory provisions. As of March 31, 2019, the Company believes it is in compliance with all applicable REIT requirements.

The Company evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Company has no examinations in progress and none are expected at this time.

The Company recognizes its tax positions and evaluates them using a two-step process. First, the Company determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

The Company had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2019. The Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2018, 2017 and 2016 tax years remain open to examination by tax jurisdictions to which the Company and its subsidiaries are subject. When applicable, the Company recognizes interest and/or penalties related to uncertain tax positions on its consolidated statements of operations and comprehensive income (loss).

Accounting Pronouncements Adopted in the Current Year

In May 2014, the FASB issued ASU 2014-09, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should also disclose sufficient quantitative and qualitative information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which amends ASU 2014-09 to defer the effective date by one year. The new standard is effective for annual and interim periods in fiscal years beginning after December 15, 2018. Entities are allowed to use either the full or modified retrospective approach when transitioning to the ASU. The Company implemented the provisions of ASU 2014-09 as of January 1, 2019 using the modified retrospective approach. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements as a substantial portion of its revenue consists of rental income from leasing arrangements, which is specifically excluded from ASU 2014-09.   

8

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities(“ASU 2016-01”), which changes certain recognition, measurement, presentation, and disclosure requirements for financial instruments. The ASU requires all equity investments, except those accounted for under the equity method of accounting or resulting in consolidation, to be measured at fair value with changes in fair value recognized in net income. The ASU also simplifies the impairment assessment for equity investments without readily determinable fair values, amends the presentation requirements for changes in the fair value of financial liabilities, requires presentation of financial instruments by measurement category and form of financial asset, and eliminates the requirement to disclose the methods and significant assumptions used in estimating the fair value of financial instruments. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company implemented the provisions of ASU 2016-01 as of January 1, 2019, and it did not have a material impact on the Company’s consolidated financial statementsas the Company does not, nor does it expect to, have a material amount of financial assets or financial liabilities that would be subject to the provisions of ASU 2016-01.

Recent Accounting Pronouncements

Section 107 of the Jumpstart Our Business Startups Act (“JOBS Act”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has elected to take advantage of this extended transition period. The emerging growth company transition period ends December 31, 2020, or if the Company’s public float exceeds $700 million at June 30, 2019, the transition period ends at December 31, 2019.  At the point the transition period ends, the Company will follow the adoption criteria for public companies. As a result of this election, the Company’s financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. The Company may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act. The following recent accounting pronouncements reflect effective dates that delay the adoption until those standards would otherwise apply to private companies.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) (“ASU 2017-12”), which clarifies hedge accounting requirements, improves disclosure of hedging arrangements, and better aligns risk management activities and financial reporting for hedging relationships. The Company early adopted ASU 2017-12 on January 1, 2018, on a modified retrospective basis. For cash flow hedges existing as of the date of adoption, the Company eliminated the separate measurement of ineffectiveness by means of a cumulative-effect adjustment to accumulated other comprehensive income (“OCI”) with a corresponding adjustment to the opening balance of accumulated earnings less dividends on January 1, 2018. The cumulative-effect adjustment, which eliminated the cumulative ineffectiveness that was previously reported in interest expense, resulted in an increase to OCI of approximately $1.4 million, with a corresponding decrease to accumulated earnings less dividends.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which supersedes the current accounting for leases and while retaining two distinct types of leases, finance and operating, (1) requires lessees to record a right of use asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (2) eliminates most real estate specific lease provisions and (3) aligns many of the underlying lessor model principles with those in the new revenue standard. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Entities are required to use a modified retrospective approach when transitioning to the ASU for leases that exist as of or are entered into after the beginning of the earliest comparative period presented in the financial statements. The Company expects to implement the provisions of ASU 2016-02 as of January 1, 2020. As lessors, substantially all of the Company’s agreements have a term of 12 months or less. For lessors, accounting for leases under the new standard will be substantially the same as existing guidance for sales-type leases, direct financing leases, and operating leases, but eliminates current real estate specific provisions and changes the treatment of initial direct costs. The Company is continuing its evaluation, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which provides entities with relief from the costs of implementing certain aspects of ASU 2016-02. The ASU provides a practical expedient which allows lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company intends to elect the practical expedient to account for lease and non-lease components as a single component in lease contracts where the Company is the lessor. The ASU also provides a transition option that permits entities to not recast the comparative periods presented when transitioning to the standard. The Company also intends to elect the transition option.

9

In August 2018, the SEC adopted SEC Release No. 33-10532, Disclosure Update and Simplification (the “SEC Release”), which amends certain disclosure requirements that were redundant, duplicative, overlapping or superseded by other SEC disclosure requirements or GAAP. The amendments generally eliminated or otherwise reduced certain disclosure requirements of various SEC rules and regulations. However, in some cases, the amendments require additional information to be disclosed, including changes in stockholders’ equity in interim periods. Under the SEC Release, registrants will be required to disclose in interim periods on Form 10-Q the changes in each caption of stockholders’ equity and noncontrolling interests for the current and comparative year-to-date periods, with subtotals for each interim period and the amount of dividends per share for each class of shares. The amendments require registrants, including smaller reporting companies, to provide information as prescribed by Rule 3-04 of Regulation S-X. Therefore, the interim disclosures of changes in stockholders’ equity, including dividends per share amounts, may be given in a note to the financial statements or in a separate financial statement. Under Rule 3-04, the interim disclosures of the changes in stockholders’ equity should be in the form of a reconciliation of the beginning balance to the ending balance for each period for which an income statement is required to be filed, with all significant reconciling items described by appropriate captions. The reconciliation should also reflect any adjustments to the balance at the beginning of the earliest period presented for items retroactively applied to periods prior to that period. The Company adopted the provisions of the SEC Release on September 30, 2018, on a retrospective basis.

3. Investments in Subsidiaries

The Company conducts its operations through the OP, which owns the properties through single asset limited liability companies that are special purpose entities (“SPEs”). The Company consolidates the SPEs that it controls as well as any VIEs where it is the primary beneficiary. In connection with its indirect equity investments in the properties acquired, the Company, through the OP and the TRS, directly or indirectly holds 100% of the membership interests in SPEs that directly own the properties. All of the properties the Company has acquired are consolidated in the Company’s consolidated financial statements. The assets of each entity can only be used to settle obligations of that particular entity, and the creditors of each entity have no recourse to the assets of other entities or the Company.

Additionally, the Company has in the past and may in the future enter into purchase and sale transactions structured as reverse like-kind exchanges (“1031 Exchanges”) under Section 1031 of the Code. For a reverse 1031 Exchange in which the Company purchases a new property prior to selling the property to be matched in the like-kind exchange (the Company refers to the new property being acquired in the 1031 Exchange prior to the sale of the related property as a “Parked Asset”), legal title to the Parked Asset is held by an Exchange Accommodation Titleholder (“EAT”) engaged to execute the 1031 Exchange until the sale transaction and the 1031 Exchange are completed. The Company, through a wholly owned subsidiary, enters into a master lease agreement with the EAT whereby the EAT leases the acquired property and all other rights acquired in connection with the acquisition to the Company. The term of the master lease agreement is the earlier of the completion of the reverse 1031 Exchange or 180 days from the date that the property was acquired. The EAT is classified as a VIE as it does not have sufficient equity investment at risk to finance its activities without additional subordinated financial support. The Company consolidates the EAT as its primary beneficiary because it has the ability to control the activities that most significantly impact the EAT’s economic performance and the Company retains all of the legal and economic benefits and obligations related to the Parked Assets prior to completion of the 1031 Exchange. As such, the Parked Assets are included in the Company’s consolidated financial statements as VIEs until legal title is transferred to the Company upon either completion of the 1031 Exchange or termination of the master lease agreement, at which time they will be consolidated as wholly owned subsidiaries.

10

As of March 31, 2019, the Company, through the OP and the wholly owned TRS, owned 38 properties through single-asset LLCs. The following table represents the Company’s ownership in each property by virtue of its 100% ownership of the single-asset LLCs that directly own the title to each property as of March 31, 2019 and December 31, 2018:

				Effective Ownership Percentage at
Property Name		Location	YearAcquired	March 31, 2019			December 31, 2018
Arbors on Forest Ridge		Bedford, Texas	2014		100	%		100	%
Cutter's Point		Richardson, Texas	2014		100	%		100	%
Eagle Crest		Irving, Texas	2014		100	%		100	%
Silverbrook		Grand Prairie, Texas	2014		100	%		100	%
Edgewater at Sandy Springs		Atlanta, Georgia	2014		100	%		100	%
Beechwood Terrace		Antioch, Tennessee	2014		100	%		100	%
Willow Grove		Nashville, Tennessee	2014		100	%		100	%
Woodbridge		Nashville, Tennessee	2014		100	%		100	%
Abbington Heights		Antioch, Tennessee	2014		100	%		100	%
The Summit at Sabal Park		Tampa, Florida	2014		100	%		100	%
Courtney Cove		Tampa, Florida	2014		100	%		100	%
Radbourne Lake		Charlotte, North Carolina	2014		100	%		100	%
Timber Creek		Charlotte, North Carolina	2014		100	%		100	%
Belmont at Duck Creek		Garland, Texas	2014		100	%		100	%
Sabal Palm at Lake Buena Vista		Orlando, Florida	2014		100	%		100	%
Southpoint Reserve at Stoney Creek	(1)	Fredericksburg, Virginia	2014		100	%		100	%
Cornerstone		Orlando, Florida	2015		100	%		100	%
The Preserve at Terrell Mill		Marietta, Georgia	2015		100	%		100	%
The Ashlar		Dallas, Texas	2015		100	%		100	%
Heatherstone		Dallas, Texas	2015		100	%		100	%
Versailles		Dallas, Texas	2015		100	%		100	%
Seasons 704 Apartments		West Palm Beach, Florida	2015		100	%		100	%
Madera Point		Mesa, Arizona	2015		100	%		100	%
The Pointe at the Foothills		Mesa, Arizona	2015		100	%		100	%
Venue at 8651		Fort Worth, Texas	2015		100	%		100	%
Parc500		West Palm Beach, Florida	2016		100	%		100	%
The Colonnade		Phoenix, Arizona	2016		100	%		100	%
Old Farm		Houston, Texas	2016		100	%		100	%
Stone Creek at Old Farm		Houston, Texas	2016		100	%		100	%
Hollister Place		Houston, Texas	2017		100	%		100	%
Rockledge Apartments		Marietta, Georgia	2017		100	%		100	%
Atera Apartments	(2)	Dallas, Texas	2017		100	%		100	%
Cedar Pointe	(3)	Antioch, Tennessee	2018		100	%		100	%
Crestmont Reserve		Dallas, Texas	2018		100	%		100	%
Brandywine I & II		Nashville, Tennessee	2018		100	%		100	%
Bella Vista	(4)	Phoenix, Arizona	2019		100	%		—		(5)
The Enclave	(4)	Tempe, Arizona	2019		100	%		—		(5)
The Heritage	(4)	Phoenix, Arizona	2019		100	%		—		(5)

(1) Property was classified as held for sale as of March 31, 2019.

(2) The EAT that directly owned Atera Apartments was consolidated as a VIE at December 31, 2017.  The Company completed the reverse portion of the 1031 Exchange of Atera Apartments with the sale of Timberglen on January 31, 2018, at which time legal title to Atera Apartments transferred to the Company.  Upon the transfer of title, the entity that directly owns Atera Apartments was no longer considered a VIE.

(3) The EAT that directly owned Cedar Pointe was consolidated as a VIE at December 31, 2018.  The master lease agreement with the EAT that directly owned Cedar Pointe terminated on February 20, 2019, at which time legal title to Cedar Pointe transferred to the Company.  Upon the transfer of title, the entity that directly owns Cedar Pointe was no longer considered a VIE.

(4) The EAT that directly owned Bella Vista, The Enclave and The Heritage was consolidated as a VIE at March 31, 2019.  Legal title will transfer to the Company upon completion of the reverse 1031 Exchange or July 27, 2019, whichever comes first.  Upon the transfer of title, the EAT that directly owned these properties will no longer be considered a VIE.

(5) Properties were acquired in 2019; therefore, no ownership as of December 31, 2018.

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4. Real Estate Investments Statistics

As of March 31, 2019, the Company was invested in a total of 38 multifamily properties, as listed below:

							Average Effective Monthly Rent Per Unit (1) as of					% Occupied (2) as of
Property Name		Rentable Square Footage (in thousands)		Number of Units		Date Acquired	March 31, 2019		December 31, 2018			March 31, 2019			December 31, 2018
Arbors on Forest Ridge			155	210		1/31/2014	$	868	$	870			94.8	%		95.2	%
Cutter's Point			198	196		1/31/2014		1,117		1,109			93.9	%		95.4	%
Eagle Crest			396	447		1/31/2014		932		922			94.0	%		94.9	%
Silverbrook			526	642		1/31/2014		848		835			94.9	%		94.9	%
Edgewater at Sandy Springs			727	760		7/18/2014		964		950			93.2	%		94.1	%
Beechwood Terrace			272	300		7/21/2014		935		933			93.0	%		93.7	%
Willow Grove			229	244		7/21/2014		981		960			94.7	%		95.1	%
Woodbridge			247	220		7/21/2014		1,039		1,028			90.9	%		94.1	%
Abbington Heights			239	274		8/1/2014		878		889			90.9	%		92.0	%
The Summit at Sabal Park			205	252		8/20/2014		959		955			93.7	%		94.4	%
Courtney Cove			225	324		8/20/2014		907		895			93.5	%		95.7	%
Radbourne Lake			247	225		9/30/2014		1,094		1,082			96.0	%		96.0	%
Timber Creek			248	352		9/30/2014		857		847			94.6	%		92.6	%
Belmont at Duck Creek			198	240		9/30/2014		1,040		1,030			95.4	%		92.1	%
Sabal Palm at Lake Buena Vista			371	400		11/5/2014		1,262		1,255			96.0	%		96.5	%
Southpoint Reserve at Stoney Creek	(3)		116	156		12/18/2014		1,107		1,093			95.5	%		98.1	%
Cornerstone			318	430		1/15/2015		1,029		1,007			93.0	%		94.2	%
The Preserve at Terrell Mill			692	752		2/6/2015		936		921			92.2	%		94.8	%
The Ashlar			206	264		2/26/2015		864		859			89.8	%		94.3	%
Heatherstone			116	152		2/26/2015		862		874			90.1	%		94.7	%
Versailles			301	388		2/26/2015		892		884			91.0	%		96.4	%
Seasons 704 Apartments			217	222		4/15/2015		1,130		1,130			95.5	%		96.8	%
Madera Point			193	256		8/5/2015		880		866			97.3	%		94.5	%
The Pointe at the Foothills			473	528		8/5/2015		882		859			95.5	%		95.1	%
Venue at 8651			289	333		10/30/2015		882		875			93.7	%		92.8	%
Parc500			266	217		7/27/2016		1,265		1,254			96.3	%		94.9	%
The Colonnade			256	415		10/11/2016		728		719			91.6	%		93.3	%
Old Farm			697	734		12/29/2016		1,172		1,176			91.8	%		92.9	%
Stone Creek at Old Farm			186	190		12/29/2016		1,181		1,173			96.8	%		96.8	%
Hollister Place			246	260		2/1/2017		990		984			91.2	%		93.5	%
Rockledge Apartments			802	708		6/30/2017		1,205		1,186			94.6	%		94.6	%
Atera Apartments			334	380		10/25/2017		1,233		1,232			93.4	%		97.4	%
Cedar Pointe			224	210		8/24/2018		1,050		1,051			92.9	%		95.7	%
Crestmont Reserve			199	242		9/26/2018		911		914			90.1	%		94.6	%
Brandywine I & II			414	632		9/26/2018		965		957			93.0	%		93.8	%
Bella Vista			243	248		1/28/2019		1,218		—	(4)		94.8	%		—		(4)
The Enclave			194	204		1/28/2019		1,261		—	(4)		97.1	%		—		(4)
The Heritage			199	204		1/28/2019		1,233		—	(4)		96.6	%		—		(4)
			11,664		13,211

(1) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of March 31, 2019 and December 31, 2018, respectively, minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of March 31, 2019 and December 31, 2018, respectively.

(2) Percent occupied is calculated as the number of units occupied as of March 31, 2019 and December 31, 2018, divided by the total number of units, expressed as a percentage.

(3) Property was classified as held for sale as of March 31, 2019. 

(4) Properties were acquired in 2019.

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5. Real Estate Investments

As of March 31, 2019, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties		Land		Buildings and Improvements			Intangible Lease Assets			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge		$	2,330	$	11,325		$	—		$	—	$	1,088		$	14,743
Cutter's Point			3,330		13,354			—			—		1,400			18,084
Eagle Crest			5,450		23,039			—			422		1,604			30,515
Silverbrook			4,860		26,834			—			—		3,321			35,015
Edgewater at Sandy Springs			14,290		44,572			—			—		5,254			64,116
Beechwood Terrace			1,390		21,319			—			—		1,789			24,498
Willow Grove			3,940		10,840			—			—		1,287			16,067
Woodbridge			3,650		13,141			—			—		1,607			18,398
Abbington Heights			1,770		17,173			—			—		1,578			20,521
The Summit at Sabal Park			5,770		13,547			—			—		1,416			20,733
Courtney Cove			5,880		13,186			—			65		1,315			20,446
Radbourne Lake			2,440		22,300			—			—		1,584			26,324
Timber Creek			11,260		13,766			—			—		1,781			26,807
Belmont at Duck Creek			1,910		17,424			—			—		1,498			20,832
Sabal Palm at Lake Buena Vista			7,580		41,422			—			—		1,341			50,343
Cornerstone			1,500		30,522			—			—		2,018			34,040
The Preserve at Terrell Mill			10,170		49,125			—			6		5,190			64,491
The Ashlar			4,090		12,852			—			—		2,105			19,047
Heatherstone			2,320		8,137			—			—		1,222			11,679
Versailles			6,720		21,519			—			—		3,103			31,342
Seasons 704 Apartments			7,480		14,225			—			—		1,323			23,028
Madera Point			4,920		17,577			—			—		1,472			23,969
The Pointe at the Foothills			4,840		47,000			—			—		2,154			53,994
Venue at 8651			2,350		18,106			—			—		2,597			23,053
Parc500			3,860		20,780			—			—		2,680			27,320
The Colonnade			8,340		37,242			—			653		1,726			47,961
Old Farm			11,078		70,496			—			—		1,884			83,458
Stone Creek at Old Farm			3,493		19,403			—			—		487			23,383
Hollister Place			2,782		21,629			—			—		1,601			26,012
Rockledge Apartments			17,451		95,847			—			29		3,690			117,017
Atera Apartments			22,371		36,664			—			29		1,216			60,280
Cedar Pointe	(1)		2,372		23,537			—			41		561			26,511
Crestmont Reserve			4,124		19,653			—			105		568			24,450
Brandywine I & II			6,236		71,432			—			244		1,500			79,412
Bella Vista	(2)		10,942		36,124			919			—		640			48,625
The Enclave	(2)		11,046		29,654			769			—		523			41,992
The Heritage	(2)		6,835		34,031			750			—		538			42,154
			231,170		1,038,797			2,438			1,594		66,661			1,340,660
Accumulated depreciation and amortization			—		(104,468	)		(813	)		—		(41,192	)		(146,473	)
Total Operating Properties		$	231,170	$	934,329		$	1,625		$	1,594	$	25,469		$	1,194,187
Held For Sale Property
Southpoint Reserve at Stoney Creek			6,120		11,319			—			—		805			18,244
Accumulated depreciation and amortization			—		(736	)		—			—		(161	)		(897	)
Total Held For Sale Property		$	6,120	$	10,583		$	—		$	—	$	644		$	17,347
Total		$	237,290	$	944,912		$	1,625		$	1,594	$	26,113		$	1,211,534

(1) The EAT that directly owned Cedar Pointe was consolidated as a VIE at December 31, 2018.  The master lease agreement with the EAT that directly owned Cedar Pointe terminated on February 20, 2019, at which time legal title to Cedar Pointe transferred to the Company.  Upon the transfer of title, the entity that directly owns Cedar Pointe was no longer considered a VIE.

(2) The EAT that directly owned Bella Vista, The Enclave and The Heritage was consolidated as a VIE at March 31, 2019.  Legal title will transfer to the Company upon completion of the reverse 1031 Exchange or July 27, 2019, whichever comes first.  Upon the transfer of title, the EAT that directly owned these properties will no longer be considered a VIE.

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As of December 31, 2018, the major components of the Company’s investments in multifamily properties were as follows (in thousands):

Operating Properties		Land		Buildings and Improvements			Intangible Lease Assets			Construction in Progress		Furniture, Fixtures and Equipment			Totals
Arbors on Forest Ridge		$	2,330	$	11,319		$	—		$	—	$	1,047		$	14,696
Cutter's Point			3,330		13,347			—			—		1,320			17,997
Eagle Crest			5,450		22,969			—			—		1,563			29,982
Silverbrook			4,860		26,485			—			60		3,230			34,635
Edgewater at Sandy Springs			14,290		44,186			—			349		5,083			63,908
Beechwood Terrace			1,390		21,123			—			31		1,670			24,214
Willow Grove			3,940		10,829			—			—		1,231			16,000
Woodbridge			3,650		13,125			—			—		1,536			18,311
Abbington Heights			1,770		17,140			—			—		1,539			20,449
The Summit at Sabal Park			5,770		13,447			—			43		1,347			20,607
Courtney Cove			5,880		13,170			—			—		1,268			20,318
Radbourne Lake			2,440		22,138			—			72		1,536			26,186
Timber Creek			11,260		13,582			—			—		1,556			26,398
Belmont at Duck Creek			1,910		17,397			—			—		1,471			20,778
Sabal Palm at Lake Buena Vista			7,580		41,336			—			—		1,280			50,196
Cornerstone			1,500		30,513			—			—		1,885			33,898
The Preserve at Terrell Mill			10,170		49,091			—			57		4,843			64,161
The Ashlar			4,090		12,845			—			—		2,017			18,952
Heatherstone			2,320		8,132			—			—		1,199			11,651
Versailles			6,720		21,513			—			—		3,033			31,266
Seasons 704 Apartments			7,480		14,223			—			—		1,288			22,991
Madera Point			4,920		17,570			—			—		1,431			23,921
The Pointe at the Foothills			4,840		46,998			—			—		2,078			53,916
Venue at 8651			2,350		18,084			—			—		2,499			22,933
Parc500			3,860		20,692			—			37		2,600			27,189
The Colonnade			8,340		37,086			—			567		1,604			47,597
Old Farm			11,078		70,471			—			—		1,800			83,349
Stone Creek at Old Farm			3,493		19,394			—			—		467			23,354
Hollister Place			2,782		21,389			—			135		1,410			25,716
Rockledge Apartments			17,451		95,484			—			428		3,314			116,677
Atera Apartments			22,371		36,563			—			86		1,151			60,171
Cedar Pointe	(1)		2,371		23,458			600			16		441			26,886
Crestmont Reserve			4,124		19,544			687			—		504			24,859
Brandywine I & II			6,237		70,961			1,762			—		1,215			80,175
			202,347		935,604			3,049			1,881		61,456			1,204,337
Accumulated depreciation and amortization			—		(95,364	)		(1,625	)		—		(37,135	)		(134,124	)
Total Operating Properties		$	202,347	$	840,240		$	1,424		$	1,881	$	24,321		$	1,070,213
Held For Sale Properties
Southpoint Reserve at Stoney Creek			6,120		11,319			—			—		787			18,226
Accumulated depreciation and amortization			—		(736	)		—			—		(161	)		(897	)
Total Held For Sale Properties		$	6,120	$	10,583		$	—		$	—	$	626		$	17,329
Total		$	208,467	$	850,823		$	1,424		$	1,881	$	24,947		$	1,087,542

(1) The EAT that directly owned Cedar Pointe was consolidated as a VIE at December 31, 2018.  The master lease agreement with the EAT that directly owned Cedar Pointe terminated on February 20, 2019, at which time legal title to Cedar Pointe transferred to the Company.  Upon the transfer of title, the entity that directly owns Cedar Pointe was no longer considered a VIE.

Depreciation expense was $13.2 million and $10.7 million for the three months ended March 31, 2019 and 2018, respectively.

Amortization expense related to the Company’s intangible lease assets was $2.2 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively. Amortization expense related to the Company’s intangible lease assets for all acquisitions completed through March 31, 2019 is expected to be $1.6 million for the remainder of the year ended December 31, 2019. Due to the six-month useful life attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to September 30, 2018 has been fully amortized and the assets and related accumulated amortization have been written off as of March 31, 2019.

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Acquisitions

The Company acquired three properties during the three months ended March 31, 2019, as detailed in the table below (dollars in thousands); there were no acquisitions of real estate during the three months ended March 31, 2018.

Property Name	Location	Date of Acquisition	Purchase Price		Mortgage Debt (1)		# Units		Effective Ownership
Bella Vista	Phoenix, Arizona	January 28, 2019	$	48,400	$	29,040		248		100	%
The Enclave	Tempe, Arizona	January 28, 2019		41,800		25,322		204		100	%
The Heritage	Phoenix, Arizona	January 28, 2019		41,900		24,625		204		100	%
			$	132,100	$	78,987		656

(1) For additional information regarding the Company’s debt, see Note 6.

Dispositions

There were no sales of real estate during the three months ended March 31, 2019. The Company sold one property for approximately $30.0 million during the three months ended March 31, 2018.

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6. Debt

Mortgage Debt

The following table contains summary information concerning the mortgage debt of the Company as of March 31, 2019 (dollars in thousands):

Operating Properties		Type	Term(months)		Outstanding Principal (1)				Interest Rate (2)	Maturity Date
Arbors on Forest Ridge	(3)	Floating		84	$	13,130			4.17%	7/1/2024
Cutter's Point	(3)	Floating		84		16,640			4.17%	7/1/2024
Eagle Crest	(3)	Floating		84		29,510			4.17%	7/1/2024
Silverbrook	(3)	Floating		84		30,590			4.17%	7/1/2024
Edgewater at Sandy Springs	(3)	Floating		84		52,000			4.17%	7/1/2024
Beechwood Terrace	(3)	Floating		84		23,365			3.93%	9/1/2025
Willow Grove	(3)	Floating		84		14,818			4.27%	7/1/2024
Woodbridge	(3)	Floating		84		13,677			4.27%	7/1/2024
The Summit at Sabal Park	(3)	Floating		84		13,560			4.11%	7/1/2024
Courtney Cove	(3)	Floating		84		13,680			4.11%	7/1/2024
The Preserve at Terrell Mill	(3)	Floating		84		42,480			4.11%	7/1/2024
The Ashlar	(3)	Floating		84		14,520			4.11%	7/1/2024
Heatherstone	(3)	Floating		84		8,880			4.11%	7/1/2024
Versailles	(3)	Floating		84		23,880			4.11%	7/1/2024
Seasons 704 Apartments	(3)	Floating		84		17,460			4.11%	7/1/2024
Madera Point	(3)	Floating		84		15,150			4.11%	7/1/2024
The Pointe at the Foothills	(3)	Floating		84		34,800			4.11%	7/1/2024
Venue at 8651	(3)	Floating		84		13,734			4.27%	7/1/2024
The Colonnade	(3)	Floating		84		28,093			4.17%	7/1/2024
Old Farm	(3)	Floating		84		52,886			4.17%	7/1/2024
Stone Creek at Old Farm	(3)	Floating		84		15,274			4.17%	7/1/2024
Timber Creek	(3)	Floating		84		24,100			3.75%	10/1/2025
Radbourne Lake	(3)	Floating		84		20,000			3.78%	10/1/2025
Sabal Palm at Lake Buena Vista	(3)	Floating		84		42,100			3.79%	9/1/2025
Abbington Heights	(3)	Floating		84		16,920			3.74%	9/1/2025
Belmont at Duck Creek	(3)	Floating		84		17,760			3.88%	6/1/2025
Cornerstone	(4)	Fixed		120		22,112			4.24%	3/1/2023
Parc500	(5)	Fixed		120		15,416			4.49%	8/1/2025
Hollister Place	(3)	Floating		84		14,811			3.83%	10/1/2025
Rockledge Apartments	(3)	Floating		84		68,100			4.06%	7/1/2024
Atera Apartments	(3)	Floating		84		29,500			3.97%	11/1/2024
Cedar Pointe	(6)	Floating		84		17,300			3.84%	9/1/2025
Crestmont Reserve	(3)	Floating		84		12,061			3.67%	10/1/2025
Brandywine I & II	(3)	Floating		84		43,835			3.67%	10/1/2025
Bella Vista	(7)	Floating		84		29,040			3.81%	2/1/2026
The Enclave	(7)	Floating		84		25,322			3.81%	2/1/2026
The Heritage	(7)	Floating		84		24,625			3.81%	2/1/2026
					$	911,129
Fair market value adjustment						608		(8)
Deferred financing costs, net of accumulated amortization of $2,154						(8,594	)
					$	903,143
Held For Sale Property
Southpoint Reserve at Stoney Creek	(3)	Floating		84		13,334			4.60%	1/1/2022
Deferred financing costs, net of accumulated amortization of $100						(65	)
					$	13,269

(1) Mortgage debt that is non-recourse to the Company and encumbers the multifamily properties.

(2) Interest rate is based on one-month LIBOR plus an applicable margin, except for fixed rate mortgage debt. One-month LIBOR as of March 31, 2019 was 2.4945%.

(3) Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13^th month of the term through the 81^st month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.

(4) Debt in the amount of $18.0 million was assumed upon acquisition of this property and recorded at approximated fair value. The assumed debt carries a 4.09% fixed rate, was originally issued in March 2013, and had a term of 120 months with an initial 24 months of interest only. At the time of acquisition, the principal balance of the first mortgage remained unchanged and had a

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remaining term of 98 months with 2 months of interest only. The first mortgage is pre-payable and subject to yield maintenance from the 13^th month through August 31, 2022 and is pre-payable at par September 1, 2022 until maturity. Concurrently with the acquisition of the property, the Company placed a supplemental second mortgage on the property with a principal amount of approximately $5.8 million, a fixed rate of 4.70%, and with a maturity date that is the same time as the first mortgage. The supplemental second mortgage is pre-payable and subject to yield maintenance from the date of issuance through August 31, 2022 and is pre-payable at par September 1, 2022 until maturity. As of March 31, 2019, the total indebtedness secured by the property had a blended interest rate of 4.24%.

(5) Debt was assumed upon acquisition of this property and recorded at approximated fair value. The loan is open to pre-payment in the last four months of the term.

(6) Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%.  Starting in the 13^th month of the term through the 81^st month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term.  The EAT that directly owned Cedar Pointe was consolidated as a VIE at December 31, 2018.  The master lease agreement with the EAT that directly owned Cedar Pointe terminated on February 20, 2019, at which time legal title to Cedar Pointe transferred to the Company.  Upon the transfer of title, the entity that directly owns Cedar Pointe was no longer considered a VIE.

(7) Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13^th month of the term through the 81^st month of the term, the loan can be pre-paid at par plus 1.00% of the unpaid principal balance and at par during the last three months of the term. The EAT that directly owned Bella Vista, The Enclave and The Heritage was consolidated as a VIE at March 31, 2019. Legal title will transfer to the Company upon completion of the reverse 1031 Exchange or July 27, 2019, whichever comes first. Upon the transfer of title, the EAT that directly owned these properties will no longer be considered a VIE.

(8) The Company reflected a valuation adjustment on its fixed rate debt for Parc500 to adjust it to fair market value on the date of acquisition for the difference between the fair value and the assumed principal amount of debt. The difference is amortized into interest expense over the remaining term of the mortgage.

The weighted average interest rate of the Company’s mortgage indebtedness was 4.04% as of March 31, 2019 and 4.07% as of December 31, 2018. The decrease between the periods is primarily related to a decrease in one-month LIBOR of approximately 1 basis points to 2.4945% as of March 31, 2019 from 2.5027% as of December 31, 2018. As of March 31, 2019, the adjusted weighted average interest rate of the Company’s mortgage indebtedness was 3.22%. For purposes of calculating the adjusted weighted average interest rate of the outstanding mortgage indebtedness, the Company has included the weighted average fixed rate of 1.3388% for one-month LIBOR on its combined $650.0 million notional amount of interest rate swap agreements, which effectively fix the interest rate on $650.0 million of the Company’s floating rate mortgage indebtedness (see Note 7).

Each of the Company’s mortgages is a non-recourse obligation subject to customary provisions. The loan agreements contain customary events of default, including defaults in the payment of principal or interest, defaults in compliance with the covenants contained in the documents evidencing the loan, defaults in payments under any other security instrument covering any part of the property, whether junior or senior to the loan, and bankruptcy or other insolvency events. As of March 31, 2019, the Company believes it is in compliance with all provisions.

Freddie Mac Multifamily Green Advantage. In order to obtain more favorable pricing on the Company’s mortgage debt financing with Freddie Mac, the Company has decided to participate in Freddie Mac’s new Multifamily Green Advantage program (the “Green Program”). In the second quarter of 2017, the Company escrowed approximately $4.2 million to finance smarter, greener property improvements at 18 of its properties. In connection with the three acquisitions and seven refinancings the Company completed in 2018, the Company escrowed approximately $1.2 million related to the Green Program.  In connection with the three purchases in 2019, the Company escrowed approximately $0.5 million related to the Green Program.

Credit Facility

The following table contains summary information concerning the Company’s credit facility as of March 31, 2019 (dollars in thousands):

	Type	Term(months)		Outstanding Principal			Interest Rate (1)	Maturity Date
$75 Million Credit Facility	Floating		24	$	52,500		4.74%	1/28/2021
Deferred financing costs, net of accumulated amortization of $54					(590	)
				$	51,910

(1) Interest rate is based on one-month LIBOR plus an applicable margin.  One-month LIBOR as of March 31, 2019 was 2.4945%.

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$75 Million Credit Facility. On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the “$75 Million Credit Facility”) with SunTrust Bank, as administrative agent and the lenders party thereto, and immediately drew $52.5 million to fund a portion of the purchase price of Bella Vista, The Enclave, and The Heritage. The $75 Million Credit Facility is a full-term, interest-only facility with an initial 24-month term, has one 12-month extension option, bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on the Company’s leverage level as determined under the credit facility agreement, and is guaranteed by the Company.

Deferred Financing Costs

The Company defers costs incurred in obtaining financing and amortizes the costs over the terms of the related loans using the straight-line method, which approximates the effective interest method. Deferred financing costs, net of amortization, are recorded as a reduction from the related debt on the Company’s consolidated balance sheets. Upon repayment of or in conjunction with a material change in the terms of the underlying debt agreement (i.e. a 10% or greater difference in the cash flows between instruments), any unamortized costs and fair market value adjustments related to the original debt are charged to loss on extinguishment of debt and modification costs. For the three months ended March 31, 2019 and 2018, the Company wrote-off deferred financing costs of approximately $0.0 million and $0.4 million, respectively, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations and comprehensive income. For the three months ended March 31, 2019 and 2018, amortization of deferred financing costs of approximately $0.4 million and $0.4 million, respectively, is included in interest expense on the consolidated statements of operations and comprehensive income.

Loss on Extinguishment of Debt and Modification Costs

Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs incurred on the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment.

Schedule of Debt Maturities

The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years subsequent to March 31, 2019 are as follows (in thousands):

	Operating Properties		Held For Sale Property		Credit Facility		Total
2019	$	535	$	163		—	$	698
2020		744		239		—		983
2021		782		258		52,500		53,540
2022		817		12,674		—		13,491
2023		20,598		—		—		20,598
Thereafter		887,653		—		—		887,653
Total	$	911,129	$	13,334	$	52,500	$	976,963

7. Fair Value of Derivatives and Financial Instruments

Fair value measurements are determined based on the assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy):

• Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals.

• Level 3 inputs are the unobservable inputs for the asset or liability, which are typically based on an entity’s own assumption, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on input from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

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The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The Company utilizes independent third parties to perform the allocation of value analysis for each property acquisition and to perform the market valuations on its derivative financial instruments and has established policies, as described above, processes and procedures intended to ensure that the valuation methodologies for investments and derivative financial instruments are fair and consistent as of the measurement date.

Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings. In order to minimize counterparty credit risk, the Company enters into and expects to enter into hedging arrangements only with major financial institutions that have high credit ratings.

The Company utilizes an independent third party to perform the market valuations on its derivative financial instruments. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the Company’s derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. The Company has determined that the significance of the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2019 and December 31, 2018 were classified as Level 2 of the fair value hierarchy.

The Company’s main objective in using interest rate derivatives is to add stability to interest expense related to floating rate debt. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The interest rate swaps have terms ranging from four to five years. Interest rate caps involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. The interest rate caps have terms ranging from three to four years. During the three months ended March 31, 2019 and 2018, interest rate cap derivatives were used to hedge the variable cash flows associated with a portion of the Company’s floating rate debt. The interest rate cap agreements the Company has entered into effectively cap one-month LIBOR on $310.0 million of the Company’s floating rate mortgage indebtedness at a weighted average rate of 5.81%.

The changes in the fair value of derivative financial instruments that are designated as cash flow hedges are recorded in OCI and are subsequently reclassified into net income (loss) in the period that the hedged forecasted transaction affects earnings. Amounts reported in OCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s floating rate debt. Prior to the Company’s adoption of ASU 2017-12 on January 1, 2018, the ineffective portion of changes in the fair value of the Company’s derivatives designated as cash flow hedges was recognized directly in net income (loss) as interest expense. The adoption of ASU 2017-12 eliminates the separate measurement of effectiveness and ineffectiveness, and all changes in the fair value of derivatives that are designated as cash flow hedges are recorded directly in OCI. Therefore, during the three months ended March 31, 2019, the Company recorded no gain or loss related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges. During the three months ended March 31, 2019 and 2018, the Company recorded no gain/(loss) related to the ineffective portion of changes in the fair value of its derivatives designated as cash flow hedges, which is recorded as a decrease/(increase) to interest expense on the accompanying consolidated statements of operations and comprehensive income.

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In order to fix a portion of, and mitigate the risk associated with, the Company’s floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), the Company, through the OP, has entered into seven interest rate swap transactions with KeyBank National Association (“KeyBank”) (the “Counterparty”) with a combined notional amount of $650.0 million. The interest rate swaps the Company has entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3388%. The Company has designated these interest rate swaps as cash flow hedges of interest rate risk.

As of March 31, 2019, the Company had the following outstanding interest rate swaps that were designated as cash flow hedges of interest rate risk (dollars in thousands):

Effective Date	Termination Date	Notional		Fixed Rate (1)
July 1, 2016	June 1, 2021	$	100,000		1.1055	%
July 1, 2016	June 1, 2021		100,000		1.0210	%
July 1, 2016	June 1, 2021		100,000		0.9000	%
September 1, 2016	June 1, 2021		100,000		0.9560	%
April 1, 2017	April 1, 2022		100,000		1.9570	%
May 1, 2017	April 1, 2022		50,000		1.9610	%
July 1, 2017	July 1, 2022		100,000		1.7820	%
		$	650,000		1.3388	%	(2)

(1) The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2019, one-month LIBOR was 2.4945%.

(2) Represents the weighted average fixed rate of the interest rate swaps.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but either do not meet the strict requirements to apply hedge accounting in accordance with FASB ASC 815, Derivatives and Hedging, or the Company has elected not to designate such derivatives as hedges. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net income (loss) as interest expense.

As of March 31, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):

Product	Number of Instruments		Notional
Interest rate caps		13	$	310,028

As of March 31, 2018, the Company had 11 interest rate cap derivatives, with a notional amount of $177.3 million, which were not designated as hedges in qualifying hedging relationships.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets as of March 31, 2019 and December 31, 2018 (in thousands):

		Asset Derivatives				Liability Derivatives
	Balance Sheet Location	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Derivatives designated as hedging instruments:
Interest rate swaps	Fair market value of interest rate swaps	$	12,467	$	18,141	$	—	$	—
Derivatives not designated as hedging instruments:
Interest rate caps	Prepaid and other assets		4		10		—		—
Total		$	12,471	$	18,151	$	—	$	—

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The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations and comprehensive income for the three months ended March 31, 2019 and 2018 (in thousands):

	Amount of gain (loss) recognized in OCI						Location of gain (loss) reclassified from accumulated	Amount of gain (loss) reclassified from OCI into income					Location of gain (loss) recognized	Amount of gain (loss) recognized in income
	2019			2018			OCI into income	2019		2018			in income	2019		2018
Derivatives designated as hedging instruments:
For the three months ended March 31,
Interest rate products	$	(3,785	)	$	8,100	(1)	Interest expense	$	1,880	$	339	(1)	Interest expense	$	—	$	—	(2)

(1) Represents the effective portion of changes in fair value.

(2) Represents the ineffective portion of changes in fair value.

	Location of gain (loss)	Amount of gain (loss) recognized in income
	recognized in income	2019			2018
Derivatives not designated as hedging instruments:
For the three months ended March 31,
Interest rate products	Interest expense	$	(26	)	$	10

Other Financial Instruments Carried at Fair Value

Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP (see Note 10). The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the OP are classified as Level 2 if they are adjusted to their redemption value.

Financial Instruments Not Carried at Fair Value

At March 31, 2019 and December 31, 2018, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid assets, accounts payable and other accrued liabilities, accrued real estate taxes payable, accrued interest payable, security deposits and prepaid rent approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

Long-term indebtedness is carried at amounts that reasonably approximate their fair value. In calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities. These financial instruments utilize Level 2 inputs.

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value. There can be no assurance that the estimates discussed herein, using Level 3 inputs, are indicative of the amounts the Company could realize on disposition of the real estate asset. For the three months ended March 31, 2019 and 2018, the Company did not record any impairment charges related to real estate assets.

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8. Stockholders’ Equity

Common Stock

During the three months ended March 31, 2019, the Company issued 143,642 shares of common stock pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below).

As of March 31, 2019, the Company had 23,643,277 shares of common stock, par value $0.01 per share, issued and outstanding.

Share Repurchase Program

On June 15, 2016, the Board authorized the Company to repurchase up to $30.0 million of its common stock, par value $0.01 per share, during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”). On April 30, 2018, the Board increased the Share Repurchase Program to up to $40.0 million and extended it by an additional two years to June 15, 2020. The Company may utilize various methods to effect the repurchases, and the timing and extent of the repurchases will depend upon several factors, including market and business conditions, regulatory requirements and other corporate considerations, including whether the Company’s common stock is trading at a significant discount to net asset value per share. Repurchases under this program may be discontinued at any time. During the three months ended March 31, 2019, the Company did not repurchase any shares of its common stock. As of March 31, 2019, the Company had repurchased 737,458 shares of its common stock, par value $0.01 per share, at a total cost of approximately $16,694,000, or $22.64 per share.

Long Term Incentive Plan

On June 15, 2016, the Company’s stockholders approved a long-term incentive plan (the “2016 LTIP”) and the Company filed a registration statement on Form S-8 registering 2,100,000 shares of common stock, par value $0.01 per share, which the Company may issue pursuant to the 2016 LTIP. The 2016 LTIP authorizes the compensation committee of the Board to provide equity-based compensation in the form of stock options, appreciation rights, restricted shares, restricted stock units, performance shares, performance units and certain other awards denominated or payable in, or otherwise based on, the Company’s common stock or factors that may influence the value of the Company’s common stock, plus cash incentive awards, for the purpose of providing the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries), the Company’s non-employee directors, and potentially certain non-employees who perform employee-type functions, incentives and rewards for performance.

Restricted Stock Units. Under the 2016 LTIP, restricted stock units may be granted to the Company’s directors, officers and other key employees (and those of the Adviser and the Company’s subsidiaries) and typically vest over a three to five-year period for officers, employees and certain key employees of the Adviser and annually for directors. Beginning on the date of grant, restricted stock units earn dividends that are payable in cash on the vesting date. On August 11, 2016, pursuant to the 2016 LTIP, the Company granted 209,797 restricted stock unitsto its directors and officers. On March 16, 2017, pursuant to the 2016 LTIP, the Company granted 219,802 restricted stock units to its directors and officers. On February 15, 2018, pursuant to the 2016 LTIP, the Company granted 275,795 restricted stock units to its directors, officers, employees and certain key employees of the Adviser.  On February 21, 2019, pursuant to the 2016 LTIP, the Company granted 186,662 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. The following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of March 31, 2019:

	2019
	Number of Units				Weighted Average Grant Date Fair Value
Outstanding January 1,		464,626
Granted		186,662				37.50
Vested		(148,091	)	(1)		23.10
Forfeited		—				—
Outstanding March 31,		503,197		(2)	$	28.17

(1) Certain key employees of the Adviser elected to net the taxes owed upon vesting against the shares issued resulting in 143,642 shares being issued as shown on the Consolidated Statement of Stockholders’ Equity.  

(2) 49,772 restricted stock units vest in August 2019, 110,314 vest in February 2020, 69,530 vest in March 2020, 101,266 vest in February 2021, 101,265 vest in February 2022, 35,523 vest in February 2023 and 35,527 vest in February 2024.

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As of March 31, 2019, the Company had issued 384,410 shares of common stock under the 2016 LTIP. For the three months ended March 31, 2019 and 2018, the Company recognized approximately $1.2 million and $0.9 million, respectively, of equity-based compensation expense related to grants of restricted stock units, which is included in corporate general and administrative expenses on the consolidated statements of operations and comprehensive income. As of March 31, 2019, the Company had recognized a liability of approximately $0.6 million related to dividends earned on restricted stock units that are payable in cash upon vesting.

At-the-Market Offering

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”) and SunTrust Robinson Humphrey, Inc., pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000.  Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices (the “ATM Program”).  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the ATM Program.  The Company had not commenced any sales through the ATM Program as of March 31, 2019.  The ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the ATM Program reach $100,000,000.

9. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of the Company’s common stock outstanding, which is adjusted for shares classified as treasury shares during the period and excludes any unvested restricted stock units issued pursuant to the 2016 LTIP. Diluted earnings (loss) per share is computed by adjusting basic earnings (loss) per share for the dilutive effect of the assumed vesting of restricted stock units. During periods of net loss, the assumed vesting of restricted stock units is anti-dilutive and is not included in the calculation of earnings (loss) per share.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted earnings (loss) per share, as they are exchangeable for common stock on a one-for-one basis. The income (loss) allocable to such units is allocated on this same basis and reflected as net income (loss) attributable to redeemable noncontrolling interests in the OP in the accompanying consolidated statements of operations and comprehensive income. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings (loss) per share. See Note 10 for additional information.

The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods presented (in thousands, except per share amounts):

	For the Three Months Ended March 31,
	2019			2018
Numerator for earnings (loss) per share:
Net income (loss)	$	(4,373	)	$	10,094
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(13	)		30
Net income (loss) attributable to common stockholders	$	(4,360	)	$	10,064
Denominator for earnings (loss) per share:
Weighted average common shares outstanding		23,550			20,987
Denominator for basic earnings (loss) per share		23,550			20,987
Weighted average unvested restricted stock units		494			443
Denominator for diluted earnings per share		24,044			21,430
Earnings (loss) per weighted average common share:
Basic	$	(0.19	)	$	0.48
Diluted	$	(0.19	)	$	0.47

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10. Noncontrolling Interests

Redeemable Noncontrolling Interests in the OP

Interests in the OP held by limited partners are represented by OP Units. Net income (loss) is allocated to holders of OP Units based upon net income (loss) attributable to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company, outside limited partners of the OP receive their pro-rata share of the distribution.Redeemable noncontrolling interests in the OP have a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable noncontrolling interests in the OP.

On June 30, 2017, the Company and the OP entered into a contribution agreement (the “Contribution Agreement”) with BH Equities, LLC and its affiliates (collectively, “BH Equity”), whereby the Company purchased 100% of the joint venture interests in the Portfolio owned by BH Equity, representing approximately 8.4% ownership in the Portfolio (the “BH Buyout”), for total consideration of approximately $51.7 million (the “Purchase Amount”). The Purchase Amount consisted of approximately $49.7 million in cash that was paid on June 30, 2017 and 73,233 OP Units (initially valued at $2.0 million) that were issued on August 1, 2017. The number of OP Units issued was calculated by dividing $2.0 million by the midpoint of the range of the Company’s net asset value as publicly disclosed in connection with the Company’s release of its second quarter of 2017 earnings results, which was $27.31 per share.

In connection with the issuance of OP Units to BH Equity on August 1, 2017, the Company and the OP amended the partnership agreement of the OP (the “Amendment”). Pursuant to the Amendment, limited partners holding OP Units have the right to cause the OP to redeem their units at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the OP), provided that such OP Units have been outstanding for at least one year. The Company, through the OP GP, as the general partner of the OP may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (one share of common stock of the Company for each OP Unit), as defined in the partnership agreement of the OP. Notwithstanding the foregoing, a limited partner will not be entitled to exercise its redemption right to the extent the issuance of the Company’s common stock to the redeeming limited partner would (1) be prohibited, as determined in the Company’s sole discretion, under the Company’s charter or (2) cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of the Company’s common stock for purposes of complying with the Securities Act. Accordingly, the Company records the OP Units held by noncontrolling limited partners outside of permanent equity and reports the OP Units at the greater of their carrying value or their redemption value using the Company’s stock price at each balance sheet date.

The following table sets forth the redeemable noncontrolling interests in the OP for the three months ended March 31, 2019 (in thousands):

Redeemable noncontrolling interests in the OP, December 31, 2018	$	2,567
Net loss attributable to redeemable noncontrolling interests in the OP		(13	)
Other comprehensive loss attributable to redeemable noncontrolling interests in the OP		(17	)
Contributions from redeemable noncontrolling interests in the OP		181
Distributions to redeemable noncontrolling interests in the OP		(36	)
Adjustment to reflect redemption value of redeemable noncontrolling interests in the OP		126
Redeemable noncontrolling interests in the OP, March 31, 2019	$	2,808

Fees and Reimbursements to BH and its Affiliates

The Company has entered into management agreements with BH Management Services, LLC (“BH”), the Company’s property manager and an independently owned third party, who manages the Company’s properties and supervises the implementation of the Company’s value-add program. BH is an affiliate of BH Equity, who was a noncontrolling interest member of the Company’s joint ventures prior to the BH Buyout on June 30, 2017. Through BH Equity’s noncontrolling interests in such joint ventures, BH Equity was deemed to be a related party. With the completion of the BH Buyout, BH Equity is no longer deemed to be a related party. BH Equity became a noncontrolling limited partner of the OP upon execution of the Amendment. BH and its affiliates do not have common ownership in any joint venture with the Adviser; there is also no common ownership between BH and its affiliates and the Adviser.

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The property management fee paid to BH is approximately 3% of the monthly gross income from each property managed. Currently, BH manages all of the Company’s properties. Additionally, the Company may pay BH certain other fees, including: (1) a fee of $15-25 per unit for the one-time setup and inspection of properties, (2) a construction supervision fee of 5-6% of total project costs, which is capitalized, (3) acquisition fees and due diligence costs reimbursements, and (4) other owner approved fees at $55 per hour. BH also acts as a paymaster for the properties and is reimbursed at cost for various operating expenses it pays on behalf of the properties. The following is a summary of fees that the properties incurred to BH and its affiliates, as well as reimbursements paid to BH from the properties for various operating expenses, for the three months ended March 31, 2019 and 2018 (in thousands):

		For the Three Months Ended March 31,
		2019		2018
Fees incurred
Property management fees	(1)	$	1,240	$	1,054
Construction supervision fees	(2)		224		287
Acquisition fees	(3)		308		—
Reimbursements
Payroll and benefits	(4)		4,311		3,788
Other reimbursements	(5)		633		461

(1) Included in property management fees on the consolidated statements of operations and comprehensive income.

(2) Capitalized on the consolidated balance sheets and reflected in buildings and improvements.

(3) Includes due diligence costs. Acquisition fees are capitalized to real estate assets on the consolidated balance sheets.

(4) Included in property operating expenses on the consolidated statements of operations and comprehensive income.

(5) Includes property operating expenses such as repairs and maintenance costs and certain property general and administrative expenses, which are included on the consolidated statements of operations and comprehensive income.

11. Related Party Transactions

Advisory and Administrative Fee

In accordance with the Advisory Agreement, the Company pays the Adviser an advisory fee equal to 1.00% of the Average Real Estate Assets (as defined below). The duties performed by the Company’s Adviser under the terms of the Advisory Agreement include, but are not limited to: providing daily management for the Company, selecting and working with third party service providers, managing the Company’s properties or overseeing the third party property manager, formulating an investment strategy for the Company and selecting suitable properties and investments, managing the Company’s outstanding debt and its interest rate exposure through derivative instruments, determining when to sell assets, and managing the value-add program or overseeing a third party vendor that implements the value-add program. “Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of real estate assets at the end of each month (1) for which any fee under the Advisory Agreement is calculated or (2) during the year for which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for capital expenditures (the value-add program). The advisory fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the advisory fee in shares of common stock, subject to certain limitations.

In accordance with the Advisory Agreement, the Company also pays the Adviser an administrative fee equal to 0.20% of the Average Real Estate Assets. The administrative fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole discretion, to receive all or a portion of the administrative fee in shares of common stock, subject to certain limitations.

The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined in the Advisory Agreement) are subject to an annual cap of approximately $5.4 million (the “Contributed Assets Cap”) (see “Expense Cap” below).

Pursuant to the terms of the Advisory Agreement, the Company will reimburse the Adviser for all documented Operating Expenses and Offering Expenses it incurs on behalf of the Company. “Operating Expenses” include legal, accounting, financial and due diligence services performed by the Adviser that outside professionals or outside consultants would otherwise perform, the Company’s pro rata share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Adviser required for the Company’s operations, and compensation expenses under the 2016 LTIP. Operating Expenses do not include expenses for the advisory and administrative services described in the Advisory Agreement. Certain Operating Expenses, such as the Company’s ratable share of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses incurred by the Adviser or its affiliates that relate to the operations of the Company, may be billed monthly to the Company under a shared services agreement. “Offering Expenses” include all expenses (other than underwriters’ discounts) in connection with an offering, including, without limitation, legal, accounting, printing, mailing and filing fees and other documented offering expenses. For the three months ended March 31, 2019 and 2018, the Adviser did not bill any Operating Expenses or Offering Expenses to the Company and any such expenses the Adviser incurred during the periods are considered to be permanently waived.

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Expense Cap

Pursuant to the terms of the Advisory Agreement, expenses paid or incurred by the Company for advisory and administrative fees payable to the Adviser and Operating Expenses will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect (the “Expense Cap”)). The Expense Cap does not limit the reimbursement of expenses related to Offering Expenses. The Expense Cap also does not apply to legal, accounting, financial, due diligence and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation or other events outside the Company’s ordinary course of business or any out-of-pocket acquisitions or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets. Also, advisory and administrative fees are further limited on Contributed Assets to approximately $5.4 million in any calendar year. Contributed Assets refers to all Real Estate Assets contributed to the Company as part of the Spin-Off. The Contributed Assets Cap is not reduced for dispositions of such assets subsequent to the Spin-Off. Advisory and administrative fees on New Assets are not subject to the above limitation and are based on an annual rate of 1.2% on Average Real Estate Assets, but are subject to the Expense Cap. New Assets are all Real Estate Assets that are not Contributed Assets.

For the three months ended March 31, 2019 and 2018, the Company incurred advisory and administrative fees of $1.8 million and $1.8 million, respectively. The amount paid for the three months ended March 31, 2019 and 2018 represents the maximum fee allowed on Contributed Assets under the Advisory Agreement plus approximately $0.5 million and $0.5 million, respectively, of advisory and administrative fees incurred on New Assets.

For the three months ended March 31, 2019, the Adviser elected to voluntarily waive the advisory and administrative fees incurred on the eleven properties acquired subsequent to October 2016, which totaled approximately $1.6 million and are considered to be permanently waived. For the three months ended March 31, 2018, the Adviser elected to voluntarily waive the advisory and administrative fees incurred on properties acquired subsequent to October 2016, which totaled approximately $0.9 million and are considered to be permanently waived.  The Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion.

Other Related Party Transactions

The Company has in the past, and may in the future, utilize the services of affiliated parties. For the three months ended March 31, 2019 and 2018, the Company paid approximately $0.0 million and $0.1 million, respectively, to NexBank Title, Inc. (“NexBank Title”). NexBank Title is an affiliate of the Adviser through common beneficial ownership. NexBank Title provides title insurance and work related to providing title insurance on properties related to acquisitions, dispositions and refinancing transactions. These amounts are either capitalized as real estate assets or deferred financing costs, expensed as loss on extinguishment of debt and modification costs, or expensed as selling costs when determining gain (loss) on sales of real estate, depending on the appropriate accounting as determined for each specific transaction.

On November 14, 2018, the Company issued 2,702,500 shares of common stock, par value $0.01 per share, at a public offering price of $33.00 per share (before underwriters’ discounts and offering costs) for gross proceeds of approximately $89.2 million (the “2018 Offering”). As part of the 2018 Offering, affiliates of the Adviser purchased 207,971 shares from the underwriters. The shares were purchased on the same terms as other investors at a public offering price of $33.00 per share. However, no underwriters’ discount applied to the purchase of such shares.

12. Commitments and Contingencies

Commitments

In the normal course of business, the Company enters into various rehabilitation construction related purchase commitments with parties that provide these goods and services. In the event the Company were to terminate rehabilitation construction services prior to the completion of projects, the Company could potentially be committed to satisfy outstanding or uncompleted purchase orders with such parties. As of March 31, 2019, management does not anticipate any material deviations from schedule or budget related to rehabilitation projects currently in process.

Contingencies

In the normal course of business, the Company is subject to claims, lawsuits, and legal proceedings. While it is not possible to ascertain the ultimate outcome of all such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations and comprehensive income of the Company. The Company is not involved in any material litigation nor, to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries.

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The Company is not aware of any environmental liability with respect to the properties that could have a material adverse effect on the Company’s business, assets, or results of operations. However, there can be no assurance that such a material environmental liability does not exist. The existence of any such material environmental liability could have an adverse effect on the Company’s results of operations and cash flows.

13. Subsequent Events

Dividends Declared

On April 29, 2019, the Company’s board of directors declared a quarterly dividend of $0.275 per share, payable on June 28, 2019 to stockholders of record on June 14, 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our financial condition and our historical results of operations. The following should be read in conjunction with our financial statements and accompanying notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed below and elsewhere in this quarterly report. See “Cautionary Statement Regarding Forward-Looking Statements” in this report, and “Risk Factors” in Part I, Item 1A, “Risk Factors” of our annual report on Form 10-K (our “Annual Report”), filed with the Securities and Exchange Commission (the “SEC”) on February 19, 2019.

Overview

As of March 31, 2019, our Portfolio consisted of 38 multifamily properties primarily located in the Southeastern and Southwestern United States encompassing 13,211 units of apartment space that was approximately 93.6% leased with a weighted average monthly effective rent per occupied apartment unit of $1,007. Substantially all of our business is conducted through the OP. We own the Portfolio through the OP and our TRS. The OP owns approximately 99.9% of the Portfolio; our TRS owns approximately 0.1% of the Portfolio. The OP GP is the sole general partner of the OP. As of March 31, 2019, there were 23,819,402 OP Units outstanding, of which 23,746,169, or 99.7%, were owned by us and 73,233, or 0.3%, were owned by an unaffiliated limited partner (see Note 10 to our consolidated financial statements).

We are primarily focused on directly or indirectly acquiring, owning, and operating well-located multifamily properties with a value-add component in large cities and suburban submarkets of large cities, primarily in the Southeastern and Southwestern United States. We generate revenue primarily by leasing our multifamily properties. We intend to employ targeted management and a value-add program at a majority of our properties in an attempt to improve rental rates and the net operating income (“NOI”) at our properties and achieve long-term capital appreciation for our stockholders. We are externally managed by the Adviser through the Advisory Agreement, by and among the OP, the Adviser and us. The Advisory Agreement was renewed on February 13, 2019 for a one-year term set to expire on March 16, 2020. The Adviser is wholly owned by NexPoint Advisors, L.P., which is an affiliate of our Sponsor.

On November 14, 2018, we issued 2,702,500 shares of our common stock, par value $0.01 per share, at a public offering price of $33.00 per share, for net proceeds of approximately $84.8 million (after underwriters’ discounts and offering costs) (the “2018 Offering”). We contributed the net proceeds from the 2018 Offering to the OP in exchange for 2,702,500 OP Units, and the OP in turn used a majority of the net proceeds to repay the $50.0 million outstanding under a credit facility with Keybank and the $30.0 million outstanding under a bridge facility with Keybank.

On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements (“Equity Distribution Agreements”) with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”) and SunTrust Robinson Humphrey, Inc. (“SunTrust”), pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000.  Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act of 1933, as amended, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices (the “ATM Program”).  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the ATM Program.  The Company had not commenced any sales through the ATM Program as of March 31, 2019.  The ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the ATM Program reach $100,000,000 (see Note 8 to our consolidated financial statements).

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code, and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2019 and 2018.

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Components of Our Revenues and Expenses

Revenues

Rental income. Our earnings are primarily attributable to the rental revenue from our multifamily properties. We anticipate that the leases we enter into for our multifamily properties will typically be for one year or less on average.

Other income. Other income includes ancillary income earned from tenants such as application fees, late fees, laundry fees, utility reimbursements, and other rental related fees charged to tenants.

Expenses

Property operating expenses. Property operating expenses include property maintenance costs, salary and employee benefit costs, utilities, casualty-related expenses and recoveries and other property operating costs.

Real estate taxes and insurance. Real estate taxes include the property taxes assessed by local and state authorities depending on the location of each property. Insurance includes the cost of commercial, general liability, and other needed insurance for each property.

Property management fees. Property management fees include fees paid to BH, our property manager, or other third party management companies for managing each property (see Note 10 to our consolidated financial statements).

Advisory and administrative fees. Advisory and administrative fees include the fees paid to our Adviser pursuant to the Advisory Agreement (see Note 11 to our consolidated financial statements).

Corporate general and administrative expenses. Corporate general and administrative expenses include, but are not limited to, audit fees, legal fees, listing fees, board of director fees, equity-based compensation expense, investor relations costs and payments of reimbursements to our Adviser for operating expenses. Corporate general and administrative expenses and the advisory and administrative fees paid to our Adviser (including advisory and administrative fees on properties defined in the Advisory Agreement as New Assets) will not exceed 1.5% of Average Real Estate Assets per calendar year (or part thereof that the Advisory Agreement is in effect), calculated in accordance with the Advisory Agreement, or the Expense Cap. The Expense Cap does not limit the reimbursement by us of expenses related to securities offerings paid by our Adviser. The Expense Cap also does not apply to legal, accounting, financial, due diligence, and other service fees incurred in connection with mergers and acquisitions, extraordinary litigation, or other events outside our ordinary course of business or any out-of-pocket acquisition or due diligence expenses incurred in connection with the acquisition or disposition of real estate assets.  Additionally, in the sole discretion of the Adviser, the Adviser may elect to waive certain advisory and administrative fees otherwise due.  If advisory and administrative fees are waived in a period, the waived fees for that period are considered to be waived permanently and the Adviser may not be reimbursed in the future.

Property general and administrative expenses. Property general and administrative expenses include the costs of marketing, professional fees, general office supplies, and other administrative related costs of each property.

Depreciation and amortization. Depreciation and amortization costs primarily include depreciation of our multifamily properties and amortization of acquired in-place leases.

Other Income and Expense

Interest expense. Interest expense primarily includes the cost of interest expense on debt, the amortization of deferred financing costs, the related impact of interest rate derivatives used to manage our interest rate risk and fair market value adjustments on debt.

Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment.

Gain on sales of real estate. Gain on sales of real estate includes the gain recognized upon sales of properties. Gain on sales of real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices of the properties.

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Results of Operations for the Three Months Ended March 31, 2019 and 2018

The following table sets forth a summary of our operating results for the three months ended March 31, 2019 and 2018 (in thousands):

	For the Three Months Ended March 31,
	2019			2018			$ Change
Total revenues	$	41,491		$	35,057		$	6,434
Total expenses		(37,776	)		(31,357	)		(6,419	)
Operating income before gain on sales of real estate		3,715			3,700			15
Gain on sales of real estate		—			13,742			(13,742	)
Operating income		3,715			17,442			(13,727	)
Interest expense		(8,088	)		(6,797	)		(1,291	)
Loss on extinguishment of debt and modification costs		—			(551	)		551
Net income (loss)		(4,373	)		10,094			(14,467	)
Net income (loss) attributable to redeemable noncontrolling interests in the Operating Partnership		(13	)		30			(43	)
Net income (loss) attributable to common stockholders	$	(4,360	)	$	10,064		$	(14,424	)

The change in our net loss for the three months ended March 31, 2019 as compared to the net income for the three months ended March 31, 2018 primarily relates to a decrease in gain on sales of real estate and an increase in interest expenses, and was partially offset by an increase in total revenues and decreases in loss on extinguishment of debt and modification costs. The change in our net loss between the periods was also due to our acquisition and disposition activity in 2019 and 2018 and the timing of the transactions (we acquired three properties in the first quarter of 2019; we sold one property in the first quarter of 2018).

Revenues

Rental income. Rental income was $36.3 million for the three months ended March 31, 2019 compared to $30.6 million for the three months ended March 31, 2018, which was an increase of approximately $5.7 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above, and a 5.1% increase in the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,007 as of March 31, 2019 from $958 as of March 31, 2018. The increase in effective rent was primarily driven by the value-add program that we have implemented and organic growth in rents in the markets where our properties are located. The increase between the periods was partially offset by a decrease in the occupancy rate of our Portfolio of -0.4% to 93.6% as of March 31, 2019 from 94.0% as of March 31, 2018.

Other income. Other income was $5.2 million for the three months ended March 31, 2019 compared to $4.5 million for the three months ended March 31, 2018, which was an increase of approximately $0.7 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above, as well as a 4.7% increase in other income collected at existing properties.

Expenses

Property operating expenses. Property operating expenses were $9.6 million for the three months ended March 31, 2019 compared to $8.9 million for the three months ended March 31, 2018, which was an increase of approximately $0.7 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above. The increase between the periods was also due to a $0.5 million, or 19.3%, increase in repairs and maintenance costs and a $0.4 million, or 12.3%, increase in labor costs.

Real estate taxes and insurance. Real estate taxes and insurance costs were $5.8 million for the three months ended March 31, 2019 compared to $4.9 million for the three months ended March 31, 2018, which was an increase of approximately $0.9 million. The increase between the periods was primarily due to a $0.8 million, or 19.5%, increase in property taxes. Property taxes incurred in the first year of ownership may be significantly less than subsequent years since the purchase price of the property may trigger a significant increase in assessed value by the taxing authority in subsequent years, increasing the cost of real estate taxes.

Property management fees. Property management fees were $1.2 million for the three months ended March 31, 2019 compared to $1.1 million for the three months ended March 31, 2018, which was an increase of approximately $0.1 million. The increase between the periods was primarily due to an increase in total revenues, which the fee is primarily based on.

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Advisory and administrative fees. Advisory and administrative fees were $1.9 million for the three months ended March 31, 2019 compared to $1.8 million for the three months ended March 31, 2018, which was an increase of approximately $0.1 million. The amount incurred during the three months ended March 31, 2019 and 2018 represents the maximum fee allowed on properties defined as Contributed Assets under the Advisory Agreement plus approximately $0.5 million and $0.5 million, respectively, of advisory and administrative fees incurred on certain properties defined as New Assets. For the three months ended March 31, 2019, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the eleven properties we acquired subsequent to October 2016, which totaled approximately $1.6 million and are considered to be permanently waived. For the three months ended March 31, 2018, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on theproperties we acquired subsequent to October 2016, which totaled approximately $0.9 million and are considered to be permanently waived for the period. Our Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving fees on New Assets at its discretion. Advisory and administrative fees may increase in future periods as we acquire additional properties, which will be classified as New Assets.

Corporate general and administrative expenses. Corporate general and administrative expenses were $2.2 million for the three months ended March 31, 2019 compared to $1.8 million for the three months ended March 31, 2018, which was an increase of approximately $0.4 million. The increase between the periods was primarily due to approximately $1.2 million of equity-based compensation expense recognized during the three months ended March 31, 2019 related to the grants of restricted stock units to our directors, officers, employees and certain key employees of our Adviser pursuant to our long-term incentive plan (the “2016 LTIP”), compared to $0.9 million of equity-based compensation expense recognized during the three months ended March 31, 2018 (see Note 8 to our consolidated financial statements). Subject to the Expense Cap, corporate general and administrative expenses may increase in future periods as we acquire additional properties, incur additional public company costs if we lose our status as an “emerging growth company” as defined in the JOBS Act or the Board issues additional equity grants under the 2016 LTIP.

Property general and administrative expenses. Property general and administrative expenses were $1.7 million for the three months ended March 31, 2019 compared to $1.5 million for the three months ended March 31, 2018, which was an increase of approximately $0.2 million. The increase between the periods was primarily due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions, as described above.

Depreciation and amortization. Depreciation and amortization costs were $15.4 million for the three months ended March 31, 2019 compared to $11.4 million for the three months ended March 31, 2018, which was an increase of approximately $4.0 million. The increase between the periods was primarily due to the amortization of intangible lease assets of $2.2 million related to six properties for the three months ended March 31, 2019 compared to $0.7 million related to one property for the three months ended March 31, 2018, which was an increase of approximately $1.6 million. The increase between the periods was also due to a $2.4 million increase in depreciation expense, primarily due to our acquisition activity in 2018 and 2019 and the timing of the transactions, as described above. The amortization of intangible lease assets over a six-month period from the date of acquisition is expected to increase the amortization expense during the year of acquisition for each property.

Other Income and Expense

Interest expense. Interest expense was $8.1 million for the three months ended March 31, 2019 compared to $6.8 million for the three months ended March 31, 2018, which was an increase of approximately $1.3 million. The increase between the periods was primarily due an increase in interest on debt of $2.8 million related to our acquisition activity in 2018 and 2019.  This increase was partially offset by an increase in gain recognized related to the effective portion of changes in fair value of our interest rate swap derivatives designated as cash flow hedges of approximately $1.5 million (see “Debt, Derivatives and Hedging Activity – Interest Rate Swap Agreements” below). The following table details the various costs included in interest expense for the three months ended March 31, 2019 and 2018 (in thousands):

	For the Three Months Ended March 31,
	2019			2018			$ Change
Interest on debt	$	9,510		$	6,757		$	2,753
Amortization of deferred financing costs		432			389			43
Interest rate swaps - effective portion		(1,880	)		(424	)		(1,456	)
Interest rate swaps - ineffective portion		—			—			—
Interest rate caps expense		26			75			(49	)
Total	$	8,088		$	6,797		$	1,291

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Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $- million for the three months ended March 31, 2019 compared to $0.6 million for the three months ended March 31, 2018, which was a decrease of approximately $0.6 million. The decrease between the periods was primarily due to decreases in prepayment penalties and defeasance costs of approximately $0.2 million and a decrease in deferred financing costs of approximately $0.4 million. The following table details the various costs included in loss on extinguishment of debt and modification costs for the three months ended March 31, 2019 and 2018 (in thousands):

	For the Three Months Ended March 31,
	2019		2018		$ Change
Prepayment penalties and defeasance costs	$	—	$	172	$	(172	)
Write-off of deferred financing costs		—		379		(379	)
Write-off of fair market value adjustment of assumed debt		—		—		—
Debt modification and other extinguishment costs		—		—		—
Total	$	—	$	551	$	(551	)

Gain on sales of real estate. There were no sales of real estate during the three months ended March 31, 2019. Gain on sale of real estate was $13.7 million for the three months ended March 31, 2018, which was a decrease of approximately $13.7 million.

Non-GAAP Measurements

Net Operating Income and Same Store Net Operating Income

NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties to other comparable properties, to determine trends in earnings and to compute the fair value of our properties as NOI is not affected by (1) the cost of funds, (2) acquisition costs, (3) advisory and administrative fees, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP, (5) corporate general and administrative expenses, (6) other gains and losses that are specific to us, (7) casualty-related expenses/(recoveries) and (8) property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.

The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital, which may have changed or may change in the future. Acquisition costs and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner. Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale, which will usually change from period to period. Casualty-related expenses and recoveries are excluded because they do not reflect continuing operating costs of the property owner. Entity level general and administrative expenses incurred at the properties are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these items from net income is useful because the resulting measure captures the actual ongoing revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.

However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense, loss on extinguishment of debt and modification costs, acquisition costs, certain fees to affiliates such as advisory and administrative fees, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as determined under GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income, which further limits its usefulness.

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NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.

We define “Same 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.

Net Operating Income for Our Same Store and Non-Same Store Properties for the Three Months Ended March 31, 2019 and 2018

There are 32 properties encompassing 11,471 units of apartment space in our same store pool for the three months ended March 31, 2019 and 2018 (our “Same Store” properties). Our Same Store properties exclude the following six properties in our Portfolio as of March 31, 2019: Cedar Pointe, Crestmont Reserve, Brandywine I & II, Bella Vista, The Enclave and The Heritage.

The following table reflects the revenues, property operating expenses and NOI for the three months ended March 31, 2019 and 2018 for our Same Store and Non-Same Store properties (dollars in thousands):

	For the Three Months Ended March 31,
	2019		2018		$ Change			% Change
Revenues
Same Store
Rental income	$	31,784	$	30,356	$	1,428			4.7	%
Other income		4,695		4,483		212			4.7	%
Same Store revenues		36,479		34,839		1,640			4.7	%
Non-Same Store
Rental income		4,538		217		4,321			1991.2	%
Other income		474		1		473			47300.0	%
Non-Same Store revenues		5,012		218		4,794			2199.1	%
Total revenues		41,491		35,057		6,434			18.4	%
Operating expenses
Same Store
Property operating expenses (1)		8,580		8,736		(156	)		-1.8	%
Real estate taxes and insurance		5,225		4,818		407			8.4	%
Property management fees (2)		1,091		1,045		46			4.4	%
Property general and administrative expenses (3)		1,166		1,155		11			1.0	%
Same Store operating expenses		16,062		15,754		308			2.0	%
Non-Same Store
Property operating expenses (4)		1,024		117		907			775.2	%
Real estate taxes and insurance		533		38		495			1302.6	%
Property management fees (2)		149		9		140			1555.6	%
Property general and administrative expenses (5)		136		12		124			1033.3	%
Non-Same Store operating expenses		1,842		176		1,666			946.6	%
Total operating expenses		17,904		15,930		1,974			12.4	%
NOI
Same Store		20,417		19,085		1,332			7.0	%
Non-Same Store		3,170		42		3,128			7447.6	%
Total NOI	$	23,587	$	19,127	$	4,460			23.3	%

(1) For the three months ended March 31, 2019 and 2018, excludes approximately $35,000 and $23,000, respectively, of casualty-related expenses.

(2) Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.

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(3) For the three months ended March 31, 2019 and 2018, excludes approximately $238,000 and $359,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.

(4) For the three months ended March 31, 2018, excludes approximately $1,000 of casualty-related expenses.  We did not have any casualty-related expenses for the three months ended March 31, 2019.

(5) For the three months ended March 31, 2019 and 2018, excludes approximately $118,000 and $21,000, respectively, of expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.

See reconciliation of net income (loss) to NOI below under “NOI and Same Store NOI for the Three Months Ended March 31, 2019 and 2018.”

Same Store Results of Operations for the Three Months Ended March 31, 2019 and 2018

As of March 31, 2019, our Same Store properties were approximately 93.6% leased with a weighted average monthly effective rent per occupied apartment unit of $996. As of March 31, 2018, our Same Store properties were approximately 94.0% leased with a weighted average monthly effective rent per occupied apartment unit of $958. For our Same Store properties, we recorded the following operating results for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018:

Revenues

Rental income. Rental income was $31.8 million for the three months ended March 31, 2019 compared to $30.4 million for the three months ended March 31, 2018, which was an increase of approximately $1.4 million, or 4.7%. The majority of the increase is related to a 4.0% increase in the weighted average monthly effective rent per occupied apartment unit to $996 as of March 31, 2019 from $958 as of March 31, 2018, partially offset by a 0.4% decrease in occupancy.

Other income. Other income was $4.7 million for the three months ended March 31, 2019 compared to $4.5 million for the three months ended March 31, 2018, which was an increase of approximately $0.2 million, or 4.7%. The majority of the increase is related to a $0.2 million, or 38%, increase in other resident charges.

Expenses

Property operating expenses. Property operating expenses were $8.6 million for the three months ended March 31, 2019 compared to $8.7 million for the three months ended March 31, 2018, which was a decrease of approximately $0.1 million, or 1.8%. The majority of the decrease is related to a $0.5 million, or 20.2%, decrease in utility costs, partially offset by a $0.3 million, or 9.4%, increase in repair and maintenance costs and a $0.1 million, or 2.1%, increase in labor costs.

Real estate taxes and insurance. Real estate taxes and insurance costs were $5.2 million for the three months ended March 31, 2019 compared to $4.8 million for the three months ended March 31, 2018, which was an increase of approximately $0.4 million, or 8.4%. The majority of the increase is related to a $0.4 million, or 9.8%, increase in property taxes due to higher assessments of value by taxing authorities.

Property management fees. Property management fees were $1.1 million for the three months ended March 31, 2019 compared to $1.0 million for the three months ended March 31, 2018, which was an increase of approximately $0.1 million, or 4.4%. The majority of the increase is related to a $1.3 million, or 3.9%, increase in rental income, and a $0.2 million, or 4.7%, increase in other income, which the fee is primarily based on.

Property general and administrative expenses. Property general and administrative expenses remained flat at $1.2 million for the three months ended March 31, 2019 compared to $1.2 million for the three months ended March 31, 2018.

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NOI and Same Store NOI for the Three Months Ended March 31, 2019 and 2018

The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our Same Store NOI for the three months ended March 31, 2019 and 2018 to net income (loss), the most directly comparable GAAP financial measure (in thousands):

		For the Three Months Ended March 31,
		2019			2018
Net income (loss)		$	(4,373	)	$	10,094
Adjustments to reconcile net income (loss) to NOI:
Advisory and administrative fees			1,850			1,838
Corporate general and administrative expenses			2,233			1,813
Casualty-related expenses	(1)		35			24
Property general and administrative expenses	(2)		356			380
Depreciation and amortization			15,398			11,372
Interest expense			8,088			6,797
Loss on extinguishment of debt and modification costs			—			551
Gain on sales of real estate			—			(13,742	)
NOI		$	23,587		$	19,127
Less Non-Same Store
Revenues			(5,012	)		(218	)
Operating expenses			1,842			176
Same Store NOI		$	20,417		$	19,085

(1) Adjustment to net income (loss) to exclude certain property operating expenses that are casualty-related recoveries.

(2) Adjustment to net income (loss) to exclude certain property general and administrative expenses that are not reflective of the continuing operations of the properties or are incurred on our behalf at the property for expenses such as legal, professional and franchise tax fees.

FFO, Core FFO and AFFO

We believe that net income, as defined by GAAP, is the most appropriate earnings measure. We also believe that funds from operations (“FFO”), as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), core funds from operations (“Core FFO”) and adjusted funds from operations (“AFFO”) are important non-GAAP supplemental measures of operating performance for a REIT.

Since the historical cost accounting convention used for real estate assets requires depreciation except on land, such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income, as defined by GAAP. FFO is defined by NAREIT as net income computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. We compute FFO attributable to common stockholders in accordance with NAREIT’s definition. Our presentation differs slightly in that we begin with net income (loss) before adjusting for amounts attributable to (1) noncontrolling interests in consolidated joint ventures and (2) redeemable noncontrolling interests in the OP and we show the combined amounts attributable to such noncontrolling interests as an adjustment to arrive at FFO attributable to common stockholders.

Core FFO makes certain adjustments to FFO, which are either not likely to occur on a regular basis or are otherwise not representative of the ongoing operating performance of our portfolio. Core FFO adjusts FFO to remove items such as acquisition expenses, losses on extinguishment of debt and modification costs (including prepayment penalties and defeasance costs incurred on the early repayment of debt, the write-off of unamortized deferred financing costs and fair market value adjustments of assumed debt related to the early repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in a debt extinguishment), casualty-related expenses and recoveries, the amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, the ineffective portion of fair value adjustments on interest rate derivatives designated as cash flow hedges (see Notes 2 and 7 to our consolidated financial statements), and the noncontrolling interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

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AFFO makes certain adjustments to Core FFO in order to arrive at a more refined measure of the operating performance of our Portfolio. There is no industry standard definition of AFFO and practice is divergent across the industry. AFFO adjusts Core FFO to remove items such as equity-based compensation expense and the amortization of deferred financing costs incurred in connection with obtaining long-term debt financing, and the noncontrolling interests (as described above) related to these items. We believe AFFO is useful to investors as a supplemental gauge of our operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the aforementioned activities.

The effect of the conversion of OP Units held by noncontrolling limited partners is not reflected in the computation of basic and diluted FFO, Core FFO and AFFO per share, as they are exchangeable for common stock on a one-for-one basis. The FFO, Core FFO and AFFO allocable to such units is allocated on this same basis and reflected in the adjustments for noncontrolling interests in the table below. As such, the assumed conversion of these units would have no net impact on the determination of diluted FFO, Core FFO and AFFO per share. See Note 9 to our consolidated financial statements for additional information.

We believe that the use of FFO, Core FFO and AFFO, combined with the required GAAP presentations, improves the understanding of operating results of REITs among investors and makes comparisons of operating results among such companies more meaningful. While FFO, Core FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income (loss) as defined by GAAP and should not be considered as an alternative or substitute to those measures in evaluating our liquidity or operating performance. FFO, Core FFO and AFFO do not purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO, Core FFO and AFFO may not be comparable to FFO, Core FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define Core FFO or AFFO differently than we do.

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The following table reconciles our calculations of FFO, Core FFO and AFFO to net income (loss), the most directly comparable GAAP financial measure, for the three months ended March 31, 2019 and 2018(in thousands, except per share amounts):

		For the Three Months Ended March 31,
		2019			2018			% Change
Net income (loss)		$	(4,373	)	$	10,094			-143.3	%
Depreciation and amortization			15,398			11,372			35.4	%
Gain on sales of real estate			—			(13,742	)		-100.0	%
Adjustment for noncontrolling interests			(33	)		(23	)		43.5	%
FFO attributable to common stockholders			10,992			7,701			42.7	%
FFO per share - basic		$	0.47		$	0.37			27.2	%
FFO per share - diluted		$	0.46		$	0.36			27.2	%
Loss on extinguishment of debt and modification costs			—			551			-100.0	%
Casualty-related expenses/(recoveries)			35			24			45.8	%
Change in fair value on derivative instruments - ineffective portion			—			—		N/A
Amortization of deferred financing costs - acquisition term notes			—			21			-100.0	%
Adjustment for noncontrolling interests			—			(26	)		-100.0	%
Core FFO attributable to common stockholders			11,027			8,271			33.3	%
Core FFO per share - basic		$	0.47		$	0.39			18.8	%
Core FFO per share - diluted		$	0.46		$	0.39			18.8	%
Amortization of deferred financing costs - long term debt			432			368			17.4	%
Equity-based compensation expense			1,235			914			35.1	%
Adjustment for noncontrolling interests			(5	)		(4	)		25.0	%
AFFO attributable to common stockholders			12,689			9,549			32.9	%
AFFO per share - basic		$	0.54		$	0.45			18.4	%
AFFO per share - diluted		$	0.53		$	0.45			18.4	%
Weighted average common shares outstanding - basic			23,550			20,987			12.2	%
Weighted average common shares outstanding - diluted			24,044			21,430			12.2	%
Dividends declared per common share		$	0.275		$	0.250			10.0	%
FFO Coverage - diluted	(1)	1.66x			1.44x				15.65	%
Core FFO Coverage - diluted	(1)	1.67x			1.54x				8.02	%
AFFO Coverage - diluted	(1)	1.92x			1.78x				7.67	%

(1) Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during the period.

FFO was $11.0 million for the three months ended March 31, 2019 compared to $7.7 million for the three months ended March 31, 2018, which was an increase of approximately $3.3 million. The change in our FFO between the periods primarily relates to an increase in total revenues of $6.4 million and a decrease in loss on extinguishment of debt and modification costs of $0.6 million.  These were partially offset by an increase in property operating expenses of $2.0 million, an increase in advisory and administrative fees of $0.1 million, an increase in interest expense of $1.3 million, an increase in corporate general and administrative expenses of $0.4 million and adjustments for amounts attributable to noncontrolling interests.

Core FFO was $11.0 million for the three months ended March 31, 2019 compared to $8.3 million for the three months ended March 31, 2018, which was an increase of approximately $2.7 million. The change in our Core FFO between the periods primarily relates to an increase in FFO, partially offset by a decrease in loss on extinguishment of debt and modification costs of $0.6 million and adjustments for amounts attributable to noncontrolling interests.

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AFFO was $12.7 million for the three monthsended March 31, 2019 compared to $9.5 million for the three monthsended March 31, 2018, which was an increase of approximately $3.2 million. The change in our AFFO between the periods primarily relates to increases in Core FFO and an increase in equity-based compensation expense of $0.3 million.

Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for debt maturities, operating expenses and other expenditures directly associated with our multifamily properties, including:

• capital expenditures to continue our value-add program and to improve the quality and performance of our multifamily properties;

• interest expense and scheduled principal payments on outstanding indebtedness (see “—Obligations and Commitments” below);

• recurring maintenance necessary to maintain our multifamily properties;

• distributions necessary to qualify for taxation as a REIT;

• advisory and administrative fees payable to our Adviser;

• general and administrative expenses;

• reimbursements to our Adviser; and

• property management fees payable to BH.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash balances. As of March 31, 2019, we had approximately $6.2 million of renovation value-add reserves for our planned capital expenditures to implement our value-add program. Renovation value-add reserves are not required to be held in escrow by a third party. We may reallocate these funds, at our discretion, to pursue other investment opportunities or meet our short-term liquidity requirements.

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional multifamily properties, renovations and other capital expenditures to improve our multifamily properties and scheduled debt payments and distributions. We expect to meet our long-term liquidity requirements through various sources of capital, which may include a revolving credit facility and future debt or equity issuances, existing working capital, net cash provided by operations, long-term mortgage indebtedness and other secured and unsecured borrowings, and property dispositions. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the state of overall equity and credit markets, our degree of leverage, our unencumbered asset base and borrowing restrictions imposed by lenders (including as a result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs, our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to remain competitive. Also, acquisitions, redevelopments, or expansions of our multifamily properties will require significant capital outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gains. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could be materially and adversely affected.

On February 20, 2019, the Company, the OP and the Adviser entered into separate Equity Distribution Agreements with each of Jefferies, Raymond James and SunTrust, pursuant to which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $100,000,000.  In addition to the issuance and sale of shares of common stock, the Company may enter into forward sale agreements with each of Jefferies and Raymond James, or their respective affiliates, through the ATM Program.  The Company had not commenced any sales through the ATM Program as of March 31, 2019.  The ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the ATM Program reach $100,000,000.

We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period following March 31, 2019.

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Cash Flows

The following table presents selected data from our consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 (in thousands):

	For the Three Months Ended March 31,
	2019			2018
Net cash provided by operating activities	$	11,376		$	3,131
Net cash provided by (used in) investing activities		(139,379	)		22,723
Net cash provided by (used in) financing activities		123,157			(36,909	)
Net decrease in cash, cash equivalents and restricted cash		(4,846	)		(11,055	)
Cash, cash equivalents and restricted cash, beginning of period		43,129			43,248
Cash, cash equivalents and restricted cash, end of period	$	38,283		$	32,193

Cash flows from operating activities. During the three months ended March 31, 2019, net cash provided by operating activities was $11.4 million compared to net cash provided by operating activities of $3.1 million for the three months ended March 31, 2018. The change in cash flows from operating activities was mainly due to an increase in total revenues and net cash received on derivative settlements and decreases in prepayment penalties and defeasance costs, debt modification and other extinguishment costs paid and changes in operating assets and liabilities.  These were partially offset by an increase in property operating expenses.

Cash flows from investing activities. During the three months ended March 31, 2019, net cash used in investing activities was $139.4 million compared to net cash provided by investing activities of $22.7 million for the three months ended March 31, 2018. The change in cash flows from investing activities was mainly due to the acquisition of three properties for a combined purchase price of approximately $132.1 million during the period in 2019 compared to no acquisitions during the period in 2018. The change in cash flows from investing activities was partially offset by a decrease in net proceeds from sales of real estate. We had no sales during the three months ended Marcy 31, 2019 and we sold one property for net proceeds of approximately $29.6 million during the period in 2018.

Cash flows from financing activities. During the three months ended March 31, 2019, net cash provided by financing activities was $123.2 million compared to net cash used in financing activities of $36.9 million for the three months ended March 31, 2018. The change in cash flows from financing activities was mainly due to a net increase in debt of approximately $157.8 million and a decrease in common stock repurchases of approximately $5.1 million between the periods.  These were partially offset by an increase in common stock dividends paid of approximately $1.4 million and an increase in deferred financing costs paid of approximately $1.4 million between the periods.

Debt, Derivatives and Hedging Activity

Mortgage Debt

As of March 31, 2019, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $924.5 million at a weighted average interest rate of 4.04% and an adjusted weighted average interest rate of 3.22%. For purposes of calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed rate of 1.3388% for one-month LIBOR on our combined $650.0 million notional amount of interest rate swap agreements, which effectively fixes the interest rate on $650.0 million of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial statements for additional information.

We have entered into and expect to continue to enter into interest rate swap and cap agreements with various third parties to fix or cap the floating interest rates on a majority of our floating rate mortgage debt outstanding. The interest rate swap agreements generally have a term of four to five years and effectively establish a fixed interest rate on debt on the underlying notional amounts. The interest rate swap agreements involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of March 31, 2019, interest rate swap agreements effectively covered $650.0 million, or 73%, of our $886.9 million of floating rate mortgage debt outstanding.

The interest rate cap agreements generally have a term of three to four years, cover the outstanding principal amount of the underlying debt and are generally required by our lenders. Under the interest rate cap agreements, we pay a fixed fee in exchange for the counterparty to pay any interest above a maximum rate. As of March 31, 2019, interest rate cap agreements covered $310.0 million of our $886.9 million of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month LIBOR on $310.0 million of our floating rate mortgage debt at a weighted average rate of 5.81%.

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We intend to invest in additional multifamily properties as suitable opportunities arise and adequate sources of equity and debt financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly acquired properties, will depend on and will be financed by, in whole or in part, our existing cash, future borrowings and the proceeds from additional issuances of common stock or other securities or property dispositions.

Although we expect to be subject to restrictions on our ability to incur indebtedness, we expect that we will be able to refinance existing indebtedness or incur additional indebtedness for acquisitions or other purposes, if needed. However, there can be no assurance that we will be able to refinance our indebtedness, incur additional indebtedness or access additional sources of capital, such as by issuing common stock or other debt or equity securities, on terms that are acceptable to us or at all.

Furthermore, following the completion of our value-add and capital expenditures programs and depending on the interest rate environment at the applicable time, we may seek to refinance our floating rate debt into longer-term fixed rate debt at lower leverage levels.

$75 Million Credit Facility

On January 28, 2019, we, through the OP, entered into a $75.0 million credit facility (the “$75 Million Credit Facility”) with SunTrust Bank, as administrative agent and the lenders party thereto, and immediately drew $52.5 million to fund a portion of the purchase price of three properties we acquired on January 28, 2019. The $75 Million Credit Facility is a full-term, interest-only facility with an initial 24-month term, has one 12-month extension option, bears interest at a rate of one-month LIBOR plus a range from 2.00% to 2.50%, depending on our leverage level as determined under the credit facility agreement, and is guaranteed by us. As of March 31, 2019, at our current leverage level, the spread over the reference rate is 2.25%.  See Note 6 to our consolidated financial statements for additional information.

Interest Rate Swap Agreements

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into seven interest rate swap transactions with KeyBank (the “Counterparty”) with a combined notional amount of $650.0 million. As of March 31, 2019, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $650.0 million of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3388%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3388%, on a weighted average basis, on the notional amounts, while the Counterparty is obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. For purposes of hedge accounting under FASB ASC 815, Derivatives and Hedging, we have designated these interest rate swaps as cash flow hedges of interest rate risk. See Notes 6 and 7 to our consolidated financial statements for additional information.

The following table contains summary information regarding our outstanding interest rate swaps (dollars in thousands):

Effective Date	Termination Date	Notional		Fixed Rate (1)
July 1, 2016	June 1, 2021	$	100,000		1.1055	%
July 1, 2016	June 1, 2021		100,000		1.0210	%
July 1, 2016	June 1, 2021		100,000		0.9000	%
September 1, 2016	June 1, 2021		100,000		0.9560	%
April 1, 2017	April 1, 2022		100,000		1.9570	%
May 1, 2017	April 1, 2022		50,000		1.9610	%
July 1, 2017	July 1, 2022		100,000		1.7820	%
		$	650,000		1.3388	%	(2)

(1) The floating rate option for the interest rate swaps is one-month LIBOR. As of March 31, 2019, one-month LIBOR was 2.4945%.

(2) Represents the weighted average fixed rate of the interest rate swaps.

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Obligations and Commitments

The following table summarizes our contractual obligations and commitments as of March 31, 2019 for the next five calendar years subsequent to March 31, 2019. We used one-month LIBOR as of March 31, 2019 to calculate interest expense due by period on our floating rate debt and net interest expense due by period on our interest rate swaps.

		Payments Due by Period (in thousands)
		Total		2019		2020		2021		2022		2023		Thereafter
Operating Properties Mortgage Debt
Principal payments		$	911,129	$	535	$	744	$	782	$	817	$	20,598	$	887,653
Interest expense	(1)		192,521		22,290		29,659		33,087		36,546		36,349		34,590
Total		$	1,103,650	$	22,825	$	30,403	$	33,869	$	37,363	$	56,947	$	922,243
Held For Sale Property Mortgage Debt
Principal payments		$	13,334	$	163	$	239	$	258	$	12,674	$	—	$	—
Interest expense			1,674		466		611		597		—		—		—
Total		$	15,008	$	629	$	850	$	855	$	12,674	$	—	$	—
Credit Facility
Principal payments		$	52,500	$	—	$	—	$	52,500	$	—	$	—	$	—
Interest expense			4,384		1,805		2,402		177		—		—		—
Total		$	56,884	$	1,805	$	2,402	$	52,677	$	—	$	—	$	—
Total contractual obligations and commitments		$	1,175,542	$	25,259	$	33,655	$	87,401	$	50,037	$	56,947	$	922,243

(1) Interest expense obligations includes the impact of expected settlements on interest rate swaps which have been entered into in order to fix the interest rate on the hedged portion of our floating rate debt obligations. As of March 31, 2019, we had entered into seven interest rate swap transactions with a combined notional amount of $650.0 million. We have allocated the total impact of expected settlements on the $650.0 million notional amount of interest rate swaps to ‘Operating Properties Mortgage Debt.’ We used one-month LIBOR as of March 31, 2019 to determine our expected settlements through the terms of the interest rate swaps.

Capital Expenditures and Value-Add Program

We anticipate incurring average annual repairs and maintenance expense of $575 to $725 per apartment unit in connection with the ongoing operations of our business. These expenditures are expensed as incurred. In addition, we reserve, on average, approximately $250 to $350 per apartment unit for non-recurring capital expenditures and/or lender required replacement reserves. When incurred, these expenditures are either capitalized or expensed, in accordance with GAAP, depending on the type of the expenditure. Although we will continuously monitor the adequacy of this average, we believe these figures to be sufficient to maintain the properties at a high level in the markets in which we operate. A majority of the properties in our Portfolio were underwritten and acquired with the premise that we would invest $4,000 to $10,000 per unit in the first 36 months of ownership, in an effort to add value to the asset’s exterior and interiors. In many cases, we reserve cash at the closing of each acquisition to fund these planned capital expenditures and value-add improvements. As of March 31, 2019, we had approximately $6.2 million of renovation value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,000 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our value-add program for the three months ended March 31, 2019 and 2018 (in thousands):

		For the Three Months Ended March 31,
Rehab Expenditures		2019		2018
Interior	(1)	$	2,488	$	1,516
Exterior and common area			1,785		2,449
Total rehab expenditures		$	4,273	$	3,965

(1) Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the three months ended March 31, 2019 and 2018, we completed full and partial interior rehabs on 245 and 298 units, respectively.

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Freddie Mac Multifamily Green Advantage Program

In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, we have decided to participate in Freddie Mac’s new Multifamily Green Advantage program (the “Green Program”). In the second quarter of 2017, we escrowed approximately $4.2 million to finance smarter, greener property improvements at 18 of our properties. In connection with the three acquisitions and seven refinancings we completed in 2018, we escrowed approximately $1.2 million related to the Green Program.  In connection with the three purchases in 2019, the Company escrowed approximately $0.5 million related to the Green Program. Since the inception of the Green Program through March 31, 2019, we had spent approximately $3.4 million on green improvements and completed 17 Green Programs. We expect to spend approximately $1.1 million on green improvements during the fiscal year 2019. We expect to reduce water/sewer costs at each property where the Green Program is implemented by at least 15% through the replacement of showerheads, plumbing fixtures and toilets with modern energy efficient upgrades. For the three months ended March 31, 2019, utility costs decreased by approximately $0.2 million compared to the three months ended March 31, 2018.  In 2018, for the 17 properties where the Green Program was completed, this resulted in an estimated reduction of utility costs of approximately $1.4 million.

Emerging Growth Company

Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates for such new or revised standards. We may elect to comply with public company effective dates at any time, and such election would be irrevocable pursuant to Section 107(b) of the JOBS Act.

We could remain an “emerging growth company” until the earliest of (1) the last day of the fiscal year following the fifth anniversary of becoming a public company, (2) the last day of the first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (4) the date on which we have, during the preceding three year period, issued more than $1.0 billion in non-convertible debt.

Income Taxes

We anticipate that we will continue to qualify to be taxed as a REIT for U.S. federal income tax purposes, and we intend to continue to be organized and to operate in a manner that will permit us to qualify as a REIT. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to stockholders. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2019 and 2018.

If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates, and dividends paid to our stockholders would not be deductible by us in computing taxable income. Any resulting corporate liability could be substantial and could materially and adversely affect our net income and net cash available for distribution to stockholders. Unless we were entitled to relief under certain Code provisions, we also would be disqualified from re-electing to be taxed as a REIT for the four taxable years following the year in which we failed to qualify to be taxed as a REIT.

We evaluate the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” (greater than 50 percent probability) of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Our management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. We have no examinations in progress and none are expected at this time.

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We recognize our tax positions and evaluate them using a two-step process. First, we determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, we will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

We had no material unrecognized tax benefit or expense, accrued interest or penalties as of March 31, 2019. We and our subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2018, 2017 and 2016 tax years remain open to examination by tax jurisdictions to which our subsidiaries and we are subject. When applicable, we recognize interest and/or penalties related to uncertain tax positions on our consolidated statements of operations and comprehensive income.

Dividends

We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form of a taxable distribution of stock or debt securities.

We will make dividend payments based on our estimate of taxable earnings per share of common stock, but not earnings calculated pursuant to GAAP. Our dividends and taxable income and GAAP earnings will typically differ due to items such as depreciation and amortization, fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividends per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Our Board declared our first quarterly dividend of 2019 of $0.275 per share on February 13, 2019, which was paid on March 29, 2019 and funded out of cash flows from operations.

Off-Balance Sheet Arrangements

As of March 31, 2019 and December 31, 2018, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management’s historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of recent accounting pronouncements and our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2 “Summary of Significant Accounting Policies” to our consolidated financial statements included in this quarterly report.

Purchase Price Allocation

Upon acquisition of a property, the purchase price and related acquisition costs (“total consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with FASB ASC 805.

The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related

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information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as interest expense over the life of the debt assumed.

Impairment

Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, we will evaluate the recoverability of such real estate assets based on estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be written down to its estimated fair value.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to a relatively low inflation rate. The majority of our lease terms are for a period of one year or less and reset to market if renewed. The majority of our leases also contain protection provisions applicable to reimbursement billings for utilities. Should inflation return, due to the short-term nature of our leases, we do not believe our results will be materially affected.

Inflation may also affect the overall cost of debt, as the implied cost of capital increases. Currently, interest rates are less than historical averages. However, the Federal Reserve, in response to or in anticipation of continued inflation concerns, could continue to raise interest rates. We intend to mitigate these risks through long-term fixed interest rate loans and interest rate hedges, which to date have included interest rate cap and interest rate swap agreements.

REIT Tax Election

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code and expect to continue to qualify as a REIT. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our “REIT taxable income,” as defined by the Code, to our stockholders. Taxable income from certain non-REIT activities is managed through a TRS and is subject to applicable federal, state, and local income and margin taxes. We had no significant taxes associated with our TRS for the three months ended March 31, 2019 and 2018. We believe we qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify as a REIT.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the adverse effect on the value of assets and liabilities that results from a change in market conditions. Our primary market risk exposure is interest rate risk with respect to our indebtedness and counterparty credit risk with respect to our interest rate derivatives. In order to minimize counterparty credit risk, we enter into and expect to enter into hedging arrangements only with major financial institutions that have high credit ratings. As of March 31, 2019, we had total indebtedness of $977.0 million at a weighted average interest rate of 4.07%, of which $939.4 million was debt with a floating interest rate. The interest rate swap agreements we have entered into effectively fix the interest rate on $650.0 million, or 73%, of our $886.9 million of floating rate mortgage debt outstanding (see below). As of March 31, 2019, the adjusted weighted average interest rate of our total indebtedness was 3.28%. For purposes of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate of 1.3388% for one-month LIBOR on the $650.0 million notional amount of interest rate swap agreements that we have entered into as of March 31, 2019, which effectively fix the interest rate on $650.0 million of our floating rate mortgage debt outstanding.

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An increase in interest rates could make the financing of any acquisition by us more costly. Rising interest rates could also limit our ability to refinance our debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. We may manage, or hedge, interest rate risks related to our borrowings by means of interest rate cap and interest rate swap agreements. As of March 31, 2019, the interest rate cap agreements we have entered into effectively cap one-month LIBOR on $310.0 million of our floating rate mortgage debt at a weighted average rate of 5.81% for the term of the agreements, which is generally three to four years. We also expect to manage our exposure to interest rate risk by maintaining a mix of fixed and floating rates for our indebtedness.

In order to fix a portion of, and mitigate the risk associated with, our floating rate indebtedness (without incurring substantial prepayment penalties or defeasance costs typically associated with fixed rate indebtedness when repaid early or refinanced), we, through the OP, have entered into seven interest rate swap transactions with the Counterparty with a combined notional amount of $650.0 million. The interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to that amount with a weighted average fixed rate of 1.3388%. During the term of these interest rate swap agreements, we are required to make monthly fixed rate payments of 1.3388%, on a weighted average basis, on the notional amounts, while the Counterparty is obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. We have designated these interest rate swaps as cash flow hedges of interest rate risk.

Until our interest rates reach the caps provided by our interest rate cap agreements, each quarter point change in LIBOR would result in an approximate increase to annual interest expense costs on our floating rate indebtedness, reduced by any payments due from the Counterparty under the terms of the interest rate swap agreements we had entered into as of March 31, 2019, of the amounts illustrated in the table below for our indebtedness as of March 31, 2019 (dollars in thousands):

Change in Interest Rates	Annual Increase to Interest Expense
0.25%	$	720
0.50%		1,440
0.75%		2,160
1.00%		2,880

There is no assurance that we would realize such expense as such changes in interest rates could alter our liability positions or strategies in response to such changes.

We may also be exposed to credit risk in the derivative financial instruments we use. Credit risk is the failure of the Counterparty to perform under the terms of the derivative financial instruments. If the fair value of a derivative financial instrument is positive, the Counterparty will owe us, which creates credit risk for us. If the fair value of a derivative financial instrument is negative, we will owe the Counterparty and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative financial instruments by entering into transactions with major financial institutions that have high credit ratings.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our President and Chief Financial Officer, evaluated, as of March 31, 2019, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation, our President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019, to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including the President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the three months ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.

Item 1A. Risk Factors

We have disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report, filed with the SEC on February 19, 2019, risk factors which materially affect our business, financial condition or results of operations.  There have been no material changes from the risk factors previously disclosed.  You should carefully consider the risk factors set forth in the Annual Report and the other information set forth elsewhere in this quarterly report on Form 10-Q.  You should be aware that these risk factors and other information may not describe every risk facing our company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Repurchase of Shares

On June 15, 2016, our Board authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $30 million during a two-year period that was set to expire on June 15, 2018 (the “Share Repurchase Program”).  On April 30, 2018, our Board increased the Share Repurchase Program to up to $40 million and extended it by an additional two years to June 15, 2020.  There were no purchases of equity securities during the three months ended March 31, 2019.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1+	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

+ Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NEXPOINT RESIDENTIAL TRUST, INC.

Signature	Title	Date
/s/ Jim Dondero	President and Director	April 30, 2019
Jim Dondero	(Principal Executive Officer)
/s/ Brian Mitts	Chief Financial Officer and Director	April 30, 2019
Brian Mitts	(Principal Financial Officer and Principal Accounting Officer)

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