2020 Annual Report
nxrt.nexpoint.com
April 12, 2021
TO MY FELLOW SHAREHOLDERS,
NexPoint Residential Trust, Inc. (NYSE: NXRT) (“NXRT” or the “Company”) had another strong year in
2020, our fifth full year as a public company. While the apartment industry and macroeconomy as a whole
experienced challenges related to the COVID-19 pandemic, NXRT continued to experience strong demand
for our well-located, middle-market housing communities, while maintaining collections at a near historic
level.
Performance Highlights As of Close of Trading December 31, 2020
For the full year 2020, NXRT reported Net Income, FFO, Core FFO and AFFO of $44.0M, $57.2M, $55.5M
and $62.4M, respectively, attributable to common stockholders.1
Since inception, we have generated superior Same Store NOI growth relative to our multifamily peers.
During 2020, our 2019-2020 Same Store properties average effective rent, total revenue and NOI increased
1.4%, 3.6% and 3.2%, respectively, over the prior year period.1 NXRT’s 3.6% revenue growth outpaced
the average for our peer group by 186 bps, while 3.2% NOI growth proved to be 222 bps better than our
peers.1,2
238.1% Cumulative Total Return Since Inception
(cid:1085)(cid:1005)(cid:1007)(cid:1012)(cid:856)(cid:1012)(cid:1081) (cid:75)(cid:437)(cid:410)(cid:393)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286) (cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:396)(cid:286)(cid:282) (cid:410)(cid:381) (cid:18)(cid:367)(cid:381)(cid:400)(cid:286)(cid:400)(cid:410) (cid:87)(cid:286)(cid:286)(cid:396)
(cid:1085)(cid:1005)(cid:1012)(cid:1008)(cid:856)(cid:1005)(cid:1081) (cid:75)(cid:437)(cid:410)(cid:393)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286) (cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:396)(cid:286)(cid:282) (cid:410)(cid:381) (cid:410)(cid:346)(cid:286) (cid:87)(cid:286)(cid:286)(cid:396) (cid:4)(cid:448)(cid:286)(cid:396)(cid:258)(cid:336)(cid:286)
(cid:1085)(cid:1006)(cid:1006)(cid:1005)(cid:856)(cid:1007)(cid:1081) (cid:75)(cid:437)(cid:410)(cid:393)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286) (cid:18)(cid:381)(cid:373)(cid:393)(cid:258)(cid:396)(cid:286)(cid:282) (cid:410)(cid:381) (cid:410)(cid:346)(cid:286) (cid:90)(cid:68)(cid:127)
(cid:1007)(cid:1009)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1007)(cid:1004)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1006)(cid:1009)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1006)(cid:1004)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1005)(cid:1009)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1005)(cid:1004)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1009)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1005)(cid:1009)
(cid:882)(cid:1009)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:882)(cid:1005)(cid:1004)(cid:1004)(cid:856)(cid:1004)(cid:1004)(cid:1081)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1005)(cid:1010)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1005)(cid:1011)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1005)(cid:1012)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1005)(cid:1013)
(cid:1008)(cid:876)(cid:1005)(cid:876)(cid:1006)(cid:1004)(cid:1006)(cid:1004)
(cid:69)(cid:121)(cid:90)(cid:100)
(cid:18)(cid:87)(cid:100)
(cid:47)(cid:90)(cid:100)
(cid:68)(cid:4)(cid:4)
(cid:4)(cid:87)(cid:100)(cid:94)
(cid:17)(cid:90)(cid:39)
(cid:90)(cid:68)(cid:127)
(cid:1005)
Also, we continue to have success in our value-add programs. We completed full and partial renovations
on 1,679 units across our portfolio in 2020, adding significant value to our communities, while improving
resident quality of life and achieving meaningful returns on invested capital. During the year, our interior
renovation programs achieved average rent growth of 12.3% resulting in a total return on invested capital
expended of 21.7%. Looking forward to 2021, we are budgeting to complete 1,435 more full, partial and
bespoke interior upgrades and expect to produce estimated ROIs of approximately 20.2%, 21.1% and
30.8%, respectively on those value-added initiatives.3
During 2020, we installed 681 washer/dryer sets, which produced an ROI of approximately 68%. Looking
forward to 2021, we are budgeting to install 421 more washer/dryer sets and expect to produce an estimated
ROI of approximately 59%.3 We completed full rollouts of our smart home technology and security
upgrades at 24 properties throughout the year, which has produced an ROI of approximately 34%. For 2021,
we are budgeting for smart home technology upgrades on approximately 677 additional units, which we
expect to produce an estimated ROI of approximately 57%.3
We believe NXRT's focus on acquiring properties with a value-add component should continue to produce
attractive returns and outsized Core FFO and NOI growth, which we believe will deliver long-term capital
appreciation to stockholders.3 Additionally, the Company declared dividends totaling $32.6 million, or
$1.279 per share, in 2020. Driven by excellent cash flow generation and a healthy Core FFO Coverage
Ratio (1.72x our dividends declared during the fiscal year 2020)1, our board of directors increased the
quarterly dividend by 9.2% during the fourth quarter of 2020. This increase in our quarterly dividend to
$0.34125 per share represents a 65.7% increase since inception.
ESG Initiatives
Throughout the year, NXRT successfully decreased its utility costs while adding value for its residents by
participating in Freddie Mac’s Green Advantage program. Since inception, NXRT has spent approximately
$6.2 million on green improvements and has fully implemented green improvements at 35 of its properties.
Through December 31, 2020, 34 of those properties reported reduced utility costs of approximately $2.8
million, saving approximately 395.7 million gallons of water and 12.5 million kWh since inception. The
average yearly cost savings for 2020 was $2.1 million (compared to $2.0 million in 2019) and generated an
average ROI of 40.1%. We expect these environmentally-friendly improvements will continue to reduce
operating expenses and save our residents money, thereby enhancing property value, asset quality, and
extending the runway for further organic revenue growth.3
In addition to our green initiatives, mentioned above, NXRT’s core strategy allows working-class
Americans access to safe, clean and affordable housing in high job growth markets. As homeownership
becomes less and less attainable for the general population, we believe our communities fill a void in the
workforce housing sector. As COVID-19 led to record-breaking unemployment, NXRT communities
strived to provide bilingual support to residents who requested assistance applying for rental assistance,
while also complying with all CDC and local guidelines to protect the health and safety of our residents
and employees. As America begins to get back to work, we will continue to support our residents.
(cid:1006)
NXRT is also proud to report that BH Management, our property management partner, continues to improve
upon diversity in the workplace. As of December 31, 2020, 75% of BH employees dedicated to NXRT
operations are racially and/or ethnically diverse and 44% are women. NXRT and BH aspire to promote
women and racially and/or ethnically diverse employees to management positions - women account for
58% of managers at BH, while 46% of managers at BH are racially and/or ethnically diverse.
Additionally, NXRT remains committed to diversifying the composition of the board of directors. In March
2020, we appointed Catherine Wood to the board of directors. Ms. Wood is the Founder, Chief Executive
Officer and Chief Investment Officer of ARK Investment Management LLC (“ARK”). ARK is an
investment firm focused on investment strategies that span various market capitalizations, sectors, and
geographies and focuses on public companies that it believes to be leaders, enablers, and beneficiaries of
disruptive growth innovation. We believe Ms. Wood’s expertise as it relates to disruptive technologies,
business models and processes provide a unique and important perspective to the board of directors. We
continue to review potential director candidates who may further diversify the composition of our board of
directors through their professional and life experiences, education, skills, perspectives and leadership, as
well as other individual qualities and attributes that contribute to board heterogeneity, such as race, gender,
ethnicity, sexual orientation and national origin. We believe a balanced board of directors with diverse
viewpoints and deep expertise best serves the interests of NXRT and its shareholders.
Superior Capital Allocation & Balance Sheet Management
During 2020, the Company successfully completed the disposition of four properties, further validating our
value creation strategy while generating net cash proceeds of $140.2 million, an approximate 56% IRR and
a 4.42x multiple on invested capital.4
The Company has thoughtfully redeployed proceeds through tax-deferred 1031 exchanges to acquire better
quality assets in superior locations within core markets that we believe will benefit from new management
and our value-add program. NXRT added one property to the portfolio during the full year 2020 – the $85
million acquisition of The Fairways at San Marcos (“Fairways”) in a core market – Phoenix, AZ.
During the full year 2020, through our ATM program, the Company issued approximately 1.3 million
shares of common stock at an average share price of $46.58 (before sales commissions and offering costs)
for approximately $59.5 million in gross proceeds, which the Company used to pay down the corporate
revolver, to acquire Fairways and for other general corporate purposes.
We continued to work diligently to manage our exposure to rising interest rates, while further strengthening
our balance sheet through a volatile 2020. As of December 31, 2020, we had total indebtedness of $1.4
billion at an adjusted weighted average interest rate of 1.94%, of which $1.3 billion was debt with a floating
interest rate. The interest rate swap agreements we have entered into effectively fix the interest rate on $1.2
billion, or 100%, of our $1.1 billion of floating rate mortgage debt outstanding, leaving just 8% of our $1.4
billion of total debt outstanding exposed to interest rate volatility as of December 31, 2020.
(cid:1007)
Outlook/Strategic Advantages3
Looking forward to 2021, we expect to continue to see a rebound in economic fundamentals that should
lead to healthy demand, from both renters and investors, for well-located workforce housing with value-
add potential in major Sunbelt markets. We maintain a core focus on delivering internal growth and outsized
performance to investors and making prudent capital allocation decisions to drive value creation for our
shareholders. We have long maintained Class B assets that have been thoughtfully renovated and will
continue to attract tenants, through all market conditions, as we provide a high-quality product that can
attract tenants currently residing in a Class A community that may be forced to reduce expenditures and
locate to a Class B community. Through the COVID-19 crisis, we continue to believe there will always be
a demand for safe, affordable, and clean housing.
In addition to the attractiveness of our product, price point and the resiliency of our tenant base, we believe
we are well positioned to capitalize on the economic resurgence coming out of a post-COVID environment.
COVID has accelerated the migration from coastal cities to the major Sunbelt markets that offer lower
taxes, more business-friendly climates and lower cost of living that has been developing for a decade. Our
portfolio is well positioned to continue to benefit from these net migration trends. Our debt is manageable
as we have fixed 92% or $1.2 billion of our floating rate debt at an all-in 1.38% for a weighted average 4.31
years with only $304.2 million of maturities and amortization over the next 36 months. As of March 31,
2021, we had $20.3 million cash on hand, with average occupancy across the portfolio of 94.6%.
As vaccine rollout begins to increase nationwide, we believe we are in the final innings of the COVID-19
crisis. We will continue to communicate frequently and transparently with our investors like we always
have, and react accordingly to provide additional value to our shareholders.
Thank you for your continued support of our team and belief in our company,
James D. Dondero, President
1 See Non-GAAP Measurements included in our Form 10-K for the year ended December 31, 2020 accompanying this letter.
2 Industry leading is based on total return vs NXRTs peer group. NXRTs peer group includes the following NYSE-listed multifamily REITs: APTS,
BRG, CPT, IRT, MAA.
3 See Cautionary Statement Regarding Forward-Looking Statements in our Form 10-K for the year ended December 31, 2020 accompanying this
letter.
4 We define a multiple on invested capital as the total return to NXRT (inclusive of the Companys share of property distributions and net cash
proceeds from sales, less mortgage debt repaid) divided by NXRTs total capital investment in the properties.
(cid:1008)
CCOOMMPPAANNYY PPRROOFIILLEE
NEEXXPOOIINNTT RREESSIIDDEENNTTIIAALL TTRRUUSSTT,, IINCC.
NexPoint Residential Trust is a publicly traded REIT, with its
We believe NXRT is the only pure-play, publicly-traded REIT
shares listed on the New York Stock Exchange under the
on the NYSE,
focused on value-add multifamily real
symbol NXRT, and is primarily focused on acquiring, owning
and operating well-located middle-income multifamily
properties with value-add potential in large cities, primarily
in the Southeastern and Southwestern United States. NXRT
is externally advised by NexPoint Real Estate Advisors, L.P.
We pursue investments in multifamily real property, typically
with a value-add component, where we can invest capital to
provide life style amenities to work force and middle-
property. We target markets that we believe have the
following characteristics:
•
•
•
Attractive job growth and household formation
fundamentals;
High costs of homeownership or class A
multifamily rental; and
Elevated or increasing construction or
replacement costs for multifamily real property.
income housing. Our value-add strategies seek to provide
Our value-add program seeks to provide our residents
both dramatically-improved communities for our residents
with life-style amenities found in newly constructed
and outsized returns for our shareholders.
multifamily property at a reasonable price as well as
increase shareholder value for ourinvestors.
As of December 31, 2020, NXRT owned a portfolio of 37
multifamily communities consisting of 14,205 apartment
units in 10 major markets across the SE & SW U.S.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
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
(State or other Jurisdiction of
Incorporation or Organization)
300 Crescent Court, Suite 700, Dallas, Texas
(Address of Principal Executive Offices)
47-1881359
(I.R.S. Employer
Identification No.)
75201
(Zip Code)
(972) 628-4100
(Telephone Number, Including Area Code)
Title of each class
Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Trading Symbol
NXRT
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
None
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§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
Non-Accelerated Filer
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the shares of common stock of the registrant held by non-affiliates of the registrant, based upon the closing price of
such shares on June 30, 2020 was approximately $736,520,000.00.
As of February 22, 2021, the registrant had 25,067,948 shares of its common stock, par value $0.01 per share, outstanding.
Accelerated Filer
Smaller reporting company
☒
☐
☐
☐
☐
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
NEXPOINT RESIDENTIAL TRUST, INC.
Form 10-K
Year Ended December 31, 2020
Cautionary Statement Regarding Forward-Looking Statements
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
INDEX
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Index to Consolidated Financial Statements
PART IV
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F-1
i
Cautionary Statement Regarding Forward-Looking Statements
This annual 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 annual 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:
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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 the current COVID-19 pandemic and the future outbreak of other highly infectious or contagious
diseases;
risks associated with the 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 and the Fair Housing Act;
risks associated with limited warranties we may obtain when purchasing properties;
exposure to decreases in market rents due to our short-term leases;
ii
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risks associated with operating through joint ventures and funds;
our dependence on information systems;
risks associated with breaches of our data security;
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;
loss of key personnel of NexPoint Advisors, L.P. (our “Sponsor”), NexPoint Real Estate Advisors, L.P. (“our Advisor”)
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 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 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 the heading “Risk Factors” in this 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 annual 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
ITEM 1. BUSINESS
General
PART I
NexPoint Residential Trust, Inc. (the “Company”, “we”, “our”) was incorporated in Maryland on September 19, 2014, and has
elected to be taxed as a 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 December 31, 2020, 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 to our consolidated financial statements).
The Company is externally managed by the Adviser through an agreement dated March 16, 2015, as amended, and renewed on
February 15, 2021 for a one-year term (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 Board. The
Adviser is wholly owned by our Sponsor.
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.
The entities through which we own the properties in the Portfolio have entered into management agreements with BH
Management Services, LLC (“BH”). Pursuant to these agreements, BH operates and leases the underlying properties in the Portfolio
and provides construction management services. BH has significant experience operating and leasing multifamily properties, having
begun business in 1993 and currently operating and leasing approximately 99,000 multifamily units across the country. The Company
pays BH a management fee of approximately 3% of the monthly gross income from each property managed, as well as construction
supervision fees and certain other fees. BH is an affiliate of the noncontrolling limited partner of the OP. See Note 10 to our
consolidated financial statements for additional information.
The Company may also participate with third parties in property ownership through limited liability companies (“LLCs”), funds
or other types of co-ownership or acquire real estate or interests in real estate in exchange for the issuance of common stock, OP
Units, preferred stock or options to purchase stock. These types of investments may permit the Company to own interests in larger
assets without unduly restricting diversification, which provides flexibility in structuring the Company’s portfolio.
The Company may allocate up to 30% of the portfolio to investments in real estate-related debt and securities with the potential
for high current income or total returns. These allocations may include first and second mortgages and subordinated, bridge,
mezzanine, construction and other loans, as well as debt securities related to or secured by multifamily real estate and common and
preferred equity securities, which may include securities of other REITs or real estate companies.
As of December 31, 2020, the Company, through the OP and the wholly owned TRS, owned 37 properties representing 14,069
units in seven states, as further described under Item 2, “Properties” and Notes 3, 4 and 5 to our consolidated financial statements.
2020 Highlights
Key highlights and transactions completed in 2020 include the following:
•
2020 ATM Program: On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution
agreements with each of Jefferies LLC (“Jefferies”), Raymond James & Associates, Inc. (“Raymond James”), KeyBanc
Capital Markets Inc. (“KeyBanc”) and Truist Securities, Inc. f/k/a SunTrust Robinson Humphrey, Inc. (“Truist”, and
4
together with Jefferies, Raymond James and KeyBanc, the “2020 ATM Sales Agents”), pursuant to which the Company
may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having an
aggregate sales price of up to $225,000,000 (the “2020 ATM Program”). Sales of shares of common stock, if any, may be
made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act,
including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange, to
or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at
negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of common stock, the
Company may enter into forward sale agreements with each of Jefferies, KeyBanc and Raymond James, Truist, or their
respective affiliates, through the 2020 ATM Program. During the year ended December 31, 2020, the Company issued
718,306 shares of common stock at an average price of $43.92 per share for gross proceeds of $31.5 million under the
2020 ATM Program. The Company paid approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect
to such sales and incurred other issuance costs of approximately $0.6 million, both of which were netted against the gross
proceeds and recorded in additional paid in capital. The following table contains summary information of the 2020 ATM
Program:
Gross proceeds
Common shares issued
Gross average sale price per
share
Sales commissions
Offering costs
Net proceeds
Average price per share, net
$
$
$
$
31,546,577
718,306
43.92
473,199
609,615
30,463,763
42.41
•
Acquisitions: We completed one acquisition in 2020. Details of the acquisition are in the table below (dollars in
thousands):
Property Name
Location
Fairways at San Marcos
Chandler, Arizona
Date of
Acquisition
November 2,
2020
Purchase Price
Mortgage Debt (1)
# Units
Effective
Ownership
$
84,480
$
46,464
352
100%
(1)
For additional information regarding our debt, see Note 6 to our consolidated financial statements.
•
Dispositions: We sold four properties totaling 1,067 units in 2020. Details of the dispositions are in the table below (in
thousands):
Property Name
Southpoint Reserve at Stoney
Creek
Willow Grove
Woodbridge
Eagle Crest
Location
Fredericksburg,
Virginia
Nashville,
Tennessee
Nashville,
Tennessee
Irving, Texas
Date of Sale
Sales Price
Outstanding
Principal (1)
Net Cash
Proceeds (2)
Gain on Sale
of Real Estate
March 20, 2020
$
23,500
$
13,101
$
23,176
$
5,469
March 26, 2020
March 26, 2020
September 30,
2020
31,300
31,700
14,818
31,005
13,677
31,237
55,500
142,000
$
$
29,510
71,106
54,779
140,197
$
$
17,513
15,990
30,160
69,132
(1) Represents the outstanding principal balance when the loan was repaid.
(2) Represents sales price, net of closing costs.
5
•
•
•
Renovations: For the properties in our Portfolio as of December 31, 2020, we completed full and partial renovations on
1,679 units at an average cost of $6,011 per renovated unit. Since inception, for the properties in our Portfolio as of
December 31, 2020, we have completed full and partial renovations on 5,355 units at an average cost of $7,039 per
renovated unit that has been leased as of December 31, 2020. We have achieved average rent growth of 10.9%, or a $115
average monthly rental increase per unit, on all units renovated and leased as of December 31, 2020, resulting in a return
on investment on capital expended for interior renovations of 22.5%.
Dividends: We declared dividends totaling $32.6 million, or $1.279 per share. During the fourth quarter of 2020, we
increased our quarterly dividend for the fourth time since the Spin-Off to $0.34125 per share, which was an increase of
$0.0288 per share, or a 9.2% increase, over our previous quarterly dividends declared in 2020. The increase in our
quarterly dividend to $0.34125 per share is an increase of $0.1353 per share, or a 65.7% increase, over our quarterly
dividends declared from the Spin-Off through the third quarter of 2016. Our fourth quarter dividend equates to a 3.2%
annualized yield based on our closing share price of $42.31 on December 31, 2020.
Results of Operations and Non-GAAP Measures: We reported the following net income, net operating income
(“NOI”), funds from operations (“FFO”), core funds from operations (“Core FFO”) and adjusted funds from operations
(“AFFO”) for the year ended December 31, 2020 as compared to the year ended December 31, 2019 (dollars in
thousands):
For the Year Ended December 31,
2020
2019
$ Change
% Change
Net income (loss)
(2)
NOI
FFO attributable to common stockholders
(2)
Core FFO attributable to common stockholders (2)
(2)
AFFO attributable to common stockholders
$
$
44,150
116,092
57,238
55,512
62,448
$
99,438
102,591
40,718
47,573
54,213
(55,288) (1)
13,501
16,520
7,939
8,235
-55.6%
13.2%
40.6%
16.7%
15.2%
(1)
(2)
The change in our net income between the periods primarily relates to a decrease in gain on sales of real estate of $58.5 million
and increases in total property operating expenses of $4.5 million and depreciation and amortization expense of $13.3 million,
partially offset by an increase in total revenues of $23.7 million.
See Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” for a discussion
regarding the non-GAAP measures of NOI, FFO, Core FFO and AFFO provided above, including reconciliations to net income
in accordance with U.S. generally accepted accounting principles (“GAAP”).
•
Same Store Growth: There are 24 properties encompassing 9,074 units of apartment space in our same store pool for the
years ended December 31, 2020 and 2019 (our “2019-2020 Same Store” properties). For our 2019-2020 Same Store
properties, we recorded the following operating metrics for the year ended December 31, 2020 as compared to the year
ended December 31, 2019:
Operating Metric
2020
2019
% Change
Occupancy (1)
Average Effective Monthly Rent Per Unit (2)
Rental income (in thousands)
Other income (in thousands)
NOI (in thousands)
94.2%
1,047
120,109
2,106
68,150
$
$
$
$
94.3%
1,033
115,588
2,331
66,054
$
$
$
$
-0.1%
1.4%
3.9%
-9.7%
3.2%
(1) Occupancy is calculated as the number of units occupied as of December 31 for the respective year, divided by the total number
of units, expressed as a percentage.
(2) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of December 31
for the respective year minus any tenant concessions over the term of the lease, divided by the number of units under
commenced leases as of December 31 for the respective year.
•
Cash Position: At December 31, 2020, we had $57.0 million of cash on our balance sheet, of which $10.6 million was
reserved for future renovations, and $21.9 million was reserved for lender-required escrows and security deposits. We
believe we have adequate cash on hand, in addition to our expected cash flows from operations, to meet our near-term
obligations, service our debt, pay distributions and make opportunistic acquisitions.
6
•
COVID-19: For information on the effects COVID-19 pandemic had on our business, see Item 1A. “Risk Factors” to our
consolidated financial statements included in this annual report.
Our Real Estate Portfolio
As of December 31, 2020, we owned 37 properties representing 14,069 units in seven states that were approximately 94.1%
occupied with a weighted average monthly effective rent per occupied apartment unit of $1,128. For additional information regarding
our Portfolio, see Item 2, “Properties” and Notes 3, 4 and 5 to our consolidated financial statements.
We evaluate our operating performance on an individual property level and view our real estate assets as one industry segment
and, accordingly, our properties are aggregated into one reportable segment.
Our Business Objectives and Strategies
Our primary business objectives are to:
•
•
•
•
•
•
deliver stable, attractive yields and long-term capital appreciation to our stockholders;
acquire multifamily properties in markets with attractive job growth and household formation fundamentals primarily in
the Southeastern and Southwestern United States;
acquire assets at discounts to replacement cost;
implement a value-add program to increase returns to our stockholders;
own assets that provide lifestyle amenities and upgraded living spaces to low and moderate income renters; and
recycle capital from dispositions when economic and market conditions present opportunities that we believe are in the
best interest of our stockholders.
We intend to accomplish these objectives by:
•
•
•
Focusing on Acquiring Class B Properties in Our Core Markets. We will continue to seek opportunities to acquire
primarily Class B multifamily properties at prices that we believe represent discounts to replacement cost, provide the
potential for significant
long-term value appreciation and that we expect will generate attractive yields for our
stockholders. We will focus on these types of opportunities in our core markets, which we consider to be primarily major
metropolitan areas in the Southeastern and Southwestern United States.
Focusing on Multifamily Properties with a Value-Add Component. We will continue to seek opportunities to acquire
multifamily properties that have a value-add component. Due to a lack of reinvestment by many prior owners, we believe
these types of properties provide us the opportunity to make relatively modest capital expenditures that result in a
significant increase in rents, thereby generating NOI growth, and thus higher yields and capital appreciation for our
stockholders.
Prudently Using Leverage to Increase Stockholder Value. We will typically finance new property acquisitions at a
target leverage level of approximately 50-60% loan-to-value (outstanding principal balance to enterprise value). Given
that we intend for the majority of our acquisitions to have a value-add component in the first three years of ownership, we
will generally seek leverage with the optionality to refinance (such as floating rate debt). In the management team’s
experience, this leverage strategy allows for the opportunity to maximize returns for our stockholders while providing
maximum flexibility. We are currently targeting to reduce our leverage to 40-45% loan-to-value (outstanding principal
balance to enterprise value) over time by increasing the value of our properties, refinancing properties we intend to hold
longer term and strategically paying down debt with excess cash flows from operations or future equity offerings.
Our Adviser’s investment approach combines its management team’s experience with a structure that emphasizes thorough
market research, local market knowledge, underwriting discipline and risk management in evaluating potential investments with a goal
of maximizing long-term stockholder value and a philosophy of thoughtful capital allocation and balance sheet management.
7
Acquisition and Operating Strategy
We seek primarily Class B multifamily properties that are priced at a discount to replacement cost. We believe that through the
implementation of our value-add program we will be able to grow the NOI of these types of properties significantly in the first three
years of ownership and thus these types of acquisitions will be accretive over the long-term to our FFO, Core FFO and AFFO. As we
progress through the real estate life cycle, these opportunities will become more difficult to find. However, we will continue to take a
disciplined approach to acquisitions by primarily pursuing these types of opportunities. Our Adviser’s investment approach includes
active management of each property acquired. Our Adviser believes that active management is critical to creating value. Prior to the
purchase of a property, BH and our Adviser generally tour each property and develop a business strategy for the property. This
includes a forecast of the action items to be taken and the capital needed to achieve the anticipated returns. Our Adviser reviews such
property-level business strategies on an ongoing basis to anticipate changes or opportunities in the market. In an effort to keep
properties in compliance with our underwriting standards and management strategies, our Adviser remains involved throughout the
investment life cycle of each acquired property and actively consults with BH throughout the holding period.
We may also allocate up to 30% of our Portfolio to investments in real estate-related debt, mezzanine and other loans and
preferred equity and other securities in situations where the risk-return profile is more attractive than investments in common equity.
This strategy would be focused on the multifamily property type and would be designed to minimize potential losses during market
downturns and maximize risk adjusted total returns to our stockholders in all market cycles.
Value-Add Strategy
We will continue to implement our value-add strategy at our properties where we believe we can achieve a significant increase
in rents above what would otherwise be the case with purely organic market increases. Our value-add program has three components:
1) improvement of exteriors and common areas, 2) improvement of interiors and 3) management and cost improvements.
We invest in exterior and common areas improvements at our properties in an effort to enhance asset quality, to improve “curb
appeal”/market positioning, and expand or enhance our amenity offerings, all of which we believe will improve tenant retention and
modestly drive rent and NOI growth. Renovations to the exteriors and common areas include structural improvements that enhance
the physical condition, value and/or useful life of our properties, as well as aesthetic improvements to, among others, landscape and
signage. We also seek to improve our competitive positioning by adding to, redecorating or otherwise enhancing our common areas
and amenity offerings. As of December 31, 2020, with the exception of the properties we acquired in 2020, we have renovated the
exteriors and common areas at a majority of the properties in our Portfolio.
We expect interior renovations, along with organic growth in rents, to be the primary drivers of rent and NOI growth at our
properties. Our interior renovations include: 1) aesthetic design enhancements such as kitchen and/or bath remodeling, 2) replacement
of outdated appliances, equipment and fixtures, 3) addition of washer/dryer appliances, 4) private yards and 5) smart technologies
such as Bluetooth locks, networked climate control systems and USB electrical outlets. We also seek to achieve cost improvements
through investment in longer-lived materials, energy conservation projects, and other strategic initiatives. Since inception, for the
properties in our Portfolio as of December 31, 2020, we have completed full and partial renovations on 5,355 units out of our 14,069
total units with an average monthly rental increase per unit of $126 and an average cost of $7,039 per renovated unit that has been
leased as of December 31, 2020. In cases where we believe rents will grow significantly in a market organically, we will implement
the value-add program more strategically in order to capture significant rent and NOI growth without expending additional capital.
Additionally, to the extent we believe rents at a property are maximized regardless of the level of additional renovations, we may opt
not to further renovate units at that property. As of December 31, 2020, we had reserved approximately $10.6 million for our planned
capital expenditures and other expenses to implement our value-add program, which will complete approximately 1,205 planned
interior rehabs, eliminating the need for us to raise additional capital in order to carry out our currently planned value-add program.
Disposition Strategy
In general, we intend to hold our multifamily properties for production of rental income for a period of at least three years from
the date of acquisition. Economic and market conditions may influence us to hold our investments for different periods of time. From
time to time, we may sell an asset before the end of the expected holding period, particularly if we receive a bona fide unsolicited offer
with attractive terms, have an upcoming liquidity need, such as a debt maturing, are strategically exiting a certain market or sub-
market or the sale of the asset would otherwise be in the best interest of our stockholders. When reviewing whether a sale is in the best
interest of our stockholders, we take into consideration whether market conditions and asset positioning have maximized the value of
the property to us and any potential adverse tax consequences of a sale.
8
Financing Strategy
We intend to use leverage in making our investments with an objective of maintaining a strong balance sheet and providing
liquidity to grow our Portfolio. We are currently targeting to reduce our leverage to 40-45% loan-to-value (outstanding principal
balance to enterprise value) over time by increasing the value of our properties and refinancing properties we intend to hold longer-
term. However, we are not subject to any limitations on the amount of leverage we may use, and, accordingly, the amount of leverage
we use may be significantly less or greater than what we currently anticipate. We are currently meeting our short-term liquidity needs
through our cash and cash equivalents and cash flows from operations.
When interest rates are high or financing is otherwise unavailable on a timely basis, we may purchase certain properties and
other assets for cash with the intention of obtaining a loan for a portion of the purchase price at a later time. We will refinance
properties during the term of a loan only under certain circumstances, such as when a decline in interest rates makes it beneficial to
prepay an existing mortgage, an existing mortgage matures, the value of the property has increased significantly and we can obtain
more attractive terms through refinancing the property, or an attractive investment becomes available and the proceeds from the
refinancing can be used to purchase such investment.
We typically use floating rate debt with interest rate swaps and interest rate caps as opposed to using fixed rate debt. We believe
this is a more sensible and flexible way to utilize leverage, while limiting our interest rate risk in our strategy as we attempt to increase
the value of each property over the course of three years after acquisition through our value-add program. Fixed rate financing is
typically more expensive and less flexible since there are typically high prepayment penalties, yield maintenance payments and/or
defeasance penalties when refinancing the debt prior to maturity. To the extent we intend to hold a property long-term, we will
reassess the use of refinancing with fixed rate debt.
Property Management Strategy
We seek to achieve long-term earnings growth through superior property management. To achieve this, we have partnered with
BH to manage all of our properties as an external manager. In order to align our property manager’s interests with those of our
stockholders, BH (through an affiliate) is a noncontrolling limited partner of the OP. We believe BH provides the following benefits:
•
•
•
•
•
•
•
•
•
manages approximately 99,000 multifamily units in 25 states and has managed multifamily communities for 28 years;
brings a scale of operations we could not otherwise achieve for approximately 3% of gross income, which is the
contracted amount we pay for its property management services;
has operations in all of our current and desired markets, allowing us greater scale when entering new markets or make
investments in non-core markets without making substantial investments in management infrastructure in those markets;
has a construction management operation and substantial experience in renovating Class B multifamily units;
its scale allows it to obtain highly competitive pricing as it pertains to the costs of our value-add program, increasing our
return on investment for renovations;
helps us source and underwrite opportunities as well as assist in due diligence of properties prior to closing;
assists in locating potential buyers for our properties;
its size, scale and experience allows it to keep costs low and maximize rents and occupancy; and
has proved successful in driving other revenue growth at properties it manages.
9
Our Structure
The following chart shows our ownership structure.
∗
An affiliate of BH Equities, LLC is the property manager for all of our properties.
Our Adviser
We are externally managed by our Adviser pursuant to the Advisory Agreement, by and among the OP, our Adviser, and us.
Our Adviser was organized on September 5, 2014 and is an affiliate of our Sponsor. Our Adviser has contractual and fiduciary
responsibilities to us and our stockholders as further described under “—Our Advisory Agreement” below. The members of our
Adviser’s management team are Jim Dondero, Brian Mitts, Matt McGraner and Matthew Goetz, all of whom are employed by our
Adviser or its affiliates.
Our Advisory Agreement
Below is a summary of the terms of our Advisory Agreement:
Duties of Our Adviser. Our Advisory Agreement provides that our Adviser manage our business and affairs in accordance with
the policies and guidelines established by our Board and that our Adviser be under the supervision of our Board. The agreement
requires our Adviser to provide us with all services necessary or appropriate to conduct our business, including the following:
•
•
locating, presenting and recommending to us real estate investment opportunities consistent with our investment policies,
acquisition and disposition strategies and objectives, including our conflicts of interest policies;
structuring the terms and conditions of transactions pursuant to which acquisitions and dispositions of properties will be
made;
10
•
•
•
•
•
•
•
acquiring and disposing properties on our behalf in compliance with our investment objectives, strategies and applicable
tax regulations;
arranging for the financing and refinancing of properties;
administering our bookkeeping and accounting functions;
serving as our consultant in connection with policy decisions to be made by our Board, managing our properties or
causing our properties to be managed by another party;
monitoring our compliance with regulatory requirements, including the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated
thereunder, New York Stock Exchange (“NYSE”) rules and regulations of the Code to maintain our status as a REIT;
performing administrative services; and
rendering other services as our Board deems appropriate.
Our Adviser is required to obtain the prior approval of our Board in connection with:
•
•
•
any investment for which the portion of the consideration paid out of our equity equals or exceeds $50,000,000;
any investment that is inconsistent with the publicly disclosed investment guidelines as in effect from time to time, or, if
none are then publicly disclosed, as otherwise adopted by our Board from time to time; or
any engagement of affiliated service providers on behalf of us or the OP, which engagement terms will be negotiated on
an arm’s length basis.
For these purposes, “equity” means the purchase price of the investment, exclusive of the proceeds of any debt financing
incurred or to be incurred in connection with the relevant investment and anticipated closing and other acquisition costs.
Our Adviser will be prohibited from taking any action, in its sole judgment, or in the sole judgment of our Board, that:
•
•
•
•
would adversely affect our qualification as a REIT under the Code, unless our Board had determined that REIT
qualification is not in the best interest of us and our stockholders;
would subject us to regulation under the Investment Company Act of 1940 (the “1940 Act”), except to the extent that we
and our Adviser have undertaken in the Advisory Agreement and our charter to comply with Section 15 of the 1940 Act in
connection with the entry into, continuation of, or amendment of the Advisory Agreement or any advisory agreement;
is contrary to or inconsistent with our investment guidelines; or
would violate any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction
over us or our shares of common stock, or otherwise not be permitted by our charter or bylaws.
Advisory Fee. Our Advisory Agreement requires that we pay our Adviser an annual advisory fee of 1.00% of our Average Real
Estate Assets.
“Average Real Estate Assets” means the average of the aggregate book value of Real Estate Assets (see below) 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).
In calculating the advisory fee, we categorize our Average Real Estate Assets into either “Contributed Assets” or “New Assets.”
The advisory fee on Contributed Assets may not exceed $4.5 million in any calendar year. This cap is intended to limit the fees paid to
our Adviser on the Contributed Assets following the Spin-Off to the fees that would have been paid by NHF to its adviser had the
Spin-Off not occurred. The advisory fee on New Assets is not subject to this limitation but is subject to the expense cap mentioned
below.
“Contributed Assets” means all of the real estate assets we owned upon the completion of the Spin-Off and is not reduced for
dispositions of such assets subsequent to the Spin-Off.
“New Assets” means all of the Average Real Estate Assets other than Contributed Assets. New Assets includes proceeds from
the sale of a Contributed Asset that are used to purchase a new investment.
11
The advisory fee is payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a portion
of such fee in shares of our common stock, subject to the limitations set forth below under “—Limitations on Receiving Shares.” The
number of shares issued to our Adviser as payment for the advisory fee will be equal to the dollar amount of the portion of such fee
that is payable in shares divided by the volume-weighted average closing price of shares of our common stock for the ten trading days
prior to the end of the month for which such fee will be paid, which we refer to as the fee VWAP. Our Adviser computes each
installment of the advisory fee as promptly as possible after the end of the month with respect to which such installment is payable.
The accrued fees are payable monthly as promptly as possible after the end of each month during which the Advisory
Agreement is in effect. A copy of the computations made by our Adviser to calculate such installment is delivered to our Board for
informational purposes only.
Administrative Fee. Our Advisory Agreement requires that we pay our Adviser an annual administrative fee of 0.20% of the
Average Real Estate Assets.
In calculating the administrative fee, we categorize our Average Real Estate Assets into either Contributed Assets or New
Assets. The administrative fee on Contributed Assets may not exceed $890,000 in any calendar year. This cap is intended to limit the
fees paid to our Adviser on the Contributed Assets following the Spin-Off to the fees that would have been paid by NHF to its adviser
had the Spin-Off not occurred. The administrative fee on New Assets is not subject to this limitation but is subject to the expense cap
described below.
The administrative fee is payable monthly in arrears in cash, unless our Adviser elects, in its sole discretion, to receive all or a
portion of such fee in shares of our common stock, subject to the limitations set forth below under “—Limitations on Receiving
Shares.” The number of shares issued to our Adviser as payment for the administrative fee will be equal to the dollar amount of the
portion of such fee that is payable in shares divided by the fee VWAP. Our Adviser computes each installment of the administrative
fee as promptly as possible after the end of each month with respect to which such installment is payable. The accrued fees are
payable monthly as promptly as possible after the end of each month during which the Advisory Agreement is in effect. A copy of the
computations made by our Adviser to calculate such installment is delivered to our Board for informational purposes only.
Reimbursement of Expenses. Our Advisory Agreement requires that we reimburse our Adviser for all of its out-of-pocket
expenses in performing its services, including legal, accounting, financial, due diligence and other services performed by our Adviser
that outside professionals or outside consultants would otherwise perform and also pay our pro rata share of rent, telephone, utilities,
office furniture, equipment, machinery and other office, internal and overhead expenses of our Adviser required for our operations
(“Adviser Operating Expenses”). Adviser Operating Expenses do not include expenses for the advisory and administrative services
provided under the Advisory Agreement. We will also reimburse our Adviser for any and 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.
When applicable, our Adviser prepares a statement documenting all expenses incurred during each month, and delivers such
statement to us within 15 business days after the end of each month. When submitted for reimbursement, such expenses are
reimbursed by us no later than the 15th business day immediately following the date of delivery of such statement of expenses to us.
All expenses payable by us or reimbursable to our Adviser pursuant to the agreement will not be in amounts greater than those which
would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an
arm’s length basis. Our Adviser may, at its discretion and at any time, waive its right to reimbursement for eligible out-of-pocket
expenses paid on our behalf. Once waived, these expenses are considered permanently waived and become non-recoupable in the
future.
Expense Cap. Reimbursement of Adviser Operating Expenses under the Advisory Agreement, advisory and administrative fees
paid to our Adviser and corporate general and administrative expenses such as audit, legal, listing and Board fees and equity-based
compensation expense recognized under a long-term incentive plan 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 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.
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Term of the Advisory Agreement. The Advisory Agreement has a one-year term. The Advisory Agreement shall continue in
full force and effect so long as the Advisory Agreement is approved at least annually by our Board. On February 15, 2021, our Board,
including the independent directors, unanimously approved the renewal of the Advisory Agreement with the Adviser for a one-year
term.
The Advisory Agreement may be terminated at any time, without payment of any penalty to our Adviser, by vote of our Board
or stockholders, or by our Adviser, in each case on not more than 60 days’ nor less than 30 days’ prior written notice to the other
party. The Advisory Agreement shall automatically and immediately terminate in the event of its “assignment” (as defined in the 1940
Act).
Amendment. The Advisory Agreement may only be amended, waived, discharged or terminated in writing signed by the party
against which enforcement of the amendment, waiver, discharge or termination is sought.
Limitations on Receiving Shares. The ability of our Adviser to receive shares of our common stock as payment for all or a
portion of the advisory and administrative fees due under the terms of our Advisory Agreement will be subject to the following
limitations: (1) the ownership of shares of common stock by our Adviser may not violate the ownership limitations set forth in our
charter, after giving effect to any exception from such ownership limitations that our Board may grant to our Adviser or its affiliates
and (2) compliance with all applicable restrictions under the U.S. federal securities laws and the NYSE rules. To the extent that
payment of any fee in shares of our common stock would result in a violation of the ownership limits set forth in our charter (taking
into account any applicable waiver or any restrictions imposed under the U.S. federal securities laws or NYSE rules), all or a portion
of such fee payable to our Adviser will be payable in cash to the extent necessary to avoid such violation.
Registration Rights. We entered into a registration rights agreement with our Adviser with respect to any shares of our
common stock that our Adviser receives as payment for any fees owed under our Advisory Agreement. These registration rights will
require us to file a registration statement with respect to such shares. We agreed to pay all of the expenses relating to registering these
securities. The costs associated with registering these securities will not be deducted from the compensation owed to our Adviser.
Liability and Indemnification of our Adviser. Under the Advisory Agreement, we are also required to indemnify our Adviser
and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding with respect to certain of our Adviser’s
acts or omissions.
Other Activities of our Adviser and its Affiliates. Our Adviser and its affiliates expect to engage in other business ventures,
and as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the Advisory Agreement, our
Adviser will be required to devote sufficient resources to our administration to discharge its obligations.
Potential Acquisition of our Adviser. Many REITs that are listed on a national stock exchange are considered “self-managed”
or “internally managed,” since the employees of such REITs perform all significant management functions. In contrast, REITs that are
not self-managed, like us, are referred to as “externally managed” and typically engage a third party, such as our Adviser, to perform
management functions on its behalf. Our independent directors may determine that we should become self-managed through the
acquisition of our Adviser, which we refer to as an internalization transaction. See “Risk Factors—If we internalize our management
functions, the percentage of our outstanding common stock owned by our other stockholders could be reduced, and we could incur
other significant costs associated with being self-managed.”
Our Property Manager
The entities through which we own the properties in our Portfolio have entered into management agreements with BH. Pursuant
to these agreements, BH operates and leases the underlying properties in our Portfolio. In addition to property management and
leasing services, BH also provides us with market research, acquisition advice, a pipeline of investment opportunities and construction
management services. We utilize BH for property and construction management services and leasing, paying BH a management fee of
approximately 3% of the monthly gross income from each property managed, as well as construction supervision fees and certain
other fees described under “—Property Management Agreements” below.
Property Management Agreements
Under these agreements, BH operates, coordinates and supervises the ordinary and usual business and affairs pertaining to the
operation, maintenance, leasing, licensing, and management of each property. The following summarizes the terms of the management
agreements.
Term. The terms of the management agreements will continue until the last day of the calendar month following the second
anniversary of the agreement. Upon the expiration of the original term, the agreements will automatically renew on a month-to-month
basis until terminated. The agreements may be terminated at any time with 60 days written notice.
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Proposed Management Plans. Each management agreement requires that BH prepare and submit a proposed management plan
and operating budget for the marketing, operation, repair and maintenance, and renovation of the property for the year the agreement
is entered into. BH must submit subsequent proposed management plans 45 days prior to the beginning of the next year.
Amounts Payable under the Management Agreements. The entities that own the properties pay BH monthly for its services.
Pursuant to the management agreements, BH may pay itself out of each property’s operating account. Any sums not paid within 10
days after becoming due bear interest at the rate of 18% per annum. Compensation under the management agreements consists of the
following components:
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Management Fee. The management fee is approximately 3% of the monthly gross income from each property. For the
purposes of calculating the management fee, “monthly gross income” is defined as all receipts of every kind and nature
actually collected from the operation of the property, determined on a cash basis, including, without limitation, rental or
lease payments, late charges, service charges, forfeited security deposits, proceeds of vending machine collections,
resident utility payment collections, and all other forms of miscellaneous income (but excluding the collection of any
insurance or condemnation awards).
Set-Up/Inspection Fees. BH receives a one-time set-up/inspection fee per unit upon commencement of management of
each property.
Construction Supervision Fee. BH receives a construction supervision fee of 5-6% of total project costs if BH performs
these services.
Renter’s Insurance Program Fee; Other Fees. In the event that the entities that own the properties direct BH to
implement a renter’s insurance program at a property, the entities pay BH a fee in connection with running such program.
In consideration for any additional services other than the services required under the management agreements, the
entities pay BH an hourly rate.
Additionally, 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.
Termination. A management agreement will terminate automatically in the event that the entity that owns the property is sold
or if all or substantially all of the property to which the agreement applies is otherwise disposed of. Additionally, a management
agreement may be terminated if certain other events occur, including:
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a default by BH or the entity that owns the property that is not cured prior to the expiration of any applicable cure periods;
upon written notice by either party if a petition for bankruptcy, reorganization or arrangement is filed by the other party,
or if any such petition shall be filed against the other party and is not dismissed within 60 days of the date of such filing,
or in the event the other party shall make an assignment for the benefit of creditors, or take advantage of any insolvency
statute or similar law;
upon 15 days written notice in the event that all or substantially all of the property is destroyed by a casualty, or taken by
means of eminent domain or condemnation; or
upon 60 days written notice by either party.
If a management agreement is terminated by the entity that owns the property for any reason, or if it is terminated by BH due to
our default or due to the destruction, condemnation or taking by eminent domain of a property, the entity that owns the property will
be required to pay damages to BH. Such damages will be equal to the management fee earned by BH for the calendar month
immediately preceding the month in which the notice of termination is given, multiplied by the number of months and/or portions
thereof remaining from the termination date until the end of the initial term or term year in which the termination occurred.
Additionally, for the month or the partial month after the date of the termination of BH’s on-site property management
responsibilities, BH will be paid a close-out management fee equivalent to 50% of the last month’s full management fee.
Insurance. The entities that own the properties are required to maintain property and liability insurance for each property, and
its liability insurance policy must include BH as an “Additional Insured.” BH is required to maintain, at the entities’ expense, workers’
compensation insurance covering all employees of BH employed in, on, or about each property so as to provide statutory benefits
required by state and federal laws.
Assignment. BH may not assign the management agreements without the prior written consent of the entities that own the
properties.
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Indemnification. The entities that own the properties are required to indemnify, defend and hold harmless BH and its agents
and employees from and against all claims, liabilities, losses, damages, and/or expenses arising out of (1) BH’s performance under the
management agreements, or (2) facts, occurrences, or matters first arising before the date of the management agreements. The entities
that own the properties are not required to indemnify BH against damages or expenses suffered as a result of the gross negligence,
willful misconduct, or fraud on the part of BH, its agents, or employees.
BH is required to indemnify, defend, and hold harmless the entities that own the properties and their agents and employees from
and against all claims, liabilities, losses, damages, and/or expenses arising out of the gross negligence, willful misconduct, or fraud on
the part of BH, its agents, or employees, and shall at its own cost and expense defend any action or proceeding against us arising
therefrom.
Regulation
Multifamily properties are subject to various laws, ordinances and regulations, including regulations relating to common areas,
such as swimming pools, activity centers, and recreational facilities. We believe that each of our properties has the necessary permits
and approvals to operate its business.
Americans with Disabilities Act
The properties in our Portfolio must comply with Title III of the Americans with Disability Act of 1990 (the “ADA”), to the
extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers
to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe
that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital
expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or
an award of damages to private litigants. The obligation to make readily accessible accommodations is an ongoing one, and we will
continue to assess our properties and make alterations as appropriate in this respect.
Fair Housing Act
The Fair Housing Act (the “FHA”), its state law counterparts and the regulations promulgated by the U.S. Department of
Housing and Urban Development and various state agencies, prohibit discrimination in housing on the basis of race or color, national
origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women
and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability or other bases. A
failure to comply with these laws in our operations could result in litigation, fines, penalties or other adverse claims, or could result in
limitations or restrictions on our ability to operate, any of which could materially and adversely affect us. We believe that we operate
our properties in substantial compliance with the FHA.
Environmental Matters
Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator
of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances,
waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such
contamination and liability for natural resources. Such laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could
be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our
aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us
to third-party liability for costs of remediation and/or personal or property damage or materially adversely affect our ability to sell,
lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on
contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if
contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be
used or businesses may be operated, and these restrictions may require substantial expenditures.
Independent environmental consultants have conducted Phase I Environmental Site Assessments at all of the properties in our
Portfolio using the American Society for Testing and Materials Standard E 1527-05. A Phase I Environmental Site Assessment is a
report that identifies potential or existing environmental contamination liabilities. Site assessments are intended to discover and
evaluate information regarding the environmental condition of the assessed property and surrounding properties. These assessments do
not generally include soil samplings, subsurface investigations or an asbestos survey. None of the site assessments identified any
known past or present contamination that we believe would have a material adverse effect on our business, assets or operations.
However, the assessments are limited in scope and may have failed to identify all environmental conditions or concerns. A prior
owner or operator of a property or historic operations at our properties, or operations and conditions at nearby properties, may have
created a material environmental condition that is not known to us or the independent consultants preparing the site assessments.
Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws,
ordinances or regulations may impose material additional environmental liability. Moreover, conditions identified in environmental
assessments that did not appear material at that time, may in the future result in material liability.
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Environmental laws also govern the presence, maintenance and removal of hazardous materials in building materials (e.g.,
asbestos and lead), and may impose fines and penalties for failure to comply with these requirements or expose us to third-party
liability (e.g., liability for personal injury associated with exposure to asbestos). Such laws require that owners or operators of
buildings containing hazardous materials properly manage and maintain certain hazardous materials, adequately notify or train those
who may come into contact with certain hazardous materials, and undertake special precautions, including removal or other
abatement, if certain hazardous materials would be disturbed during renovation or demolition of a building. In addition, the properties
in our Portfolio are subject to various federal, state, and local environmental and health and safety requirements, such as state and
local fire requirements.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture
problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor
air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other
biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be
alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of
significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to
contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the
presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage
or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties.
The cost of future environmental compliance may materially and adversely affect us. See “Risk Factors—We may face high
costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-based paint, chemical
vapor, subsurface contamination and mold growth.”
Insurance
We carry comprehensive general liability coverage on the properties in our Portfolio, with limits of liability customary within
the industry to insure against liability claims and related defense costs. Similarly, we are insured against the risk of direct physical
damage in amounts necessary to reimburse us on a replacement-cost basis for costs incurred to repair or rebuild each property,
including loss of rental income during the reconstruction period. The majority of our property policies for all U.S. operating and
development communities include coverage for the perils of flood, tornado and earthquake shock with limits and deductibles
customary in the industry and specific to the project. We will also obtain title insurance policies when acquiring new properties, which
insure fee title to the properties in our Portfolio. We have obtained coverage for losses incurred in connection with both domestic and
foreign terrorist-related activities. These policies include limits and terms we consider commercially reasonable. There are certain
losses (including, but not limited to, losses arising from environmental conditions, acts of war or certain kinds of terrorist attacks) that
are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it, in our belief, economically
impractical to maintain such coverage. Should an uninsured loss arise against us, we would be required to use our own funds to
resolve the issue, including litigation costs. In addition, for the properties in our Portfolio, we could self-insure certain portions of our
insurance program and therefore, use our own funds to satisfy those limits. We believe the policy specifications and insured limits are
adequate given the relative risk of loss, the cost of the coverage and industry practice. In the opinion of our management team, the
properties in our Portfolio are adequately insured.
Competition
In attracting and retaining residents to occupy the properties in our Portfolio, we compete with numerous other housing
alternatives. The properties in our Portfolio compete directly with other rental apartments as well as condominiums and single-family
homes that are available for rent or purchase in the sub-markets in which our properties are located. Principal factors of competition
include rent or price charged, attractiveness of the location and property and quality and breadth of services and amenities. If our
competitors offer leases at rental rates below current market rates, or below the rental rates that the tenants of the properties in our
Portfolio pay, we may lose potential tenants and we may be pressured to reduce rental rates below those currently charged or to offer
more substantial rent abatements, tenant improvements, early termination rights or below-market renewal options in order to retain
tenants when the tenants’ leases expire.
The number of competitive properties relative to demand in a particular area has a material effect on our ability to lease
apartment units at our properties and on the rents we charge. In addition, we compete with numerous other investors for suitable
properties. This competition affects our ability to acquire properties and the price that we pay in such acquisitions.
Human Capital Disclosure
As of December 31, 2020, we had three employees. We endeavor to maintain workplaces that are free from discrimination or
harassment on the basis of color, race, sex, national origin, ethnicity, religion, age, disability, sexual orientation, gender identification
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or expression or any other status protected by applicable law. The basis for recruitment, hiring, development, and training,
compensation and advancement is qualifications performance, skills and experience. Our employees are fairly compensated, without
regard to gender, race and ethnicity, and routinely recognized for outstanding performance.
Our Adviser conducts substantially all of our operations and provides asset management for our real estate investments. We
expect we will only have accounting employees while the Advisory Agreement is in effect.
Corporate Information
Our Adviser’s offices are located at 300 Crescent Court, Suite 700, Dallas, Texas 75201. Our Adviser’s telephone number is
(972) 628-4100. We maintain a website at nxrt.nexpoint.com. We make our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) available on
our website as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Information contained on, or
accessible through our website, is not incorporated by reference into and does not constitute a part of this annual report or any other
report or documents we file with or furnish to the SEC. These documents may also be found on the SEC’s website at www.sec.gov.
Item 1A. Risk Factors
You should carefully consider the following risks and other information in this annual report in evaluating us and our capital
stock. Any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem
immaterial, could materially and adversely affect our business, financial condition or results of operations, and could, in turn, impact
the trading price of our capital stock.
Summary Risk Factors
The following is a summary of some of the risks and uncertainties that could materially adversely affect our business, financial
condition and results of operations. You should read this summary together with the more detailed description of each risk factor
contained below.
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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 the current COVID-19 pandemic and the future outbreak of other highly infection or contagious
diseases;
risks associated with the 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;
risks associated with operating through joint ventures and funds;
our dependence on information systems;
risks associated with breaches of our data security;
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;
loss of key personnel of our Sponsor, 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;
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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 in accordance with Section 1031 of the Code
the risk that the Internal Revenue Service 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 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;
and
risks associated with limitations of liability for and our indemnification of our directors and officers.
Risks Related to Our Business and Industry
The current COVID-19 pandemic and the future outbreak of other highly infectious or contagious diseases could materially and
adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
The COVID-19 pandemic has had, and other pandemic in the future could have, repercussions across regional and global
economies and financial markets. The outbreak of COVID-19 in many countries has significantly adversely impacted global economic
activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has
evolved rapidly and, as cases of COVID-19 were identified in additional countries, many countries, including the United States,
reacted by instituting quarantines, manding business and school closures and restricting travel.
As a result of the recent spikes in COVID-19 cases in the United States, certain states and cities, including where we own
properties and operate our businesses, have reinstituted quarantines, restrictions on travel, “shelter in place” rules, restrictions on the
types of businesses that may continue to operate, and/or restrictions if the current trend continues and cannot predict when such
restrictions will expire. As a result, the COVID-19 pandemic has negatively impacted, and will likely continue to negatively impact,
almost every industry directly or indirectly, which may adversely impact the ability of our tenants, many of whom may be restricted in
their ability to work, to pay their rest as and when due. In addition, our property manager may be limited in its ability to properly
maintain our properties.
The COVID-19 pandemic, and other future pandemics, could also materially and adversely impact or disrupt our financial
condition, results of operations, cash flows and performance due to, among other factors:
•
reduced economic activity may cause certain of our tenants to be unable to meet their rent obligations to us in full, or at
all, or to otherwise seek modifications of such obligations;
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reduced economic activity could result in a prolonged recession, which could negatively impact our prospects for leasing
additional apartment units and/or renewing leases with existing tenants;
difficulty accessing debt and equity capital on attractive terms, or at all, impacts to our credit ratings, and a severe
disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our
access to capital necessary to fund business operations or address maturing liabilities on a timely basis, or at all;
the financial impact of the COVID-19 pandemic could negatively impact our future compliance with financial covenants
of our Corporate Credit Facility and other debt agreements and result in a default and potentially an acceleration of
indebtedness, which non-compliance could negatively impact our ability to request further increase to our Corporate
Credit Facility and pay dividends, among other things;
weaker economic conditions due to the COVID-19 pandemic could require us to recognize future impairment losses;
a general decline in business activity and demand for real estate transactions could adversely affect our ability to sell or
purchase properties;
a change in housing trends, including tenants seeking properties with yards or larger outdoor spaces;
the potential negative impact on the health of the employees of our Adviser and our property manager, particularly if a
significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during
this disruption; and
the timing of the development and distribution of an effective vaccine or treatments for COVID-19.
We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. Currently, many of our
Adviser’s employees are working remotely. An extended period of remote work arrangements could introduce operational risk,
including, but not limited to, cybersecurity risks, impair our ability to manage our business and negatively impact our internal controls
over financial reporting. In addition, as of December 31, 2020, 173 residents were on payment plans due to the COVID-19 crisis for a
total of approximately $0.1 million in rent.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and
cannot be predicted, including additional actions taken to contain COVID-19 or treat its impact, among others. The rapid development
and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the
COVID-19 pandemic presents material uncertainty and risk with respect to our financial condition, results of operations, cash flows
and performance. Moreover, many risk factors set forth in our Annual Report should be interpreted as heightened risks as a result of
the impact of the COVID-19 pandemic.
Unfavorable market and economic conditions in the United States and globally and in the specific markets or submarkets where
our properties are located could adversely affect occupancy levels, rental rates, rent collections, operating expenses and the overall
market value of our assets, and impair our ability to sell, recapitalize or refinance our assets.
Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions in the United States and
globally may significantly affect our occupancy levels, our rental rates, rent collections, operating expenses, the market value of our
properties and our ability to strategically acquire, dispose, recapitalize or refinance our multifamily properties on economically
favorable terms or at all. Our ability to lease our properties at favorable rates is adversely affected by increases in supply of
multifamily communities in our markets and is dependent upon overall economic conditions, which are adversely affected by, among
other things, the COVID-19 pandemic job losses and unemployment levels, a recession, personal debt levels, a downturn in the
housing market, stock market volatility and uncertainty about the future. Some of our major expenses, including debt service and real
estate taxes, generally do not decline when related rents decline. We expect that any declines in our occupancy levels, rental revenues
and/or the values of our multifamily properties would cause us to have less cash available to pay our indebtedness, fund necessary
capital expenditures and to make distributions to our stockholders, which could negatively affect our financial condition and the
market value of our assets. Factors that may affect our occupancy levels, our revenues, our NOI and/or the value of our properties
include the following, among others:
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the COVID-19 pandemic and the effectiveness of actions taken, or actions that may be taken, by governmental authorities
to contain the outbreak or treat its impact of COVID-19;
downturns in global, national, regional and local economic conditions;
declines in the financial condition of our residents, which may make it more difficult for us to collect rents from these
residents;
the inability or unwillingness of our residents to pay rent increases;
a decline in household formation;
a decline in employment or lack of employment growth;
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an oversupply of, or a reduced demand for, apartment homes;
changes in market rental rates in our core markets;
our ability to renew leases or re-lease space on favorable terms;
the timing and costs associated with property improvements, repairs and renovations;
declines in mortgage interest rates, making home and condominium ownership more affordable;
changes in home loan lending practices, including the easing of credit underwriting standards, increasing the availability
of home loans and thereby reducing demand for apartment homes;
government or builder incentives which enable first-time homebuyers to put little or no money down, making alternative
housing options more attractive;
rent control or rent stabilization laws, or other laws regulating housing, that could prevent us from raising rents to offset
increases in operating costs; and
economic conditions that could cause an increase in our operating expenses, such as increases in property taxes
(particularly as a result of increased local, state and national government budget deficits and debt and potentially reduced
federal aid to state and local governments), utilities,
insurance, compensation of on-site associates and routine
maintenance.
We are subject to risks inherent in ownership of real estate.
Real estate cash flows and values are affected by a number of factors, including competition from other available properties and
the ability to provide adequate property maintenance and insurance and to control operating costs. Real estate cash flows and values
are also affected by such factors as government regulations (including zoning, usage and tax laws) limitations on rent and rent
increases, interest rate levels, the availability of financing, property tax rates, utility expenses, potential liability under environmental
and other laws and changes in environmental and other laws.
Real estate investments are relatively illiquid and may limit our flexibility.
Equity real estate investments are relatively illiquid, which tends to limit our ability to react promptly to changes in economic or
other market conditions. Our ability to dispose of assets in the future will depend on prevailing economic and market conditions. Our
inability to sell our properties on favorable terms or at all could have a material adverse effect on our sources of working capital and
our ability to satisfy our debt obligations. In addition, real estate can at times be difficult to sell quickly at prices we find acceptable.
These potential difficulties in selling real estate in our markets may limit our ability to change or reduce the number of multifamily
properties in our Portfolio promptly in response to changes in economic or other conditions.
Our multifamily properties are concentrated in certain geographic markets, which makes us more susceptible to adverse
developments in those markets.
Our most significant geographic investment concentrations are primarily in the Southeastern and Southwestern United States.
We are, therefore, subject to increased exposure from economic and other competitive factors specific to markets within these
geographic areas. To the extent general economic conditions worsen in one or more of these markets, or if any of these areas
experience a natural disaster, the value of our Portfolio and our market rental rates could be adversely affected. As a result, our results
of operations, cash flow, cash available for distribution, including cash available to pay distributions to our stockholders, and our
ability to satisfy our debt obligations could be materially adversely affected.
Our strategy for acquiring value-enhancement multifamily properties involves greater risks than more conservative investment
strategies.
Our primary strategy is a value-add strategy. Therefore, for a majority of our Portfolio, we intend to execute a “value-
enhancement” strategy whereby we will acquire under-managed assets in high-demand neighborhoods, invest additional capital, and
reposition the properties to increase both average rental rates and resale value. Our strategy for acquiring value-enhancement
multifamily properties involves greater risks than more conservative investment strategies. The risks related to these value-
enhancement investments include risks related to delays in the repositioning or improvement process, higher than expected capital
improvement costs, the additional capital needed to execute our value-add program, including possible borrowings or raising
additional equity necessary to fund such costs, and ultimately that the repositioning process may not result in the higher rents and
occupancy rates anticipated. In addition, our value-enhancement properties may not produce revenue while undergoing capital
improvements. Furthermore, we may also be unable to complete the improvements of these properties and may be forced to hold or
sell these properties at a loss. For these and other reasons, we cannot assure you that we will realize growth in the value of our value-
enhancement multifamily properties, and as a result, our ability to make distributions to our stockholders could be adversely affected.
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Potential reforms or changes to Freddie Mac and Fannie Mae could adversely affect our business.
As of December 31, 2020, we had approximately $1.2 billion and $15.0 million of outstanding consolidated indebtedness under
our Freddie Mac and Fannie Mae mortgage loans, respectively. We rely on national and regional institutions, including Freddie Mac
and Fannie Mae, to provide financing for our acquisitions and permanent financing on properties we may develop in the future.
Currently, there is significant uncertainty regarding the futures of Freddie Mac and Fannie Mae. Should Freddie Mac and Fannie Mae
have their mandates changed or reduced, be disbanded or reorganized by the government, privatized or otherwise discontinue
providing liquidity to our sector, it could significantly reduce our access to debt capital and/or increase borrowing costs and could
significantly reduce our sales of assets and/or the values realized upon sale.
Competition could limit our ability to acquire attractive investment opportunities, which could adversely affect our profitability and
impede our growth.
We compete with numerous real estate companies and other owners of real estate in seeking multifamily properties for
acquisition and pursuing buyers for dispositions. We expect that other real estate investors, including insurance companies, private
equity funds, sovereign wealth funds, pension funds, other REITs and other well-capitalized investors, will compete with us to acquire
existing properties and to develop new properties, and many of these investors will have greater sources of capital to acquire
properties. This competition could increase prices for properties of the type we would likely pursue and 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.
Our multifamily properties compete with other housing alternatives to attract residents, including other rental apartments,
condominiums and single-family homes that are available for rent, as well as new and existing condominiums and single-family
homes for sale. All of our multifamily properties are located in developed areas that include other multifamily properties and/or
condominiums. The number of competitive multifamily properties and/or condominiums in a particular area, and any increased
affordability of owner occupied single and multifamily homes caused by declining housing prices, low mortgage interest rates and
government programs to promote home ownership, could have a material adverse effect on our ability to lease our apartments and the
rents we are able to obtain. In addition, single-family homes and other residential properties provide housing alternatives to residents
and potential residents of our multifamily properties.
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 occupancy rates.
The relatively low residential mortgage interest rates currently available and government-sponsored programs to promote home
ownership have resulted in a record high level on the National Association of Realtor’s Housing Affordability Index, an index used to
measure whether or not a typical family could qualify for a mortgage loan on a typical home. The foregoing factors may encourage
potential renters to purchase residences rather than lease them, thereby causing a decline in the occupancy rates of our properties.
We may fail to consummate future property acquisitions, and we may not be able to find suitable alternative investment
opportunities.
When acquiring properties in the future, we may be subject to various closing conditions, and there can be no assurance that we
can satisfy these conditions or that the acquisitions will close. If we fail to consummate future acquisitions, there can be no assurance
that we will be able to find suitable alternative investment opportunities.
Acquisitions may not yield anticipated results, which could negatively affect our financial condition and results of operations.
We intend to actively acquire multifamily properties for rental operations as market conditions, including access to the debt and
equity markets, dictate. We may also acquire multifamily properties that are unoccupied or in the early stages of lease-up. We may be
unable to lease-up these multifamily properties on schedule, resulting in decreases in expected rental revenues and/or lower yields as
the result of lower occupancy and rental rates as well as higher than expected concessions. We may underestimate the costs necessary
to bring an acquired property up to standards established for its intended market position or to complete a development project. We
may be unable to integrate the existing operations of newly acquired multifamily properties and over time such communities may not
perform as well as existing communities or as we initially anticipated in terms of occupancy and/or rental rates. Additionally, we
expect that other major real estate investors with significant capital will compete with us for attractive investment opportunities or
may also develop properties in markets where we focus our development efforts. This competition may increase acquisition costs for
multifamily properties. We may not be in a position or have the opportunity in the future to make suitable property acquisitions on
favorable terms.
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We are subject to certain risks associated with selling apartment communities, which could limit our operational and financial
flexibility.
We periodically dispose of apartment communities that no longer meet our strategic objectives, but adverse market conditions may
make it difficult to sell apartment communities like the ones we own. We cannot predict whether we will be able to sell any property for
the price or on the terms we set, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We
also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Furthermore, we may be
required to expend funds to correct defects or to make improvements before a property can be sold. These conditions may limit our ability
to dispose of properties and to change our portfolio promptly in order to meet our strategic objectives, which may in turn have a material
adverse effect on our financial condition and the market value of our assets. We are also subject to the following risks in connection with
sales of our apartment communities:
•
•
a significant portion of the proceeds from our overall property sales may be held by intermediaries in order for some sales
to qualify as an exchange under Section 1031 of the Code (“1031 Exchanges”) so that any related capital gain can be
deferred for U.S. federal income tax purposes. As a result, we may not have immediate access to all of the cash proceeds
generated from our property sales; and
U.S. federal tax laws limit our ability to profit on the sale of communities that we have owned for less than two years, and
this limitation may prevent us from selling communities when market conditions are favorable.
We may be subject to contingent or unknown liabilities related to properties or business that we have acquired or may acquire for
which we may have limited or no recourse against the sellers.
The properties or businesses that we have acquired or may acquire, may be subject to unknown or contingent liabilities for which
we have limited or no recourse against the sellers. Unknown liabilities might include liabilities for, among other things, cleanup or
remediation of undisclosed environmental conditions, liabilities under the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”), claims of residents, vendors or other persons dealing with the entities prior to the acquisition of such property, tax
liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. Because many liabilities,
including tax liabilities, may not be identified within the applicable contractual indemnification period, we may have no recourse against
any of the owners from whom we acquire such properties for these liabilities. The existence of such liabilities could significantly and
adversely affect the value of the property subject to such liability. As a result, if a liability were asserted against us based on ownership of
any of such properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flows.
We are subject to losses that are either uninsurable, not economically insurable or that are in excess of our insurance coverage.
There are certain types of losses (including, but not limited to, losses arising from environmental conditions, earthquakes,
tornados and hurricanes, acts of war or certain kinds of terrorist attacks) that are not insured, in full or in part, because they are either
uninsurable or the cost of insurance makes it, in our belief, economically impractical to maintain such coverage. We carry commercial
general liability insurance, property insurance and terrorism insurance with respect to our communities with limits and on terms we
consider commercially reasonable. If an uninsured loss or liability were to occur, whether because of a lack of insurance coverage or a
loss in excess of insured limits, we could lose our capital invested in a community, as well as the anticipated future revenues from
such community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the
community. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with, or court
ordered damages to, that third party. A significant uninsured property or liability loss could materially and adversely affect our
business and our financial condition and results of operations.
Compliance with various laws and regulations, including accessibility, building and health and safety laws and regulations, may
be costly, may adversely affect our operations or expose us to liability.
In addition to compliance with environmental regulations, we must comply with various laws and regulations such as accessibility,
building, zoning, landlord/tenant and health and safety laws and regulations, including, but not limited to, the ADA and the FHA. Some
of those laws and regulations may conflict with one another or be subject to limited judicial or regulatory interpretations. Under those
laws and regulations, we may be liable for, among other things, the costs of bringing our properties into compliance with the statutory and
regulatory requirements. Noncompliance with certain of these laws and regulations may result in liability without regard to fault and the
imposition of fines and could give rise to actions brought against us by governmental entities and/or third parties who claim to be or have
been damaged as a consequence of an apartment not being in compliance with the subject laws and regulations. As part of our due
diligence procedures in connection with the acquisition of a property, we typically conduct an investigation of the property’s compliance
with known laws and regulatory requirements with which we must comply once we acquire a property, including a review of compliance
with the ADA and local zoning regulations. Our investigations and these assessments may not have revealed, and may not with respect to
future acquisitions reveal, all potential noncompliance issues or related liabilities and we can provide no assurance that our development
properties have been, or that our future development projects will be, designed and built in accordance with all applicable legal
requirements.
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The development, construction and operation of our communities are subject to regulations and permitting under various
federal, state and local laws, regulations and ordinances, which regulate matters including wetlands protection, storm water runoff and
wastewater discharge. Noncompliance with such laws and regulations may subject us to fines and penalties. We can provide no
assurance that we will not incur any material liabilities as a result of noncompliance with these laws.
We may obtain only limited warranties when we acquire a property and may only have limited recourse if our due diligence did not
identify any issues that may subject us to unknown liabilities or lower the value of our property, which could adversely affect our
financial condition and ability to make distributions to you.
The seller of a property often sells the property in its “as is” condition on a “where is” basis and “with all faults,” without any
warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited
warranties, representations and indemnifications that will survive for only a limited period after the closing. The acquisition of, or
purchase of, properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property,
lose rental income from that property or may be subject to unknown liabilities with respect to such properties.
Short-term apartment leases expose us to the effects of declining market rent, which could adversely affect our ability to make cash
distributions to our stockholders.
Substantially all of our apartment leases are for a term of one year or less. Because these leases generally permit the residents to
leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than
if our leases were for longer terms.
We may be subject to risks involved in real estate activity through joint ventures.
We may acquire properties through joint ventures when we believe circumstances warrant the use of such structures. Joint
venture investments involve risks, including: the possibility that joint venture partners might refuse to make capital contributions when
due; that we may be responsible to joint venture partners for indemnifiable losses; that joint venture partners might at any time have
business or economic goals which are inconsistent with ours; and that joint venture partners may be in a position to take action or
withhold consent contrary to our recommendations, instructions or requests. In some instances, joint venture partners may have
competing interests in our markets that could create conflicts of interest. Further, joint venture partners may fail to meet their
obligations to the joint venture as a result of financial distress or otherwise, and we would be forced to make contributions to maintain
the value of the property. To the extent joint venture partners do not meet their obligations to the joint venture or they take action
inconsistent with the interests of the joint venture, we could be adversely affected.
If we acquire properties through joint ventures, we may be required to make decisions jointly with the other investors who have
interests in the respective joint ventures. We might not have the same interests as the other investors in relation to these decisions or
transactions. Accordingly, we might not be able to favorably resolve any of these issues, or we might have to provide financial or
other inducements to the other investors to obtain a favorable resolution.
In addition, various restrictive provisions and third-party rights, including consent rights to certain transactions, may apply to
sales or transfers of interests in joint ventures. Consequently, decisions to buy or sell interests in a property or properties relating to
joint ventures may be subject to the prior consent of other investors. These restrictive provisions and third-party rights would
potentially preclude us from achieving full value of the properties because of our inability to obtain the necessary consents to sell or
transfer the interests.
Risks Related to Health and the Environment
Our environmental assessments may not identify all potential environmental liabilities and our remediation actions may be
insufficient.
Properties being considered for potential acquisition by us are subjected to at least a Phase I or similar environmental
assessment prior to closing, which generally does not involve invasive techniques such as soil or ground water sampling. A Phase II
assessment is conducted if recommended in the Phase I report. These assessments, together with subsurface assessments conducted on
some properties, have not revealed, and we are not otherwise aware of, any environmental conditions that we believe would have a
material adverse effect on our business, assets, financial condition or results of operations. However, such environmental assessments
may not identify all potential environmental liabilities. Moreover, we may in the future discover adverse environmental conditions at
our communities, including at communities we acquire in the future, which may have a material adverse effect on our business, assets,
financial condition or results of operations. In connection with our ownership, operation and selective development of communities,
from time to time we undertake substantial remedial action in response to the presence of subsurface or other contaminants, including
contaminants in soil, groundwater and soil vapor beneath or affecting our buildings. In some cases, an indemnity exists upon which
we may be able to rely if environmental liability arises from the contamination, or if remediation costs exceed estimates. We can
provide no assurance, however, that all necessary remediation actions have been or will be undertaken at our communities or that we
will be indemnified, in full or at all, in the event that environmental liability arises.
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We may face high costs associated with the investigation or remediation of environmental contamination, including asbestos, lead-
based paint, chemical vapor, subsurface contamination and mold growth.
We are subject to various federal, state and local environmental and public health laws, regulations and ordinances. Under
various federal, state and local environmental and public health laws, regulations and ordinances, we may be required, regardless of
knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases at
our properties (including in some cases natural substances such as methane and radon gas) and may be held liable under these laws or
common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for
investigation and remediation costs incurred as a result of the contamination. These damages and costs may be substantial and may
exceed any insurance coverage we have for such events. The presence of such substances, or the failure to properly remediate the
contamination, may adversely affect our ability to borrow against, sell or rent the affected property. In addition, some environmental
laws create or allow a government agency to impose a lien on the contaminated site in favor of the government for damages and costs
it incurs as a result of the contamination.
We face risks relating to asbestos.
Certain federal, state and local laws, regulations and ordinances govern the removal, encapsulation or disturbance of asbestos
containing materials (“ACMs”) when such materials are in poor condition or in the event of renovation or demolition of a building.
These laws and the common law may impose liability for release of ACMs and may allow third parties to seek recovery from owners
or operators of real properties for personal injury associated with exposure to ACMs. ACMs may have been used in the construction
of a number of the communities that we acquired and may have been used in the construction of communities we acquire in the future.
We will implement an operations and maintenance program at each of the communities at which we discover ACMs. We can provide
no assurance that we will not incur any material liabilities as a result of the presence of ACMs at our communities.
We face risks relating to lead-based paint.
Some of our communities may have lead-based paint and we may have to implement an operations and maintenance program at
some of our communities. Communities that we acquire in the future may also have lead-based paint. We can provide no assurance
that we will not incur any material liabilities as a result of the presence of lead-based paint at our communities.
We face risks relating to chemical vapors and subsurface contamination.
We are also aware that environmental agencies and third parties have, in the case of certain communities with on-site or nearby
contamination, asserted claims for remediation, property damage or personal injury based on the alleged actual or potential intrusion
into buildings of chemical vapors (e.g., radon) or volatile organic compounds from soils or groundwater underlying or in the vicinity
of those buildings or on nearby properties. We can provide no assurance that we will not incur any material liabilities as a result of
vapor intrusion at our communities.
We face risks relating to mold growth.
Mold growth may occur when excessive moisture accumulates in buildings or on building materials, particularly if the moisture
problem remains undiscovered or is not addressed over a period of time. Although the occurrence of mold at multifamily and other
structures, and the need to remediate such mold, is not a new phenomenon, there has been increased awareness in recent years that
certain molds may in some instances lead to adverse health effects, including allergic or other reactions. To help limit mold growth,
we educate residents about the importance of adequate ventilation and include a lease requirement that they notify us when they see
mold or excessive moisture. We have established procedures for promptly addressing and remediating mold or excessive moisture
when we become aware of its presence regardless of whether the resident believes or we believe a health risk is present. However, we
can provide no assurance that mold or excessive moisture will be detected and remediated in a timely manner. If a significant mold
problem arises at one of our communities, we could be required to undertake a costly remediation program to contain or remove the
mold from the affected community and could be exposed to other liabilities that may exceed any applicable insurance coverage.
Risks Related to Indebtedness
Variable rate debt is subject to interest rate risk, which could increase our interest expense, increase the cost to refinance and
increase the cost of issuing new debt.
As of December 31, 2020, approximately $1.3 billion of our total debt outstanding bears interest at variable rates, and we may
also borrow additional money at variable interest rates in the future. As of December 31, 2020, thirteen interest rate swap agreements,
with a combined notional amount of $1.2 billion and terms expiring in 2021, 2022, 2024 and 2026, effectively fix the interest rate on
$1.2 billion, or 91%, of our $1.3 billion of floating rate debt outstanding. As of December 31, 2020, the interest rate cap agreements
we have entered into effectively cap one-month LIBOR on $393.0 million of our floating rate mortgage debt outstanding at a weighted
average rate of 5.16% for the term of the agreements, which is generally 3-4 years. Except to the extent we have arrangements in place
that hedge against the risk of rising interest rates, increases in interest rates would increase our interest expense under these
instruments and would increase the cost of refinancing these instruments and issuing new debt. As a result, our cash flow and our
ability to service our indebtedness and to make distributions to our stockholders would be adversely affected, which could adversely
affect the market price of our common stock.
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Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments.
In a speech on July 27, 2017, Andrew Bailey, the Chief Executive of the Financial Conduct Authority of the U.K., or the FCA,
announced the FCA’s intention to cease sustaining LIBOR after 2021. The FCA has statutory powers to require panel banks to
contribute to LIBOR where necessary. The FCA has decided not to ask, or to require, that panel banks continue to submit
contributions to LIBOR beyond the end of 2021. The FCA has indicated that it expects that the current panel banks will voluntarily
sustain LIBOR until the end of 2021. The FCA’s intention is that after 2021, it will no longer be necessary for the FCA to ask, or to
require, banks to submit contributions to LIBOR. The FCA does not intend to sustain LIBOR through using its influence or legal
powers beyond that date. It
the ICE Benchmark Administration Limited (formerly NYSE Euronext Rate
Administration Limited) and the panel banks could continue to produce LIBOR on the current basis after 2021, if they are willing and
able to do so, but we cannot make assurances that LIBOR will survive in its current form, or at all. The ICE Benchmark
Administration Limited also recently announced that it will consult on its intention to extend the publication of LIBOR to June 30,
2023. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of
large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a
new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances
utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown
whether these alternative reference rates will attain market acceptance as replacements for LIBOR.
is possible that
Approximately 90.0% of our portfolio as of December 31, 2020 pays interest at a variable rate that is tied to LIBOR. If LIBOR
is no longer available, our loan documents generally allow us to choose a new index based upon comparable information. However, if
LIBOR is no longer available, we may need to renegotiate some of our agreements to determine a replacement index or rate of
interest. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate.
As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined and any
changes to benchmark interest rates could increase our financing costs, which could impact our results of operations, cash flows and
the market value of our investments. In addition, the elimination of LIBOR and/or changes to another index could result in
mismatches with the interest rate of investments that we are financing.
We may incur mortgage indebtedness and other borrowings, which we have broad authority to incur, that may increase our
business risks and decrease the value of your investment.
We expect that in most instances, we will acquire real properties by using either existing financing or borrowing new funds. In
addition, we may incur additional mortgage and other secured debt and pledge all or some of our unpledged real properties as security
for that debt to obtain funds to acquire additional real properties. We may borrow if we need funds to satisfy the REIT tax
qualification requirement that we generally distribute annually to our stockholders at least 90% of our REIT taxable income (which
does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and
excluding net capital gain. We also may borrow if we otherwise deem it necessary or advisable to assure that we maintain our
qualification as a REIT.
If there is a shortfall between the cash flow from a property and the cash flow needed to service the related debt, then the
amount available for distributions to stockholders may be reduced. In addition, incurring secured debt increases the risk of loss since
defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the
property securing the loan that is in default, thus reducing the value of your investment. For U.S. federal income tax purposes, a
foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of
the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property,
we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay
the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenders of
mortgage and other secured debt to the entities that own our properties. When we provide a guaranty on behalf of an entity that owns
one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages
or other secured debt contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple
properties. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be
adversely affected, which could result in losing our REIT status and would result in a decrease in the value of your investment.
We have a substantial amount of indebtedness, which may limit our financial and operating activities and may adversely affect our
ability to incur additional debt to fund future needs.
As of December 31, 2020, there was $1.2 billion million of mortgage debt outstanding related to our Portfolio.
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Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate our properties, fully
implement our capital expenditure, acquisition and development activities, or pay the dividends necessary to maintain our REIT
qualification. Our level of debt and the limitations imposed on us by our debt agreements could have significant adverse
consequences, including the following:
•
•
•
•
•
•
•
•
•
require us to dedicate a substantial portion of cash flow from operations to the payment of principal, and interest on,
indebtedness, thereby reducing the funds available for other purposes;
make it more difficult for us to borrow additional funds as needed or on favorable terms, which could, among other things,
adversely affect our ability to meet operational needs;
force us to dispose of one or more of our properties, possibly on unfavorable terms (including the possible application of
the 100% tax on income from prohibited transactions, discussed below in “—Risks Related to Our Structure”) or in
violation of certain covenants to which we may be subject;
subject us to increased sensitivity to interest rate increases;
make us more vulnerable to economic downturns, adverse industry conditions or catastrophic external events;
limit our ability to withstand competitive pressures;
limit our ability to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of
our original indebtedness;
reduce our flexibility in planning for or responding to changing business, industry and economic conditions; and/or
place us at a competitive disadvantage to competitors that have relatively less debt than we have.
If any one of these consequences were to materialize, our financial condition, results of operations, cash flow and trading price
of our common stock could be adversely affected. Furthermore, foreclosures could create taxable income without accompanying cash
proceeds, which could hinder our ability to meet the REIT distribution requirements imposed by the Code.
We may be unable to refinance current or future indebtedness on favorable terms, if at all.
We may not be able to refinance existing debt on terms as favorable as the terms of existing indebtedness, or at all, including as
a result of increases in interest rates or a decline in the value of our Portfolio or portions thereof. If principal payments due at maturity
cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our operating cash flow
will not be sufficient in all years to repay all maturing debt. As a result, certain of our other debt may default, we may be forced to
postpone capital expenditures necessary for the maintenance of our properties, we may have to dispose of one or more properties on
terms that would otherwise be unacceptable to us or we may be forced to allow the mortgage holder to foreclose on a property.
Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our
financial condition and results of operations and could adversely affect our ability to make distributions to our stockholders.
Our debt agreements include restrictive covenants, which could limit our flexibility and our ability to make distributions.
Our debt agreements, including our lines of credit, contain customary negative covenants that, among other things, limit our
ability, without the prior consent of the lender, to further mortgage the property, to reduce or change insurance coverage or to engage
in material asset sales, mergers, consolidations and acquisitions. Our debt agreements require certain mandatory prepayments upon
disposition of underlying collateral. Early repayments of certain debt are subject to prepayment penalties. Failure to comply with these
covenants could cause a default under the agreements and result in a requirement to repay the indebtedness prior to its maturity, which
could have an adverse effect on our cash flow and ability to make distributions to our stockholders. In addition, loan documents may
limit our ability to replace a property’s property manager or terminate certain operating or lease agreements related to a property.
These or other limitations would decrease our operating flexibility and our ability to achieve our operating objectives.
If we are required to make payments under any bad boy carve out guarantees that we have provided in connection with certain
mortgages and related loans, our business and financial results could be materially adversely affected.
In obtaining certain non-recourse loans, we have provided our lenders with standard carve out guarantees. These guarantees are
only applicable if and when the borrower directly, or indirectly through an agreement with an affiliate, joint venture partner or other
third party, voluntarily files a bankruptcy or similar liquidation or reorganization action or takes other actions that are fraudulent or
improper (commonly referred to as “bad boy” guarantees). Although we believe that “bad boy” carve out guarantees are not
guarantees of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control,
some lenders in the real estate industry have recently sought to make claims for payment under such guarantees. In the event such a
claim were made against us under a “bad boy” carve out guarantee, following foreclosure on mortgages or related loans, and such
claim were successful, our business and financial results could be materially adversely affected.
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Derivatives and hedging activity could adversely affect cash flow.
In the normal course of business, we use derivatives to manage our exposure to interest rate volatility on debt instruments,
including hedging for future debt issuances. At other times, we may utilize derivatives to increase our exposure to floating interest
rates. However, these hedging arrangements may not have the desired beneficial impact. Hedging arrangements, which can include a
number of counterparties, may expose us to additional risks, including failure of any of our counterparties to perform under these
contracts, and may involve extensive costs, such as transaction fees or, if we terminate them, breakage costs. No strategy can
completely insulate us from the risks associated with interest rate fluctuations.
Risks Related to Our Structure
The recent Chapter 11 bankruptcy filing by Highland Capital Management, L.P. (Highland) may have materially adverse
consequences on our business, financial condition and results of operations.
On October 16, 2019, Highland, a former affiliate of our Sponsor, filed for Chapter 11 bankruptcy protection with the United
States Bankruptcy Court for the District of Delaware, or the Highland Bankruptcy, which was subsequently transferred to the United
States Bankruptcy Court for the Northern District of Texas (the “Bankruptcy Court”). Highland filed for Chapter 11 bankruptcy
protection on October 16, 2019. On January 9, 2020, the Bankruptcy Court approved a change of control of Highland, which involved
the resignation of James Dondero as the sole director of, and the appointment of an independent board to, Highland’s general partner.
On September 21, 2020, Highland filed a plan of reorganization and disclosure statement with the Bankruptcy Court, which was
subsequently amended (the “Fifth Amended Plan of Reorganization”). On October 9, 2020, Mr. Dondero resigned as an employee of
Highland and as portfolio manager for all Highland-advised funds. As a result of these changes, our Sponsor is no longer under
common control with Highland. On February 8, 2021, the Bankruptcy Court announced its intent to confirm Highlands’s Fifth
Amended Plan of Reorganization. The Bankruptcy Court instructed Highland’s counsel to prepare a written order, which has not yet
been circulated or presented to the Bankruptcy Court for entry. Once the written order is entered, it is automatically stayed for 14
days and will become a final order unless an appeal is filed within that 14-day period. While neither our Sponsor nor our Adviser were
parties to the bankruptcy filing, the Highland Bankruptcy could expose our Sponsor, our Adviser, our affiliates, our management
and/or us to negative publicity, which might adversely affect our reputation and/or investor confidence in us, and/or future capital
raising activities. In addition, the Highland Bankruptcy may be both time consuming and disruptive to our operations and cause
significant diversion of management attention and resources which may materially and adversely affect our business, financial
condition and results of operations. Further, the Highland Bankruptcy has and may continue to expose our Sponsor, our Advisor and
our affiliates to claims arising out of our former relationship with Highland that could have an adverse effect on our business, financial
condition and results of operations.
Further, under the Fifth Amended Plan of Reorganization, Highland was expected to continue to provide certain back office and
administrative services, including services under a Shared Services Agreement to our Sponsor. Under this Agreement, our Adviser
would have been able to utilize employees from Highland in connection with various services such as human resources, accounting,
tax, valuation, information technology services, office space, employees, compliance and legal. However, under the Fifth Amended
Plan of Reorganization and subsequent agreements between Highland and our Sponsor, the Shared Services Agreement with our
Sponsor is expected to terminate on February 19, 2020. Our Sponsor and Adviser expect to be able to provide or outsource the
services it was receiving under the Shared Services Agreement with Highland. However, there can be no assurances that our Sponsor
and Adviser will be able to provide the same level of services or upon the same terms that they received under the Shares Services
Agreement. Further, any delays in obtaining these services could have an adverse effect on our business, financial condition, and
results of operation.
The Highland Bankruptcy could create potential conflicts of interest and uncertainty related to our commercial relationship with
Highland.
Our Adviser and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other
parties and manage other accounts and private investment vehicles similar to the Company. Our Adviser has historically been
affiliated through common control with Highland, an SEC-registered investment adviser that filed for Chapter 11 bankruptcy
protection on October 16, 2019. On January 9, 2020, the Bankruptcy Court approved a change of control of Highland, which involved
the resignation of James Dondero as the sole director of, and the appointment of an independent board to, Highland’s general partner.
On October 9, 2020, Mr. Dondero resigned as an employee of Highland and as portfolio manager for all Highland-advised funds.
As a result of these changes, our Sponsor and Advisor are no longer under common control with Highland or a related person of
Highland. Mr. Dondero continues to be a portfolio manager for our Adviser. Under the Fifth Amended Plan of Reorganization,
Highland intends to terminate the Shared Services Agreement with our Sponsor. However, based upon on-going discussions with
Highland, our Sponsor and Adviser expect to be able to continue to receive these services through a transfer of personnel, equipment
and facilities from Highland either to our Sponsor or to a third-party service provider. Employees of Highland providing services to
our Sponsor or Adviser could face conflicts arising from, for example, Highland and our Sponsor or Adviser acting separately with
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respect to investment determinations on assets commonly held by clients respectively of Highland and our Sponsor or Adviser,
although any such persons will not have sole investment discretion with respect to any determinations made by our Sponsor or
Adviser for its clients. If the Highland employees are transferred to another employer, they may have similar conflicts of interests as
do the current Highland employees.
We depend upon key personnel of our Adviser and its affiliates and our property manager.
We are an externally managed REIT and therefore we do not have any internal management capacity and only have accounting
employees. We also depend on BH for our property management and construction services. We depend to a significant degree on the
diligence, skill and network of business contacts of the management team and other key personnel of our Adviser and of our property
manager to achieve our investment objectives, including Messrs. Dondero, Mitts, McGraner, Goetz and Sauter, all of whom may be
difficult to replace. We expect that our Adviser will evaluate, negotiate, structure, close and monitor our investments in accordance
with the terms of the Advisory Agreement.
We also depend upon the senior professionals of our Adviser and our property manager to maintain relationships with sources of
potential investments, and we rely upon these relationships to provide us with potential investment opportunities. We cannot assure
you that these individuals will continue to provide indirect investment advice to us. If these individuals, including the members of the
management team of our Adviser, do not maintain their existing relationships with our Adviser, maintain existing relationships or
develop new relationships with other sources of investment opportunities, we may not be able to grow our investment portfolio. In
addition, individuals with whom the senior professionals of our Adviser and our property manager have relationships are not obligated
to provide us with investment opportunities. Therefore, we can offer no assurance that such relationships will generate investment
opportunities for us.
We may not replicate the historical results achieved by other entities managed or sponsored by affiliates of our Adviser, members
of our Advisers management team or by Highland or its affiliates.
Our primary focus in making investments generally differs from that of existing investment funds, accounts or other investment
vehicles that are or have been managed by affiliates of our Adviser, members of our Adviser’s management team or sponsored by our
former affiliate Highland or its affiliates. In addition, the previously sponsored investment programs by Highland were significantly
different from us in terms of targeted assets, regulatory structure and limitations, investment strategy and objectives and investment
personnel. Past performance is not a guarantee of future results, and there can be no assurance that we will achieve comparable results
of those Highland affiliates. We also cannot assure you that we will replicate the historical results achieved by members of the
management team, and we caution you that our investment returns could be substantially lower than the returns achieved by them in
prior periods. Additionally, all or a portion of the prior results may have been achieved in particular market conditions which may
never be repeated.
Our Adviser can resign on 30 days notice from its role as adviser, and we may not be able to find a suitable replacement within
that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of
operations and cash flows.
The Advisory Agreement gives our Adviser the right to resign after giving not more than 60 nor less than 30 days’ written
notice, whether we have found a replacement or not. If our Adviser resigns, we may not be able to find a new adviser or hire internal
management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 30 to 60 days, or
at all. If we are unable to do so quickly, our operations are likely to experience a disruption and our financial condition, business and
results of operations, as well as our ability to pay distributions, are likely to be adversely affected. In addition, the coordination of our
internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single
institution or group of executives having the experience possessed by our Adviser and its affiliates. Even if we are able to retain
comparable management, the integration of such management and its lack of familiarity with our investment objectives may result in
additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
You will have limited control over changes in our policies and operations, which increases the uncertainty and risks you face as a
stockholder.
Our Board determines our major policies,
including our policies regarding financing, growth, debt capitalization, REIT
qualification and distributions. Our Board may amend or revise these and other policies without your vote. Our Board’s broad discretion
in setting policies and your inability to exert control over those policies increases the uncertainty and risks you face as a stockholder.
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We may change our targeted investments without stockholder consent.
We expect our portfolio of investments in commercial real estate to consist primarily of multifamily properties. Though this is
our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment
opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our
stockholders. Any such change could result in us making investments that are different from, and possibly riskier than, the investments
described in this annual report. These policies may change over time. A change in our targeted investments or investment guidelines,
which may occur without notice to you or without your consent, may increase our exposure to interest rate risk, default risk and real
estate market fluctuations, all of which could adversely affect the value of our common stock and our ability to make distributions to
you. We intend to disclose any changes in our investment policies in our next required periodic report, if any.
We pay substantial fees and expenses to our Adviser and its affiliates and to our property manager, which payments increase the
risk that you will not earn a profit on your investment.
Pursuant to the Advisory Agreement, we pay significant fees to our Adviser and its affiliates. Those fees include advisory and
administrative fees and obligations to reimburse our Adviser and its affiliates for expenses they incur in connection with providing
services to us, including certain personnel services.
Additionally, pursuant to the management agreements we have entered into with BH, we pay significant fees to BH. These fees
include property management fees, construction management and other customary property manager fees.
If we internalize our management functions, the percentage of our outstanding common stock owned by our other stockholders
could be reduced, and we could incur other significant costs associated with being self-managed.
In the future, our Board may consider internalizing the functions performed for us by our Adviser by, among other methods,
acquiring our Adviser’s assets. The method by which we could internalize these functions could take many forms. There is no
assurance that internalizing our management functions will be beneficial to us and our stockholders. An acquisition of our Adviser
could result in a dilution of your interests as a stockholder and could reduce earnings per share and FFO, Core FFO and AFFO per
share. Additionally, we may not realize the perceived benefits, we may not be able to properly integrate a new staff of managers and
employees or we may not be able to effectively replicate the services provided previously by our Adviser, property manager or their
affiliates. Internalization transactions, including without limitation, transactions involving the acquisition of affiliated advisers or
property managers have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced
to spend significant amounts of money defending claims that would reduce the amount of funds available for us to invest in properties
or other investments and to pay distributions. All of these factors could have a material adverse effect on our results of operations,
financial condition and ability to pay distributions.
There are significant potential conflicts of interest that could affect our investment returns.
As a result of our arrangements with our Adviser, there may be times when our Adviser or its affiliates have interests that differ
from those of our stockholders, giving rise to a conflict of interest.
Our directors and management team serve or may serve as officers, directors or principals of entities that operate in the same or
a related line of business as we do, or of investment funds managed by our Adviser or its affiliates. Similarly, our Adviser or its
affiliates may have other clients with similar, different or competing investment objectives, including NexPoint Real Estate Finance,
Inc. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of
which may not be in the best interest of us or our stockholders. For example, the management team of our Adviser has, and will
continue to have, management responsibilities for other investment funds, accounts or other investment vehicles managed or
sponsored by our Adviser or its affiliates. Our investment objectives may overlap with the investment objectives of such affiliated
investment funds, accounts or other investment vehicles. As a result, those individuals may face conflicts in the allocation of
investment opportunities among us and other investment funds or accounts advised by or affiliated with our Adviser. Our Adviser will
seek to allocate investment opportunities among eligible accounts in a manner consistent with its allocation policy. However, we can
offer no assurance that such opportunities will be allocated to us fairly or equitably in the short-term or over time.
Additionally, under the Advisory Agreement, our Adviser does not assume any responsibility to us other than to render the
services called for under that agreement, and it will not be responsible for any action of our Board in following or declining to follow
our Adviser’s advice or recommendations. In addition, we have agreed to indemnify our Adviser and each of its officers, directors,
members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses
reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf
pursuant to authority granted by the Advisory Agreement, except where attributable to gross negligence, willful misconduct, bad faith
or reckless disregard of such person’s duties under the Advisory Agreement. These protections may lead our Adviser to act in a riskier
manner when acting on our behalf than it would when acting for its own account.
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Our Adviser faces conflicts of interest relating to the fee structure under our Advisory Agreement, which could result in actions
that are not necessarily in the long-term best interest of our stockholders.
Under our Advisory Agreement, our Adviser or its affiliates is entitled to fees that are structured in a manner intended to provide
incentives to our Adviser to perform in our best interest and in the best interest of our stockholders. However, because our Adviser is
entitled to receive substantial compensation regardless of performance, our Adviser’s interests are not wholly aligned with those of
our stockholders. In that regard, our Adviser could be motivated to recommend riskier or more speculative investments that would
entitle our Adviser to the highest fees. For example, because advisory and administrative fees payable to our Adviser are based on our
total real estate assets, including any form of investment leverage, our Adviser may have an incentive to incur a high level of leverage
or to acquire properties on less than favorable terms in order to increase the total amount of real estate assets under management. In
addition, our Adviser’s ability to receive higher fees and reimbursements depends on our continued investment in real properties.
Therefore, the interest of our Adviser and its affiliates in receiving fees may conflict with the interest of our stockholders in earning
income on their investment in our common stock.
Our Adviser, Sponsor and their officers and employees face competing demands relating to their time, and this may cause our
operating results to suffer.
Our Adviser, our Sponsor and their officers and employees and their respective affiliates are key personnel, general partners,
sponsors, managers, owners and advisers of other real estate investment programs, including investment products sponsored by
affiliates of our Adviser, some of which have investment objectives and legal and financial obligations similar to ours and may have
other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts
of interest in allocating their time between our business and these other activities. If this occurs, the returns on our investments may
suffer.
We may compete with other entities affiliated with our Sponsor and property manager for tenants.
Neither our Sponsor and its affiliates nor BH and its affiliates is prohibited from engaging, directly or indirectly, in any other
business or from possessing interests in any other business venture, including ventures involved in the acquisition, development,
ownership, management, leasing or sale of real estate, including properties in the vicinity of the properties in our Portfolio. Our
Sponsor and/or its affiliates and BH and its affiliates may own and/or manage properties in the same geographical areas in which we
currently own and expect to acquire real estate assets. Therefore, our properties may compete for tenants with other properties owned
and/or managed by our Sponsor and its affiliates and BH and its affiliates. Our Sponsor and BH may face conflicts of interest when
evaluating tenant opportunities for our properties and other properties owned and/or managed by our Sponsor and its affiliates and BH
and its affiliates, and these conflicts of interest may have a negative impact on our ability to attract and retain tenants.
Risks Related to Legal, Regulatory, Tax and Accounting
Our failure to qualify as a REIT for U.S federal income tax purposes would reduce the amount of income we have available for
distribution and limit our ability to make distributions to our stockholders.
Our qualification as a REIT depends upon our ability to meet requirements regarding our organization and ownership,
distributions of our income, the nature and diversification of our income and assets and other tests imposed by the Code. The REIT
qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a
REIT is limited. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be
applied retroactively, which could result in our disqualification as a REIT. We believe we have been and are organized and qualify as
a REIT, and we intend to operate in a manner that will permit us to continue to qualify as a REIT. However, we cannot assure you that
we have qualified as a REIT, or that we will remain qualified as a REIT in the future.
If we were to fail to qualify as a REIT for any taxable year, we would be subject to U.S. federal income tax on our taxable
income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable
income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our
stockholders, which in turn could have an adverse impact on the value of shares of our common stock. Unless we were entitled to
relief under certain Code provisions, we also would be disqualified from taxation as a REIT and would not be allowed to re-elect
REIT status for the four taxable years following the year in which we failed to qualify as a REIT.
The rule against re-electing REIT status following a loss of such status would also apply to us if NREO failed to qualify as a
REIT for its taxable years ending on or before December 31, 2015, because we are treated as a successor to NREO for U.S. federal
income tax purposes. Although NREO has represented to us that it has no knowledge of any fact or circumstance that would cause us
to fail to qualify as a REIT, and covenanted in the agreement between us and our Adviser to use its reasonable best efforts to maintain
its REIT status for each of NREO’s taxable years ending on or before December 31, 2015, no assurance can be given that such
representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to
seek damages from NHF and NREO, there can be no assurance that such damages, if any, would appropriately compensate us.
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If our operating partnership failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes,
we would cease to qualify as a REIT.
Our OP intends to qualify as a partnership for U.S. federal income tax purposes, and intends to take that position for all income
tax reporting purposes. If classified as a partnership, our OP generally will not be a taxable entity and will not incur any U.S. federal
income tax liability. However, our OP would be treated as a corporation for U.S. federal income tax purposes if it was a “publicly
traded partnership,” unless at least 90% of its income was qualifying income as defined in the Code. A “publicly traded partnership” is
a partnership whose partnership interests are traded on an established securities market or are readily tradable on a secondary market
(or the substantial equivalent thereof). Although our OP’s partnership units are not traded on an established securities market, because
of the redemption rights of its outside limited partner, the OP’s units held by such limited partner could be viewed as readily tradable
on a secondary market (or the substantial equivalent thereof), and our OP may not qualify for one of the “safe harbors” under the
applicable tax regulations. Qualifying income for the 90% test generally includes passive income, such as real property rents,
dividends and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90%
test are similar in most respects. Our OP may not meet this qualifying income test. If our OP were to be taxed as a corporation, it
would incur substantial tax liabilities, and we would then fail to qualify as a REIT for U.S. federal income tax purposes, unless we
qualified for relief under certain statutory savings provisions, and our ability to raise additional capital and pay distributions to our
stockholders would be impaired.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, the sources of our income, the nature
and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet
these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may
hinder our performance. In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets
consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and
mortgage-backed securities. The remainder of our investment in securities (other than government securities, securities of TRSs and
qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than
10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our
assets (other than government securities, securities of TRSs and qualified real estate assets) can consist of the securities of any one
issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to
comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the
calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate otherwise attractive investments from our Portfolio. These actions could
have the effect of reducing our income and amounts available for distribution to our stockholders.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax
liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter
into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to
acquire or carry real estate assets or to offset certain other positions, if properly identified under applicable Treasury Regulations, does
not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of
hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of the 75% or
95% gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement
those hedges through a TRS. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains
or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a
TRS generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and
assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and
state or local income, property and transfer taxes. In addition, any TRS we form in the future will be subject to regular corporate U.S.
federal, state and local taxes. Any of these taxes would decrease cash available for distributions to stockholders.
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Our ownership of interests in TRSs raises certain tax risks.
A TRS is a corporation other than a REIT in which a REIT directly or indirectly holds stock, and that has made a joint election
with such REIT to be treated as a TRS. A TRS also includes any corporation other than a REIT with respect to which a TRS owns
securities possessing more than 35% of the total voting power or value of the outstanding securities of such corporation. Other than
some activities relating to lodging and health care facilities, a TRS may generally engage in any business, including the provision of
customary or non-customary services to tenants of its parent REIT. A TRS is subject to income tax as a regular C corporation. We
currently own interests in a TRS and may acquire securities in additional TRSs in the future.
We will be required to pay a 100% tax on any “redetermined rents,” “redetermined deductions,” “excess interest” or
“redetermined TRS service income.” In general, redetermined rents are rents from real property that are overstated as a result of
services furnished to any of our tenants by a TRS of ours. Redetermined deductions and excess interest generally represent amounts
that are deducted by a TRS of ours for amounts paid to us that are in excess of the amounts that would have been deducted based on
arm’s-length negotiations. Redetermined TRS service income generally represents amounts by which the gross income of a TRS
attributable to its services for or on behalf of us (other than to a tenant of ours) would be increased based on arm’s length negotiations.
Our TRS is and any TRS we acquire in the future will be subject to corporate income tax at the U.S. federal, state and local
levels, (including on the gain realized from the sale of property held by it, as well as on income earned while such property is operated
by the TRS). This tax obligation, if material, would diminish the amount of the proceeds from the sale or operation of such property,
or other income earned through the TRS that would be distributable to our stockholders. U.S. federal, state and local corporate income
tax rates may be increased in the future, and any such increase would reduce the amount of the net proceeds available for distribution
by us to our stockholders from the sale of property or other income earned through a TRS after the effective date of any increase in
such tax rates. We do not anticipate material income tax obligations in connection with our ownership of interests in TRSs.
As a REIT, the value of our interests in our TRSs generally may not exceed 20% of the total value of our total assets at the end
of any calendar quarter. If the IRS were to determine that the value of our interests in all of our TRSs exceeded this limit at the end of
any calendar quarter, then we would fail to qualify as a REIT. If we determine it to be in our best interest to own a substantial number
of our properties through one or more TRSs, then it is possible that the IRS may conclude that the value of our interests in our TRSs
exceeds 20% of the value of our total assets at the end of any calendar quarter and therefore cause us to fail to qualify as a REIT.
Additionally, as a REIT, no more than 25% of our gross income with respect to any year may, in general, be from sources other than
certain real estate-related assets. Dividends paid to us from a TRS are typically considered to be non-real estate income. Therefore, we
may fail to qualify as a REIT if dividends from all of our TRSs, when aggregated with all other non-real estate income with respect to
any one year, are more than 25% of our gross income with respect to such year.
The sale of certain properties could result in significant tax liabilities unless we are able to defer the taxable gain through 1031
Exchanges.
In general, we structure asset sales for possible inclusion in 1031 Exchanges. The ability to complete a 1031 Exchange depends
on many factors, including, among others, identifying and acquiring suitable replacement property within limited time periods, and the
ownership structure of the properties being sold and acquired. Therefore, we are not always able to sell an asset as part of a 1031
Exchange. When successful, a 1031 Exchange enables us to defer the taxable gain on the asset sold. If we cannot defer the taxable
gain resulting from the sales of certain properties, our business, financial condition, results of operations and cash flow, the market
price per share of our common stock and our ability to satisfy our debt service obligations and make distributions to our stockholders
could be materially and adversely affected.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your
investment.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following its acquisition may be
restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited
transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or
other disposition of any property (other than foreclosure property) that we own or hold an interest in, directly or indirectly through any
subsidiary entity, including our operating partnership, but generally excluding TRSs, that is deemed to be inventory or property held
primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily
for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each
property. During such time as we qualify as a REIT, we intend to avoid the 100% prohibited transaction tax by (1) conducting
activities that may otherwise be considered prohibited transactions through a TRS (but such TRS will incur corporate rate income
taxes with respect to any income or gain recognized by it), (2) conducting our operations in such a manner so that no sale or other
disposition of an asset we own or hold an interest in, directly or through any subsidiary, will be treated as a prohibited transaction, or
(3) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor
available under the Code for properties that, among other requirements, have been held for at least two years. No assurance can be
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given that any particular property that we own or hold an interest in, directly or through any subsidiary entity, including our operating
partnership, but generally excluding TRSs, will not be treated as inventory or property held primarily for sale to customers in the
ordinary course of a trade or business.
To continue qualifying as a REIT, we must meet annual distribution requirements, which may force us to forgo otherwise
attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our
investment objectives and reduce your overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which
does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and
excluding net capital gain. We will be subject to U.S. 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. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets
and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. It
is possible that we might not always be able to make distributions sufficient to meet the annual distribution requirements and to avoid
U.S. federal income and excise taxes on our earnings while we qualify as a REIT.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts
and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Distributions from REITs
that are treated as dividends but are not designated as qualified dividends or capital gain dividends are treated as ordinary income. For
taxable years beginning before January 1, 2026, distributions from REITs that are treated as dividends but are not designated as
qualified dividends or capital gain dividends are taxed as ordinary income after deducting 20% of the amount of the dividend in the
case of non-corporate stockholders. To qualify for this deduction, the U.S. stockholder receiving such dividends must hold the
dividend-paying REIT stock for at least 46 days taking into account certain special holding period rules) of the 91-day period
beginning 45 days before the stock becomes ex-dividend and cannot be under an obligation to make related payments with respect to a
position in substantially similar or related property. At the maximum ordinary income tax rate of 37% applicable for taxable years
beginning before January 1, 2026, the maximum tax rate on ordinary REIT dividends for non-corporate stockholders is 29.6%.
Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to
regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to
be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect
the value of the shares of REITs, including our common stock. In addition, certain U.S. stockholders may be subject to a 3.8%
Medicare tax on dividends payable by REITs. Tax rates could be changed in future legislation.
The share ownership restrictions of the Code for REITs and the 6.2% share ownership limit in our charter may inhibit market
activity in shares of our stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more
than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the
first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or
constructively owns shares of our common stock under this requirement. Additionally, at least 100 persons must beneficially own
shares of our common stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT
election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of
shares of our common stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our
qualification as a REIT while we so qualify. Unless exempted by our Board (prospectively or retroactively), for so long as we qualify
as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from
beneficially or constructively owning (applying certain attribution rules under the Code) more than 6.2% in value of the aggregate of
the outstanding shares of our capital stock and more than 6.2% (in value or in number of shares, whichever is more restrictive) of the
outstanding shares of our common stock. Our Board may not grant an exemption from these restrictions to any proposed transferee
whose ownership in excess of the 6.2% ownership limit would result in our failing to qualify as a REIT. Our Board granted a waiver
from the ownership limits for Jim Dondero and certain of his affiliates, and may grant additional waivers in the future. These waivers
will be subject to certain initial and ongoing conditions designed to protect our status as a REIT. These restrictions on transferability
and ownership will not apply, however, if our Board determines that it is no longer in our best interest to qualify as a REIT or that
compliance with the restrictions is no longer required in order for us to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our
common stock or otherwise be in the best interest of the stockholders.
33
The ability of the Board to revoke our REIT qualification without stockholder approval may cause adverse consequences to our
stockholders.
Our charter provides that our Board may revoke or otherwise terminate our REIT election, without the approval of our
stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we will
not be allowed a deduction for dividends paid to stockholders in computing our taxable income and will be subject to U.S. federal
income tax at regular corporate rates and state and local taxes, which may have adverse consequences on our total return to our
stockholders.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult
or impossible for us to qualify or remain qualified as a REIT.
The U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or
administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S. federal
income tax rules dealing with REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S.
Department of the Treasury, which could result in statutory changes as well as frequent revisions to regulations and interpretations.
There can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or
enacted that could impact our business and financial results. Furthermore, the REIT rules are constantly under review by persons
involved in the legislative process and by the IRS and the U.S. Department of the Treasury, which may result in revisions to
regulations and interpretations in addition to statutory changes. If enacted, certain of such changes could have an adverse impact on
our business and financial results.
We cannot predict whether, when or to what extent any new U.S. federal tax laws, regulations, interpretations or rulings will
impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisors regarding potential
future changes to the U.S. federal tax laws on an investment in our stock.
Foreign investors may be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions
received from us and upon disposition of shares of our common stock.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our
current or accumulated earnings and profits. Such dividends paid to a non-U.S. stockholder ordinarily will be subject to U.S.
withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are
treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign
Investment in Real Property Tax Act of 1980 (“FIRPTA”), capital gain distributions attributable to sales or exchanges of “U.S. real
property interests” (“USRPIs”), generally will be taxed to a non-U.S. stockholder as if such gain were effectively connected with a
U.S. trade or business. However, a capital gain dividend will not be treated as effectively connected income if (1) the distribution is
received with respect to a class of stock that is regularly traded on an established securities market located in the United States and
(2) the non-U.S. stockholder does not own more than 10% of the class of our stock at any time during the one-year period ending on
the date the distribution is received.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S.
federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long
as we are a “domestically-controlled” REIT. A REIT is “domestically controlled” if less than 50% of the REIT’s stock, by value, has
been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the
date of disposition or, if shorter, during the entire period of the REIT’s existence. We cannot assure you that we will qualify as a
“domestically controlled” REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of shares of our stock
would be subject to FIRPTA tax, unless the shares of our stock were traded on an established securities market and the foreign
investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding
common stock.
Risks Related to the Ownership of our Common Stock
Our common stock is listed on the NYSE and broad market fluctuations could negatively affect the market price of our stock.
We have listed shares of our common stock on the NYSE under the symbol “NXRT.” The price of NXRT common stock may
fluctuate significantly. Further, the market price of our common stock may be volatile. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock
will not fluctuate or decline significantly in the future. Some of the factors that could affect our stock price or result in fluctuations in
the price or trading volume of our common stock include:
•
•
actual or anticipated variations in our quarterly operating results;
changes in our operations or earnings estimates or publication of research reports about us or the real estate industry;
34
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
changes in market valuations of similar companies;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
adverse market reaction to any increased indebtedness we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community;
the realization of any of the other risk factors presented in this annual report;
the extent of investor interest in our securities;
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity securities,
including securities issued by other real estate-based companies;
our underlying asset value;
investor confidence in the stock and bond markets, generally;
changes in tax laws;
future equity issuances;
failure to meet income estimates;
failure to meet and maintain REIT qualifications; and
general market and economic conditions, including as a result of the COVID-19 pandemic.
In the past, class-action litigation has often been instituted against companies following periods of volatility in the price of their
common stock. This type of litigation could result in substantial costs and divert our management’s attention and resources, which
could have an adverse effect on our financial condition, results of operations, cash flow and trading price of our common stock.
The form, timing and/or amount of dividend distributions in future periods may vary and be impacted by economic and other
considerations.
The form, timing and/or amount of dividend distributions will be declared at the discretion of our Board and will depend on
actual cash flows from operations, our financial condition, capital requirements, the annual distribution requirements under the REIT
provisions of the Code and other factors as our Board may consider relevant. Our Board may modify our dividend policy from time to
time at its discretion.
We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our common
stock.
If sufficient cash is not available for distribution from our operations, we may have to fund distributions from working capital,
borrow to provide funds for such distributions, reduce the amount of such distributions, or issue stock dividends. To the extent we
borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution
from what they otherwise would have been. If cash available for distribution generated by our assets is less than we expect, our
inability to make the expected distributions could result in a decrease in the market price of our common stock. In addition, if we
make stock dividends in lieu of cash distributions, it may have a dilutive effect on the holdings of our stockholders.
All distributions are made at the discretion of our Board and are based upon, among other factors, our historical and projected
results of operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations,
capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations, applicable law and
such other matters as our Board may deem relevant from time to time. We may not be able to make distributions in the future, and our
inability to make distributions, or to make distributions at expected levels, could result in a decrease in the market price of our
common stock.
Our charter permits the Board to issue stock with terms that may subordinate the rights of our common stockholders or discourage
a third party from acquiring us in a manner that could otherwise result in a premium price to our stockholders.
Our Board may classify or reclassify any unissued shares of common stock or preferred stock and establish the preferences,
conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of
redemption of any such stock. Thus, our Board could authorize the issuance of preferred stock with terms and conditions that could
35
have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such
preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary
transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders
of our common stock.
Future issuances of debt securities and equity securities may negatively affect the market price of shares of our common stock and,
in the case of equity securities, may be dilutive to existing stockholders and could reduce the overall value of your investment.
In the future, we may issue debt or equity securities or incur other financial obligations, including stock dividends and shares
that may be issued in exchange for common units and equity plan shares/units. Upon liquidation, holders of our debt securities and
other loans and preferred stock will receive a distribution of our available assets before common stockholders. We are not required to
offer any such additional debt or equity securities to existing stockholders on a preemptive basis. Therefore, additional common stock
issuances, directly or through convertible or exchangeable securities (including common units and convertible preferred units),
warrants or options, will dilute the holdings of our existing common stockholders and such issuances or the perception of such
issuances may reduce the market price of shares of our common stock. Any convertible preferred units would have, and any series or
class of our preferred stock would likely have, a preference on distribution payments, periodically or upon liquidation, which could
eliminate or otherwise limit our ability to make distributions to common stockholders.
Existing stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 600
million shares of capital stock, of which 500 million shares are designated as common stock and 100 million shares are designated as
preferred stock. Our Board may increase the number of authorized shares of capital stock without stockholder approval. Our Board
may elect to (1) sell additional shares in future public offerings; (2) issue equity interests in private offerings; (3) issue shares of our
common stock under a long-term incentive plan to our directors, officers and other key employees (and those of our Adviser or its
affiliates and our subsidiaries), our non-employee directors, and potentially certain non-employees who perform employee-type
functions; (4) issue shares to our Adviser, its successors or assigns, in payment of an outstanding fee obligation or as consideration in
a related-party transaction; or (5) issue shares of our common stock to sellers of properties we acquire in connection with an exchange
of OP Units. To the extent we issue additional equity interests, your percentage ownership interest in us will be diluted. Further,
depending upon the terms of such transactions, most notably the offering price per share, existing stockholders may also experience a
dilution in the book value of their investment in us.
Our rights and the rights of our stockholders to recover claims against our independent directors are limited, which could reduce
your and our recovery against them if they negligently cause us to incur losses.
Maryland law provides that a director has no liability in the capacity as a director if he or she performs his or her duties in good
faith, in a manner he or she reasonably believes to be in the company’s best interest and with the care that an ordinarily prudent person
in a like position would use under similar circumstances. As permitted by the Maryland General Corporation Law (the “MGCL”), our
charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting
from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the
cause of action adjudicated.
In addition, our charter authorizes us, and our bylaws require us, to indemnify our directors and officers for actions taken by
them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the
maximum extent permitted by Maryland law. We have entered into indemnification agreements with our directors and executive
officers. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise
exist under common law. Accordingly, in the event that actions taken by any of our directors or officers are immune or exculpated
from, or indemnified against, liability but which impede our performance, our stockholders’ ability to recover damages from that
director or officer will be limited.
Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in
control.
Our charter and bylaws contain a number of provisions, the exercise or existence of which could delay, defer or prevent a
transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interest,
including the following:
•
Our Charter Contains Restrictions on the Ownership and Transfer of Our Stock. In order for us to qualify, and elect to
be taxed, as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or
constructively, by five or fewer individuals at any time during the last half of each taxable year other than the first year for
which we elect to be taxed as a REIT. Subject to certain exceptions, our charter prohibits any stockholder from owning
beneficially or constructively more than 6.2% in value or in number of shares, whichever is more restrictive, of the
outstanding shares of our common stock, or 6.2% in value of the aggregate of the outstanding shares of all classes or
series of our stock. We refer to these restrictions collectively as the “ownership limits.” The constructive ownership rules
36
under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be
deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 6.2% of our
outstanding shares of common stock or the outstanding shares of all classes or series of our stock by an individual or
entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant
ownership limits. Our charter also prohibits any person from owning shares of our stock that would result in our being
“closely held” under Section 856(h) of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or
transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the
shares being automatically transferred to a charitable trust or may be void. These ownership limits may prevent a third
party from acquiring control of us if our Board does not grant an exemption from the ownership limits, even if our
stockholders believe the change in control is in their best interest. Our Board granted a waiver from the ownership limits
applicable to holders of our common stock to Jim Dondero and certain of his affiliates and may grant additional waivers in
the future. These waivers will be subject to certain initial and ongoing conditions designed to protect our status as a REIT.
•
Our Board Has the Power to Cause Us to Issue Additional Shares of Our Stock without Stockholder Approval. Our
charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our
Board may, without stockholder approval, amend our charter to increase the aggregate number of shares of our common
stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any
unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or
reclassified shares. As a result, our Board may establish a series of shares of common or preferred stock that could delay
or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or
otherwise be in the best interest of our stockholders.
Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.
Certain provisions of the MGCL may have the effect of inhibiting a third party from acquiring us or of impeding a change of
control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the
then-prevailing market price of such shares, including:
•
•
“business combination” provisions that, subject
to limitations, prohibit certain business combinations between an
“interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our
outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year
period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then
outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most recent
date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority stockholder
voting requirements on these combinations; and
“control share” provisions that provide that holders of “control shares” of us (defined as voting shares of stock that, if
aggregated with all other shares of stock owned or controlled by the acquirer, would entitle the acquirer to exercise one of
three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the
direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights except to the extent
approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the
matter, excluding all interested shares.
Pursuant to the Maryland Business Combination Act, our Board by resolution exempted from the provisions of the Maryland
Business Combination Act all business combinations (1) between our Adviser, Jim Dondero and certain of his affiliates or their
respective affiliates and us and (2) between any other person and us, provided that such business combination is first approved by our
Board (including a majority of our directors who are not affiliates or associates of such person). Our bylaws contain a provision
exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of shares of our stock. There can
be no assurance that these exemptions or resolutions will not be amended or eliminated at any time in the future.
Additionally, Title 3, Subtitle 8 of the MGCL permits our Board, without stockholder approval and regardless of what is
currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which are not
currently provided for in our charter or bylaws.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act
could materially and adversely affect our business and the market price of our common stock.
Under the Sarbanes-Oxley Act, we must maintain effective disclosure controls and procedures and internal control over
financial reporting, which require significant resources and management oversight. Internal control over financial reporting is complex
and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We cannot assure you
that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with
respect to a prior period for which we had previously believed that internal controls were effective. Matters impacting our internal
controls may cause us to be unable to report our financial data on a timely basis, or may cause us to restate previously issued financial
data, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of
applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to
37
suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over financial
reporting. This could materially adversely affect us by, for example, leading to a decline in the market price for our common stock and
impairing our ability to raise capital.
Additionally, our independent registered public accounting firm is required pursuant to Section 404(b) of the Sarbanes-Oxley
Act to attest to the effectiveness of our internal control over financial reporting on an annual basis. If we cannot maintain effective
procedures or internal control over financial reporting, or our independent registered public accounting firm cannot provide an
unqualified attestation report on the effectiveness of our internal control over financial reporting, investor confidence and, in turn, the
market price of our common stock could decline.
General Risks
We depend on information systems, and systems failures could significantly disrupt our business, which may, in turn, negatively
affect our ability to pay dividends to our stockholders.
Our business depends on the communications and information systems of our Sponsor, to which we have access through our
Adviser. In addition, certain of these systems are provided to our Sponsor by third-party service providers. To protect confidential
customer, vendor, financial and employee information, we employ information security measures that secure our information systems
from cybersecurity attacks or breaches. Even with these measures, we may be subject to unauthorized access of digital data with the
intent to misappropriate information, corrupt data or cause operational disruptions. If a failure of our safeguarding measures were to
occur or if we use software that contains an unknown vulnerability or that is subject to an attack, it could have a negative impact to our
business and result in business interruptions, remediation costs and/or legal claims. This, in turn, could have a material adverse effect
on our operating results and negatively affect our ability to pay dividends to our stockholders.
Breaches of our data security could materially harm our business and reputation.
We collect and retain certain personal
the
confidentiality of this information are in place, we can provide no assurance that we will be able to prevent unauthorized access to this
information. Any breach of our data security measures and/or loss of this information may result in legal liability and costs (including
damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial
performance.
information provided by our tenants. While security measures to protect
Item 1B. Unresolved Staff Comments
None.
38
Item 2. Properties
As of December 31, 2020, our Portfolio consisted of 37 properties representing 14,069 units in seven states. The following table
provides a summary of the properties in our Portfolio as of December 31, 2020:
Properties by State
2019-2020 Same Store Properties
Texas
Arbors on Forest Ridge
Silverbrook
Versailles
Venue at 8651
Old Farm
Stone Creek at Old Farm
Hollister Place
Atera Apartments
Crestmont Reserve
Florida
The Summit at Sabal Park
Courtney Cove
Sabal Palm at Lake Buena Vista
Cornerstone
Seasons 704 Apartments
Parc500
Georgia
The Preserve at Terrell Mill
Rockledge Apartments
Tennessee
Beechwood Terrace
Cedar Pointe
Brandywine I & II
Arizona
Madera Point
The Venue on Camelback
North Carolina
Radbourne Lake
Timber Creek
Total 2019-2020 Same Store Properties
Non-Same Store Properties
Texas
Cutter's Point
Summers Landing
Nevada
Bella Solara
Bloom
Torreyana Apartments
Tennessee
Arbors of Brentwood
Residences at Glenview Reserve
Arizona
Bella Vista
The Enclave
The Heritage
Fairways at San Marcos
Florida
Avant at Pembroke Pines
Residences at West Place
Total Non-Same Store Properties
Total
Location
Number
of Units
Date
Acquired
Purchase
Price
(in thousands)
Average Effective
Monthly Rent
Per Unit (1)
% Occupied
(2)
Number of
Units
Rehabbed (3)
Rehab
Expenditures
per Unit (4)
As of December 31, 2020
Bedford, Texas
Grand Prairie, Texas
Dallas, Texas
Fort Worth, Texas
Houston, Texas
Houston, Texas
Houston, Texas
Dallas, Texas
Dallas, Texas
Tampa, Florida
Tampa, Florida
Orlando, Florida
Orlando, Florida
West Palm Beach,
Florida
West Palm Beach,
Florida
Marietta, Georgia
Marietta, Georgia
Antioch, Tennessee
Antioch, Tennessee
Nashville, Tennessee
Mesa, Arizona
Phoenix, Arizona
Charlotte, North
Carolina
Charlotte, North
Carolina
(5) Richardson, Texas
Fort Worth, Texas
Las Vegas, Nevada
Las Vegas, Nevada
Las Vegas, Nevada
Nashville, Tennessee
Nashville, Tennessee
Phoenix, Arizona
Tempe, Arizona
Phoenix, Arizona
Chandler, Arizona
Pembroke Pines,
Florida
Orlando, Florida
210
642
388
333
734
190
260
380
242
252
324
400
430
222
217
752
708
300
210
632
256
415
$
1/31/2014
1/31/2014
2/26/2015
10/30/2015
12/29/2016
12/29/2016
2/1/2017
10/25/2017
9/26/2018
8/20/2014
8/20/2014
11/5/2014
1/15/2015
4/15/2015
7/27/2016
2/6/2015
6/30/2017
7/21/2014
8/24/2018
9/26/2018
8/5/2015
10/11/2016
$
12,805
30,400
26,165
19,250
84,721
23,332
24,500
59,200
24,680
19,050
18,950
49,500
31,550
21,000
22,421
58,000
113,500
21,400
26,500
79,800
22,525
44,600
225
9/30/2014
24,250
352
9,074
9/30/2014
22,750
880,849
$
$
1/31/2014
6/7/2019
11/22/2019
11/22/2019
11/22/2019
9/10/2019
7/17/2019
1/28/2019
1/28/2019
1/28/2019
11/2/2020
8/30/2019
7/17/2019
196
196
320
528
315
346
360
248
204
204
352
1,520
342
5,131
14,205
15,845
19,396
66,500
106,500
68,000
62,250
45,000
48,400
41,800
41,900
84,480
322,000
55,000
977,071
1,857,920
$
$
$
$
917
926
925
933
1,133
1,194
1,007
1,247
895
1,033
946
1,259
1,056
1,209
1,340
1,006
1,261
947
1,075
960
980
821
1,137
949
1,047
1,112
941
1,128
1,120
1,184
1,194
993
1,320
1,355
1,298
1,232
1,515
1,214
1,276
1,128
94.3 %
94.9 %
94.3 %
93.4 %
92.1 %
92.1 %
91.2 %
92.1 %
98.8 %
96.0 %
93.5 %
95.0 %
91.2 %
98.6 %
97.7 %
95.5 %
95.5 %
95.7 %
96.2 %
94.3 %
93.8 %
93.7 %
89.8 %
93.5 %
94.2 %
95.0 %
95.9 %
91.6 %
94.1 %
93.0 %
91.3 %
92.8 %
95.6 %
97.5 %
94.1 %
96.0 %
94.4 %
90.1 %
93.8 %
94.1 %
$
263
702
455
403
—
—
428
206
129
348
180
256
324
170
168
540
661
361
150
176
226
146
315
282
6,889
$
218
60
36
25
9
171
56
77
74
75
—
147
57
1,005
7,894
$
$
2,751
2,648
3,930
4,333
—
—
3,961
3,217
2,448
3,300
4,815
601
5,312
5,738
14,953
9,644
4,603
3,559
3,364
9,427
3,961
11,153
905
5,511
4,583
3,776
3,306
12,320
13,798
12,063
2,291
11,224
12,089
10,559
11,223
—
14,593
6,842
8,559
4,963
(1) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of December 31,
2020 minus any tenant concessions over the term of the lease, divided by the number of units under commenced leases as of
December 31, 2020.
Percent occupied is calculated as the number of units occupied as of December 31, 2020, divided by the total number of units,
expressed as a percentage.
Inclusive of all full and partial interior upgrades completed.
Inclusive of all full and partial interior upgrades completed and leased as of December 31, 2020.
(3)
(4)
(2)
39
(5) Cutter’s Point suffered significant damage from a tornado on October 20, 2019 which necessitated a temporary halt to operation
of all 196 units. Upon completion of Phase I of the rebuild efforts, the Company returned 60 units to service in 2020; there are
57 units occupied out of the 60 available as of December 31, 2020. The remaining 136 units are currently being rebuilt as part of
Phase II of the rebuild with an expected return to service in 2021. (see Note 5).
For additional information regarding our Portfolio, see Notes 3, 4, 5 and 6 to our consolidated financial statements.
Item 3. 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 4. Mine Safety Disclosures
Not applicable.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stockholder Information
On February 22, 2021, we had 25,067,948 shares of common stock outstanding held by a total of approximately 948 record
holders. The number of record holders is based on the records of American Stock Transfer & Trust Company, LLC, who serves as our
transfer agent. The number of holders does not include individuals or entities who beneficially own shares but whose shares are held
of record by a broker or clearing agency, but does include each such broker or clearing agency as one record holder.
Market Information
Our common stock trades on the NYSE under the ticker symbol “NXRT.”
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On June 15, 2016, we announced that our Board authorized us to repurchase an indeterminate number of shares of our common
stock at an aggregate market value of up to $30.0 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 from $30.0 million to up to $40.0
million and extended it by an additional two years to June 15, 2020. On March 13, 2020, our Board further increased the Share
Repurchase Program from $40.0 million to up to $100.0 million and extended it to March 12, 2023. During the year ended December
31, 2020, the Company repurchased 1,644,697 shares of its common stock. Since the inception of the Share Repurchase Program
through December 31, 2020, the Company had repurchased 2,382,155 shares of its common stock, par value $0.01 per share, at a total
cost of approximately $61.2 million, or $25.70 per share as shown in the table below:
Period
Beginning Total
October 1 – October 31
November 1 – November 30
December 1 – December 31
Total as of December 31, 2020
Total Number
of Shares Purchased
2,382,155
—
—
—
2,382,155
Average Price
Paid Per Share
25.70
$
—
—
—
25.70
$
Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans or Programs
2,382,155
—
—
—
2,382,155
$
$
Approximate Dollar Value
of Shares that may yet be
Purchased under the
Plans or Programs (in
millions)
38.8
38.8
38.8
38.8
38.8
41
PERFORMANCE GRAPH
On April 1, 2015, our common stock commenced trading on the NYSE. The following graph compares the cumulative total
stockholder return on our common shares for the measurement period commencing December 31, 2015 and ending December 31,
2020 with the cumulative total returns of the Russell 3000 Index, the MSCI U.S. REIT Index (^RMZ) and the Standard & Poor’s U.S.
REIT Index. The following graph assumes an investment of $100 on the initial day of the relevant measurement period and that all
dividends were reinvested.
42
Item 6. Selected Financial Data
The following table summarizes selected financial data about the Company. The following selected financial data information
should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and our consolidated financial statements, including the notes thereto, included elsewhere herein. The selected financial
data presented below has been derived from our audited consolidated financial statements (in thousands, except per share amounts):
$
Balance Sheet Data
Net real estate investments (1)
Total assets
Mortgage debt, net (1)
Credit and bridge facilities, net
Total debt, net (1)
Total liabilities
Redeemable noncontrolling interests in the Operating
Partnership
Noncontrolling interests
Stockholders' equity
2020
2019
As of December 31,
2018
2017
2016
1,760,749
1,829,214
1,162,855
182,323
1,345,178
1,418,189
3,098
—
407,927
2020
$
$
1,781,810
1,865,989
1,186,547
216,501
1,403,048
1,436,453
3,295
—
426,241
$
$
1,087,542
1,161,210
838,020
—
838,020
862,615
2,567
—
296,028
991,156
1,055,375
754,405
38,419
792,824
813,796
2,135
—
239,444
For the Year Ended December 31,
2018
2017
2019
963,037
1,035,397
423,138
340,366
763,504
779,295
—
24,558
231,544
2016
Operating Data
Total revenues
Net income (loss)
Net income (loss) attributable to common
stockholders
Earnings (loss) per weighted average common share -
basic
Earnings (loss) per weighted average common share -
diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding -
diluted
Cash Flow Data
Cash flows provided by operating activities
Cash flows provided by (used in) investing activities
Cash flows provided by (used in) financing activities
Other Data
Dividends declared per common share
FFO attributable to common stockholders (2)
FFO per share - basic
FFO per share - diluted
Core FFO attributable to common stockholders (2)
Core FFO per share - basic
Core FFO per share - diluted
AFFO attributable to common stockholders (2)
AFFO per share - basic
AFFO per share - diluted
$
204,800
44,150
$
181,066
99,438
$
146,597
(1,614)
$
144,235
56,359
$
132,848
25,888
44,018
1.78
1.74
24,715
25,234
57,226
11,503
(82,896)
1.279
57,238
2.32
2.27
55,512
2.25
2.20
62,448
2.53
2.47
$
$
$
$
$
99,140
4.11
4.03
24,116
24,593
51,366
(553,129)
529,816
1.138
40,718
1.69
1.66
47,573
1.97
1.93
54,213
2.25
2.20
$
$
$
$
$
(1,609)
53,374
(0.08)
(0.08)
21,189
21,667
41,743
(136,954)
95,092
1.025
32,018
1.51
1.48
35,081
1.66
1.62
40,753
1.92
1.88
$
$
$
$
$
2.53
2.49
21,057
21,399
37,506
2,324
(51,843)
0.910
25,051
1.19
1.17
30,147
1.43
1.41
34,772
1.65
1.62
$
$
$
$
$
21,882
1.03
1.03
21,232
21,314
33,776
(51,904)
10,294
0.838
31,016
1.46
1.46
31,485
1.48
1.48
33,593
1.58
1.58
$
$
$
$
$
(1)
(2)
Includes amounts classified as held for sale, where applicable.
FFO, Core FFO and AFFO are non-GAAP measures. For definitions of these non-GAAP measures, as well an explanation of why
we believe these measures are useful and reconciliations to the most directly comparable GAAP financial measures, see Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.
43
Item 7. 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 annual report. See Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in this annual report.
Our management believes the assumptions underlying the Companys financial statements and accompanying notes are reasonable.
However, the Companys financial statements and accompanying notes may not be an indication of our financial condition and results
of operations in the future.
Overview
As of December 31, 2020, our Portfolio consisted of 37 multifamily properties primarily located in the Southeastern and
Southwestern United States encompassing 14,069 units of apartment space that was approximately 94.1% leased with a weighted
average monthly effective rent per occupied apartment unit of $1,128. 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 December 31, 2020, 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 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 15, 2021 for a one-year term. The Adviser is wholly
owned by NexPoint Advisors, L.P.
On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of
Jefferies, Raymond James, KeyBanc and Truist, pursuant to which the Company may issue and sell from time to time shares of the
Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000. Sales of shares of
common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the
Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange,
to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at
negotiated prices based on prevailing market prices.
In addition to the issuance and sale of shares of common stock, the Company
may enter into forward sale agreements with each of Jefferies, KeyBanc, Raymond James, Truist, or their respective affiliates, through
the 2020 ATM Program. During the year ended December 31, 2020, the Company issued 718,306 shares of common stock at an
average price of $43.92 per share for gross proceeds of $31.5 million under the 2020 ATM Program. The Company paid
approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of
approximately $0.6 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020
ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM
Program reach $225,000,000 (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 years ended December 31, 2020, 2019 and
2018.
For information on the effects the COVID-19 pandemic had on our business, see Note 13 “Subsequent Events—COVID-19” to
our consolidated financial statements included in this annual report.
44
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. Also included are utility
reimbursements, late fees, pet fees, and other rental fees charged to tenants.
Other income. Other income includes ancillary income earned from tenants such as non-refundable fees, application fees,
laundry fees, cable TV income, and other miscellaneous 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 and the related impact of interest rate derivatives used to manage our interest rate risk.
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs includes
prepayment penalties and defeasance costs, the write-off of unamortized deferred financing costs and fair market value adjustments of
assumed debt related to the early 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 losses. Casualty losses include expenses resulting from damages from an unexpected and unusual event such as a
natural disaster. Expenses can include additional payments on insurance premiums, impairment recognized on a property, and other
abnormal expenses arising from the related event.
45
Miscellaneous income. Miscellaneous income includes proceeds received from insurance for business interruption involving the
loss of rental income at a property that has temporarily suspended operations due to an unexpected and unusual event.
Gain on sales of real estate. Gain on sales of real estate includes the gain recognized upon sales of properties. Gain on sales of
real estate is calculated by deducting the carrying value of the real estate and costs incurred to sell the properties from the sales prices
of the properties.
Results of Operations for the Years Ended December 31, 2020, 2019 and 2018
The year ended December 31, 2020 as compared to the year ended December 31, 2019
The following table sets forth a summary of our operating results for the years ended December 31, 2020 and 2019 (in
thousands):
For the Year Ended December 31,
2020
2019
$ Change
Total revenues
Total expenses
Operating income before gain on sales of real estate
Gain on sales of real estate
Operating income
Interest expense
Loss on extinguishment of debt and modification costs
Casualty gains (losses)
Miscellaneous income
Net income
Net income attributable to redeemable noncontrolling interests in the
Operating Partnership
Net income attributable to common stockholders
$
$
$
204,800
(191,236)
13,564
69,151
82,715
(44,753)
(1,470)
5,886
1,772
44,150
$
181,066
(166,157)
14,909
127,684
142,593
(37,385)
(2,869)
(3,488)
587
99,438
132
44,018
$
298
99,140
$
23,734
(25,079)
(1,345)
(58,533)
(59,878)
(7,368)
1,399
9,374
1,185
(55,288)
(166)
(55,122)
The change in our net income between the periods primarily relates to a decrease in gain on sales of real estate of $58.5 million
and increases in total property operating expenses of $4.5 million and depreciation and amortization expense of $13.3 million,
partially offset by an increase in total revenues of $23.7 million. The change in our net income between the periods was also due to
our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions (we purchased three properties in the first
quarter of 2019, one property in the second quarter of 2019, four properties in the third quarter of 2019, three properties in the fourth
quarter of 2019, and disposed of six properties in the third quarter of 2019; we disposed of three properties in the first quarter of 2020,
one property in the third quarter of 2020, and purchased one property in the fourth quarter of 2020).
Revenues
Rental income was $199.2 million for the year ended December 31, 2020 compared to $177.2 million for the year ended
December 31, 2019, which was an increase of approximately $22.0 million. The increase between the periods was primarily due to our
acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above, and a 2.3% increase in the
weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,128 as of December 31, 2020 from $1,103
as of December 31, 2019, primarily driven by the value-add program that we have implemented and organic growth in rents in the
markets where our properties are located.
Other income. Other income was $5.6 million for the year ended December 31, 2020 compared to $3.9 million for the year
ended December 31, 2019, which was an increase of approximately $1.7 million. The increase between the periods was primarily due
to a $1.9 million increase in cable TV income partially offset by a $0.1 million decrease in application fees.
Expenses
Property operating expenses. Property operating expenses were $47.2 million for the year ended December 31, 2020 compared
to $42.7 million for the year ended December 31, 2019, which was an increase of approximately $4.5 million. The increase between
the periods was primarily due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as
described above. The increase between periods was also due to a $0.8 million, or 4.0%, increase in payroll expenses.
46
Real estate taxes and insurance. Real estate taxes and insurance costs were $31.7 million for the year ended December 31, 2020
compared to $25.1 million for the year ended December 31, 2019, which was an increase of approximately $6.6 million. The increase
between the periods was primarily due to a $5.1 million, or 23.1%, increase in property taxes. The increase between the periods was
also due to our acquisition and disposition activity in 2019 and 2020 and the timing of the transactions, as described above. 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 $6.0 million for the year ended December 31, 2020 compared to
$5.4 million for the year ended December 31, 2019, which was an increase of approximately $0.6 million. The increase between the
periods was primarily due to an increase in total revenues, which the fee is primarily based on.
Advisory and administrative fees. Advisory and administrative fees were $7.7 million for the year ended December 31, 2020
compared to $7.5 million for the year ended December 31, 2019, which was an increase of approximately $0.2 million. For the year
ended December 31, 2020, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the properties we
acquired subsequent to October 2016, excluding Hollister Place, Stone Creek at Old Farm and The Heritage, which totaled
approximately $15.4 million and are considered to be permanently waived. For the year ended December 31, 2019, our Adviser
elected to voluntarily waive the advisory and administrative fees incurred on the properties we acquired subsequent to October 2016,
excluding Hollister Place and Stone Creek at Old Farm, which totaled approximately $9.1 million and are considered to be
permanently waived for the period. The advisory and administrative fees waived by our Adviser for the years ended December 31,
2020 and 2019 are considered to be permanently waived for the periods. 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 $10.0 million for the year
ended December 31, 2020 compared to $9.6 million for the year ended December 31, 2019, which was an increase of approximately
$0.4 million. The increase was primarily due to an increase in stock compensation expense of $0.4 million.
Property general and administrative expenses. Property general and administrative expenses were $6.2 million for the year
ended December 31, 2020 compared to $6.8 million for the year ended December 31, 2019, which was a decrease of approximately
$0.6 million. The decrease between the periods was primarily due to decreases in eviction fees of $0.2 million.
Depreciation and amortization. Depreciation and amortization costs were $82.4 million for the year ended December 31, 2020
compared to $69.1 million for the year ended December 31, 2019, which was an increase of approximately $13.3 million. The
increase between the periods was primarily due to an increase of depreciation expense of $19.2 million, partially offset by the
amortization of intangible lease assets of $6.8 million related to six properties for the year ended December 31, 2020 compared to
$12.7 million related to fourteen properties for the year ended December 31, 2019, which was a decrease of approximately $5.9
million.
Other Income and Expense
Interest expense. Interest expense was $44.8 million for the year ended December 31, 2020 compared to $37.4 million for the
year ended December 31, 2019, which was an increase of approximately $7.4 million. The increase between the periods was primarily
due to an increase in interest rate swap expense of approximately $15.8 million, partially offset by a decrease in interest on debt of
$9.2 million. The following table details the various costs included in interest expense for the years ended December 31, 2020 and
2019 (in thousands):
Interest on debt
Amortization of deferred financing costs
Interest rate swaps
Interest rate caps expense
Total
For the Year Ended December 31,
2020
2019
$ Change
$
$
32,546
2,837
9,337
33
44,753
$
$
41,744
2,083
(6,472)
30
37,385
$
$
(9,198)
754
15,809
3
7,368
47
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $1.5 million
for the year ended December 31, 2020 compared to $2.9 million for the year ended December 31, 2019, which was a decrease of
approximately $1.4 million. The decrease between periods was primarily due to a decrease in prepayment penalties and defeasance
costs of $0.7 million and a decrease in write-offs of deferred financing costs of $0.7 million. The following table details the various
costs included in loss on extinguishment of debt and modification costs for the years ended December 31, 2020 and 2019 (in
thousands):
Prepayment penalties and defeasance costs
Write-off of deferred financing costs
Write-off of fair market value adjustment of assumed debt
Debt modification and other extinguishment costs
Total
For the Year Ended December 31,
2020
2019
$ Change
$
$
711
756
—
3
1,470
$
$
1,449
1,419
—
1
2,869
$
$
(738)
(663)
—
2
(1,399)
Casualty gains (losses). Casualty gains were $5.9 million for the year ended December 31, 2020 compared to casualty losses of
$3.5 million for the year ended December 31, 2019. The increase between periods was primarily due to significant damages sustained
at Cutter’s Point, Venue 8651, and Timber Creek (see Note 5 to our consolidated financial statements).
Miscellaneous income. Miscellaneous income was $1.8 million for the year ended December 31, 2020 compared to $0.6 million
for the year ended December 31, 2019, which was an increase of approximately $1.2 million. The increase between the periods was
primarily due to business interruption proceeds received from insurance for lost rents at Cutter’s Point and Venue 8651 (see Note 5 to
our consolidated financial statements).
Gain on sales of real estate. Gain on sales of real estate was $69.2 million for the year ended December 31, 2020 compared to
$127.7 million for the year ended December 31, 2019, which was a decrease of approximately $58.5 million. During the year ended
December 31, 2020, we sold four properties; during the year ended December 31, 2019, we sold six properties.
The year ended December 31, 2019 as compared to the year ended December 31, 2018
The following table sets forth a summary of our operating results for the years ended December 31, 2019 and 2018 (in
thousands):
For the Year Ended December 31,
2019
2018
$ Change
Total revenues
Total expenses
Operating income
Interest expense
Loss on extinguishment of debt and modification costs
Gain on sales of real estate
Casualty losses
Miscellaneous income
Net income (loss)
Net income (loss) attributable to redeemable noncontrolling interests in
the Operating Partnership
Net income (loss) attributable to common stockholders
$
$
$
181,066
(166,157)
14,909
(37,385)
(2,869)
127,684
(3,488)
587
99,438
$
146,597
(129,805)
16,792
(28,572)
(3,576)
13,742
—
—
(1,614)
298
99,140
$
(5)
(1,609) $
34,469
(36,352)
(1,883)
(8,813)
707
113,942
(3,488)
587
101,052
303
100,749
The change in our net income (loss) for the year ended December 31, 2019 as compared to the year ended December 31, 2018
primarily relates to an increase in gain on sales of real estate and an increase in total revenues, and was partially offset by increases in
total property operating expenses and depreciation and amortization expense. The change in our net income (loss) between the periods
was also due to our acquisition and disposition activity in 2018 and 2019 and the timing of the transactions (we acquired three
properties in the third quarter of 2018, and disposed of one property in the first quarter of 2018; we purchased three properties in the
first quarter of 2019, one property in the second quarter of 2019, four properties in the third quarter of 2019, three properties in the
fourth quarter of 2019, and disposed of six properties in the third quarter of 2019).
48
Revenues
Rental income was $177.2 million for the year ended December 31, 2019 compared to $143.2 million for the year ended
December 31, 2018, which was an increase of approximately $34.0 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 12.0% increase in
the weighted average monthly effective rent per occupied apartment unit in our Portfolio to $1,103 as of December 31, 2019 from
$985 as of December 31, 2018, primarily driven by the value-add program that we have implemented and organic growth in rents in
the markets where our properties are located.
Other income. Other income was $3.9 million for the year ended December 31, 2019 compared to $3.4 million for the year
ended December 31, 2018, which was an increase of approximately $0.5 million. The increase between the periods was primarily due
to a $0.6 million increase in cable TV income.
Expenses
Property operating expenses. Property operating expenses were $42.7 million for the year ended December 31, 2019 compared
to $35.8 million for the year ended December 31, 2018, which was an increase of approximately $6.9 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 periods was also due to a $3.1 million, or 16.5%, increase in payroll expenses.
Real estate taxes and insurance. Real estate taxes and insurance costs were $25.1 million for the year ended December 31, 2019
compared to $20.7 million for the year ended December 31, 2018, which was an increase of approximately $4.4 million. The increase
between the periods was primarily due to a $3.8 million, or 21.0%, 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 $5.4 million for the year ended December 31, 2019 compared to
$4.4 million for the year ended December 31, 2018, which was an increase of approximately $1.0 million. The increase between the
periods was primarily due to an increase in total revenues, which the fee is primarily based on.
Advisory and administrative fees. Advisory and administrative fees remained flat at $7.5 million for the years ended December
31, 2019 and 2018. The amount incurred during the years ended December 31, 2019 and 2018 represents the maximum fee allowed on
properties defined as Contributed Assets under the Advisory Agreement plus $2.1 million and $2.1 million, respectively, of advisory
and administrative fees incurred on certain properties defined as New Assets. For the year ended December 31, 2019, our Adviser
elected to voluntarily waive the advisory and administrative fees incurred on the nineteen properties we acquired subsequent to
October 2016, which totaled approximately $9.1 million and are considered to be permanently waived. For the year ended December
31, 2018, our Adviser elected to voluntarily waive the advisory and administrative fees incurred on the eight properties we acquired
subsequent to October 2016, which totaled approximately $4.1 million and are considered to be permanently waived for the period.
The advisory and administrative fees waived by our Adviser for the years ended December 31, 2019 and 2018 are considered to be
permanently waived for the periods. 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 $9.6 million for the year
ended December 31, 2019 compared to $7.8 million for the year ended December 31, 2018, which was an increase of approximately
$1.8 million. The increase between the periods was primarily due to approximately $5.1 million of equity-based compensation
expense recognized during the year ended December 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 $4.2
million of equity-based compensation expense recognized during the year ended December 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.
Property general and administrative expenses. Property general and administrative expenses were $6.8 million for the year
ended December 31, 2019 compared to $6.1 million for the year ended December 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.
Depreciation and amortization. Depreciation and amortization costs were $69.1 million for the year ended December 31, 2019
compared to $47.5 million for the year ended December 31, 2018, which was an increase of approximately $21.6 million. The
increase between the periods was primarily due to the amortization of intangible lease assets of $12.7 million related to fourteen
49
properties for the year ended December 31, 2019 compared to $2.5 million related to four properties for the year ended December 31,
2018, which was an increase of approximately $10.3 million. The amortization of intangible lease assets over a six-month period from
the date of acquisition is expected to increase the amortization expense during the initial year of operations for each property.
Other Income and Expense
Interest expense. Interest expense was $37.4 million for the year ended December 31, 2019 compared to $28.6 million for the
year ended December 31, 2018, which was an increase of approximately $8.8 million. The increase between the periods was primarily
due to an increase in interest on debt of approximately $10.9 million, partially offset by a decrease in interest rate swap expense of
$2.2 million. The following table details the various costs included in interest expense for the years ended December 31, 2019 and
2018 (in thousands):
Interest on debt
Amortization of deferred financing costs
Interest rate swaps - effective portion
Interest rate caps expense
Total
For the Year Ended December 31,
2019
2018
$ Change
$
$
41,744
2,083
(6,472)
30
37,385
$
$
30,870
1,650
(4,224)
276
28,572
$
$
10,874
433
(2,248)
(246)
8,813
Loss on extinguishment of debt and modification costs. Loss on extinguishment of debt and modification costs was $2.9 million
for the year ended December 31, 2019 compared to $3.6 million for the year ended December 31, 2018, which was a decrease of
approximately $0.7 million. The decrease between periods was primarily due to a decrease in debt modification and other
extinguishment costs of $0.5 million. The following table details the various costs included in loss on extinguishment of debt and
modification costs for the years ended December 31, 2019 and 2018 (in thousands):
Prepayment penalties and defeasance costs
Write-off of deferred financing costs
Write-off of fair market value adjustment of assumed debt
Debt modification and other extinguishment costs
Total
For the Year Ended December 31,
2019
2018
$ Change
$
$
1,449
1,419
—
1
2,869
$
$
1,706
1,412
(27)
485
3,576
$
$
(257)
7
27
(484)
(707)
Casualty losses. Casualty losses were $3.5 million for the year ended December 31, 2019; there were no casualty losses for the
year ended December 31, 2018. This is related to significant damages sustained at Cutter’s Point due to a tornado hitting the property
(see Note 5 to our consolidated financial statements).
Miscellaneous income. Miscellaneous income was $0.6 million for the year ended December 31, 2019;
there was no
miscellaneous income for the year ended December 31, 2018. This is related to business interruption proceeds received from insurance
for lost rents at Cutter’s Point (see Note 5 to our consolidated financial statements).
Gain on sales of real estate. Gain on sales of real estate was $127.7 million for the year ended December 31, 2019 compared to
$13.7 million for the year ended December 31, 2018, which was an increase of approximately $114.0 million. During the year ended
December 31, 2019, we sold six properties; during the year ended December 31, 2018, we sold one property.
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 gains or losses, (8) miscellaneous income derived from recognition of
lost rents covered by insurance, (9) pandemic expenses and (10) 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.
50
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 and gains and losses are excluded because they do not reflect
continuing operating costs of the property owner. Miscellaneous income is eliminated as the income is derived from recognition of
lost rents covered by insurance. Corporate level general and administrative expenses are eliminated because they do not reflect the
operating activity performed at the properties. Entity level general and administrative expenses incurred at the properties and
pandemic expenses are eliminated as they are specific to the way in which we have chosen to hold our properties and are the result of
our ownership structuring. Also, expenses that are incurred upon acquisition of a property do not reflect continuing operating costs of
the property owner. These gains and losses can create distortions when comparing one period to another or when comparing our
operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We
believe that eliminating these items from net income is useful because the resulting measure captures the actual ongoing revenue
generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating
costs.
However, the usefulness of NOI is limited because it excludes corporate general and administrative expenses, interest expense,
loss on extinguishment of debt and modification costs, acquisition costs, certain fees to affiliates such as advisory and administrative
fees, depreciation and amortization expense and gains or losses from the sale of properties, pandemic expenses, and other gains and
losses as determined under GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance
of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net
income, which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is
therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in
conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations”
regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different
methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled
measures reported by other companies that do not define the measure exactly as we do.
We define “Same 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 2019-2020 Same Store and Non-Same Store Properties for the Years Ended December 31, 2020
and 2019
There are 24 properties encompassing 9,074 units of apartment space in our same store pool for the years ended December 31,
2020 and 2019 (our “2019-2020 Same Store” properties). Our 2019-2020 Same Store properties exclude the following 13 properties in
our Portfolio as of December 31, 2020: Bella Vista, The Enclave, The Heritage, Summers Landing, Residences at Glenview Reserve,
Residences at West Place, Avant at Pembroke Pines, Arbors of Brentwood, Torreyana, Bloom, Bella Solara, Fairways at San Marcos
and Cutter’s Point.
51
The following table reflects the revenues, property operating expenses and NOI for the years ended December 31, 2020 and
2019 for our 2019-2020 Same Store and Non-Same Store properties (dollars in thousands):
For the Year Ended December 31,
2020
2019
$ Change
% Change
Revenues
Same Store
Rental income
Other income
Same Store revenues
Non-Same Store
Rental income
Other income
Non-Same Store revenues
Total revenues
Operating expenses
Same Store
Property operating expenses (1)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative expenses (3)
Same Store operating expenses
Non-Same Store
Property operating expenses (4)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative expenses (5)
Non-Same Store operating expenses
Total operating expenses
NOI
Same Store
Non-Same Store
Total NOI
$
$
120,109
2,106
122,215
79,128
3,457
82,585
204,800
$
115,588
2,331
117,919
61,574
1,573
63,147
181,066
27,910
19,301
3,629
3,225
54,065
17,991
12,408
2,342
1,902
34,643
88,708
27,484
17,331
3,518
3,532
51,865
15,242
7,782
1,870
1,716
26,610
78,475
4,521
(225)
4,296
17,554
1,884
19,438
23,734
426
1,970
111
(307)
2,200
2,749
4,626
472
186
8,033
10,233
68,150
47,942
116,092
$
66,054
36,537
102,591
$
2,096
11,405
13,501
$
3.9%
-9.7%
3.6%
28.5%
119.8%
30.8%
13.1%
1.5%
11.4%
3.2%
-8.7%
4.2%
18.0%
59.4%
25.2%
10.8%
30.2%
13.0%
3.2%
31.2%
13.2%
(1)
(2)
(3)
(4)
(5)
For the years ended December 31, 2020 and 2019, excludes approximately $555,000 and $53,000, respectively, of casualty-
related recoveries.
Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.
For the years ended December 31, 2020 and 2019, excludes approximately $495,000 and $883,000, 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.
For the years ended December 31, 2020 and 2019, excludes approximately $344,000 and $19,000, respectively, of casualty-
related expenses.
For the years ended December 31, 2020 and 2019, excludes approximately $617,000 and $634,000, 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 2019-2020 Same Store NOI for the Years Ended
December 31, 2020 and 2019.”
2019-2020 Same Store Results of Operations for the Years Ended December 31, 2020 and 2019
As of December 31, 2020, our 2019-2020 Same Store properties were approximately 94.2% leased with a weighted average
monthly effective rent per occupied apartment unit of $1,047. As of December 31, 2019, our 2019-2020 Same Store properties were
approximately 94.3% leased with a weighted average monthly effective rent per occupied apartment unit of $1,033. For our 2019-
2020 Same Store properties, we recorded the following operating results for the year ended December 31, 2020 as compared to the
year ended December 31, 2019:
52
Revenues
Rental income. Rental income was $120.1 million for the year ended December 31, 2020 compared to $115.6 million for the
year ended December 31, 2019, which was an increase of approximately $4.5 million, or 3.9%. The majority of the increase is related
to a 1.4% increase in the weighted average monthly effective rent per occupied apartment unit to $1,047 as of December 31, 2020
from $1,033 as of December 31, 2019.
Other income. Other income was $2.1 million for the year ended December 31, 2020 compared to $2.3 million for the year
ended December 31, 2019, which was a decrease of approximately $0.2 million, or 9.7%. The majority of the decrease is related to a
$0.1 million decrease in miscellaneous income.
Expenses
Property operating expenses. Property operating expenses were $27.9 million for the year ended December 31, 2020 compared
to $27.5 million for the year ended December 31, 2019, which was an increase of approximately $0.4 million, or 1.5%. The majority
of the increase is related to a $0.2 million, or 1.4%, increase in payroll expenses.
Real estate taxes and insurance. Real estate taxes and insurance costs were $19.3 million for the year ended December 31, 2020
compared to $17.3 million for the year ended December 31, 2019, which was an increase of approximately $2.0 million, or 11.4%.
The majority of the increase is related to a $1.7 million, or 11.1%, increase in property taxes and a $0.3 million, or 13.7%, increase in
insurance expense.
Property management fees. Property management fees were $3.6 million for the year ended December 31, 2020 compared to
$3.5 million for the year ended December 31, 2019, which was an increase of approximately $0.1 million, or 3.2%. The majority of
the increase is related to an increase in total revenues, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $3.2 million for the year
ended December 31, 2020 compared to $3.5 million for the year ended December 31, 2019, which was a decrease of approximately
$0.3 million, or 8.7%. The majority of the decrease is related to a $0.2 million, or 17.6%, decrease in marketing costs.
Net Operating Income for Our 2018-2020 Same Store and Non-Same Store Properties for the Years Ended December 31,
2020, 2019 and 2018
There are 21 properties encompassing 7,990 units of apartment space in our same store pool for the years ended December 31,
2020, 2019 and 2018 (our “2018-2020 Same Store” properties). Our 2018-2020 Same Store properties exclude the following 16
properties in our Portfolio as of December 31, 2020: Cedar Pointe, Crestmont Reserve, Brandywine I & II, Bella Vista, The Enclave,
The Heritage, Summers Landing, Residences at Glenview Reserve, Residences at West Place, Avant at Pembroke Pines, Arbors of
Brentwood, Torreyana, Bloom, Bella Solara. Fairways at San Marcos and Cutter’s Point.
53
The following table reflects the revenues, property operating expenses and NOI for the years ended December 31, 2020, 2019
and 2018 for our 2018-2020 Same Store and Non-Same Store properties (dollars in thousands):
For the Year Ended December 31,
2018
2019
2020
2020 compared to 2019
$ Change
% Change
2020 compared to 2018
$ Change
% Change
Revenues
Same Store
Rental income
Other income
Same Store revenues
Non-Same Store
Rental income
Other income
Non-Same Store revenues
Total revenues
Operating expenses
Same Store
Property operating expenses (1)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative
expenses (3)
Same Store operating expenses
Non-Same Store
Property operating expenses (4)
Real estate taxes and insurance
Property management fees (2)
Property general and administrative
expenses (5)
Non-Same Store operating expenses
Total operating expenses
NOI
Same Store
Non-Same Store
Total NOI
$ 106,490
1,952
108,442
$ 102,554
2,145
104,699
$ 98,013
2,576
100,589
$
3,936
(193)
3,743
3.8% $
-9.0%
3.6%
8,477
(624)
7,853
92,747
3,611
96,358
204,800
74,608
1,759
76,367
181,066
45,145
863
46,008
146,597
18,139
1,852
19,991
23,734
24.3%
105.3%
26.2%
13.1%
47,602
2,748
50,350
58,203
24,817
17,467
3,219
2,841
48,344
21,084
14,242
2,752
2,286
40,364
88,708
24,462
15,876
3,122
3,119
46,579
18,264
9,237
2,266
2,129
31,896
78,475
24,059
15,832
3,000
3,295
46,186
12,428
4,881
1,382
1,545
20,236
66,422
355
1,591
97
(278)
1,765
2,820
5,005
486
157
8,468
10,233
1.5%
10.0%
3.1%
-8.9%
3.8%
15.4%
54.2%
21.4%
7.4%
26.5%
13.0%
758
1,635
219
(454)
2,158
8,656
9,361
1,370
741
20,128
22,286
60,098
55,994
$ 116,092
58,120
44,471
$ 102,591
54,403
25,772
$ 80,175
1,978
11,523
$ 13,501
5,695
3.4%
30,222
25.9%
13.2% $ 35,917
8.6%
-24.2%
7.8%
105.4%
318.4%
109.4%
39.7%
3.2%
10.3%
7.3%
-13.8%
4.7%
69.6%
191.8%
99.1%
48.0%
99.5%
33.6%
10.5%
117.3%
44.8%
(1)
(2)
(3)
(4)
(5)
For the years ended December 31, 2020, 2019 and 2018, excludes approximately $(609,000), $(58,000) and $95,000,
respectively, of casualty-related expenses/(recoveries).
Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the OP.
For the years ended December 31, 2020, 2019 and 2018, excludes approximately $472,000, $578,000 and $698,000,
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.
For the years ended December 31, 2020, 2019 and 2018, excludes approximately $1,910,000, $23,000 and $(758,000),
respectively, of casualty-related expenses/(recoveries).
For the years ended December 31, 2020, 2019 and 2018, excludes approximately $640,000, $939,000 and $596,000,
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 2018-2020 Same Store NOI for the Years Ended
December 31, 2020, 2019 and 2018.”
54
2018-2020 Same Store Results of Operations for the Years Ended December 31, 2020 and 2019
As of December 31, 2020, our 2018-2020 Same Store properties were approximately 94.0% leased with a weighted average
monthly effective rent per occupied apartment unit of $1,058. As of December 31, 2019, our 2018-2020 Same Store properties were
approximately 94.4% leased with a weighted average monthly effective rent per occupied apartment unit of $1,040. For our 2018-
2020 Same Store properties, we recorded the following operating results for the year ended December 31, 2020 as compared to the
year ended December 31, 2019:
Revenues
Rental income. Rental income was $106.5 million for the year ended December 31, 2020 compared to $102.6 million for the
year ended December 31, 2019, which was an increase of approximately $3.9 million, or 3.8%. The majority of the increase is related
to a 1.7% increase in the weighted average monthly effective rent per occupied apartment unit to $1,058 as of December 31, 2020
from $1,040 as of December 31, 2019, partially offset by a 0.4% decrease in occupancy.
Other income. Other income was $2.0 million for the year ended December 31, 2020 compared to $2.1 million for the year
ended December 31, 2019, which was a decrease of approximately $0.2 million, or 9.0%. The majority of the decrease is related to a
$0.1 million decrease in miscellaneous income.
Expenses
Property operating expenses. Property operating expenses were $24.8 million for the year ended December 31, 2020 compared
to $24.5 million for the year ended December 31, 2019, which was an increase of approximately $0.3 million, or 1.5%. The majority
of the increase is related to an increase in payroll costs of $0.2 million.
Real estate taxes and insurance. Real estate taxes and insurance costs were $17.5 million for the year ended December 31, 2020
compared to $15.9 million for the year ended December 31, 2019, which was an increase of approximately $1.6 million, or 10.0%.
The majority of the increase is related to a $1.3 million, or 9.6%, increase in property taxes.
Property management fees. Property management fees were $3.2 million for the year ended December 31, 2020 compared to
$3.1 million for the year ended December 31, 2019, which was an increase of approximately $0.1 million, or 3.1%. The majority of
the increase is related to an increase in total revenues, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $2.8 million for the year
ended December 31, 2020 compared to $3.1 million for the year ended December 31, 2019, which was a decrease of approximately
$0.3 million, or 8.9%. The majority of the decrease is related to a $0.2 million decrease in marketing expenses.
2018-2020 Same Store Results of Operations for the Years Ended December 31, 2020 and 2018
As of December 31, 2020, our 2018-2020 Same Store properties were approximately 94.0% leased with a weighted average
monthly effective rent per occupied apartment unit of $1,058. As of December 31, 2018, our 2018-2020 Same Store properties were
approximately 94.7% leased with a weighted average monthly effective rent per occupied apartment unit of $1,005. For our 2018-
2020 Same Store properties, we recorded the following operating results for the year end December 31, 2020 as compared to the year
ended December 31, 2018:
Revenues
Rental income. Rental income was $106.5 million for the year ended December 31, 2020 compared to $98.0 million for the year
ended December 31, 2018, which was an increase of approximately $8.5 million, or 8.6%. The majority of the increase is related to a
5.3% increase in the weighted average monthly effective rent per occupied apartment unit to $1,058 as of December 31, 2020 from
$1,005 as of December 31, 2018, partially offset by a 0.7% decrease in occupancy.
Other income. Other income was $2.0 million for the year ended December 31, 2020 compared to $2.6 million for the year
ended December 31, 2018, which was a decrease of approximately $0.6 million, or 24.2%. The majority of the decrease is related to a
$0.4 million decrease in non-refundable fees.
Expenses
Property operating expenses. Property operating expenses were $24.8 million for the year ended December 31, 2020 compared
to $24.1 million for the year ended December 31, 2018, which was an increase of approximately $0.7 million, or 3.2%. The majority
of the increase is related to a $0.6 million, or 5.9%, increase in payroll expenses.
55
Real estate taxes and insurance. Real estate taxes and insurance costs were $17.5 million for the year ended December 31, 2020
compared to $15.8 million for the year ended December 31, 2018, which was an increase of approximately $1.7 million, or 10.3%.
The majority of the increase is related to a $1.7 million, or 12.2%, increase in property taxes.
Property management fees. Property management fees were $3.2 million for the year ended December 31, 2020 to $3.0 million
for the year ended December 31, 2018, which was an increase of approximately $0.2 million, or 7.3%. The majority of the increase is
related to an increase in total revenues, which the fee is primarily based on.
Property general and administrative expenses. Property general and administrative expenses were $2.8 million for the year
ended December 31, 2020 compared to $3.3 million for the year ended December 31, 2018, which was a decrease of approximately
$0.5 million, or 13.8%. The majority of the decrease is related to a $0.3 million, or 26.8%, decrease in marketing expenses.
NOI and 2019-2020 Same Store NOI for the Years Ended December 31, 2020 and 2019
The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2019-
2020 Same Store NOI for the years ended December 31, 2020 and 2019 to net income, the most directly comparable GAAP financial
measure (in thousands):
Net income
Adjustments to reconcile net income to NOI:
Advisory and administrative fees
Corporate general and administrative expenses
Casualty-related expenses/(recoveries)
Casualty losses (gains)
Miscellaneous income
Pandemic expense
Property general and administrative expenses
Depreciation and amortization
Interest expense
Loss on extinguishment of debt and modification costs
Gain on sales of real estate
NOI
Less Non-Same Store
Revenues
Operating expenses
Same Store NOI
For the Year Ended December 31,
2019
2020
$
44,150
$
99,438
7,670
10,035
790
(5,886)
(1,772)
510
1,112
82,411
44,753
1,470
(69,151)
116,092
(82,585)
34,643
68,150
$
$
7,500
9,613
(34)
3,488
(587)
—
1,517
69,086
37,385
2,869
(127,684)
102,591
(63,147)
26,610
66,054
(1)
(2)
(3)
$
$
(1) Adjustment to net income to exclude certain property operating expenses that are casualty-related expenses/(recoveries).
(2) Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19.
(3) Adjustment to net income 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.
56
NOI and 2018-2020 Same Store NOI for the Years Ended December 31, 2020, 2019 and 2018
The following table, which has not been adjusted for the effects of noncontrolling interests, reconciles our NOI and our 2018-
2020 Same Store NOI for the years ended December 31, 2020, 2019 and 2018 to net income (loss), the most directly comparable
GAAP financial measure (in thousands):
Net income (loss)
Adjustments to reconcile net income to NOI:
Advisory and administrative fees
Corporate general and administrative expenses
Casualty-related expenses/(recoveries)
Casualty losses (gains)
Miscellaneous income
Pandemic expense
Property general and administrative expenses
Depreciation and amortization
Interest expense
Loss on extinguishment of debt and modification costs
Gain on sales of real estate
NOI
Less Non-Same Store
Revenues
Operating expenses
Same Store NOI
For the Year Ended December 31,
2020
2019
2018
$
44,150
$
99,438
$
(1,614)
7,670
10,035
790
(5,886)
(1,772)
510
1,112
82,411
44,753
1,470
(69,151)
116,092
(96,358)
40,364
60,098
$
$
7,500
9,613
(34)
3,488
(587)
—
1,517
69,086
37,385
2,869
(127,684)
102,591
(76,367)
31,896
58,120
$
$
7,474
7,808
(663)
—
—
—
1,294
47,470
28,572
3,576
(13,742)
80,175
(46,008)
20,236
54,403
(1)
(2)
(3)
$
$
(1) Adjustment to net income (loss) to exclude certain property operating expenses that are casualty-related expenses/(recoveries).
(2) Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19.
(3) 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.
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. 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 noncontrolling interests 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 and gains or losses, pandemic expenses, the
amortization of deferred financing costs incurred in connection with obtaining short-term debt financing, and the noncontrolling
57
interests (as described above) related to these items. We believe Core FFO is useful to investors as a supplemental gauge of our
operating performance and is useful in comparing our operating performance with other REITs that are not as involved in the
aforementioned activities.
AFFO makes certain adjustments to Core FFO in order to arrive at a more refined measure of the operating performance of our
portfolio. 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 10 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.
58
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 years ended December 31, 2020, 2019 and 2018 (in thousands, except per share amounts):
`
For the Year Ended December 31,
Net income (loss)
Depreciation and amortization
Gain on sales of real estate
Adjustment for noncontrolling interests
FFO attributable to common stockholders
FFO per share - basic
FFO per share - diluted
Loss on extinguishment of debt and modification costs
Casualty-related expenses/(recoveries)
Casualty losses (gains)
Pandemic expense
Amortization of deferred financing costs - acquisition
term notes
Adjustment for noncontrolling interests
Core FFO attributable to common stockholders
(1)
Core FFO per share - basic
Core FFO per share - diluted
Amortization of deferred financing costs - long term
debt
Equity-based compensation expense
Adjustment for noncontrolling interests
AFFO attributable to common stockholders
AFFO per share - basic
AFFO per share - diluted
$
$
2020
44,150
82,411
(69,151)
(172)
57,238
2019
99,438
69,086
(127,684)
(122)
40,718
2018
(1,614)
47,470
(13,742)
(96)
32,018
2.32
2.27
$
$
1.69
1.66
$
$
1.51
1.48
1,470
790
(5,886)
510
1,384
6
55,512
2,869
(34)
3,488
—
553
(21)
47,573
3,576
(663)
—
—
159
(9)
35,081
2.25
2.20
$
$
1.97
1.93
$
$
1.66
1.62
1,453
5,504
(21)
62,448
1,530
5,130
(20)
54,213
1,491
4,198
(17)
40,753
2.53
2.47
$
$
2.25
2.20
$
$
1.92
1.88
$
$
$
$
$
$
$
Weighted average common shares outstanding -
basic
Weighted average common shares outstanding -
diluted
24,715
24,116
21,189
25,234
24,593
21,667
Dividends declared per common share
$
1.279
$
1.138
$
1.025
FFO Coverage - diluted
Core FFO Coverage - diluted
AFFO Coverage - diluted
(2)
(2)
(2)
1.77x
1.72x
1.94x
1.46x
1.70x
1.94x
1.44x
1.58x
1.84x
% Change
2020 - 2019
% Change
2020 - 2018
-55.6%
19.3%
-45.8%
41.0%
40.6%
37.0%
37.0%
-58.9%
N/M
N/M
N/M
150.3%
-128.6%
16.7%
13.9%
13.7%
-5.0%
7.3%
5.0%
15.2%
12.4%
12.3%
2.5%
2.6%
12.4%
21.9%
1.2%
-0.1%
N/M
73.6%
403.2%
79.2%
78.8%
53.4%
53.5%
-58.9%
-219.1%
N/M
N/M
770.4%
-166.7%
58.2%
35.7%
35.9%
-2.5%
31.1%
23.5%
53.2%
31.4%
31.6%
16.6%
16.5%
24.8%
23.0%
8.9%
5.5%
(1) Represents additional cleaning, disinfecting and other costs incurred at the properties related to COVID-19.
(2)
Indicates coverage ratio of FFO/Core FFO/AFFO per common share (diluted) over dividends declared per common share during
the period.
The year ended December 31, 2020 as compared to the year ended December 31, 2019
FFO was $57.2 million for the year ended December 31, 2020 compared to $40.7 million for the year ended December 31,
2019, which was an increase of approximately $16.5 million. The change in our FFO between the periods primarily relates to an
increase in total revenues of $23.7 million, partially offset by an increase in total property operating expenses of $11.2 million, interest
59
expense of $7.4 million, real estate taxes and insurance expenses of $6.6 million and adjustments for amounts attributable to
noncontrolling interests.
Core FFO was $55.5 million for the year ended December 31, 2020 compared to $47.6 million for the year ended December 31,
2019, which was an increase of approximately $7.9 million. The change in our Core FFO between the periods primarily relates to an
increase in FFO and an increase in amortization of deferred financing costs for acquisition term notes of $0.8 million, partially offset
by an increase in casualty gains of $9.4 million and a decrease in loss on extinguishment of debt and modification costs of $1.4
million.
AFFO was $62.4 million for the year ended December 31, 2020 compared to $54.2 million for the year ended December 31,
2019, which was an increase of approximately $8.2 million. The change in our AFFO between the periods primarily relates to
increases in Core FFO and equity-based compensation expense of $0.4 million.
The year ended December 31, 2020 as compared to the year ended December 31, 2018
FFO was $57.2 million for the year ended December 31, 2020 compared to $32.0 million for the year ended December 31,
2018, which was an increase of approximately $25.2 million. The change in our FFO between the periods primarily relates to an
increase in total revenues of $58.2 million, partially offset by an increase in total property operating expenses of $11.4 million, interest
expense of $16.2 million, and corporate general and administrative expenses of $2.2 million.
Core FFO was $55.5 million for the year ended December 31, 2020 compared to $35.1 million for the year ended December 31,
2018, which was an increase of approximately $20.4 million. The change in our Core FFO between the periods primarily relates to an
increase in FFO and an increase in amortization of deferred financing costs for acquisition term notes of $1.2 million, partially offset
by an increase in casualty gains of $5.9 million.
AFFO was $62.4 million for the year ended December 31, 2020 compared to $40.8 million for the year ended December 31,
2018, which was an increase of approximately $21.6 million. The change in our AFFO between the periods primarily relates to
increases in Core FFO and equity-based compensation expense of $1.3 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;
acquisitions of additional properties;
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 December 31, 2020, we had approximately $10.6 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. Additionally, we had $42.0 million of unused capacity on the Corporate Credit Facility as of December 31, 2020.
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
60
result of any failure to comply with financial covenants in our existing and future indebtedness), general market conditions for REITs,
our operating performance and liquidity, market perceptions about us and restrictions on sales of properties under the Code. The
Company continues to monitor the impact on COVID-19 and its impact on future rent collections, valuation of real estate investments,
impact on cash flow and ability to refinance or repay debt. The success of our business strategy will depend, in part, on our ability to
access these various capital sources.
In addition to our value-add program, our multifamily properties will require periodic capital expenditures and renovation to
remain competitive. Also, acquisitions, redevelopments, or expansions of our multifamily properties will require significant capital
outlays. Long-term, we may not be able to fund such capital improvements solely from net cash provided by operations because we
must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and
excluding net capital gains, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and
gains. As a result, our ability to fund capital expenditures, acquisitions, or redevelopment through retained earnings long-term is
limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to
obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations, and prospects could
be materially and adversely affected.
On February 20, 2019, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of
Jefferies, Raymond James and Truist (collectively, the “2019 ATM Sales Agents”), pursuant to which the Company could 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 (the “2019 ATM Program”). Sales of shares of common stock, if any, could be made in transactions that are deemed to
be “at the market” offerings, as defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of
ordinary brokers’ transactions on the New York Stock Exchange, to or through a market maker at market prices prevailing at the time
of sale, at prices related to prevailing market prices or at negotiated prices based on prevailing market prices.
In addition to the
issuance and sale of shares of common stock, the Company could enter into forward sale agreements with each of Jefferies and
Raymond James, or their respective affiliates, through the 2019 ATM Program. During the year ended December 31, 2019, the
Company issued 1,565,322 shares of common stock at an average price of $45.98 per share for gross proceeds of approximately $72.0
million. The Company paid approximately $1.1 million in fees to the 2019 ATM Sales Agents with respect to such sales and incurred
other issuance costs of approximately $1.0 million, both of which were netted against the gross proceeds and recorded in additional
paid in capital. During the year ended December 31, 2020, the Company issued 560,000 shares of common stock at an average price
of $50.00 per share for gross proceeds of $28.0 million under the 2019 ATM Program. The Company paid approximately $0.4 million
in fees to the 2019 ATM Sales Agents with respect to such sales and incurred other issuance costs of approximately $0.4 million, both
of which were netted against the gross proceeds and recorded in additional paid in capital. On February 27, 2020, the 2019 ATM
Program reached aggregate sales of $100,000,000 and therefore expired.
On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of
Jefferies, Raymond James, KeyBanc and Truist, pursuant to which the Company may issue and sell from time to time shares of the
Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000. Sales of shares of
common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the
Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on the New York Stock Exchange,
to or through a market maker at market prices prevailing at the time of sale, at prices related to prevailing market prices or at
negotiated prices based on prevailing market prices.
In addition to the issuance and sale of shares of common stock, the Company
may enter into forward sale agreements with each of Jefferies, KeyBanc, Raymond James, Truist, or their respective affiliates, through
the 2020 ATM Program. During the year ended December 31, 2020, the Company issued 718,306 shares of common stock at an
average price of $43.92 per share for gross proceeds of $31.5 million under the 2020 ATM Program. The Company paid
approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other issuance costs of
approximately $0.6 million, both of which were netted against the gross proceeds and recorded in additional paid in capital. The 2020
ATM Program may be terminated by the Company at any time and expires automatically once aggregate sales under the 2020 ATM
Program reach $225,000,000 (see Note 8 to our consolidated financial statements).
We believe that our available cash, expected operating cash flows, and potential debt or equity financings will provide sufficient
funds for our operations, anticipated scheduled debt service payments and dividend requirements for the twelve-month period
following December 31, 2020.
61
Cash Flows
The following table presents selected data from our consolidated statements of cash flows for the years ended December 31,
2020, 2019 and 2018 (in thousands):
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
$
$
2020
For the Year Ended December 31,
2019
2018
57,226
11,503
(82,896)
(14,167)
71,182
57,015
$
$
51,366
(553,129)
529,816
28,053
43,129
71,182
$
$
41,743
(135,248)
93,386
(119)
43,248
43,129
The year ended December 31, 2020 as compared to the year ended December 31, 2019
Cash flows from operating activities. During the year ended December 31, 2020, net cash provided by operating activities was
$57.2 million compared to net cash provided by operating activities of $51.4 million for the year ended December 31, 2019.
Cash flows from investing activities. During the year ended December 31, 2020, net cash provided by investing activities was
$11.5 million compared to net cash used in investing activities of $553.1 million for the year ended December 31, 2019. The change in
cash flows from investing activities was mainly due to our acquisition and disposition activity in 2020 and 2019 and the timing of the
transactions.
Cash flows from financing activities. During the year ended December 31, 2020, net cash used in financing activities was $82.9
million compared to net cash provided by financing activities of $529.8 million for the year ended December 31, 2019. The change in
cash flows from financing activities was mainly due to a net decrease in debt of approximately $555.8 million between the periods.
The year ended December 31, 2019 as compared to the year ended December 31, 2018
Cash flows from operating activities. During the year ended December 31, 2019, net cash provided by operating activities was
$51.4 million compared to net cash provided by operating activities of $41.7 million for the year ended December 31, 2018. The
change in cash flows from operating activities was mainly due to an increase in total revenues, partially offset by an increase in total
property operating expenses.
Cash flows from investing activities. During the year ended December 31, 2019, net cash used in investing activities was $553.1
million compared to net cash used in investing activities of $135.2 million for the year ended December 31, 2018. The change in cash
flows from investing activities was mainly due to an increase in acquisitions, partially offset by an increase in dispositions. We sold
six properties for net proceeds of approximately $286.5 million and acquired eleven properties for a combined purchase price of
approximately $876.7 million during the period in 2019; we sold one property for net proceeds of approximately $29.6 million and
acquired three properties for a combined purchase price of approximately $131.0 million during 2018.
Cash flows from financing activities. During the year ended December 31, 2019, net cash provided by financing activities was
$529.8 million compared to net cash provided by financing activities of $93.4 million for the year ended December 31, 2018. The
change in cash flows from financing activities was mainly due to a net increase in debt of approximately $450.6 million between the
periods.
Debt, Derivatives and Hedging Activity
Mortgage Debt
As of December 31, 2020, our subsidiaries had aggregate mortgage debt outstanding to third parties of approximately $1.2
billion at a weighted average interest rate of 1.83% and an adjusted weighted average interest rate of 3.06%. For purposes of
calculating the adjusted weighted average interest rate of our mortgage debt outstanding, we have included the weighted average fixed
rate of 1.3792% for one-month LIBOR on our combined $1.2 billion notional amount of interest rate swap agreements, which
effectively fix the interest rate on $1.1 billion of our floating rate mortgage debt. See Notes 6 and 7 to our consolidated financial
statements for additional information.
62
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 December 31, 2020, interest
rate swap agreements effectively covered 100% of our $1.1 billion 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 December 31, 2020, interest rate cap agreements covered $393.0
million of our $1.1 billion of floating rate mortgage debt outstanding. These interest rate cap agreements effectively cap one-month
LIBOR on $393.0 million of our floating rate mortgage debt at a weighted average rate of 5.16%.
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.
Corporate Credit Facility
On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the “Corporate Credit Facility”)
with Truist 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 Corporate Credit Facility is a full-term, interest-only facility with
an initial 24-month term, has one 12-month extension at the option of the Company, and the Company has the right to request an
increase in the facility amount up to $150 million (the “Accordion Feature”). The facility 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 Corporate Credit Facility
agreement, and is guaranteed by the Company. On June 29, 2019, the Company, through the OP, exercised its option under the
Accordion Feature of the Corporate Credit Facility and increased the amount of the facility from $75 million to $125 million. In
conjunction with the increase in the facility, the Company incurred costs of $0.5 million in obtaining the additional financing through
the Accordion Feature (see Note 6 for additional information related to our deferred financing costs). On August 28, 2019, the
Company, through the OP, increased the amount of the Corporate Credit Facility by $25 million, resulting in aggregate commitments
of $150 million as of September 30, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.2 million
of deferred financing costs. On November 20, 2019, the Company, through the OP, increased the amount of the Corporate Credit
Facility by $75 million, resulting in aggregate commitments of $225 million as of December 31, 2019. In conjunction with the
increase in the facility, the Company incurred costs of $0.8 million of deferred financing costs. As of December 31, 2020, there was
$183.0 million in aggregate principal outstanding on the Corporate Credit Facility. On October 13, 2020, the Company extended the
maturity date of the Corporate Credit Facility from January 28, 2021 to January 28, 2022. There are currently no more extension
options available under the existing agreement.
On October 13, 2020, the Company extended the maturity date of the Corporate Credit Facility from January 28, 2021 to
January 28, 2022 (the “Maturity Date”), which falls within one year of February 19, 2021. During 2020, the Company repaid $35.0
million in principal on the Corporate Credit Facility and had sufficient cash flow to fund operations as well as close on a new
acquisition (Fairways at San Marcos) in the fourth quarter of 2020. Management recognizes that finding an alternative source of
funding is necessary to repay the facility by the Maturity Date. Management is evaluating multiple options to fund the repayment of
the $183.0 million principal balance outstanding, including recasting the Corporate Credit Facility, securing additional equity or debt
financing, selling a portion of the portfolio, or any combination thereof. Management believes that there is sufficient time before the
Maturity Date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they
become due.
63
The Corporate Credit Facility is a non-recourse obligation and contains customary events of default, including defaults in the
payment of principal or interest, defaults in compliance with the covenants contained in the document evidencing the loan, defaults in
payments under any other security instrument, and bankruptcy or other insolvency events. As of December 31, 2020, the Company
believes it is compliant with all provisions.
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 eleven interest rate swap transactions with KeyBank and two with Truist Bank (collectively the
“Counterparties”) with a combined notional amount of $1.2 billion which are effective as of December 31, 2020. As of December 31,
2020, the interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect to $1.1
billion of our floating rate mortgage debt outstanding with a weighted average fixed rate of 1.3792%. During the term of these interest
rate swap agreements, we are required to make monthly fixed rate payments of 1.3792%, on a weighted average basis, on the notional
amounts, while the Counterparties are 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 Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“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
July 1, 2016
July 1, 2016
July 1, 2016
September 1, 2016
April 1, 2017
May 1, 2017
July 1, 2017
June 1, 2019
June 1, 2019
September 1, 2019
September 1, 2019
January 3, 2020
March 4, 2020
Termination Date
June 1, 2021
June 1, 2021
June 1, 2021
June 1, 2021
April 1, 2022
April 1, 2022
July 1, 2022
June 1, 2024
June 1, 2024
September 1, 2026
September 1, 2026
September 1, 2026
June 1, 2026
Counterparty
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
Truist
KeyBank
KeyBank
KeyBank
Truist
$
$
Notional
Fixed Rate (1)
100,000
100,000
100,000
100,000
100,000
50,000
100,000
50,000
50,000
100,000
125,000
92,500
100,000
1,167,500
1.1055%
1.0210%
0.9000%
0.9560%
1.9570%
1.9610%
1.7820%
2.0020%
2.0020%
1.4620%
1.3020%
1.6090%
0.8200%
1.3792%(2)
(1)
The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2020, one-month LIBOR was
0.14388%.
(2) Represents the weighted average fixed rate of the interest rate swaps.
The following table contains summary information regarding our forward interest rate swaps (dollars in thousands):
Effective Date
June 1, 2021
June 1, 2021
September 1, 2026
Termination Date
September 1, 2026
September 1, 2026
January 1, 2027
Counterparty
KeyBank
KeyBank
KeyBank
Notional Amount
Fixed Rate (1)
$
$
200,000
200,000
92,500
492,500
0.8450%
0.9530%
1.7980%
1.0678% (2)
(1)
The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2020, one-month LIBOR was
0.14388%.
(2) Represents the weighted average fixed rate of the interest rate swaps.
64
Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2020 for the next five
calendar years subsequent to December 31, 2020. We used one-month LIBOR as of December 31, 2020 to calculate interest expense
due by period on our floating rate debt and net interest expense due by period on our interest rate swaps.
Total
2021
Payments Due by Period (in thousands)
2023
2022
2024
2025
Thereafter
Operating Properties Mortgage Debt
Principal payments
Interest expense
(1)
Total
Credit Facility
Principal payments
Interest expense
Total
$1,168,078 $
155,861
1,509 $ 21,293 $ 395,168 $ 245,780
20,769
29,946
$1,323,939 $ 35,096 $ 31,455 $ 49,949 $ 420,726 $ 266,549
896 $
25,558
28,656
34,200
$ 503,432
16,732
$ 520,164
$ 183,000 $
4,782
$ 187,782 $
— $ 183,000 $
4,453
4,453 $ 183,329 $
329
— $
—
— $
— $
—
— $
— $
—
— $
—
—
—
Total contractual obligations and
commitments
$1,511,721 $ 39,549 $ 214,784 $ 49,949 $ 420,726 $ 266,549
$ 520,164
(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 December 31, 2020, we had
entered into thirteen interest rate swap transactions with a combined notional amount of $1.2 billion. We have allocated the total
impact of expected settlements on the $1.2 billion notional amount of interest rate swaps to “Operating Properties Mortgage
Debt.” We used one-month LIBOR as of December 31, 2020 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 December 31, 2020, we had approximately $10.6 million of renovation
value-add reserves for our planned capital expenditures and other expenses to implement our value-add program, which will complete
approximately 1,205 planned interior rehabs. The following table sets forth a summary of our capital expenditures related to our
value-add program for the years ended December 31, 2020, 2019 and 2018 (in thousands):
Rehab Expenditures
Interior
Exterior and common area
Total rehab expenditures
2020
For the Year Ended December 31,
2019
2018
(1)$
$
10,093
20,447
30,540
$
$
12,044
11,242
23,286
$
$
8,559
9,133
17,692
(1)
Includes total capital expenditures during the period on completed and in-progress interior rehabs. For the years ended
December 31, 2020, 2019 and 2018, we completed full and partial interior rehabs on 1,679, 2,516 and 1,432 units, respectively.
65
Freddie Mac Multifamily Green Advantage Program
In order to obtain more favorable pricing on our mortgage debt financing with Freddie Mac, the Company decided to participate
in Freddie Mac’s Multifamily Green Advantage program (the “Green Program”). As of December 31, 2020, the Company has
completed its Green Program improvements on all but one property. We will complete the green improvements on this property
during 2021. 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. Due to changes in
Freddie Mac’s requirements to participate in the Green Program, we are not implementing this on acquisitions going forward.
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 years ended December 31, 2020, 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.
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 December 31, 2020. We and our
subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2019, 2018 and 2017
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
(loss).
Dividends
We intend to make regular quarterly dividend payments to holders of our common stock. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid
and excluding net capital gains. As a REIT, we will be subject to federal income tax on our undistributed REIT taxable income and net
capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are
less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income
from prior years. We intend to make regular quarterly dividend payments of all or substantially all of our taxable income to holders of
our common stock out of assets legally available for this purpose, if and to the extent authorized by our Board. Before we make any
dividend payments, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements
and debt service on our debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell
assets, borrow funds or raise additional capital to make cash dividends or we may make a portion of the required dividend in the form
of a taxable distribution of stock or debt securities.
66
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 fourth quarterly dividend of 2020 of $0.34125 per share on October
26, 2020, which was paid on December 31, 2020 and funded out of cash flows from operations.
Off-Balance Sheet Arrangements
As of December 31, 2020 and 2019, we had no off-balance sheet arrangements that have or are reasonably likely to have a
current or future material 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 annual report.
Purchase Price Allocation
Upon acquisition of a property considered to be an asset acquisition, the purchase price and related acquisition costs (“total
consideration”) are allocated to land, buildings, improvements, furniture, fixtures, and equipment, and intangible lease assets based on
relative fair value in accordance with FASB ASC 805, Business Combinations. Acquisition costs are capitalized in accordance with
FASB ASC 805.
The allocation of total consideration, which is determined using inputs that are classified within Level 3 of the fair value
hierarchy established by FASB ASC 820, Fair Value Measurement and Disclosures (see Note 7 to our consolidated financial
statements), is based on management’s estimate of the property’s “as-if” vacant fair value and is calculated by using all available
information such as the replacement cost of such asset, appraisals, property condition reports, market data and other related
information. If any debt is assumed in an acquisition, the difference between the fair value, which is estimated using inputs that are
classified within Level 2 of the fair value hierarchy, and the face value of debt is recorded as a premium or discount and amortized as
interest expense over the life of the debt assumed.
Impairment
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The key inputs into our impairment analysis include, but are not limited to, the holding period, net
operating income, and capitalization rates. In such cases, we will evaluate the recoverability of such real estate assets based on
estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be
written down to its estimated fair value. The Company’s impairment analysis identifies and evaluates events or changes in
circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period
the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate
investment.
67
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 years ended December 31, 2020, 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 7A. 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 December 31, 2020, we had total indebtedness of $1.4 billion
at a weighted average interest rate of 1.94%, of which $1.3 billion was debt with a floating interest rate. The interest rate swap
agreements we have entered into effectively fix the interest rate on 100% of our $1.1 billion of floating rate mortgage debt outstanding
(see below). As of December 31, 2020, the adjusted weighted average interest rate of our total indebtedness was 3.06%. For purposes
of calculating the adjusted weighted average interest rate of the total indebtedness, we have included the weighted average fixed rate
of 1.3792% for one-month LIBOR on the $1.2 billion notional amount of interest rate swap agreements that we have entered into as of
December 31, 2020, which effectively fix the interest rate on $ 1.1 billion of our floating rate mortgage debt outstanding.
An increase in interest rates could make the financing of any acquisition by us costlier. 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 December 31, 2020, the interest rate cap agreements we have entered into effectively cap one-
month LIBOR on $393.0 million of our floating rate mortgage debt at a weighted average rate of 5.16% for the term of the
agreements, which is generally 3 to 4 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 thirteen interest rate swap transactions with the Counterparties with a combined notional amount of
$1.2 billion. The interest rate swaps we have entered into effectively replace the floating interest rate (one-month LIBOR) with respect
to that amount with a weighted average fixed rate of 1.3792%. During the term of these interest rate swap agreements, we are required
to make monthly fixed rate payments of 1.3792%, on a weighted average basis, on the notional amounts, while the Counterparties are
obligated to make monthly floating rate payments based on one-month LIBOR to us referencing the same notional amounts. We have
designated these interest rate swaps as cash flow hedges of interest rate risk.
68
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 Counterparties under the terms of the interest rate swap agreements we had entered into as of December 31, 2020, of the
amounts illustrated in the table below for our indebtedness as of December 31, 2020 (dollars in thousands):
Change in Interest Rates
0.25%
0.50%
0.75%
1.00%
$
Annual Increase to Interest Expense
280
560
840
1,120
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 ARRC has proposed that 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 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in our consolidated financial statements and the notes thereto beginning on
page F-1 in this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 December 31, 2020, 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 December 31, 2020, 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.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and for our assessment of the effectiveness of internal control
over financial reporting. Our internal control over financial reporting is a process designed under the supervision of our President and
our Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.
69
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our President and Chief Financial Officer, has conducted an assessment regarding the effectiveness
of our internal control over financial reporting as of December 31, 2020, based on the framework established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
assessment under the criteria described above, management has concluded that our internal control over financial reporting was
effective as of December 31, 2020.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2020, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in their report which is included herein.
Item 9B. Other Information
On February 15, 2021, our Board approved an amendment to the Bylaws by adopting the Amended and Restated Bylaws of the
Company (as amended and restated, the “Amended Bylaws”). The amendment to the Bylaws reflected in Article XV of the Amended
Bylaws provides that the Company’s stockholders may alter, amend or repeal the Amended Bylaws by the affirmative vote of a
majority of the votes entitled to be cast on the matter and without any action by the Board. The foregoing summary of the Amended
Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Bylaws, a copy of
which is attached hereto as Exhibit 3.2 and is incorporated by reference herein.
70
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required in response to this Item 10 is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required in response to this Item 11 is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required in response to this Item 12 is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required in response to this Item 13 is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
Our Board has determined that Mr. Constantino’s simultaneous service on the audit committees of more than two other public
companies (NXRT, NHF and Patriot Bank N.A.) would not impair his ability to effectively serve on our audit committee. Our Board
also determined that Mr. Constantino’s service on the other companies’ audit committees did not hinder his ability to serve on our
audit committee as he is currently retired and not serving in an executive officer capacity for another company.
Item 14. Principal Accountant Fees and Services
The information required in response to this Item 14 is incorporated herein by reference to our definitive proxy statement to be
filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal
year covered by this Annual Report on Form 10-K.
71
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
PART IV
1. Financial Statements. See Index to Consolidated Financial Statements and Schedules of NexPoint Residential Trust, Inc. on
page F-1 of this Report.
2. Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules of NexPoint Residential Trust,
Inc. on page S-43 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required
information is included in the financial statements or notes thereto.
3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index.
72
Exhibit Number
EXHIBIT INDEX
Description
1.1
1.2
2.1
3.1
3.2*
4.1*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
Form of Equity Distribution Agreement (incorporated by reference to Exhibit 1.1 to the Company’s Current Report
on Form 8-K filed with the SEC on March 10, 2020)
Form of Master Forward Sale Agreement (incorporated by reference to Exhibit 1.2 to the Company’s Current Report
on Form 8-K filed with the SEC on February 18, 2020)
Separation and Distribution Agreement (incorporated by reference to Exhibit 2.1 to the Company’s Registration
Statement on Form 10 filed with the SEC on March 12, 2015)
Articles of Amendment and Restatement of NexPoint Residential Trust, Inc. (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on 8-K filed with the SEC on June 15, 2016)
Amended and Restated Bylaws of NexPoint Residential Trust, Inc.
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
Amended and Restated Limited Partnership Agreement of NexPoint Residential Trust Operating Partnership, L.P.
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2017, filed with the SEC on August 1, 2017)
First Amendment to Amended and Restated Limited Partnership Agreement of NexPoint Residential Trust Operating
Partnership, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the
year ended December 31, 2019, filed with the SEC on February 19, 2019)
Advisory Agreement by and among NexPoint Residential Trust, Inc., NexPoint Residential Trust Operating
Partnership, L.P. and NexPoint Real Estate Advisors, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, filed with the SEC on May 15, 2015)
Amendment to Advisory Agreement, dated June 15, 2016, by and among the Company, NexPoint Residential Trust
Operating Partnership, L.P. and NexPoint Real Estate Advisors, L.P. (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on 8-K filed with the SEC on June 15, 2016)
Registration Rights Agreement by and between NexPoint Residential Trust, Inc. and NexPoint Real Estate Advisors,
L.P. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2015, filed with the SEC on May 15, 2015)
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.4 to the
Company’s Registration Statement on Form 10 filed with the SEC on January 9, 2015)
NexPoint Residential Trust, Inc. 2016 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on 8-K filed with the SEC on June 15, 2016)
Confirmation of swap transaction, dated May 18, 2016, from KeyBank National Association to NexPoint Residential
Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-
K filed with the SEC on May 19, 2016)
Confirmation of swap transaction, dated June 13, 2016, from KeyBank National Association to NexPoint Residential
Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-
K filed with the SEC on June 17, 2016)
Confirmation of swap transaction, dated June 30, 2016, from KeyBank National Association to NexPoint Residential
Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on 8-
K filed with the SEC on July 1, 2016)
Confirmation of swap transaction, dated August 12, 2016, from KeyBank National Association to NexPoint
Residential Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on 8-K filed with the SEC on August 16, 2016)
Confirmation of swap transaction, dated March 27, 2017, from KeyBank National Association to NexPoint
Residential Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed with the SEC on March 28, 2017)
73
10.13
10.14
10.15*
10.16
10.17
21.1*
23.1*
31.1*
31.2*
32.1+
Confirmation of swap transaction, dated June 14, 2017, from KeyBank National Association to NexPoint Residential
Trust Operating Partnership, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the SEC on June 15, 2017)
Form of Restricted Stock Units Agreement (Officers) for award agreements entered into prior to February 15, 2021
(incorporated by reference to Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, filed with the SEC on March 15, 2017)
Form of Restricted Stock Units Agreement for award agreements entered into on or after February 15, 2021
Form of Restricted Stock Units Agreement (Directors) (incorporated by reference to Exhibit 10.13 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 15, 2017)
Revolving Credit Agreement by and among NexPoint Residential Trust Operating Partnership, L.P., as Borrower,
the Lenders from time to time party thereto, and SunTrust Bank, a Georgia banking corporation, as Administrative
Agent, dated as of January 28, 2019, as amended (incorporated by reference to Exhibit 10.16 to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020)
List of Subsidiaries of NexPoint Residential Trust, Inc.
Consent of KPMG LLP
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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*
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its
XBRL tags are embedded within the inline XBRL document)
101.SCH*
Inline XBRL Taxonomy Extension Schema
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
+
Filed herewith.
Furnished herewith.
74
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
February 22, 2021
NEXPOINT RESIDENTIAL TRUST, INC.
/s/ Jim Dondero
Jim Dondero
President and Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Jim Dondero
Jim Dondero
/s/ Brian Mitts
Brian Mitts
/s/ Edward Constantino
Edward Constantino
/s/ Dr. Arthur Laffer
Dr. Arthur Laffer
/s/ Scott Kavanaugh
Scott Kavanaugh
/s/ Catherine Wood
Catherine Wood
President and Director
(Principal Executive Officer)
Chief Financial Officer and Director
(Principal Financial Officer and Principal
Accounting Officer)
Director
Director
Director
Director
Date
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
February 22, 2021
75
INDEX TO FINANCIAL STATEMENTS
Financial Statements
NexPoint Residential Trust, Inc.—Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
Financial Statements Schedules
Schedule III—Real Estate and Accumulated Depreciation
Page
F-2
F-6
F-7
F-8
F-9
F-11
S-1
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexPoint Residential Trust, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NexPoint Residential Trust, Inc. and subsidiaries (the Company) as
of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income (loss), stockholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and financial
statement Schedule III Real Estate and Accumulated Depreciation (collectively, the consolidated financial statements). In our opinion,
the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31,
2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal
Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated February 22, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of
January 1, 2019 due to the adoption of Accounting Standards Update 2016-02, Leases and Accounting Standards Update 2018-
11, Leases Targeted Improvements.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-2
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the
critical audit matters or on the accounts or disclosures to which they relate.
Assessment of the relative fair value allocation in an asset acquisition
As discussed in Notes 2 and 5 to the consolidated financial statements, the Company acquired a real estate property recorded as
an asset acquisition during the year ended December 31, 2020. The purchase price in an asset acquisition is allocated to the assets
acquired and liabilities assumed using their relative fair values.
We identified the assessment of the relative fair value allocation in an asset acquisition, specifically the land, buildings,
improvements, and furniture, fixtures, and equipment as a critical audit matter. There is a high degree of subjective auditor
judgment in evaluating the results of procedures over the relevance of comparable land sales and replacement cost of the
buildings, improvements, and furniture, fixtures, and equipment used by the Company to determine the fair value of these assets.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested
the operating effectiveness of certain internal controls over the Company’s asset acquisition allocation process, including controls
to identify and select publicly available and comparable land sales and replacement costs of the buildings, improvements, and
furniture, fixtures, and equipment. We involved valuation professionals with specialized skills and knowledge, who assisted in the
following procedures for the Company’s asset acquisition:
•
•
•
compared the consideration paid by the Company to acquire the property to comparable market transactions based on the
price per apartment unit acquired
compared the Company’s estimated fair value of land to independently developed estimates based on publicly available and
comparable land sales
compared the cost inputs used in the Company’s replacement cost analysis of buildings, improvements and furniture,
fixtures, and equipment to market data, such as data included in industry recognized guides used for developing replacement,
reproduction, and insurable value costs.
Evaluation of real estate investments for impairment
As discussed in Note 2 to the consolidated financial statements, the Company evaluates the recoverability of its real estate
investments whenever events or changes in circumstances indicate that the carrying amount of a property may not be recoverable.
The Company evaluates the recoverability of such real estate investments based on estimated undiscounted future cash flows and
the estimated liquidation value of such real estate investments based on the expected period the Company will hold the rental
property, and provide for impairment if such estimated undiscounted cash flows, inclusive of the estimated liquidation value, are
insufficient to recover the carrying amount of the real estate investment. As disclosed in Note 5 to the consolidated financial
statements, the Company had $1.8 billion in real estate investments as of December 31, 2020.
We identified the evaluation of real estate investments for impairment as a critical audit matter. Identifying events or changes in
circumstances that indicate the carrying value of a real estate investment may not be recoverable involves a high degree of
subjective auditor judgment. In addition, evaluating how identified events or changes in circumstances impact the expected period
the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective property
requires subjective auditor judgment.
F-3
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested
the operating effectiveness of certain internal controls over the Company’s process to identify and evaluate events or changes in
circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including controls over
determining the period the Company will hold the rental property, net operating income, and the estimated capitalization rate for
each respective real estate investment. We compared the estimated undiscounted cash flows, inclusive of the estimated liquidation
value, based on the expected period the Company will hold the rental property, of each real estate investment to its carrying value
and assessed the sensitivity to changes in assumptions on the recoverability of each property. We performed independent
evaluations considering third-party market reports for (1) indications of a decrease in the fair value of similar real estate
investments and (2) decreases in current and projected operating performance of the real estate investments of the Company. We
inquired of Company officials and inspected documents, such as meeting minutes of the board of directors, to identify Company
strategies that might indicate it was more-likely-than not that a property will be sold before the end of the expected period the
Company planned to hold the property.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Dallas, Texas
February 22, 2021
F-4
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
NexPoint Residential Trust, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited NexPoint Residential Trust, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2020, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2020, and the related notes and financial statement Schedule III Real Estate and Accumulated Depreciation
(collectively, the consolidated financial statements), and our report dated February 22, 2021 expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Dallas, Texas
February 22, 2021
F-5
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
December 31, 2020
December 31, 2019
ASSETS
Operating Real Estate Investments
Land
Buildings and improvements
Intangible lease assets
Construction in progress
Furniture, fixtures, and equipment
Total Gross Operating Real Estate Investments
Accumulated depreciation and amortization
Total Net Operating Real Estate Investments
Real estate held for sale, net of accumulated depreciation of $0 and $7,859, respectively
Total Net Real Estate Investments
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid and other assets
Fair market value of interest rate swaps
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable, net
Mortgages payable held for sale, net
Credit facility, net
Accounts payable and other accrued liabilities
Accrued real estate taxes payable
Accrued interest payable
Security deposit liability
Prepaid rents
Fair market value of interest rate swaps
Total Liabilities
Redeemable noncontrolling interests in the Operating Partnership
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; 25,016,957 and
25,245,740 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated earnings less dividends
Accumulated other comprehensive income (loss)
Total Stockholders' Equity
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
$
$
$
$
$
$
$
323,429
1,544,115
1,675
10,796
96,228
1,976,243
(215,494)
1,760,749
—
1,760,749
24,457
32,558
9,045
2,405
—
1,829,214
1,162,855
—
182,323
10,058
12,822
2,274
2,688
1,639
43,530
1,418,189
317,886
1,472,319
12,414
4,375
81,038
1,888,032
(152,552)
1,735,480
46,330
1,781,810
25,671
45,511
6,285
2,336
4,376
1,865,989
1,145,371
41,176
216,501
11,971
12,206
3,691
2,977
1,658
902
1,436,453
3,098
3,295
—
—
250
376,710
75,321
(44,354)
407,927
1,829,214
$
251
359,748
63,776
2,466
426,241
1,865,989
F-6
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
Revenues
Rental income
Other income
Total revenues
Expenses
Property operating expenses
Real estate taxes and insurance
Property management fees (1)
Advisory and administrative fees (2)
Corporate general and administrative expenses
Property general and administrative expenses
Depreciation and amortization
Total expenses
Operating income before gain on sales of real estate
Gain on sales of real estate
Operating income
Interest expense
Loss on extinguishment of debt and modification costs
Casualty gains (losses)
Miscellaneous income
Net income (loss)
Net income (loss) attributable to redeemable noncontrolling interests in
the Operating Partnership
Net income (loss) attributable to common stockholders
Other comprehensive income (loss)
Unrealized gains (losses) on interest rate derivatives
Total comprehensive income (loss)
Comprehensive income (loss) attributable to redeemable
noncontrolling interests in the Operating Partnership
Comprehensive income (loss) attributable to common stockholders
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
For the Year Ended December 31,
2019
2018
2020
$
$
199,237
5,563
204,800
47,201
31,709
5,971
7,670
10,035
6,239
82,411
191,236
13,564
69,151
82,715
(44,753)
(1,470)
5,886
1,772
44,150
177,162
3,904
181,066
42,692
25,113
5,388
7,500
9,613
6,765
69,086
166,157
14,909
127,684
142,593
(37,385)
(2,869)
(3,488)
587
99,438
132
44,018
$
298
99,140
(46,961)
(2,811)
(14,625)
84,813
(9)
(2,802) $
24,715
25,234
1.78
1.74
$
$
254
84,559
24,116
24,593
4.11
4.03
$
$
$
$
$
$
$
$
$
143,158
3,439
146,597
35,824
20,713
4,382
7,474
7,808
6,134
47,470
129,805
16,792
13,742
30,534
(28,572)
(3,576)
—
—
(1,614)
(5)
(1,609)
1,931
317
1
316
21,189
21,667
(0.08)
(0.08)
(1)
(2)
Fees incurred to an unaffiliated third party that is an affiliate of the noncontrolling limited partner of the Company’s Operating
Partnership (see Note 10).
Fees incurred to the Adviser (see Note 11).
See Notes to Consolidated Financial Statements
F-7
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F-8
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
2019
2018
2020
$
44,150
$
99,438
$
(1,614)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gain on sales of real estate
Depreciation and amortization
Amortization/write-off of deferred financing costs
Change in fair value on derivative instruments included in interest expense
Net cash received (paid) on derivative settlements
Amortization/write-off of fair market value adjustment of assumed debt
Provision for bad debts, net
Vesting of stock-based compensation
Insurance proceeds received for business interruption
Insurance proceeds paid for business interruption
Casualty losses (gains)
Changes in operating assets and liabilities, net of effects of acquisitions:
Operating assets
Operating liabilities
Net cash provided by operating activities
Cash flows from investing activities
Net proceeds from sales of real estate
Prepaid acquisition costs
Insurance premiums paid for casualty losses
Insurance proceeds received from casualty losses
Additions to real estate investments
Acquisitions of real estate investments
Net cash provided by (used in) investing activities
Cash flows from financing activities
Mortgage proceeds received
Mortgage payments
Credit facilities proceeds received
Credit facilities payments
Bridge facility proceeds received
Bridge facility payments
Deferred financing costs paid
Interest rate cap fees paid
Prepayment penalties on extinguished debt
Proceeds from the issuance of common shares through public offering, net of
offering costs
Proceeds from the issuance of common shares through at-the-market offering, net
of offering costs
Payments for taxes related to net share settlement of stock-based compensation
Repurchase of common stock
Dividends paid to common stockholders
Net cash provided by (used in) financing activities
(69,151)
82,411
4,354
9,370
(7,859)
(202)
2,710
5,504
1,468
(605)
(7,125)
(4,866)
(2,933)
57,226
140,197
—
(1,495)
7,544
(49,977)
(84,766)
11,503
46,464
(71,914)
35,000
(70,000)
—
—
(861)
(35)
(711)
—
57,718
(1,731)
(44,530)
(32,296)
(82,896)
(127,684)
69,086
3,502
(6,442)
6,842
(148)
906
5,130
—
—
3,488
(1,256)
(1,496)
51,366
286,479
—
(600)
2,500
(44,159)
(797,349)
(553,129)
423,149
(145,821)
255,000
(37,000)
—
—
(5,120)
(20)
(1,449)
—
69,874
(751)
—
(28,046)
529,816
(13,742)
47,470
3,062
(3,948)
3,832
(169)
668
4,198
—
—
—
(459)
2,445
41,743
29,553
(7,653)
—
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(26,775)
(130,373)
(135,248)
232,252
(148,942)
55,000
(85,000)
30,000
(38,597)
(2,410)
(56)
(1,706)
84,782
—
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(9,672)
(22,265)
93,386
(119)
43,248
43,129
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
(14,167)
71,182
57,015
$
28,053
43,129
71,182
$
$
See Notes to Consolidated Financial Statements
F-9
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Supplemental Disclosure of Cash Flow Information
Interest paid
Supplemental Disclosure of Noncash Activities
Capitalized construction costs included in accounts payable and other accrued
liabilities
Change in fair value on derivative instruments designated as hedges
Other assets acquired from acquisitions
Liabilities assumed from acquisitions
Fair market value adjustment of assumed debt
Assumed debt on acquisitions
Increase in dividends payable upon vesting of restricted stock units
Write-off of assets due to casualty losses
Write-off of fully amortized in-place leases
Write-off of deferred financing costs
$
34,165
$
41,053
$
30,261
2,713
(46,961)
31
44
—
—
268
1,297
12,414
756
3,776
(14,625)
758
6,608
980
70,486
173
7,838
8,181
1,419
1,715
1,931
76
1,382
—
—
336
—
1,340
1,412
See Notes to Consolidated Financial Statements
F-10
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 December 31, 2020, 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 15, 2021 for a one-year term (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 NexPoint Advisors, L.P. (the “Sponsor”).
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.
The Company may allocate up to 30% of the portfolio to investments in real estate-related debt and securities with the potential
for high current income or total returns. These allocations may include first and second mortgages and subordinated, bridge,
mezzanine, construction and other loans, as well as debt securities related to or secured by multifamily real estate and common and
preferred equity securities, which may include securities of other REITs or real estate companies.
2. Summary of Significant Accounting Policies
Basis of Accounting
The accompanying 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 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 year ended December 31, 2020.
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year.
These reclassifications had no impact on net income (loss), stockholders' equity or cash flows as previously reported.
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 consolidated financial statements include the accounts of the
Company and its subsidiaries, including the OP and its subsidiaries.
F-11
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. The Company records an allowance to reflect revenue that may not be
collectible. This is recorded through a provision for bad debts which is included in rental income in the accompanying consolidated
statements of operations and comprehensive income (loss). 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 Accounting Standards Update (“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.
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. 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. 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 is 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.
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. ASU 2018-11 provides a practical expedient that 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 elected 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 Company
implemented the provisions of ASU 2018-11 and 2016-02, collectively Topic 842 Leases (“ASC 842”), effective January 1, 2019, and
elected the transition option that the ASU provides which permits entities to not recast the comparative periods presented when
transitioning to the standard. The Company implemented changes to its business processes and controls related to accounting for and
the presentation and disclosure of leases in the consolidated statements of operations and began presenting all rentals and
reimbursements from tenants as a single line item within rental
income on the consolidated statements of operations and
comprehensive income (loss). The table below outlines the components of rental income and its other components which were
previously classified as other income for the years ended December 31, 2020, 2019 and 2018:
Lease Income Type
Rental income
Utility reimbursements (1)
Late fees (1)
Pet fees (1)
Other fees (1)
Total rental income
$
$
2020
For the Year Ended December 31,
2019
2018
176,549
12,252
1,288
924
8,224
199,237
$
$
158,167
10,906
1,622
816
5,651
177,162
$
$
127,964
9,835
1,443
618
3,298
143,158
(1)
Previously classified as other income prior to December 31, 2019.
F-12
The table below quantifies the effects on rental and other income for the years ended December 31, 2020, 2019 and 2018 from
the adoption ASC 842:
Prior to adoption of ASC 842
Rental income
Other income
Total revenue
Post adoption of ASC 842
Rental income
Other income
Total revenue
Differences resulting in ASC 842 adoption
Rental income difference
Other income difference
Total revenue difference
2020
For the Year Ended December 31,
2019
2018
$
$
$
$
$
$
176,549
28,251
204,800
199,237
5,563
204,800
22,688
(22,688)
$
$
$
$
$
158,167
22,899
181,066
177,162
3,904
181,066
18,995
(18,995)
$
$
$
$
$
— $
— $
127,964
18,633
146,597
143,158
3,439
146,597
15,194
(15,194)
—
Certain revenue streams such as service provider income and damage recoveries did not qualify for the practical expedient and
therefore remained in other income and were subjected to ASU 2014-09.
In April 2020, the FASB issued a Staff Q&A on accounting for leases during the COVID-19 pandemic, focused on the
application of lease guidance in ASC 842, Leases. The Q&A states that some lease contracts may contain explicit or implicit
enforceable rights and obligations that require lease concessions if certain circumstances arise that are beyond the control of the
parties to the contract. Therefore, entities would need to perform a lease-by-lease analysis to determine whether contractual provisions
in an existing lease agreement provide enforceable rights and obligations related to lease concessions. The FASB determined it would
be acceptable for entities to not perform a lease-by-lease analysis regarding rent concessions resulting from COVID-19, and to instead
make a policy election regarding rent concessions, which would give entities the option to account or not to account for these rent
concessions as lease modifications if the total payments required by the modified contract are substantially the same or less than the
total payments required by the original contract. Entities making the election to account for these rent concessions as lease
modifications would recognize the effects of rent abatements and rent deferrals on a prospective straight-line basis over the remainder
of the modified contract. We have made the election to not perform a lease-by-lease analysis to determine whether contractual
provisions in an existing lease agreement provide enforceable rights and obligations related to payment plans. By electing the FASB
relief, we have also made an accounting policy election to not account for rent deferrals provided to lessees due to the COVID-19
pandemic as lease modifications. Lessees are required to pay the full outstanding balance of the rent deferred over the period of the
payment plan.
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.
F-13
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
Buildings
Improvements
Furniture, fixtures, and equipment
Intangible lease assets
Not depreciated
30 years
15 years
3 years
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. The key inputs into our impairment analysis include, but are not limited to, the holding period, net
operating income, and capitalization rates. In such cases, 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. The Company’s impairment analysis identifies and evaluates events or changes in
circumstances that indicate the carrying amount of a real estate investment may not be recoverable, including determining the period
the Company will hold the rental property, net operating income, and the estimated capitalization rate for each respective real estate
investment.
As of December 31, 2020, the Company has not recorded any impairment on its real estate assets. We continue to monitor the
impact of COVID-19 on our real estate assets (see “—Coronavirus (‘COVID-19’)” for additional information, below).
Held for Sale
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. As of
December 31, 2020, there are no properties held for sale.
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 years ended December 31, 2020, 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 December 31, 2020, 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
F-14
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 December 31, 2020. The
Company and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The 2019,
2018 and 2017 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).
Recent Accounting Pronouncements
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 statements as 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.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) (“ASU
2016-15) which amends the classification of cash payments for debt prepayment or debt extinguishment costs. Amendments to Topic
230 made by ASU 2016-15 require that any debt prepayment or debt extinguishment costs be classified as cash flows from financing
activities. Debt extinguishment costs include third-party costs, premiums paid and other fees paid to creditors that are directly related to
the debt prepayment or extinguishment. The Company adopted the provisions of ASU 2016-15 as of January 1, 2019 on a retrospective
basis and it did not have a material impact on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 contains
practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in
ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During 2020, the Company has elected to
apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to
assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives.
Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company will continue to
evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Coronavirus (COVID-19)
In December 2019, a novel coronavirus, which causes respiratory illness and spreads from person to person (COVID-19), was first
identified during an investigation into an outbreak in Wuhan, China. The first case of COVID-19 in the U.S. was reported on January 20,
2020. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. declared a
national emergency with respect to COVID-19. Over the ensuing weeks, the President Trump and the task force that was set up to deal
with preparations across the country, announced sweeping and unprecedented actions to help slow the spread of the virus.
F-15
The President’s task force recommended all citizens practice “social distancing” and other protocols to limit interaction between
individuals for a period of 15 days, which was later expanded for 30 days and ultimately expired on April 30, 2020. While many of these
restrictions and forced closures were initially lifted in varying degrees beginning in May, the recent spike in COVID-19 cases in the
United States has caused many cities and states to reinstitute such restrictions and closures. In addition, the federal U.S. government has
imposed restrictions on the entry of certain travelers into the United States and the U.S./Mexican and U.S./Canadian borders remain
temporarily closed for all non-essential travel to limit the spread of the virus across countries.
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) imposed a moratorium on evictions and the charging
of late fees, which expired on July 25, 2020. On September 4, 2020, the Former President issued an executive order, announcing a new
moratorium that temporarily halts evictions through December 31, 2020.
As of January 29, 2021, according to the U.S. Centers for Disease Control and Prevention, over 4.7 million individuals in the U.S.
have been fully vaccinated for COVID-19, and the U.S. will continue to roll out vaccines across the nation, prioritizing frontline and
essential workers, the elderly, and individuals considered high risk. However, the initial rollout of vaccine distribution has encountered
significant delays, and uncertainties remain as to the amount of vaccine available for distribution, the logistics of implementing a national
vaccine program, and the overall efficacy of the vaccines once widely administered, especially as new strains of COVID-19 have been
discovered, and the level of resistance these new strains have to the existing vaccines, if any, remains unknown.
On January 14, 2020, President Biden unveiled a $1.9 trillion “American Rescue Plan” proposal to combat the pandemic and
stimulate the economy. The proposal provides additional provisions for increased unemployment benefits, rental assistance, small
businesses, state and local governments, educational institutions, and substantial funding towards accelerated distribution of vaccinations
and for COVID-19 testing, as well as direct payments of $1,400 to all eligible Americans. The American Rescue Plan is the first of two
major spending initiatives expected to be proposed by President Biden.
Collectively, these actions, while for the benefit of public health, have had a significant impact on the American economy. The
U.S. stock market initially experienced historic declines over an extraordinarily short period of time. Certain industries such as airlines,
lodging, entertainment, gaming, cruise ships, plus industries closely associated with these industries have seen, and continue to see,
unprecedented declines in business.
Potential ineffectiveness or delay of such relief measures could lead to further deterioration of economic conditions, higher
unemployment rates, and prolonged recession, which in turn could materially affect our (or our tenants’ or venture investment portfolio
companies’) performance, financial condition, results of operations, and cash flows. See “Item 1A. Risk factors” within “Part I” in this
annual report on Form 10-K for additional discussion of the risks posed by the COVID-19 pandemic, and uncertainties we, our tenants,
and the national and global economies face as a result.
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 SPEs own 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.
F-16
As of December 31, 2020, the Company, through the OP and the wholly owned TRS, owned 37 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 December 31, 2020 and 2019:
Property Name
Arbors on Forest Ridge
Cutter's Point
Eagle Crest
Silverbrook
Beechwood Terrace
Willow Grove
Woodbridge
The Summit at Sabal Park
Courtney Cove
Radbourne Lake
Timber Creek
Sabal Palm at Lake Buena Vista
Southpoint Reserve at Stoney Creek
Cornerstone
The Preserve at Terrell Mill
Versailles
Seasons 704 Apartments
Madera Point
Venue at 8651
Parc500
The Venue on Camelback
Old Farm
Stone Creek at Old Farm
Hollister Place
Rockledge Apartments
Atera Apartments
Cedar Pointe
Crestmont Reserve
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at Glenview Reserve
Residences at West Place
Avant at Pembroke Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Fairways at San Marcos
Location
Bedford, Texas
Richardson, Texas
(1) Irving, Texas
Grand Prairie, Texas
Antioch, Tennessee
(1) Nashville, Tennessee
(1) Nashville, Tennessee
Tampa, Florida
Tampa, Florida
Charlotte, North Carolina
Charlotte, North Carolina
Orlando, Florida
(1) Fredericksburg, Virginia
Orlando, Florida
Marietta, Georgia
Dallas, Texas
West Palm Beach, Florida
Mesa, Arizona
Fort Worth, Texas
West Palm Beach, Florida
(2) Phoenix, Arizona
Houston, Texas
Houston, Texas
Houston, Texas
Marietta, Georgia
Dallas, Texas
(3) Antioch, Tennessee
Dallas, Texas
Nashville, Tennessee
(4) Phoenix, Arizona
(4) Tempe, Arizona
(4) Phoenix, Arizona
Fort Worth, Texas
(5) Nashville, Tennessee
(5) Orlando, Florida
Pembroke Pines, Florida
Nashville, Tennessee
(6) Las Vegas, Nevada
(6) Las Vegas, Nevada
(6) Las Vegas, Nevada
(7) Chandler, AZ
(1)
(2)
Property was sold in 2020.
Formerly known as The Colonnade.
Year Acquired
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2014
2015
2015
2015
2015
2015
2015
2016
2016
2016
2016
2017
2017
2017
2018
2018
2018
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2019
2020
Effective Ownership Percentage at
December 31,
2020
2019
100%
100%
—
100%
100%
—
—
100%
100%
100%
100%
100%
—
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
—
F-17
(3)
(4)
(5)
(6)
(7)
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 owned Cedar Pointe was no longer considered a VIE.
The EAT that directly owned Bella Vista, The Enclave and The Heritage was consolidated as a VIE at March 31, 2019. The
master lease agreement with the EAT that directly owned these properties terminated on July 27, 2019, at which time legal title
transferred to the Company. Upon the transfer of title, the EAT that directly owned these properties was no longer considered a
VIE.
The Company acquired two multifamily properties, the Residences at Glenview Reserve and the Residences at West Place (the
“Residences”) on July 17, 2019. The master lease agreement with the EAT that directly owned these properties terminated on
September 3, 2019, at which time legal title transferred to the Company. Upon the transfer of title, the EAT that directly owned
these properties was no longer considered a VIE.
The EAT that directly owned Torreyana, Bloom and Bella Solara was consolidated as a VIE at December 31, 2019. The master
lease agreement with the EAT that directly owned these properties terminated on March 31, 2020, at which time legal title
transferred to the Company. Upon the transfer of the title, the EAT that directly owned these properties was no longer
considered a VIE.
Fairways at San Marcos was acquired in 2020; therefore, no ownership as of December 31, 2019.
4. Real Estate Investments Statistics
As of December 31, 2020, the Company was invested in a total of 37 multifamily properties, as listed below:
F-18
Rentable Square
Footage
(in thousands)*
Number
of
Units*
Property Name
Arbors on Forest
Ridge
Cutter's Point
Silverbrook
Beechwood Terrace
The Summit at Sabal
Park
Courtney Cove
Radbourne Lake
Timber Creek
Sabal Palm at Lake
Buena Vista
Cornerstone
The Preserve at
Terrell Mill
Versailles
Seasons 704
Apartments
Madera Point
Venue at 8651
Parc500
The Venue on
Camelback
Old Farm
Stone Creek at Old
Farm
Hollister Place
Rockledge
Apartments
Atera Apartments
Cedar Pointe
Crestmont Reserve
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at
Glenview Reserve
Residences at West
Place
Avant at Pembroke
Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Fairways at San
Marcos
(3)
155
198
526
272
205
225
247
248
371
318
692
301
217
193
289
266
256
697
186
246
802
334
224
199
414
243
194
199
139
344
345
1,442
325
309
498
271
340
12,730
(4)
*
Information is unaudited.
Average Effective Monthly
Rent Per Unit
as of December 31,*(1)
% Occupied as of
December 31,*(2)
2020
2019
2020
2019
$
917
1,112
926
947
1,033
946
1,137
949
1,259
1,056
1,006
925
1,209
980
933
1,340
821
1,133
1,194
1,007
1,261
1,247
1,075
895
960
1,320
1,355
1,298
941
993
1,214
1,515
1,194
1,184
1,120
1,128
1,232
894
—
870
937
1,010
927
1,118
916
1,270
1,053
969
923
1,155
924
924
1,304
777
1,162
1,194
995
1,260
1,256
1,066
902
978
1,265
1,295
1,265
920
977
1,211
1,498
1,192
1,171
1,105
1,136
—
94.3%
95.0%
94.9%
95.7%
96.0%
93.5%
89.8%
93.5%
95.0%
91.2%
95.5%
94.3%
98.6%
93.8%
93.4%
97.7%
93.7%
92.1%
92.1%
91.2%
95.5%
92.1%
96.2%
98.8%
94.3%
95.6%
97.5%
94.1%
95.9%
92.8%
90.1%
94.4%
91.3%
93.0%
94.1%
91.6%
96.0%
95.7%
—
95.5%
91.3%
97.2%
94.8%
90.7%
94.9%
93.8%
95.6%
94.9%
93.0%
94.6%
96.1%
96.1%
93.1%
94.2%
92.8%
95.8%
93.1%
95.3%
93.4%
91.4%
94.2%
93.7%
97.2%
93.6%
96.6%
91.8%
94.4%
92.7%
93.7%
96.2%
95.6%
90.9%
91.9%
—
$
Date
Acquired
1/31/2014
1/31/2014
1/31/2014
7/21/2014
8/20/2014
8/20/2014
9/30/2014
9/30/2014
11/5/2014
1/15/2015
2/6/2015
2/26/2015
4/15/2015
8/5/2015
10/30/2015
7/27/2016
10/11/2016
12/29/2016
12/29/2016
2/1/2017
6/30/2017
10/25/2017
8/24/2018
9/26/2018
9/26/2018
1/28/2019
1/28/2019
1/28/2019
6/7/2019
210
196
642
300
252
324
225
352
400
430
752
388
222
256
333
217
415
734
190
260
708
380
210
242
632
248
204
204
196
360
7/17/2019
342
7/17/2019
1520
346
315
528
320
352
14,205
8/30/2019
9/10/2019
11/22/2019
11/22/2019
11/22/2019
11/2/2020
F-19
(1) Average effective monthly rent per unit is equal to the average of the contractual rent for commenced leases as of December 31,
2020 and December 31, 2019, respectively, minus any tenant concessions over the term of the lease, divided by the number of
units under commenced leases as of December 31, 2020 and December 31, 2019, respectively.
Percent occupied is calculated as the number of units occupied as of December 31, 2020 and 2019, divided by the total number
of units, expressed as a percentage.
(2)
(3) Cutter’s Point suffered significant damage from a tornado on October 20, 2019 which necessitated a temporary halt to operation
of all 196 units. Upon completion of Phase I of the rebuild efforts, the Company returned 60 units to service in 2020; there are
57 units occupied out of the 60 available as of December 31, 2020. The remaining 136 units are currently being rebuilt as part of
Phase II of the rebuild with an expected return to service in 2021 (see Note 5).
Fairways at San Marcos was acquired in 2020.
(4)
5. Real Estate Investments
As of December 31, 2020, the major components of the Company’s investments in multifamily properties were as follows (in
thousands):
Operating Properties
Land
Intangible Lease
Assets
Construction in
Progress
Furniture,
Fixtures and
Equipment
Totals
$
Arbors on Forest Ridge
Cutter's Point
Silverbrook
Beechwood Terrace
The Summit at Sabal Park
Courtney Cove
Radbourne Lake
Timber Creek
Sabal Palm at Lake Buena Vista
Cornerstone
The Preserve at Terrell Mill
Versailles
Seasons 704 Apartments
Madera Point
Venue at 8651
Parc500
The Venue on Camelback
Old Farm
Stone Creek at Old Farm
Hollister Place
Rockledge Apartments
Atera Apartments
Cedar Pointe
Crestmont Reserve
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at Glenview Reserve
Residences at West Place
Avant at Pembroke Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Fairways at San Marcos
Accumulated depreciation and
amortization
Total Operating Properties
$
2,330
3,330
4,860
1,390
5,770
5,880
2,440
11,260
7,580
1,500
10,170
6,720
7,480
4,920
2,350
3,860
8,340
11,078
3,493
2,782
17,451
22,371
2,371
4,124
6,237
10,942
11,046
6,835
1,798
3,367
3,345
48,436
6,346
23,824
23,805
12,605
10,993
323,429
Buildings and
Improvements
11,682
$
8,035
27,256
22,233
13,749
13,713
22,617
13,245
42,401
30,781
50,757
21,766
14,418
17,926
17,473
20,927
38,106
70,846
19,471
21,884
96,902
37,525
24,268
20,955
73,613
36,787
30,308
34,761
17,909
42,027
51,802
272,436
55,777
43,489
81,714
53,134
71,422
1,544,115
$
—
323,429
$
(153,063)
1,391,052
$
F-20
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,675
1,675
(558)
1,117
$
17
4,983
3
32
—
114
—
42
—
2
1,524
—
18
—
106
22
37
24
—
—
86
9
—
19
6
—
—
—
43
14
154
2,847
21
122
494
57
—
10,796
—
10,796
$
$
1,650
2,044
5,049
2,791
1,813
2,165
2,147
3,473
2,391
3,343
7,310
3,861
1,743
2,273
3,531
3,827
2,570
3,419
792
2,555
5,363
2,188
1,577
1,411
4,072
2,110
1,856
1,793
670
1,495
1,049
7,977
1,118
1,047
1,782
1,228
745
96,228
15,679
18,392
37,168
26,446
21,332
21,872
27,204
28,020
52,372
35,626
69,761
32,347
23,659
25,119
23,460
28,636
49,053
85,367
23,756
27,221
119,802
62,093
28,216
26,509
83,928
49,839
43,210
43,389
20,420
46,903
56,350
331,696
63,262
68,482
107,795
67,024
84,835
1,976,243
$
(61,873)
34,355
$
(215,494)
1,760,749
As of December 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
Cutter's Point
Eagle Crest
Silverbrook
Beechwood Terrace
The Summit at Sabal Park
Courtney Cove
Radbourne Lake
Timber Creek
Sabal Palm at Lake Buena Vista
Cornerstone
The Preserve at Terrell Mill
Versailles
Seasons 704 Apartments
Madera Point
Venue at 8651
Parc500
The Venue on Camelback
Old Farm
Stone Creek at Old Farm
Hollister Place
Rockledge Apartments
Atera Apartments
Cedar Pointe
Crestmont Reserve
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at Glenview Reserve
Residences at West Place
Avant at Pembroke Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Accumulated depreciation and
amortization
Total Operating Properties
Held For Sale Properties
Southpoint Reserve at Stoney Creek
Woodbridge
Willow Grove
Accumulated depreciation and
amortization
Total Held For Sale Properties
Total
$
$
$
$
$
2,330
3,330
5,450
4,860
1,390
5,770
5,880
2,440
11,260
7,580
1,500
10,170
6,720
7,480
4,920
2,350
3,860
8,340
11,078
3,493
2,782
17,451
22,371
2,372
4,124
6,237
10,942
11,046
6,835
1,798
3,367
3,345
48,436
6,346
23,823
23,805
12,605
317,886
$
11,585
2,563
23,830
27,091
22,000
13,600
13,413
22,465
13,993
41,841
30,653
49,216
21,688
14,336
17,615
18,192
20,821
37,992
70,670
19,436
21,788
96,108
37,442
24,193
20,613
73,004
36,690
30,224
34,580
16,958
40,202
50,884
266,103
54,995
42,721
80,365
52,449
1,472,319
—
317,886
$
(105,335)
1,366,984
$
6,120
3,650
3,940
13,710
—
13,710
331,596
$
$
11,502
13,296
10,946
35,744
(5,390)
30,354
1,397,338
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,989
1,215
1,201
1,851
1,158
12,414
(6,171)
6,243
$
—
—
—
—
—
— $
2,648
—
—
70
—
2
—
—
492
—
8
8
—
—
21
193
—
40
1
—
134
8
24
—
58
—
24
—
35
11
244
217
137
—
—
—
4,375
—
4,375
1
—
—
1
—
1
$
1,520
1,878
1,832
4,630
2,535
1,598
1,982
1,997
2,939
2,108
2,977
6,183
3,736
1,482
2,042
3,330
3,202
2,086
2,950
716
2,159
4,759
2,044
1,268
1,272
3,148
1,500
1,176
1,246
528
837
810
5,376
779
655
1,095
663
81,038
15,435
10,419
31,112
36,581
25,995
20,968
21,277
26,902
28,192
52,021
35,130
65,577
32,152
23,298
24,577
23,893
28,076
48,418
84,738
23,646
26,729
118,452
61,865
27,857
26,009
82,447
49,132
42,470
42,661
19,319
44,417
55,283
327,121
63,472
68,400
107,116
66,875
1,888,032
$
$
$
(41,046)
39,992
$
(152,552)
1,735,480
968
1,934
1,832
4,734
(2,469)
2,265
42,257
$
$
18,591
18,880
16,718
54,189
(7,859)
46,330
1,781,810
6,243
$
4,376
Depreciation expense was $75.6 million, $56.4 million and $45.0 million for the years ended December 31, 2020, 2019 and
2018, respectively.
Amortization expense related to the Company’s intangible lease assets was $6.8 million, $12.7 million and $2.5 for the years
ended December 31, 2020, 2019 and 2018, respectively. Amortization expense related to the Company’s intangible lease assets for all
acquisitions completed through December 31, 2020 is expected to be $1.1 million in 2021. Due to the six-month useful life
attributable to intangible lease assets, the value of intangible lease assets on any acquisition prior to June 30, 2020 has been fully
amortized and the assets and related accumulated amortization have been written off as of December 31, 2020.
F-21
Acquisitions
The Company acquired one property during the year ended December 31, 2020, as detailed in the table below (dollars in
thousands). The Company acquired eleven properties for a combined purchase price of approximately $876.7 million during the year
ended December 31, 2019. See Notes 3, 4 and 6 for additional information.
Property Name
Fairways at San Marcos
Location
Chandler, Arizona
Date of
Acquisition
November 2, 2020
Purchase Price
$
84,480
Mortgage Debt (1)
46,464
$
# Units
352
Effective
Ownership
100%
(1)
For additional information regarding the Company’s debt, see Note 6.
Dispositions
The Company sold four properties during the year ended December 31, 2020, as detailed in the table below (in thousands). The
Company sold six property for approximately $289.9 million during the year ended December 31, 2019.
Property Name
Southpoint Reserve at Stoney
Creek
Willow Grove
Woodbridge
Eagle Crest
Location
Date of Sale
Sales Price
Net Cash Proceeds (1)
Gain on Sale
of Real Estate
Fredericksburg,
Virginia
March 20, 2020
Nashville, Tennessee March 26, 2020
Nashville, Tennessee March 26, 2020
Irving, Texas
September 30, 2020
$
$
23,500
31,300
31,700
55,500
142,000
$
$
23,176
31,005
31,237
54,779
140,197
$
$
5,469
17,513
15,990
30,160
69,132
(1) Represents sales price, net of closing costs.
Cutters Point Casualty Losses
On October 20, 2019, as a result of a tornado, the Cutter’s Point property suffered significant property damage. The damage
incurred rendered the Property inoperable; therefore, the Company has ceased operations at the property as it is under reconstruction.
In relation to this event, the Company wrote down the carrying value of Cutter’s Point by approximately $7.8 million, and, in
accordance with ASC 610 Other Income, the Company recognized approximately $3.5 million in casualty losses on the consolidated
statements of operations and comprehensive income (loss) during the year ended December 31, 2019. Also, the Company filed a
business interruption insurance claim and recognized approximately $0.6 million for the lost rent, which is included in miscellaneous
income on the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2019. For the
year ended December 31, 2020, the Company recognized approximately $1.7 million for lost rents, which is included in miscellaneous
income on the consolidated statements of operations and comprehensive income (loss). Lost rental income is insured and the
Company expects any operating losses resulting from the damage to be immaterial while the property undergoes reconstruction.
Starting November 1, 2019, the Company began capitalizing insurance expense, real estate taxes, interest expense and debt issuance
costs to construction in progress and stopped depreciation due to Cutter’s Point being under reconstruction. As of December 31, 2020,
approximately $0.6 million of these costs have been capitalized. During the year ended December 31, 2020, the Company recognized
approximately $5.8 million in casualty gains on the consolidated statements of operations and comprehensive income (loss) in relation
to this event. Upon completion of Phase I of the rebuild efforts, the Company returned 60 units to service in 2020; there are 57 units
occupied out of the 60 available as of December 31, 2020. The remaining 136 units are currently being rebuilt as part of Phase II of
the rebuild with an expected return to service in 2021. As of December 31, 2020, Cutter’s Point was excluded from the portfolio’s
total unit count and all same store pools due to the property undergoing reconstruction which is estimated to be completed in 2021.
Venue 8651 Casualty Losses
On June 10, 2020, as a result of a fire, the Venue 8651 property suffered property damage. In relation to this event, the
Company wrote down the carrying value of Venue 8651 by approximately $0.6 million, and, in accordance with ASC 610 Other
Income, the Company recognized approximately $0.2 million in net casualty gains which is included in property operating expense on
the consolidated statements of operations and comprehensive income (loss) during the year ended December 31, 2020. Venue 8651
recognized $0.1 million in business interruption proceeds for lost rents which is included in miscellaneous income on the consolidated
statements of operations and comprehensive income (loss) during the year ended December 31, 2020.
F-22
Timber Creek Casualty Losses
On November 26, 2020, as a result of a fire, the Timber Creek property suffered property damage. In relation to this event, the
Company wrote down the carrying value of Timber Creek by approximately $0.6 million, and, in accordance with ASC 610 Other
Income, the Company recognized approximately $0.8 million in net casualty gains which is included in property operating expense on
the consolidated statements of operations and comprehensive income (loss) during the year ended December 31, 2020.
6. Debt
Mortgage Debt
The following table contains summary information concerning the mortgage debt of the Company as of December 31, 2020
(dollars in thousands):
Operating Properties
Arbors on Forest Ridge
Cutter's Point
Silverbrook
Beechwood Terrace
The Summit at Sabal Park
Courtney Cove
The Preserve at Terrell Mill
Versailles
Seasons 704 Apartments
Madera Point
Venue at 8651
The Venue on Camelback
Old Farm
Stone Creek at Old Farm
Timber Creek
Radbourne Lake
Sabal Palm at Lake Buena Vista
Cornerstone
Parc500
Hollister Place
Rockledge Apartments
Atera Apartments
Cedar Pointe
Crestmont Reserve
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Residences at Glenview Reserve
Residences at West Place
Avant at Pembroke Pines
Arbors of Brentwood
Torreyana Apartments
Bloom
Bella Solara
Fairways at San Marcos
Fair market value adjustment
Deferred financing costs, net of
accumulated amortization of $3,706
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(3)
(4)
(5)
(3)
(3)
(3)
(6)
(3)
(3)
(6)
(6)
(6)
(7)
(8)
(8)
(3)
(3)
(6)
(6)
(6)
(6)
Type
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Fixed
Fixed
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Floating
Fixed
Floating
Floating
Floating
Floating
Floating
Floating
Term (months)
84
84
84
84
84
84
84
84
84
84
84
84
84
84
84
84
84
120
120
84
84
84
84
84
84
84
84
84
84
84
120
84
84
84
84
84
84
Interest Rate (2)
1.82%
1.82%
1.82%
1.58%
1.76%
1.76%
1.76%
1.76%
1.76%
1.76%
1.92%
1.82%
1.82%
1.82%
1.40%
1.43%
1.44%
4.24%
4.49%
1.48%
1.71%
1.62%
1.49%
1.32%
1.32%
1.46%
1.46%
1.46%
1.32%
1.58%
4.24%
1.57%
1.57%
1.84%
1.84%
1.84%
2.21%
Outstanding
Principal (1)
13,130
16,640
30,590
23,365
13,560
13,680
42,480
23,880
17,460
15,150
13,734
28,093
52,886
15,274
24,100
20,000
42,100
21,299
14,951
14,811
68,100
29,500
17,300
12,061
43,835
29,040
25,322
24,625
10,109
26,560
33,817
177,100
34,237
37,400
58,850
36,575
46,464
1,168,078
1,261 (9)
(6,484)
1,162,855
$
$
$
Maturity Date
7/1/2024
7/1/2024
7/1/2024
9/1/2025
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
7/1/2024
10/1/2025
10/1/2025
9/1/2025
3/1/2023
8/1/2025
10/1/2025
7/1/2024
11/1/2024
9/1/2025
10/1/2025
10/1/2025
2/1/2026
2/1/2026
2/1/2026
10/1/2025
10/1/2025
10/1/2028
9/1/2026
10/1/2026
12/1/2026
12/1/2026
12/1/2026
12/1/2027
(1) Mortgage debt that is non-recourse to the Company and encumbers the multifamily properties.
(2)
Interest rate is based on a reference rate plus an applicable margin, except for fixed rate mortgage debt. One-month LIBOR was
0.14388% and 30-Day Average Secured Overnight Financing Rate (“SOFR”) was 0.08334% as of December 31, 2020.
Fairways at San Marcos utilizes 30-Day Average SOFR as its reference rate while all other properties utilize one-month LIBOR.
Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13th month of
the term through the 81st 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.
(3)
F-23
(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
remaining term of 98 months with 2 months of interest only. The first mortgage is pre-payable and subject to yield maintenance
from the 13th 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 December 31, 2020, 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
(6)
the last four months of the term.
Loan can be pre-paid in the first 12 months of the term in certain circumstances at par plus 5.00%. Starting in the 13th month of
the term through the 81st 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.
(7) Debt was assumed upon acquisition of this property and recorded at approximated fair value. It can be pre-paid in the first 12
months of the term in certain circumstances at par plus 5.00%. Starting in the 13th month of the term through the 81st 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.
(8) Debt was assumed upon acquisition of this property and recorded at approximated fair value. The loan can be prepaid at the
greater of par plus 1.00% of the unpaid principal balance or the product obtained by multiplying the present value of the
principal being prepaid by the excess of the monthly fixed interest rate of the loan over a daily discount rate. The loan is open to
pre-payment in the last three months of the term.
The Company reflected a valuation adjustment on its fixed rate debt for Parc500 and Residences at West Place to adjust it to fair
market value on their respective dates 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 terms of the mortgages.
(9)
During the year ended December 31, 2020, the Company sold four properties and repaid the related mortgage loans that
encumbered the properties, as detailed in the table below (in thousands):
Property Name
Southpoint Reserve at Stoney Creek
Willow Grove
Woodbridge
Eagle Crest
Date of Sale
March 20, 2020
March 26, 2020
March 26, 2020
September 30, 2020
Type
Floating
Floating
Floating
Floating
Outstanding
Principal (1)
13,101
14,818
13,677
29,510
71,106
$
$
(1) Represents the outstanding principal balance when the loan was repaid.
The weighted average interest rate of the Company’s mortgage indebtedness was 1.83% as of December 31, 2020 and 3.34% as
of December 31, 2019. The decrease between the periods is primarily related to a decrease in one-month LIBOR of approximately 162
basis points to 0.14388% as of December 31, 2020 from 1.7625% as of December 31, 2019. As of December 31, 2020, the adjusted
weighted average interest rate of the Company’s mortgage indebtedness was 3.06%. 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 1.3792%
for one-month LIBOR on its combined $1.2 billion notional amount of interest rate swap agreements, which effectively fix the interest
rate on $1.1 billion of the Company’s floating rate mortgage debt (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 December 31, 2020, the Company
believes it is in compliance with all provisions.
F-24
Freddie Mac Multifamily Green Advantage. In order to obtain more favorable pricing on the Company’s mortgage debt
financing with Freddie Mac, the Company decided to participate in Freddie Mac’s Multifamily Green Advantage program (the “Green
Program”). As of December 31, 2020, the Company has completed its Green Program improvements on all but one property, which is
expected to be completed in 2021. The Company expects 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. Due to changes in Freddie Mac’s requirements to participate in the Green Program, the Company is not implementing this
on acquisitions going forward.
Credit Facility
The following table contains summary information concerning the Company’s credit facility as of December 31, 2020 (dollars
in thousands):
Corporate Credit Facility
Deferred financing costs, net of
accumulated amortization of $1,937
Type
Floating
Term (months)
24
Outstanding
Principal
$
$
183,000
(677)
182,323
Interest Rate (1)
2.64%
Maturity Date
1/28/2022
(1)
Interest rate is based on one-month LIBOR plus an applicable margin. One-month LIBOR as of December 31, 2020 was
0.14388%.
Corporate Credit Facility. On January 28, 2019, the Company, through the OP, entered into a $75.0 million credit facility (the
“Corporate Credit Facility”) with Truist 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 Corporate Credit Facility is a full-
term, interest-only facility with an initial 24-month term. The Company has the right to request an increase in the facility amount up to
$150 million (the “Accordion Feature”). The facility 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 Corporate Credit Facility agreement, and is guaranteed by the
Company. On June 29, 2019, the Company, through the OP, exercised its option under the Accordion Feature of the Corporate Credit
Facility and increased the amount of the facility from $75 million to $125 million. In conjunction with the increase in the facility, the
Company incurred costs of $0.5 million in obtaining the additional financing through the Accordion Feature (see “Deferred Financing
Costs” below). On August 28, 2019, the Company, through the OP, increased the amount of the Corporate Credit Facility by $25
million, resulting in incurred costs of $0.2 million of deferred financing costs. On November 20, 2019, the Company, through the OP,
increased the amount of the Corporate Credit Facility by $75 million, resulting in aggregate commitments of $225 million as of
December 31, 2019. In conjunction with the increase in the facility, the Company incurred costs of $0.8 million of deferred financing
costs. As of December 31, 2020, there was $183.0 million in aggregate principal outstanding on the Corporate Credit Facility.
On October 13, 2020, the Company extended the maturity date of the Corporate Credit Facility from January 28, 2021 to
January 28, 2022 (the “Maturity Date”), which falls within one year of February 19, 2021. During 2020, the Company repaid $35.0
million in principal on the Corporate Credit Facility and had sufficient cash flow to fund operations as well as close on a new
acquisition (Fairways at San Marcos) in the fourth quarter of 2020. Management recognizes that finding an alternative source of
funding is necessary to repay the facility by the Maturity Date. Management is evaluating multiple options to fund the repayment of
the $183.0 million principal balance outstanding, including recasting the Corporate Credit Facility, securing additional equity or debt
financing, selling a portion of the portfolio, or any combination thereof. Management believes that there is sufficient time before the
Maturity Date and that the Company has sufficient access to capital to ensure the Company is able to meet its obligations as they
become due.
$60 Million Credit Facility. On December 29, 2016, the Company, through the OP, entered into a $30.0 million credit facility
(the “$30 Million Credit Facility”) with KeyBank National Association (“KeyBank”). On April 27, 2018, the Company, through the
OP, amended the $30 Million Credit Facility to temporarily increase the loan commitment by $5.0 million (the “Temporary Increase”)
and immediately drew $5.0 million. The $5.0 million drawn under the Temporary Increase was repaid in full on July 25, 2018. The
Company accounted for the Temporary Increase as an extinguishment of a debt instrument. As such, the Company wrote-off the
unamortized deferred financing costs of approximately $0.1 million as of April 27, 2018, which is recorded in loss on extinguishment
of debt and modification costs on the accompanying consolidated statements of operations and comprehensive income (loss).
On September 26, 2018, the Company, through the OP, repaid the $30.0 million outstanding under the $30 Million Credit
Facility and amended the loan agreement, extending the maturity date to September 26, 2020 and increasing the loan commitment to
$60.0 million (the “$60 Million Credit Facility”). The Company accounted for the refinancing as an extinguishment of a debt
instrument. The Company, through the OP, immediately drew $50.0 million to fund a portion of the purchase price of Brandywine I &
II and Crestmont Reserve.
F-25
The $60 Million Credit Facility was a full-term, interest-only facility with a 24-month term and was guaranteed by the
Company. Interest accrued on the $60 Million Credit Facility at an interest rate of one-month LIBOR plus 2.00%. In November 2018,
the Company, through the OP, used net proceeds from the 2018 Offering (as defined below) (see Note 8) to repay the $50.0 million
outstanding under the $60 Million Credit Facility, which retired the credit facility. In connection with the repayment, the Company,
through the OP, received a commitment fee rebate of approximately $0.8 million from KeyBank, which was previously capitalized as
a deferred financing cost on the Company’s consolidated balance sheet as of September 30, 2018.
$30 Million Bridge Facility. On September 26, 2018, the Company, through the OP, entered into a $30.0 million bridge facility
(the “$30 Million Bridge Facility”) with KeyBank and immediately drew $30.0 million to fund a portion of the purchase price of
Brandywine I & II and Crestmont Reserve. The $30 Million Bridge Facility was a full-term, interest-only facility with a six-month
term and was guaranteed by the Company. Interest accrued on the $30 Million Bridge Facility at an interest rate of one-month LIBOR
plus 2.00%. In November 2018, the Company, through the OP, used net proceeds from the 2018 Offering to repay the $30.0 million
outstanding under the $30 Million Bridge Facility, which retired the bridge facility. In connection with the repayment, the Company,
through the OP, received a commitment fee rebate of approximately $0.3 million from KeyBank, which was previously capitalized as
a deferred financing cost on the Company’s consolidated balance sheet as of September 30, 2018.
2017 Bridge Facility. On June 30, 2017, the Company, through the OP, entered into a $65.9 million bridge facility (the “2017
Bridge Facility”) with KeyBank. The 2017 Bridge Facility was a full-term, interest-only facility with an initial four-month term and
was guaranteed by the Company. Interest accrued on the 2017 Bridge Facility at an interest rate of one-month LIBOR plus 3.75%. In
July 2017, the Company used proceeds from the sale of Regatta Bay to pay down $11.3 million on the 2017 Bridge Facility. In
October 2017, the Company used proceeds from the sale of four properties to pay down approximately $46.0 million on the 2017
Bridge Facility, bringing the outstanding balance to approximately $8.6 million, and also extended the maturity date to March 31,
2018. In February 2018, the Company used proceeds from the sale of Timberglen to pay the remaining $8.6 million outstanding on the
2017 Bridge Facility, which retired the bridge facility.
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, any unamortized costs are charged to loss on extinguishment of debt and
modification costs (see “Loss on Extinguishment of Debt and Modification Costs” below). For the years ended December 31, 2020,
2019 and 2018, the Company wrote-off deferred financing costs of approximately $0.8 million, $1.4 million and $1.4 million,
respectively, which is included in loss on extinguishment of debt and modification costs on the consolidated statements of operations
and comprehensive income (loss). For the years ended December 31, 2020, 2019 and 2018, amortization of deferred financing costs of
approximately $2.8 million, $2.1 million and $1.7 million, respectively, is included in interest expense on the consolidated statements
of operations and comprehensive income (loss).
Loss on Extinguishment of Debt and Modification Costs
Loss on extinguishment of debt and modification costs includes prepayment penalties and defeasance costs incurred on the early
repayment of debt, costs incurred in a debt modification that are not capitalized as deferred financing costs and other costs incurred in
a debt extinguishment.
Schedule of Debt Maturities
The aggregate scheduled maturities, including amortizing principal payments, of total debt for the next five calendar years
subsequent to December 31, 2020 are as follows (in thousands):
2021
2022
2023
2024
2025
Thereafter
Total
Operating
Properties
Credit Facility
Total
$
$
896
1,509
21,293
395,168
245,780
503,432
1,168,078
$
$
— $
183,000
—
—
—
—
183,000 $
896
184,509
21,293
395,168
245,780
503,432
1,351,078
F-26
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.
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 December 31, 2020, 2019 and 2018 were classified as Level 2 of the fair value hierarchy.
F-27
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 years ended December 31, 2020, 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 $393.0 million of the Company’s floating rate mortgage
indebtedness at a weighted average rate of 5.16%.
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 years ended December 31,
2020, 2019 and 2018, 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.
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 eleven interest rate swap transactions with KeyBank and two with Truist
Bank (the “Counterparties”) with a combined notional amount of $1.2 billion which are effective as of December 31, 2020. 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 1.3792%. The Company has designated these interest rate swaps as cash flow hedges of
interest rate risk.
As of December 31, 2020, 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
July 1, 2016
July 1, 2016
July 1, 2016
September 1, 2016
April 1, 2017
May 1, 2017
July 1, 2017
June 1, 2019
June 1, 2019
September 1, 2019
September 1, 2019
January 3, 2020
March 4, 2020
Termination Date
June 1, 2021
June 1, 2021
June 1, 2021
June 1, 2021
April 1, 2022
April 1, 2022
July 1, 2022
June 1, 2024
June 1, 2024
September 1, 2026
September 1, 2026
September 1, 2026
June 1, 2026
Counterparty
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
KeyBank
Truist
KeyBank
KeyBank
KeyBank
Truist
Notional Amount
Fixed Rate (1)
100,000
100,000
100,000
100,000
100,000
50,000
100,000
50,000
50,000
100,000
125,000
92,500
100,000
1,167,500
1.1055%
1.0210%
0.9000%
0.9560%
1.9570%
1.9610%
1.7820%
2.0020%
2.0020%
1.4620%
1.3020%
1.6090%
0.8200%
1.3792%(2)
$
$
(1)
The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2020, one-month LIBOR was
0.14388%.
(2) Represents the weighted average fixed rate of the interest rate swaps.
F-28
As of December 31, 2020, the Company had the following outstanding interest rate swaps that were designated as cash flow
hedges of interest rate risk with future effective dates (dollars in thousands):
Future Swaps
Effective Date
June 1, 2021
June 1, 2021
September 1, 2026
Termination Date
September 1, 2026
September 1, 2026
January 1, 2027
Counterparty
KeyBank
KeyBank
KeyBank
Notional Amount
Fixed Rate (1)
$
$
200,000
200,000
92,500
492,500
0.8450%
0.9530%
1.7980%
1.0678%(2)
(1)
The floating rate option for the interest rate swaps is one-month LIBOR. As of December 31, 2020, one-month LIBOR was
0.14388%.
(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 December 31, 2020, 2019 and 2018, the Company had the following outstanding derivatives that were not designated as
hedges in qualifying hedging relationships (dollars in thousands):
As of December 31,
2020
2019
2018
Number of
Instruments
16
15
12
Notional
Amount
$
$
$
393,006
346,542
255,179
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 December 31, 2020 and 2019 (in thousands):
Balance Sheet Location
Asset Derivatives
Liability Derivatives
December 31,
2020
December 31,
2019
December 31,
2020
December 31,
2019
Derivatives designated as hedging
instruments:
Interest rate swaps
Derivatives not designated as
hedging instruments:
Interest rate caps
Total
Fair market value of
interest rate swaps
Prepaid and other assets
$
$
— $
7,298
$
43,530
$
3,824
3
3
$
—
7,298
$
—
43,530
$
—
3,824
The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of
operations and comprehensive income (loss) for the years ended December 31, 2020, 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
2020
2019
2018
OCI into income
2020
2019
2018
Derivatives designated as
hedging instruments:
For the year ended December
31,
Interest rate products
$
(56,299) $
(8,153) $
5,928
Interest expense $
(9,337) $
6,472
$
3,997
F-29
Derivatives not designated as
hedging instruments:
For the year ended December
31,
Interest rate products
Location of gain
(loss)
recognized in
income
Amount of gain (loss)
recognized in income
2020
2019
2018
Interest expense $
(33) $
(30) $
(49)
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 December 31, 2020 and 2019, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid and
other 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
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.
instruments were determined by the Company using available market
Long-term indebtedness is carried at amounts that reasonably approximate their fair value at the time they were recognized. In
calculating the fair value of its long-term indebtedness, the Company used interest rate and spread assumptions that reflect current
credit worthiness and market conditions available for the issuance of long-term debt with similar terms and remaining maturities.
These financial instruments utilize Level 2 inputs.
The table below presents the carrying value and estimated fair value of our debt at December 31, 2020 and 2019 (in thousands):
December 31, 2020
December 31, 2019
Carrying Value
Estimated
Fair Value
Carrying Value
Estimated
Fair Value
$
$
70,067
1,281,011
$
$
73,548
1,324,990
$
$
70,810
1,340,718
$
$
72,386
1,318,989
Fixed rate debt
Floating rate debt (1)
(1)
Includes balances outstanding under our Corporate Credit Facility.
Real estate assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. In such cases, the Company will evaluate the recoverability of such real estate assets based on
estimated future cash flows and the estimated liquidation value of such real estate assets, and provide for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the real estate asset. If impaired, the real estate asset will be
written down to its estimated fair value. There can be no assurance that the estimates discussed herein, using Level 3 inputs, are
indicative of the amounts the Company could realize on disposition of the real estate asset. For the year ended December 31, 2020, the
Company noted there was no impairment, but incurred a casualty loss that resulted in net write downs of approximately $0.6 million
for both Venue 8651 and Timber Creek (see Note 5). The Company did not record any impairment charges related to real estate assets
for the years ended December 31, 2020, 2019 and 2018.
F-30
8. Stockholders’ Equity
Common Stock
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”). The common stock was offered and sold pursuant to a prospectus supplement, dated November 14, 2018, and a base
prospectus, dated April 24, 2017, relating to an effective registration statement on Form S-3. The Company 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 the $60 Million Credit Facility and the $30.0 million outstanding under the $30 Million
Bridge Facility.
During the year ended December 31, 2020 and 2019, the Company issued 137,608 and 180,783 shares of common stock
pursuant to its long-term incentive plan (see “Long Term Incentive Plan” below) and 1,278,306 and 1,565,322 pursuant to its at-the-
market offering (see “At-the-Market Offering” below).
As of December 31, 2020, the Company had 25,016,957 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 from $30.0 million to up to $40.0 million and extended it by an additional two years
to June 15, 2020. On March 13, 2020, the Board further increased the Share Repurchase Program from $40.0 million to up to $100.0
million and extended it to March 12, 2023. The Company may utilize various methods to 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 year ended December 31, 2020, the Company repurchased 1,644,697 shares of its common stock. Since the inception
of the Share Repurchase Program through December 31, 2020, the Company had repurchased 2,382,155 shares of its common stock,
par value $0.01 per share, at a total cost of approximately $61,224,000, or $25.70 per share.
Treasury Shares
From time to time, in accordance with the Company’s share repurchase program, the Company may repurchase shares of its
common stock in the open market. Until any such shares are retired, the cost of the shares is included in common stock held in
treasury at cost on the consolidated balance sheet. The number of shares of common stock classified as treasury shares reduces the
number of shares of the Company’s common stock outstanding and, accordingly, are considered in the weighted average number of
shares outstanding during the period. During the year ended December 31, 2020, the Company retired 1,644,697 shares of its common
stock held in treasury. During the years ended December 31, 2019 and 2018, the Company retired no shares of its common stock held
in treasury. As of December 31, 2020 and 2019, the Company had no shares of common stock held in treasury.
Long Term Incentive Plan
On June 15, 2016, the Company’s stockholders approved a long-term incentive plan (the “2016 LTIP”) and the Company filed a
registration statement on Form S-8 registering 2,100,000 shares of common stock, 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.
F-31
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 units to 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. On February 20, 2020, pursuant to the 2016 LTIP, the Company granted 168,183 restricted stock units
to its directors, officers, employees and certain key employees of the Adviser. On May 11, 2020, pursuant to the 2016 LTIP, the
Company granted 116,852 restricted stock units to its directors, officers, employees and certain key employees of the Adviser. The
following table includes the number of restricted stock units granted, vested, forfeited and outstanding as of December 31, 2020:
Outstanding January 1,
Granted
Vested
Outstanding December 31,
2020
Number of Units
Weighted Average
Grant Date Fair Value
447,039
285,035
(178,143) (1)
553,931
$
$
29.13
42.53
26.61
36.83
(1) Certain key employees of the Adviser elected to net the taxes owed upon vesting against the shares issued resulting in 137,608
shares being issued as shown on the consolidated statement of stockholders’ equity.
The following table contains information regarding the vesting of restricted stock units under the 2016 LTIP for the next five
calendar years subsequent to December 31, 2020:
2021
2022
2023
2024
2025
Total
February
Shares Vesting
May
139,842
131,546
66,860
66,860
31,971
437,079
27,984
22,221
22,217
22,215
22,215
116,852
Total
167,826
153,767
89,077
89,075
54,186
553,931
As of December 31, 2020, the Company had issued 559,159 shares of common stock under the 2016 LTIP. For the years ended
December 31, 2020, 2019 and 2018, the Company recognized approximately $5.5 million, $5.1 million and $4.2 million, respectively,
of equity-based compensation expense related to grants of restricted stock units. As of December 31, 2020, the Company had
recognized a liability of approximately $1.1 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 Truist Securities, Inc. f/k/a SunTrust
Robinson Humphrey, Inc. (“Truist”, and together with Raymond James and Jefferies, the “2019 ATM Sales Agents”), pursuant to
which the Company may issue and sell from time to time shares of the Company’s common stock, par value $0.01 per share, having
an aggregate sales price of up to $100,000,000 (the “2019 ATM Program”). Sales of shares of common stock, if any, may be made in
transactions that are deemed to be “at the market” offerings, as defined in Rule 415 under the Securities Act 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. 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 2019
ATM Program. During the year ended December 31, 2019, the Company issued 1,565,322 shares of common stock at an average
price of $45.98 per share for gross proceeds of approximately $72.0 million. The Company paid approximately $1.1 million in fees to
the Sales Agents with respect to such sales and incurred other issuance costs of approximately $1.0 million, both of which were netted
against the gross proceeds and recorded in additional paid in capital. During the three months ended March 31, 2020, the Company
issued 560,000 shares of common stock at an average price of $50.00 per share for gross proceeds of $28.0 million under the 2019
ATM Program. The Company paid approximately $0.4 million in fees to the 2019 ATM Sales Agents with respect to such sales and
F-32
incurred other issuance costs of approximately $0.3 million, both of which were netted against the gross proceeds and recorded in
additional paid in capital. On February 27, 2020, the 2019 ATM Program reached aggregate sales of $100,000,000 and therefore
expired. The following table contains summary information of the 2019 ATM Program since its inception:
Gross proceeds
Common shares issued
Gross average sale price per share
Sales commissions
Offering costs
Net proceeds
Average price per share, net
$
$
$
$
99,973,433
2,125,322
47.04
1,499,601
1,350,920
97,122,912
45.70
On March 4, 2020, the Company, the OP and the Adviser entered into separate equity distribution agreements with each of
Jefferies, Raymond James, KeyBanc Capital Markets Inc. (“KeyBanc”) and Truist Bank (together with Jefferies, Raymond James and
KeyBanc, the “2020 ATM Sales Agents”), pursuant to which the Company may issue and sell from time to time shares of the
Company’s common stock, par value $0.01 per share, having an aggregate sales price of up to $225,000,000 (the “2020 ATM
Program”). Sales of shares of common stock, if any, may be made in transactions that are deemed to be “at the market” offerings, as
defined in Rule 415 under the Securities Act, including, without limitation, sales made by means of ordinary brokers’ transactions on
the New York Stock Exchange, to or through a market maker at market prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices based on prevailing market prices. In addition to the issuance and sale of shares of
common stock, the Company may enter into forward sale agreements with each of Jefferies, KeyBanc, Raymond James, and Truist, or
their respective affiliates, through the 2020 ATM Program. During the year ended December 31, 2020, the Company issued 718,306
shares of common stock at an average price of $43.92 per share for gross proceeds of $31.5 million under the 2020 ATM Program.
The Company paid approximately $0.5 million in fees to the 2020 ATM Sales Agents with respect to such sales and incurred other
issuance costs of approximately $0.6 million, both of which were netted against the gross proceeds and recorded in additional paid in
capital. The following table contains summary information of the 2020 ATM Program:
Gross proceeds
Common shares issued
Gross average sale price per
share
Sales commissions
Offering costs
Net proceeds
Average price per share, net
9. Earnings (Loss) Per Share
$
$
$
$
31,546,577
718,306
43.92
473,199
609,615
30,463,763
42.41
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 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.
F-33
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 (loss). As such, the assumed conversion of
these units would have no net impact on the determination of diluted earnings (loss) per share. See Note 10 for additional information.
The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods presented (in
thousands, except per share amounts):
Numerator for earnings (loss) per share:
Net income (loss)
Net income (loss) attributable to redeemable noncontrolling
interests in the Operating Partnership
Net income (loss) attributable to common stockholders
Denominator for earnings (loss) per share:
Weighted average common shares outstanding
Denominator for basic loss per share
Weighted average unvested restricted stock units
Denominator for diluted loss per share
Earnings (loss) per weighted average common share:
Basic
Diluted
$
$
$
$
(1)
2020
For the Year Ended December 31,
2019
2018
44,150
$
99,438
$
132
44,018
$
298
99,140
$
24,715
24,715
519
25,234
24,116
24,116
477
24,593
(1,614)
(5)
(1,609)
21,189
21,189
478
21,189
1.78
1.74
$
$
4.11
4.03
$
$
(0.08)
(0.08)
(1)
If the Company sustains a net loss for the period presented, unvested restricted stock units are not included in the diluted
earnings per share calculation.
10. Noncontrolling Interests
Redeemable Noncontrolling Interests in the OP
Interests in the OP held by limited partners are represented by OP Units. Net income (loss) is allocated to holders of OP Units
based upon net income (loss) attributable to common stockholders and the weighted average number of OP Units outstanding to total
common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated
to OP Units in accordance with the terms of the partnership agreement of the OP. Each time the OP distributes cash to the Company,
outside limited partners of the OP receive their pro-rata share of the distribution. Redeemable noncontrolling interests in the OP have
a redemption feature and are marked to their redemption value if such value exceeds the carrying value of the redeemable
noncontrolling interests in the OP.
On June 30, 2017, the Company and the OP entered into a 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.
F-34
The following table sets forth the redeemable noncontrolling interests in the OP for the year ended December 31, 2020 (in
thousands):
Redeemable noncontrolling interests in the OP, December 31, 2019
Net income attributable to redeemable noncontrolling interests in the OP
Other comprehensive loss attributable to redeemable noncontrolling interests in the OP
Contributions from redeemable noncontrolling interests in the OP
Distributions to redeemable noncontrolling interests in the OP
Adjustment to reflect redemption value of redeemable noncontrolling interests in the OP
Redeemable noncontrolling interests in the OP, December 31, 2020
$
$
3,295
132
(141)
168
(265)
(91)
3,098
Noncontrolling Interests
Noncontrolling interests have in the past and may in the future be comprised of joint venture partners’ interests in joint ventures
the Company consolidates. When applicable, the Company reports its joint venture partners’ interests in its consolidated joint ventures
and other subsidiary interests held by third parties as noncontrolling interests. The Company records these noncontrolling interests at
their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investment’s net income or loss,
equity contributions, return of capital, and distributions. Generally, these noncontrolling interests are not redeemable by the equity
holders and are presented as part of permanent equity. Income and losses are allocated to the noncontrolling interest holder based on
its economic ownership percentage.
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.
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 years ended December 31, 2020, 2019 and 2018 (in thousands):
Fees incurred
Property management fees
Construction supervision fees
Design fees
Acquisition fees
Reimbursements
Payroll and benefits
Other reimbursements
(1) $
(2)
(2)
(3)
(4)
(5)
2020
For the Year Ended December 31,
2019
2018
$
5,949
1,848
666
201
18,321
3,507
$
5,363
1,549
255
1,465
18,148
3,286
4,382
974
102
348
14,100
2,200
Included in property management fees on the consolidated statements of operations and comprehensive income (loss).
(1)
(2) Capitalized on the consolidated balance sheets and reflected in buildings and improvements.
(3)
(4)
(5)
Includes due diligence costs. Acquisition fees are capitalized to real estate assets on the consolidated balance sheets.
Included in property operating expenses on the consolidated statements of operations and comprehensive income (loss).
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 (loss).
F-35
11. Related Party Transactions
Advisory and Administrative Fee
In accordance with the Advisory Agreement, the Company pays the Adviser an advisory fee equal to 1.00% of the Average Real
Estate Assets (as defined below). The duties performed by the Company’s Adviser under the terms of the Advisory Agreement
include, but are not limited to: providing daily management for the Company, selecting and working with third party service
providers, managing the Company’s properties or overseeing the third party property manager, formulating an investment strategy for
the Company and selecting suitable properties and investments, managing the Company’s outstanding debt and its interest rate
exposure through derivative instruments, determining when to sell assets, and managing the value-add program or overseeing a third
party vendor that implements the value-add program. “Average Real Estate Assets” means the average of the aggregate book value of
Real Estate Assets before reserves for depreciation or other non-cash reserves, computed by taking the average of the book value of
real estate assets at the end of each month (1) for which any fee under the Advisory Agreement is calculated or (2) during the year for
which any expense reimbursement under the Advisory Agreement is calculated. “Real Estate Assets” is defined broadly in the
Advisory Agreement to include, among other things, investments in real estate-related securities and mortgages and reserves for
capital expenditures (the value-add program). The advisory fee is payable monthly in arrears in cash, unless the Adviser elects, in its
sole discretion, to receive all or a portion of the advisory fee in shares of common stock, subject to certain limitations.
In accordance with the Advisory Agreement, the Company also pays the Adviser an administrative fee equal to 0.20% of the
Average Real Estate Assets. The administrative fee is payable monthly in arrears in cash, unless the Adviser elects, in its sole
discretion, to receive all or a portion of the administrative fee in shares of common stock, subject to certain limitations.
The advisory and administrative fees paid to the Adviser on the Contributed Assets (as defined below) 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 years ended December 31, 2020, 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.
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 its Spin-Off.
The Contributed Assets Cap is not reduced for dispositions of such assets subsequent to its Spin-Off. Advisory and administrative fees
on New Assets are not subject to the above limitation and are based on an annual rate of 1.2% on Average Real Estate Assets, but are
subject to the Expense Cap. New Assets are all Real Estate Assets that are not Contributed Assets.
For the years ended December 31, 2020, 2019 and 2018, the Company incurred advisory and administrative fees of $7.7 million,
$7.5 million and $7.5 million, respectively. For the years ended December 31, 2020, 2019 and 2018, the Adviser elected to voluntarily
waive the advisory and administrative fees of $15.4 million, $9.1 million and $4.1 million, respectively. The advisory and
administrative fees waived by the Adviser for the years ended December 31, 2020, 2019 and 2018 are considered to be permanently
waived for the periods. The Adviser is not contractually obligated to waive fees on New Assets in the future and may cease waiving
fees on New Assets at its discretion.
F-36
Other Related Party Transactions
The Company has in the past, and may in the future, utilize the services of affiliated parties. For the years ended December 31,
2020, 2019 and 2018, the Company paid approximately $0.2 million, $0.3 million and $0.3 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.
In the normal course of business, the Company may purchase properties from affiliates of the Adviser. During the year ended
December 31, 2019, the Company purchased the Residences at Glenview Reserve and Residences at West Place from an affiliate of
the Adviser for approximately $100.0 million. The Company’s Audit Committee authorized, approved and ratified the acquisition of
the two properties.
On November 14, 2018, 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 December 31, 2020, 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 (loss) of the Company. The Company is not involved in any material litigation nor,
to management’s knowledge, is any material litigation currently threatened against the Company or its properties or subsidiaries.
Environmental liabilities could have a material adverse effect on the Company’s business, assets, cash flows or results of
operations. During the year ended December 31, 2020, the Company incurred an environmental liability of $1.1 million at Cutter’s
Point involving asbestos. As of December 31, 2020, the environmental liability involving asbestos at Cutter’s Point has been fully
depreciated. There can be no assurance that other material environmental liabilities do not exist.
Self-Insurance Program
Effective March 1, 2019, the Company maintains a partial self-insurance program for property and casualty claims whereby it
incurs the “first-loss” portion of a claim up to an aggregate loss amount. Claims resulting in losses in excess of a $100,000 per
occurrence property deductible will be paid by the Company up to an aggregate amount of $1.2 million (the “2019 Aggregate Amount”).
For the period from March 1, 2019 to February 29, 2020, the Company incurred a claim related to Cutter’s Point (see Note 5) as part of
the 2019 Aggregate Amount. The claim related to Cutter’s Point required the Company to fund the full 2019 Aggregate Amount with
$0.6 million being funded in December 2019 and the remaining $0.6 million funded during the three months ended March 31, 2020. For
the period from March 1, 2019 to February 29, 2020, there were no other potential claims, besides the claim involving Cutter’s Point, that
met the criteria as set forth under ASC 450-20.
On March 1, 2020, the Adviser entered into a new policy resulting in a new aggregate amount of $2,365,000 (the “2020 Aggregate
Amount”) which is allocated across properties managed by the Adviser with approximately $1.5 million being allocated to the Company.
As of December 30, 2020, all of the $1.5 million of the 2020 Aggregate Amount allocated to the Company has been funded. Under ASC
450-20 “Loss Contingencies”, the Company does not reserve for the 2020 Aggregate Amount or any portion thereof until a claim is made
and the amount of the claim and the timing of payment on the claim can be reasonably estimated. For the period from March 1, 2020 to
December 31, 2020, the Company incurred a claim related to Venue 8651 for $0.9 million and Timber Creek for $1.0 million as part of
the 2020 Aggregate Amount (see Note 5).
F-37
13. Subsequent Events
Dividends Declared
On February 15, 2021, the Company’s board of directors declared a quarterly dividend of $0.34125 per share, payable on March
31, 2021 to stockholders of record on March 15, 2021.
$145.0 Million Swap
On February 17, 2021, NexPoint Residential Trust, Inc. (the “Company”),
through its operating partnership, NexPoint
Residential Trust Operating Partnership, L.P., entered into an interest rate swap transaction with Truist Bank (the “Swap”). The
Company entered into the Swap 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). The Swap
has an effective date of March 1, 2022 and a termination date of March 1, 2025. Beginning on April 1, 2022, the Company will be
required to make monthly fixed rate payments of 0.573% calculated on a notional amount of $145.0 million, while the counterparty
will be obligated to make monthly floating rate payments based on one-month LIBOR to the Company referencing the same notional
amount.
14. Quarterly Results (unaudited)
Presented below is a summary of the unaudited quarterly consolidated financial information for the years ended December 31,
2020, 2019 and 2018 (in thousands, except per share amounts):
Total revenues
Net income (loss)
$
52,582 $
28,039
50,681 $
(9,318)
March 31
June 30
September 30
2020 Quarters Ended
50,990 $
29,641
December 31
50,547
(4,212)
Net income (loss) attributable to common stockholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
27,955
1.10
1.08
(1)
(1)
(9,290)
(0.38)
(0.38)
29,552
1.21
1.19
(4,199)
(0.17)
(0.17)
(1) Quarterly earnings (loss) per share amounts are based on the weighted average common shares outstanding during the respective
quarter and, therefore, may not agree in total with the loss per share amount calculated for the year ended December 31, 2020.
Total revenues
Net income (loss)
$
41,491 $
(4,373)
43,066 $
(1,987)
46,833 $
119,104
December 31
49,676
(13,306)
March 31
June 30
September 30
2019 Quarters Ended
Net income (loss) attributable to common stockholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
(1)
(1)
(4,360)
(0.19)
(0.19)
(1,981)
(0.08)
(0.08)
118,747
4.93
4.84
(13,266)
(0.53)
(0.53)
(1) Quarterly earnings (loss) per share amounts are based on the weighted average common shares outstanding during the respective
quarter and, therefore, may not agree in total with the earnings per share amount calculated for the year ended December 31,
2019.
Total revenues
Net income (loss)
$
35,057 $
10,094
35,655 $
(1,666)
March 31
June 30
September 30
2018 Quarters Ended
36,495 $
(5,260)
December 31
39,390
(4,782)
Net income (loss) attributable to common stockholders
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
10,064
0.48
0.47
(1)
(1)
(1,661)
(0.08)
(0.08)
(5,245)
(0.25)
(0.25)
(4,767)
(0.21)
(0.21)
(1) Quarterly earnings (loss) per share amounts are based on the weighted average common shares outstanding during the respective
quarter and, therefore, may not agree in total with the earnings per share amount calculated for the year ended December 31,
2018.
F-38
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2020
(in thousands)
Initial Cost to Company
Costs
Capitalized
Gross Amount Carried at December 31,
2020
Location
Encumbrances
(1)
Land
Buildings and
Improvements
(2)
Subsequent
to
Acquisition
Land
Buildings and
Improvements
(3)
Total
Total (4)
Accumulated
Depreciation
and
Amortization
(5) (6)
Date
Acquired
Property Name
Arbors on Forest
Ridge
Cutter's Point
Silverbrook
Beechwood Terrace
The Summit at
Sabal Park
Courtney Cove
Radbourne Lake
Timber Creek
Sabal Palm at Lake
Buena Vista
Cornerstone
The Preserve at
Terrell Mill
Versailles
Seasons 704
Apartments
Madera Point
Venue at 8651
Parc500
The Venue on
Camelback
Old Farm
Stone Creek at Old
Farm
Bedford,
Texas
Richardson,
Texas
Grand Prairie,
Texas
Antioch,
Tennessee
Tampa,
Florida
Tampa,
Florida
Charlotte,
North
Carolina
Charlotte,
North
Carolina
Orlando,
Florida
Orlando,
Florida
Marietta,
Georgia
Dallas, Texas
West Palm
Beach,
Florida
Mesa,
Arizona
Fort Worth,
Texas
West Palm
Beach,
Florida
Phoenix,
Arizona
Houston,
Texas
Houston,
Texas
Houston,
Texas
Marietta,
Georgia
Hollister Place
Rockledge
Apartments
Atera Apartments Dallas, Texas
Cedar Pointe
Crestmont Reserve Dallas, Texas
Antioch,
Tennessee
Brandywine I & II
Bella Vista
The Enclave
The Heritage
Summers Landing
Nashville,
Tennessee
Phoenix,
Arizona
Tempe,
Arizona
Phoenix,
Arizona
Fort Worth,
Texas
$
13,130 $
2,330 $
10,475 $
12,805 $
3,186 $
2,330 $
13,349 $
15,679 $
(4,266) 1/31/2014
16,640
3,330
12,515
15,845
2,899
3,330
15,062
18,392
(2,009) 1/31/2014
30,590
4,860
25,540
30,400
7,561
4,860
32,308
37,168
(10,470) 1/31/2014
23,365
1,390
20,010
21,400
5,455
1,390
25,056
26,446
(7,041) 7/21/2014
13,560
5,770
13,280
19,050
2,686
5,770
15,562
21,332
(4,704) 8/20/2014
13,680
5,880
13,070
18,950
3,353
5,880
15,992
21,872
(4,697) 8/20/2014
20,000
2,440
21,810
24,250
3,606
2,440
24,764
27,204
(6,739) 9/30/2014
24,100
11,260
11,490
22,750
6,069
11,260
16,760
28,020
(5,610) 9/30/2014
42,100
7,580
41,920
49,500
4,259
7,580
44,792
52,372
(10,618) 11/5/2014
21,299
1,500
30,050
31,550
4,970
1,500
34,126
35,626
(8,861) 1/15/2015
42,480
23,880
10,170
6,720
47,830
19,445
58,000
26,165
13,575
6,763
10,170
6,720
59,591
25,627
69,761
32,347
(16,074) 2/6/2015
(7,676) 2/26/2015
17,460
7,480
13,520
21,000
3,060
7,480
16,179
23,659
(4,485) 4/15/2015
15,150
4,920
17,605
22,525
3,223
4,920
20,199
25,119
(5,113) 8/5/2015
13,734
2,350
16,900
19,250
4,721
2,350
21,110
23,460
(6,020) 10/30/2015
14,951
3,860
19,424
23,284
5,843
3,860
24,776
28,636
(6,073) 7/27/2016
28,093
8,340
36,520
44,860
4,916
8,340
40,713
49,053
(7,496) 10/11/2016
52,886
11,078
73,986
85,064
3,657
11,078
74,289
85,367
(12,211) 12/29/2016
15,274
3,493
19,937
23,430
898
3,493
20,263
23,756
(3,287) 12/29/2016
14,811
2,782
21,902
24,684
3,469
2,782
24,439
27,221
(4,664) 2/1/2017
68,100
29,500
17,300
12,061
17,451
22,371
2,371
4,124
96,577
37,090
24,410
20,667
114,028
59,461
26,781
24,791
8,795
3,972
1,435
1,718
17,451
22,371
2,371
4,124
102,351
39,722
119,802
62,093
(15,894) 6/30/2017
(5,784) 10/25/2017
25,845
22,385
28,216
26,509
(2,801) 8/24/2018
(2,398) 9/26/2018
43,835
6,237
73,870
80,107
3,821
6,237
77,691
83,928
(7,761) 9/26/2018
29,040
10,942
37,661
48,603
1,236
10,942
38,897
49,839
(3,437) 1/28/2019
25,322
11,046
30,933
41,979
1,231
11,046
32,164
43,210
(2,836) 1/28/2019
24,625
6,835
35,244
42,079
1,310
6,835
36,554
43,389
(3,111) 1/28/2019
10,109
1,798
17,628
19,426
994
1,798
18,622
20,420
(1,245) 6/7/2019
S-1
Residences at
Glenview Reserve
Residences at West
Place
Avant at Pembroke
Pines
Arbors of
Brentwood
Torreyana
Apartments
Bloom
Bella Solara
Fairways at San
Marcos
Nashville,
Tennessee
Orlando,
Florida
Pembroke
Pines, Florida
Nashville,
Tennessee
Las Vegas,
Nevada
Las Vegas,
Nevada
Las Vegas,
Nevada
Chandler,
Arizona
26,560
3,367
41,652
45,019
1,884
3,367
43,536
46,903
(2,675) 7/17/2019
33,817
3,345
52,657
56,002
348
3,345
53,005
56,350
(3,050) 7/17/2019
177,100
48,436
275,671
324,107
7,589
48,436
283,260
331,696
(14,844) 8/30/2019
34,237
6,346
56,409
62,755
507
6,346
56,916
63,262
(3,003) 9/10/2019
37,400
23,824
44,560
68,384
98
23,824
44,658
68,482
(1,937) 11/22/2019
58,850
23,805
83,288
107,093
702
23,805
83,990
107,795
(3,543) 11/22/2019
36,575
12,605
54,262
66,867
157
12,605
54,419
67,024
(2,278) 11/22/2019
46,464
10,993
73,785
84,778
57
10,993
73,842
84,835
(783) 11/2/2020
$
1,168,078 $323,429 $ 1,543,593 $1,867,022 $ 130,023 $323,429 $ 1,652,814 $1,976,243 $ (215,494)
(1)
(2)
(3)
(4)
Encumbrances includes mortgage debt.
Includes gross intangible lease assets of approximately $27.8 million and buildings, improvements and furniture, fixtures and
equipment of approximately $1.5 billion, which includes total acquisition costs of approximately $7.3 million incurred on the
acquisitions of The Colonnade, Old Farm, Stone Creek at Old Farm, Hollister Place, Rockledge Apartments, Atera Apartments,
Cedar Pointe, Crestmont Reserve, Brandywine I & II, Bella Vista, The Enclave, The Heritage, Summers Landing, Residences at
Glenview Reserve, Residences at West Place, Avant at Pembroke Pines, Arbors of Brentwood, Torreyana, Bloom, Bella Solara,
and Fairways at San Marcos and a fair market value adjustment, a premium of approximately $0.9 million, related to the
assumption of debt in connection with the acquisition of Parc500.
Includes gross intangible lease assets of approximately $1.7 million, construction in progress of approximately $10.8 million,
and furniture, fixtures and equipment of approximately $96.2 million.
The aggregate cost, net of accumulated depreciation, for Federal
approximately $1.8 billion (unaudited).
Includes accumulated amortization of intangible lease assets of approximately $0.6 million.
income tax purposes as of December 31, 2020 was
(5)
(6) Depreciation and amortization are computed on a straight-line basis over the estimated useful lives. The estimated useful life to
compute depreciation for buildings is 30 years, for improvements is 15 years, and for furniture, fixtures and equipment is three
years. The estimated useful life to compute amortization for intangible lease assets is six months.
S-2
NEXPOINT RESIDENTIAL TRUST, INC. AND SUBSIDIARIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2020
A summary of activity for real estate and accumulated depreciation for the years ended December 31, 2020, 2019 and 2018 is as
follows (in thousands):
Real Estate:
Balance, beginning of year
Additions:
Real estate acquired
Improvements
Deductions:
Real estate sold
Write-off of fully amortized assets and other
Balance, end of year
Accumulated Depreciation and Amortization:
Balance, beginning of year
Depreciation expense
Amortization expense
Accumulated depreciation on sales
Write-off of fully amortized assets and other
Balance, end of year
For the Year Ended December 31,
2019
2018
2020
$
1,942,221
$
1,222,563
$
1,082,805
84,778
48,933
(85,588)
(14,101)
1,976,243
160,411
75,609
6,802
(14,523)
(12,805)
215,494
$
$
$
882,313
47,739
(191,203)
(19,191)
1,942,221
135,021
56,360
12,726
(32,408)
(11,288)
160,411
$
$
$
131,679
28,809
(18,311)
(2,419)
1,222,563
91,649
45,002
2,468
(2,500)
(1,598)
135,021
$
$
$
S-3