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EX-31.2 - EX-31.2 - Steadfast Income REIT, Inc. | g24428exv31w2.htm |
EX-31.1 - EX-31.1 - Steadfast Income REIT, Inc. | g24428exv31w1.htm |
EX-32.2 - EX-32.2 - Steadfast Income REIT, Inc. | g24428exv32w2.htm |
EX-32.1 - EX-32.1 - Steadfast Income REIT, Inc. | g24428exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-160748
STEADFAST INCOME REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland (State or Other Jurisdiction of Incorporation or Organization) |
27-0351641 (I.R.S. Employer Identification No.) |
|
18100 Von Karman Avenue, Suite 500 Irvine, California (Address of Principal Executive Offices) |
92612 (Zip Code) |
(949) 852-0700
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No
o
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated filer o | Accelerated filer o | Non-Accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As of August 18, 2010, there were 697,608 shares of the Registrants common stock issued and
outstanding.
STEADFAST INCOME REIT, INC.
INDEX
INDEX
1
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements
Steadfast Income REIT, Inc.
(formerly Steadfast Secure Income REIT, Inc.)
(formerly Steadfast Secure Income REIT, Inc.)
Consolidated Balance Sheets
June 30, 2010 | December 31, 2009 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 3,539,334 | $ | 202,007 | ||||
Accounts receivable |
166,474 | | ||||||
Other assets |
258,088 | | ||||||
Total assets |
$ | 3,963,896 | $ | 202,007 | ||||
LIABILITIES AND EQUITY |
||||||||
Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 32,859 | $ | | ||||
Due to affiliates |
475,697 | | ||||||
Total liabilities |
508,556 | | ||||||
Commitments and Contingencies |
||||||||
Equity |
||||||||
Stockholders Equity |
||||||||
Preferred stock, $0.01 par value per share; 100,000 shares
authorized, no shares issued and outstanding |
| | ||||||
Common stock, $0.01 par value per share; 999,999,000
shares authorized, 504,532 and 22,223 shares issued and
outstanding at June 30, 2010 and December 31, 2009,
respectively |
5,045 | 222 | ||||||
Convertible stock, $0.01 par value per share; 1,000
shares issued and outstanding as of June 30, 2010 and
December 31, 2009 |
10 | 10 | ||||||
Additional paid-in capital |
3,875,555 | 200,775 | ||||||
Accumulated deficit |
(426,270 | ) | | |||||
Total stockholders equity |
3,454,340 | 201,007 | ||||||
Noncontrolling interest |
1,000 | 1,000 | ||||||
Total equity |
3,455,340 | 202,007 | ||||||
Total liabilities and equity |
$ | 3,963,896 | $ | 202,007 | ||||
See accompanying notes to consolidated financial statements.
2
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
Steadfast Income REIT, Inc. and Subsidiary
(formerly Steadfast Secure Income REIT, Inc.)
(formerly Steadfast Secure Income REIT, Inc.)
Consolidated Statements of Operations
(Unaudited)
(Unaudited)
For the Six Months | ||||||||
For the Three Months Ended | Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Revenues |
$ | | $ | | ||||
Expenses |
||||||||
General and administrative expenses |
378,755 | 378,755 | ||||||
Acquisition costs |
47,515 | 47,515 | ||||||
Net loss |
(426,270 | ) | (426,270 | ) | ||||
Net loss attributable to noncontrolling interest |
| | ||||||
Net loss attributable to common stockholders |
$ | (426,270 | ) | $ | (426,270 | ) | ||
Net loss per common share basic & diluted |
$ | (2.85 | ) | $ | (2.10 | ) | ||
Weighted average number of common shares
outstanding basic & diluted |
149,386 | 203,297 | ||||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
Steadfast Income REIT, Inc. and Subsidiary
(formerly Steadfast Secure Income REIT, Inc.)
(formerly Steadfast Secure Income REIT, Inc.)
Consolidated Statements of Equity
For the Period from May 4, 2009 (Inception) to December 31, 2009
and for the Six Months Ended June 30, 2010
(Unaudited)
For the Period from May 4, 2009 (Inception) to December 31, 2009
and for the Six Months Ended June 30, 2010
(Unaudited)
Stockholders Equity | ||||||||||||||||||||||||||||||||||||
Common Stock | Convertible Stock | |||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||
Additional Paid-in | Accumulated | Stock-holders | Non-Controlling | |||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Equity | Interest | Total Equity | ||||||||||||||||||||||||||||
BALANCE, May 4, 2009
(Inception) |
| $ | | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||
Issuance of common stock |
22,223 | 222 | | | 199,785 | | 200,007 | | 200,007 | |||||||||||||||||||||||||||
Issuance of convertible stock |
| | 1,000 | 10 | 990 | | 1,000 | | 1,000 | |||||||||||||||||||||||||||
Contribution from
noncontrolling interest |
| | | | | | | 1,000 | 1,000 | |||||||||||||||||||||||||||
BALANCE, December 31, 2009 |
22,223 | 222 | 1,000 | 10 | 200,775 | | 201,007 | 1,000 | 202,007 | |||||||||||||||||||||||||||
Issuance of common stock |
482,309 | 4,823 | | | 4,278,543 | | 4,283,366 | | 4,283,366 | |||||||||||||||||||||||||||
Offering costs |
| | | | (642,505 | ) | | (642,505 | ) | | (642,505 | ) | ||||||||||||||||||||||||
Amortization of stock-based
compensation |
| | | | 38,742 | | 38,742 | | 38,742 | |||||||||||||||||||||||||||
Net loss for six months
ended June 30, 2010 |
| | | | | (426,270 | ) | (426,270 | ) | | (426,270 | ) | ||||||||||||||||||||||||
BALANCE, June 30, 2010 |
504,532 | $ | 5,045 | 1,000 | $ | 10 | $ | 3,875,555 | $ | (426,270 | ) | $ | 3,454,340 | $ | 1,000 | $ | 3,455,340 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
Steadfast Income REIT, Inc.
(formerly Steadfast Secure Income REIT, Inc.)
(formerly Steadfast Secure Income REIT, Inc.)
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 2010
(Unaudited)
For the Six Months Ended June 30, 2010
(Unaudited)
For the Six Months | ||||
Ended June 30, 2010 | ||||
Cash Flows from Operating Activities: |
||||
Net loss |
$ | (426,270 | ) | |
Adjustment to reconcile net income to cash
provided by operating activities: |
||||
Stock-based compensation |
38,742 | |||
Changes in operating assets and liabilities: |
||||
Other assets |
(33,088 | ) | ||
Accounts payable and accrued liabilities |
32,859 | |||
Due to affiliates |
309,524 | |||
Net cash used in operating activities |
(78,233 | ) | ||
Cash Flows from Investing Activities: |
||||
Deposits for the purchase of real estate investments |
(200,000 | ) | ||
Net cash used in investing activities |
(200,000 | ) | ||
Cash Flows from Financing Activities: |
||||
Issuance of common stock, net |
3,640,560 | |||
Payment of deferred financing costs |
(25,000 | ) | ||
Net cash provided by financing activities |
3,615,560 | |||
Net increase in cash and cash equivalents |
3,337,327 | |||
Cash and cash equivalents, beginning of period |
202,007 | |||
Cash and cash equivalents, end of period |
$ | 3,539,334 | ||
See accompanying notes to consolidated financial statements.
5
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
1. | Organization |
Steadfast Income REIT, Inc. (formerly Steadfast Secure Income REIT, Inc.) (the Company) was
formed on May 4, 2009, as a Maryland corporation that intends to qualify as a real estate
investment trust (REIT). On June 12, 2009, the Company issued 22,223 shares of common stock to
Steadfast REIT Investments, LLC (the Sponsor) at a purchase price of $9.00 per share for an
aggregate purchase price of $200,007. On July 10, 2009, Steadfast Income Advisors, LLC, a Delaware
limited liability company formed on May 1, 2009 (the Advisor), invested $1,000 in the Company in
exchange for 1,000 shares of convertible stock (the Convertible Stock) as described in Note 4.
Substantially all of the Companys business is expected to be conducted through Steadfast
Income REIT Operating Partnership, L.P., a Delaware limited partnership formed on July 6, 2009 (the
Operating Partnership). The Company is the sole general partner of, and owns a 0.01% partnership
interest in, the Operating Partnership. The Advisor has invested $1,000 in the Operating
Partnership in exchange for its limited partnership interests and owns the remaining 99.99%
partnership interest in the Operating Partnership as its sole limited partner. The Company and
Advisor entered into an Amended and Restated Limited Partnership Agreement of the Operating
Partnership (the Partnership Agreement) on September 28, 2009. Pursuant to the Partnership
Agreement, the Company will contribute funds as necessary to the Operating Partnership. Thereafter,
the Operating Partnership will allocate income and distribute cash to each partner in proportion to
their respective ownership interests. Through June 30, 2010, the Operating Partnership had not yet
commenced operations.
On October 13, 2009, the Company commenced a private offering of up to $94,000,000 in shares
of the Companys common stock, subject to an option to increase the offering by up to $18,800,000
in shares of common stock, at a purchase price of $9.40 per share (with discounts available for
certain categories of purchasers) (the Private Offering). The Company offered its shares of
common stock for sale in the Private Offering pursuant to a confidential private placement
memorandum and only to persons that were accredited investors, as that term is defined under the
Securities Act of 1933, as amended, and Regulation D promulgated thereunder. As of June 30, 2010
and December 31, 2009, 467,309 and zero shares had been sold in the Private Offering, respectively.
On July 9, 2010 the Company terminated the Private Offering and on July 19, 2010 the Company
commenced its registered public offering described below (the Public Offering).
On July 23, 2009, the Company filed a registration statement on Form S-11 with the Securities
and Exchange Commission (the SEC) to offer a maximum of 150,000,000 shares of common stock for
sale to the public at an initial price of $10.00 per share. The Company is also offering up to
15,789,474 shares of common stock pursuant to the Companys distribution reinvestment plan (the
DRP) at an initial price of $9.50 per share. The SEC declared the Companys registration
statement effective on July 9, 2010. If the Company extends the Public Offering beyond two years
from the date of its commencement, the Companys board of directors may, from time to time, in its
sole discretion, change the price at which the Company offers shares to the public in the Public
Offering or to its stockholders pursuant to the DRP to reflect changes in the Companys estimated
net asset value per share and other factors that the Companys board of directors deems relevant.
The Company may reallocate the shares between the Public Offering and the DRP.
The Company intends to use substantially all of the net proceeds from the Private Offering and
the Public Offering to invest in and manage a diverse portfolio of real estate investments,
primarily in the multifamily sector, located throughout the United States. In addition to the
Companys focus on multifamily properties, the Company
may also selectively invest in industrial properties and other types of commercial properties.
The Company may also acquire or originate mortgage, mezzanine, bridge and other real estate loans
and equity securities of other real estate companies.
6
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
Subject to certain restrictions and limitations, the business of the Company will be
externally managed by the Advisor, pursuant to the Advisory Agreement, dated September 28, 2009, by
and between the Company and the Advisor, which was amended on May 4, 2010 (the Advisory
Agreement). The Company has retained Steadfast Capital Markets Group LLC (the Dealer Manager),
an affiliate of the Company, to serve as the dealer manager of the Public Offering. The Dealer
Manager will be responsible for marketing the Companys shares of common stock being offered
pursuant to the Public Offering.
From inception to June 30, 2010, neither the Company nor the Operating Partnership had
purchased or contracted to purchase any properties or other investments. On August 11, 2010, the
Company acquired a multifamily property located in Springfield, Illinois. See Note 9, Subsequent
Events.
As the Company accepts subscriptions for shares of its common stock, it will transfer
substantially all of the net proceeds of the Public Offering to the Operating Partnership as a
capital contribution. The Partnership Agreement provides that the Operating Partnership will be
operated in a manner that will enable the Company to (1) satisfy the requirements for being
classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability, and
(3) ensure that the Operating Partnership will not be classified as a publicly traded partnership
for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), which classification could result in the Operating Partnership being taxed as a
corporation, rather than as a partnership. In addition to the administrative and operating costs
and expenses incurred by the Operating Partnership in acquiring and operating real properties, the
Operating Partnership will pay all of the Companys administrative costs and expenses, and such
expenses will be treated as expenses of the Operating Partnership.
2. | Summary of Significant Accounting Policies |
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and the Operating
Partnership. All significant intercompany balances and transactions are eliminated in
consolidation. The financial statements of the Companys subsidiaries are prepared using accounting
policies consistent with those of the Company. The Company evaluates subsequent events up until the
date the consolidated financial statements are issued.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial information as
contained within the Financial Accounting Standards Board (FASB), Accounting Standards
Codification (ASC) and the rules and regulations of the SEC, including the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements
do not include all of the information and footnotes required by GAAP for audited financial
statements. In the opinion of management, the financial statements for the unaudited interim
periods presented include all adjustments, which are of a normal and recurring nature, necessary
for a fair and consistent presentation of the results for such periods. Operating results for the
three and six months ended June 30, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the
Company to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could materially differ from those
estimates.
7
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents may include cash and short-term
investments. Short-term investments are stated at cost, which approximates fair value. As of
December 31, 2009, the Companys cash on deposit was 100% within the federally insured limits. As
of June 30, 2010, the Company had amounts in excess of federally insured limits in deposit accounts
with a financial institution. The Company limits such deposits to financial institutions with high
credit standing. There were no restrictions on the use of the Companys cash as of June 30, 2010
and December 31, 2009.
Real Estate Assets
Depreciation
Real estate costs related to the acquisition, development, construction, and improvement of
properties will be capitalized. Repair and maintenance costs will be charged to expense as incurred
and significant replacements and betterments will be capitalized. Repair and maintenance costs
include all costs that do not extend the useful life of the real estate asset. The Company
considers the period of future benefit of an asset to determine its appropriate useful life. The
Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Buildings | 25-40 years | |||
Building improvements | 10-25 years | |||
Tenant improvements | Shorter of lease term or expected useful life | |||
Tenant origination and absorption costs | Remaining term of related lease | |||
Furniture, fixtures, and equipment | 7-10 years |
Real Estate Purchase Price Allocation
In accordance with ASC Topic 805, Business Combinations, the Company will record above-market
and below-market in-place lease values for acquired properties based on the present value (using an
interest rate that reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) the
Companys estimate of fair market lease rates for the corresponding in-place leases, measured over
a period equal to the remaining non-cancelable term of the lease. The Company will amortize any
capitalized above-market or below-market lease values as an increase or reduction to rental income
over the remaining non-cancelable terms of the respective leases. Acquisition costs will generally
be expensed as incurred.
The Company will measure the aggregate value of other intangible assets acquired based on the
difference between (i) the property valued with existing in-place leases adjusted to market rental
rates and (ii) the property valued as if vacant. The Companys estimates of value are expected to
be made using methods similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors to be considered by the Company in its analysis include an estimate of carrying
costs during hypothetical expected lease-up periods, considering current market conditions and
costs to execute similar leases.
The Company will also consider information obtained about each property as a result of its
pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. In estimating carrying costs, the Company will also
include real estate taxes, insurance and other operating expenses and estimates of lost rentals at
market rates during the expected lease-up periods. The Company will also estimate
8
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
costs to execute
similar leases including leasing commissions and legal and other related expenses to the extent
that such costs are not already incurred in connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired will be further allocated to in-place
lease values and customer relationship intangible values based on the Companys evaluation of the
specific characteristics of each tenants lease and the Companys overall relationship with that
respective tenant. Characteristics to be considered by the Company in allocating these values
include the nature and extent of the Companys existing business relationships with the tenant,
growth prospects for developing new business with the tenant, the tenants credit
quality and expectations of lease renewals (including those existing under the terms of the
lease agreement), among other factors.
The Company will amortize the value of in-place leases to expense over the initial term of the
respective leases. The value of customer relationship intangibles will be amortized to expense over
the initial term and any renewal periods in the respective leases, but in no event will the
amortization period for the intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value
and customer relationship intangibles would be charged to expense in that period.
Impairment of Real Estate Assets
The Company will continually monitor events and changes in circumstances that could indicate
that the carrying amounts of its real estate and related intangible assets may not be recoverable.
When indicators of potential impairment suggest that the carrying value of real estate and related
intangible assets may not be recoverable, the Company will assess the recoverability of the assets
by estimating whether the Company will recover the carrying value of the asset through its
undiscounted future cash flows and its eventual disposition. If based on this analysis the Company
does not believe that it will be able to recover the carrying value of the asset, the Company will
record an impairment loss to the extent that the carrying value exceeds the estimated fair value of
the real estate and related intangible assets and liabilities.
Deferred Financing Costs
The Company will capitalize deferred financing costs such as commitment fees, legal fees and
other third party costs associated with obtaining commitments for financing that result in a
closing of such financing. The Company will amortize these costs over the terms of the respective
financing agreements using the interest method. The Company will expense unamortized deferred
financing costs when the associated debt is refinanced or repaid before maturity unless specific
rules are met that would allow for the carryover of such costs to the refinanced debt. Costs
incurred in seeking financing transactions that do not close will be expensed in the period in
which it is determined that the financing will not close.
Fair Value Measurements
Under GAAP, the Company is required to measure certain financial instruments at fair value on
a recurring basis. In addition, the Company is required to measure other financial instruments and
balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans
receivable and long-lived assets). Fair value is defined as the price that would be received upon
the sale of an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The GAAP fair value framework uses a three-tiered approach.
Fair value measurements are classified and disclosed in one of the following three categories:
| Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
9
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
| Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and | ||
| Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
When available, the Company will utilize quoted market prices from an independent third-party
source to determine fair value and will classify such items in Level 1 or Level 2. In instances
where the market for a financial instrument is not active, regardless of the availability of a
nonbinding quoted market price, observable inputs might not be relevant and could require the
Company to make a significant adjustment to derive a fair value measurement. Additionally, in an
inactive market, a market price quoted from an independent third party may rely more on models with
inputs based on information available only to that independent third party. When the Company
determines the market for a financial instrument owned by the Company to be illiquid or when market
transactions for similar instruments do not appear orderly, the Company will use several valuation
sources (including internal valuations,
discounted cash flow analysis and quoted market prices) and will establish a fair value by
assigning weights to the various valuation sources.
Changes in assumptions or estimation methodologies can have a material effect on these
estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, may not be realized in an immediate
settlement of the instrument.
Rents and Other Receivables
The Company will periodically evaluate the collectibility of amounts due from tenants and
maintain an allowance for doubtful accounts for estimated losses resulting from the inability of
tenants to make required payments under lease agreements. The Company will maintain an allowance
for deferred rent receivable that arises from the straight-lining of rents in accordance with ASC
Topic 840, Leases. The Company will exercise judgment in establishing these allowances and consider
payment history and current credit status of its tenants in developing these estimates.
Noncontrolling Interest in Consolidated Real Estate Partnerships
The
Company will report noncontrolling partners interest in consolidated real estate
partnerships as noncontrolling interest within the equity section of the consolidated balance
sheet, and amounts attributable to controlling and noncontrolling interests will be reported
separately in the consolidated income statement and consolidated statement of equity. As of June
30, 2010 and December 31, 2009, the Company recorded the $1,000 contribution made by the Advisor to
the Operating Partnership as noncontrolling interest within the equity section of the consolidated
balance sheet.
Revenue Recognition
The Company will recognize minimum rent, including rental abatements, concessions and
contractual fixed increases attributable to operating leases, on a straight-line basis over the
term of the related lease and amounts expected to be received in later years will be recorded as
deferred rents. The Company will record property operating expense reimbursements due from tenants
for common area maintenance, real estate taxes, and other recoverable costs in the period the
related expenses are incurred. The Company will recognize revenues from property management, asset
management, syndication and other services when the related fees are earned and are realizable.
10
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
The Company will recognize gains on sales of real estate either in total or deferred for a
period of time, depending on whether a sale has been consummated, the extent of the buyers
investment in the property being sold, whether the receivable of the Company is subject to future
subordination, and the degree of the Companys continuing involvement with the property after the
sale. If the criteria for profit recognition under the full-accrual method are not met, the Company
will defer gain recognition and account for the continued operations of the property by applying
the percentage-of-completion, reduced profit, deposit, installment or cost recovery method, as
appropriate, until the appropriate criteria are met.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC Topic 718,
Compensation Stock Compensation (ASC 718). ASC 718 established a fair value based method of
accounting for stock-based compensation. Accounting for stock-based compensation under ASC 718
requires the fair value of stock-based compensation awards to be amortized as an expense over the
vesting period and requires any dividend equivalents earned to be treated as dividends for
financial reporting purposes. Stock-based compensation awards are valued at the fair value on the
date of grant and amortized as an expense over the vesting period.
Distribution Policy
The Company intends to elect to be taxed as a REIT and to operate as a REIT beginning with its
taxable year ending December 31, 2010. To maintain its qualification as a REIT, the Company intends
to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is
determined without regard to the
dividends paid deduction or net capital gain and which does not necessarily equal net income
as calculated in accordance with GAAP). The Company expects to authorize and declare daily
distributions that will be paid on a monthly basis.
Distributions to stockholders will be determined by the board of directors of the Company and
will be dependent upon a number of factors relating to the Company, including funds available for
the payment of distributions, financial condition, the timing of property acquisitions, capital
expenditure requirements, and annual distribution requirements in order to maintain the Companys
status as a REIT under the Internal Revenue Code.
Organization and Offering Costs
Organization and offering expenses include all expenses (other than sales commissions and the
dealer manager fee) to be paid by the Company in connection with the Public Offering and the
Private Offering, including legal, accounting, printing, mailing and filing fees, charges of the
Companys transfer agent, expenses of organizing the Company, data processing fees, advertising and
sales literature costs, transfer agent costs, bona fide out-of-pocket due diligence costs and
amounts to reimburse the Advisor or its affiliates for the salaries of its employees and other
costs in connection with preparing supplemental sales materials and providing other administrative
services. Any reimbursement of expenses paid to Advisor will not exceed actual expenses incurred by
the Advisor.
After the termination of the Public Offering, the Advisor will reimburse the Company to the
extent total organization and offering expenses, plus sales commissions and dealer manager fees,
borne by the Company in connection with the Public Offering exceed 15% of the gross proceeds raised
in the Public Offering. In addition, the Company may also reimburse costs of bona fide training and
education meetings held by the Company (primarily travel, meal and lodging costs of registered
representatives of broker-dealers), attendance and sponsorship fees and cost reimbursement of
employees of the Companys affiliates to attend seminars conducted by broker-dealers and, in
special, cases, reimbursement to participating broker-dealers for technology costs associated with
the Public Offering, costs and expenses related to such technology costs, and costs and expenses
associated with the
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PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
facilitation of the marketing of the Companys shares and the ownership of the
Companys shares by such broker-dealers customers; provided, however, that the Company will not
pay any of the foregoing costs to the extent that such payment would cause total underwriting
compensation to exceed 10% of the gross proceeds of the Public Offering, as required by the rules
of the Financial Industry Regulatory Authority (FINRA).
Pursuant to the Advisory Agreement and the Dealer Manager Agreement, the Company is obligated
to reimburse the Advisor, the Dealer Manager or their affiliates, as applicable, for organization
and offering costs paid by them on behalf of the Company, provided that the Advisor would be
obligated to reimburse the Company to the extent selling commissions, dealer manager fees and other
organization and offering costs incurred by the Company in the Public Offering exceed 15% of gross
offering proceeds of the Public Offering.
Reimbursements to the Advisor, the Dealer Manager, or their affiliates, for offering costs
paid by them on behalf of the Company with respect to the Private Offering are not limited to 15%
of the gross offering proceeds of the Private Offering. However, the Company will not make
reimbursements of offering costs in excess of 15% of the gross offering proceeds of the Private
Offering unless approval is obtained from the independent directors.
Income Taxes
The Company intends to elect to be taxed as a REIT under the Internal Revenue Code and intends
to operate as such beginning with its taxable year ending December 31, 2010. To qualify as a REIT,
the Company must meet certain organizational and operational requirements, including the
requirement to distribute at least 90% of the Companys annual REIT taxable income to stockholders
(which is computed without regard to the dividends paid deduction or net capital gain and which
does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the
Company generally will not be subject to federal income tax to the extent it distributes qualifying
dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income tax on its taxable income at regular corporate income tax rates
and generally will not be permitted to qualify for treatment as a REIT for federal income tax
purposes for the four taxable years following the year during which qualification is lost, unless
the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an
event could materially adversely affect the Companys net income and net cash
available for distribution to stockholders. However, the Company intends to organize and
operate in such a manner as to qualify for treatment as a REIT.
Recently Issued Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-01, Equity
(Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (ASU
No. 2010-01). This ASU clarifies that when the stock portion of a distribution allows stockholders
to elect to receive cash or stock with a potential limitation on the total amount of cash that all
stockholders can elect to receive in the aggregate, the distribution would be considered a share
issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per
share prospectively. ASU No. 2010-01 is effective for interim and annual periods ending on or after
December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU No. 2010-01
has no impact on the Companys consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements (ASU No. 2010-06).
ASU No. 2010-06 requires additional disclosures regarding significant transfers in and out of
Levels 1 and 2 fair value measurements, including a description of the reasons for the transfers.
Further, this ASU requires additional disclosures about purchases, sales, issuances and settlements
relating to the activity in Level 3 fair value measurements. ASU No. 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009, except
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PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
for the disclosures
about purchases, sales, issuances and settlements relating to the activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal years. The adoption of ASU No. 2010-06 did not have a
material impact on the Companys consolidated financial statements.
In May 2009, the FASB issued ASC Topic 855, Subsequent Events (ASC 855). ASC 855 establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued. ASC 855 requires the
disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date. This ASC also requires public entities to evaluate subsequent events through the date
that the financial statements are issued. ASC 855 is effective for interim periods and fiscal years
ending after June 15, 2009. In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events
(Topic 855): Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09). ASU
No. 2010-09 amends ASC 855 and eliminates the requirement to disclose the date through which
subsequent events have been evaluated for SEC filers. ASU No. 2010-09 is effective upon issuance.
The adoption of ASC 855 and ASU No. 2010-09 did not have a material impact on the Companys
consolidated financial statements.
In June 2009, the FASB updated ASC Topic 810, Consolidation (ASC 810). ASC 810 requires a
Company to perform ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity. ASC 810 also eliminates the quantitative approach previously required for
determining the primarily beneficiary of a variable interest entity. ASC 810 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or after November 15,
2009. The Company adopted the updated ASC 810 on January 1, 2010, which did not have an impact on
its financial statements.
3. | Other Assets |
At June 30, 2010, other assets consisted of:
June 30, 2010 | ||||
Nonrefundable deposits for the purchase of real estate investments |
$ | 200,000 | ||
Deferred financing costs |
25,000 | |||
Prepaid expenses |
33,088 | |||
$ | 258,088 | |||
The Company had no other assets as of December 31, 2009.
4. | Stockholders Equity |
General
Under the Companys Second Articles of Amendment and Restatement (the Charter:), the total
number of shares of capital stock authorized for issuance is 1,100,000,000 shares, consisting of
999,999,000 shares of common stock with a par value of $0.01 per share, 1,000 shares of Convertible
Stock with a par value of $0.01 per share and 100,000,000 shares designated as preferred stock with
a par value of $0.01 per share.
Common Stock
The shares of common stock entitle the holders to one vote per share on all matters upon which
stockholders are entitled to vote, to receive dividends and other distributions as authorized by
the board of directors in
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PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
accordance with the Maryland General Corporation Law and to all rights of
a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences
or preemptive, conversion or exchange rights.
During 2009, the Company issued 22,223 shares of common stock for proceeds of $200,007.
During the six months ended June 30, 2010, the Company issued 467,309 shares of common stock for
offering proceeds of $3,640,861, net of offering costs of $642,505. Offering proceeds include
$166,474 of amounts receivable from the Companys transfer agent as of June 30, 2010. These
offering costs consist of selling commissions and dealer manager fees. As of June 30, 2010 and
December 31, 2009, the Company had issued 504,532 and 22,223 shares of common stock, respectively.
Convertible Stock
The Company has issued 1,000 shares of Convertible Stock, par value $0.01 per share, to the
Advisor. The Convertible Stock will convert to shares of common stock if and when: (A) the Company
has made total distributions on the then outstanding shares of common stock equal to the original
issue price of those shares plus an 8.0% cumulative, non-compounded, annual return on the original
issue price of those shares, (B) subject to specified conditions, the Company lists the common
stock for trading on a national securities exchange or (C) the Advisory Agreement is terminated or
not renewed by the Company (other than for cause as defined in the Advisory Agreement). A
listing will be deemed to have occurred on the effective date of any merger of the Company in
which the consideration received by the holders of common stock is the securities of another issuer
that are listed on a national securities exchange. Upon conversion, each share of Convertible Stock
will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 10% of
the amount, if any, by which (1) the Companys enterprise value (as defined in the Charter) plus
the aggregate value of distributions paid to date on the outstanding shares of common stock exceeds
the (2) aggregate purchase price paid by the stockholders for those shares plus an 8.0% cumulative,
non-compounded, annual return on the original issue price of those shares, divided by (B) the
Companys enterprise value divided by the number of outstanding shares of common stock, in each
case calculated as of the date of the conversion. In the event of a termination or non-renewal of
the Advisory Agreement by the Company for cause, the Convertible Stock will be redeemed by the
Company for $1.00.
Preferred Stock
The Charter also provide the Companys board of directors with authority to issue one or more
classes or series of preferred stock and prior to the issuance of such shares, the board of
directors shall have the power from time to time to classify or reclassify, in one or more series,
any unissued shares and designate the preferences, rights and privileges of such shares. The
Companys board of directors is authorized to amend its charter, without the approval of the
stockholders, to increase the aggregate number of authorized shares of capital stock or the number
of shares of any class or series that the Company has authority to issue. As of June 30, 2010 and
December 31, 2009, no shares of the Companys preferred stock were issued and outstanding.
Distribution Reinvestment Plan
The Companys board of directors has approved the DRP through which common stockholders may
elect to reinvest an amount equal to the distributions declared on their shares of common stock in
additional shares of the Companys common stock in lieu of receiving cash distributions upon
commencement of the Public Offering. The initial purchase price per share under the DRP will be
$9.50. If the Company extends the Public Offering beyond two years from the date of its
commencement, the Companys board of directors may, in its sole discretion, from
time to time, change this price based upon changes in the Companys estimated net asset value
per share, the then current public offering price of shares of the Companys common stock and other
factors that the board of directors deems relevant.
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PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
No sales commissions or dealer manager fees are payable on shares sold through the DRP. The
Companys board of directors may terminate the DRP at its discretion at any time upon ten days
notice to the Companys stockholders. Following any termination of the DRP, all subsequent
distributions to stockholders will be made in cash.
Share Repurchase Plan
There is no market for the Companys common stock and, as a result, there is risk that a
stockholder may not be able to sell the Companys stock at a time or price acceptable to the
stockholder. To allow stockholders to sell their shares of common stock in limited circumstances,
the Companys board of directors has approved a share repurchase plan.
Unless shares of common stock are being redeemed in connection with a stockholders death or
disability, the Company may not redeem shares until they have been outstanding for one year. In
addition, the Company has limited the number of shares redeemed pursuant to the share repurchase
plan as follows: (1) during any calendar year, the Company would not redeem in excess of 5% of the
weighted-average number of shares outstanding during the prior calendar year and (2) funding for
the repurchase of shares would come exclusively from the net proceeds the Company received from the
sale of shares under the DRP during the prior calendar year plus such additional funds as may be
reserved for that purpose by the Companys board of directors; provided, however, that the above
holding period shall not apply to repurchases requested within two years after the death or
disability of a stockholder.
Under the share repurchase plan, prior to the completion of the Offering Stage (as defined
below), the purchase price for shares repurchased by the Company under the plan will be as follows:
Repurchase Price | ||
Share Purchase Anniversary | on Repurchase Date(1) | |
Less than 1 year
|
No Repurchase Allowed | |
1 year
|
92.5% of Primary Offering Price | |
2 years
|
95.0% of Primary Offering Price | |
3 years
|
97.5% of Primary Offering Price | |
4 years
|
100.0% of Primary Offering Price | |
In the event of a stockholders death or disability
|
Average Issue Price for Shares(2) |
(1) | As adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the shares of common stock. | |
(2) | The purchase price per share for shares redeemed upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholders shares. |
The purchase price per share for shares repurchased pursuant to the share repurchase plan will
be further reduced by the aggregate amount of net proceeds per share, if any, distributed to the
Companys stockholders prior to the repurchase date as a result of the sale of one or more of the
Companys assets that constitutes a return of capital distribution as a result of such sales.
Notwithstanding the foregoing, following the completion of the Offering Stage, shares of the
Companys common stock will be repurchased at a price equal to a price based upon the Companys
most recently established estimated net asset value per share, which the Company will publicly
disclose every six months beginning no later
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PART I FINANCIAL INFORMATION (continued)
Item 1. | Financial Statements (continued) |
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited)
than six months following the completion of the
Offering Stage based on periodic valuations by independent third party appraisers and qualified
independent valuation experts selected by the Advisor. The Offering Stage will be considered
complete on the first date that the Company is no longer publicly offering equity securities that
are not listed on a national securities exchange, whether through the Public Offering or follow-on
public equity offerings, provided the Company has not filed a registration statement for a
follow-on public equity offering as of such date.
The Companys board of directors may, in its sole discretion, amend, suspend or terminate the
share repurchase plan at any time if it determines that the funds available to fund the share
repurchase plan are needed for other business or operational purposes or that amendment, suspension
or termination of the share repurchase plan is in the best interest of the Companys stockholders.
The share repurchase plan will terminate if the shares of the Companys common stock are listed on
a national securities exchange.
Distributions
The Companys long-term policy will be to pay distributions from cash flow from operations.
However, the Company expects to have insufficient cash flow from operations available for
distribution until it makes substantial investments. In order to provide additional available funds
for the Company to pay distributions, under certain circumstances the Companys obligation to pay
all fees due to the Advisor from the Company pursuant to the Advisory Agreement will be deferred
up to an aggregate amount of $5 million during the Offering Stage. If, during any calendar quarter
during the Offering Stage, the distributions the Company pays exceed the Companys funds from
operations (as defined by the National Association of Real Estate Investment Trusts), plus (1) any
acquisition expenses and acquisition fees expensed by the Company that are related to any property,
loan or other investment acquired or expected to be acquired by the Company and (2) any
non-operating, non-cash charges incurred by the Company, such as impairments of property or loans,
any other than temporary impairments of marketable securities, or other similar charges, for the
quarter (Adjusted Funds From Operations), the fees the Company is obligated to pay the Advisor
will be deferred in an amount equal to the amount by which the distributions paid to the Companys
stockholders for the quarter exceed the Companys Adjusted Funds From Operations up to an amount
equal to a 7.0% cumulative non-compounded annual return to stockholders invested capital, prorated
for such quarter. The Company is only obligated to pay the Advisor for these deferred fees if and
to the extent that the Companys cumulative Adjusted Funds From Operations for the period beginning
on the date of the commencement of the Private Offering through the date of any such payment exceed
the lesser of (1) the cumulative amount of any distributions paid to stockholders as of the date of
such payment or (2) an amount that is equal to a 7.0% cumulative, non-compounded, annual return on
invested capital for the Companys stockholders for the period from the commencement of the Public
Offering through the date of such payment. The Companys obligation to pay the deferred fees will
survive the termination of the Advisory Agreement and will continue to be subject to the repayment
conditions above. The Company will not pay interest on the deferred fees if and when such fees are
paid to the Advisor. The amount of fees that may be deferred as described above is limited to an
aggregate amount of $5 million.
5. | Related Party Arrangements |
The Company has entered into the Advisory Agreement with the Advisor, a Dealer Manager
Agreement with the Dealer Manager with respect to the Private Offering and a Dealer Manager
Agreement with the Dealer Manager with respect to the Public Offering. Pursuant to the Advisory
Agreement and Dealer Manager Agreements, the Company is obligated to pay the Advisor and the Dealer
Manager specified fees upon the provision of certain services related to the Public and Private
Offering, the investment of funds in real estate and real estate-related investments, management of
the Companys investments and for other services (including, but not limited to, the disposition of
investments). Subject to the limitations described below, the Company is also obligated to
reimburse the Advisor and Dealer Manager for organization and offering costs incurred by the
Advisor and the Dealer
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Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
Manager on behalf of the Company, and the Company is obligated to reimburse the Advisor for
acquisition and origination expenses and certain operating expenses incurred on behalf of the
Company or incurred in connection with providing services to the Company. In certain
circumstances, the Companys obligation to pay some or all of the fees due to the Advisor pursuant
to the Advisory Agreement will be deferred. See Distributions in Note 4.
At June 30, 2010, due to affiliates consisted of:
June 30, 2010 | ||||
Advances from Advisor and its affiliates for operating expenses |
$ | 283,423 | ||
Accrued offering costs reimbursement due to Advisor |
166,173 | |||
Advances from Advisor for acquisition costs |
26,101 | |||
$ | 475,697 | |||
Operating Expenses
As of June 30, 2010, the Advisor and its affiliates had advanced the Company $283,423 for the
payment of the Companys direct operating expenses, primarily comprising fees paid to independent
directors and a directors and officers insurance policy.
Organization and Offering Costs
Organization and offering costs (other than selling commissions and dealer manager fees) of
the Company are initially being paid by the Advisor, the Dealer Manager or their affiliates on
behalf of the Company. These organization and other offering costs include all expenses to be paid
by the Company in connection with the Public and Private Offering including legal, accounting,
printing, mailing and filing fees, charges of the Companys transfer agent, expenses of organizing
the Company, data processing fees, advertising and sales literature costs, transfer agent costs,
bona fide out-of-pocket due diligence costs and amounts to reimburse the Advisor or its affiliates
for the salaries of its employees and other costs in connection with preparing supplemental sales
materials and providing other administrative services in connection with the Public Offering and
the Private Offering. Any reimbursement of expenses paid to Advisor will not exceed actual expenses
incurred by the Advisor. Organization costs include all expenses to be incurred by the Company in
connection with the formation of the Company, including but not limited to legal fees and other
costs to incorporate the Company.
Pursuant to the Advisory Agreement and the Dealer Manager Agreement, the Company is obligated
to reimburse the Advisor, the Dealer Manager or their affiliates, as applicable, for organization
and offering costs paid by them on behalf of the Company in connection with the Public Offering,
provided that the Advisor is obligated to reimburse the Company to the extent selling commissions,
dealer manager fees and other organization and offering costs incurred by the Company in the Public
Offering exceed 15% of gross offering proceeds raised in the Public Offering.
Reimbursements to the Advisor, the Dealer Manager, or their affiliates, for offering costs
paid by them on behalf of the Company with respect to the Private Offering is not limited to 15% of
the gross offering proceeds of the Private Offering. However, the Company will not make
reimbursements of organization and offering costs in excess of 15% of the gross offering proceeds
of the Private Offering unless approval is obtained from the independent directors. The
independent directors have not approved the reimbursement of excess private offering costs.
Accordingly, the Company has not accrued for the reimbursement of organization and offering costs
of the Private Offering in excess of the 15% of gross offering proceeds raised through June 30,
2010.
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Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
The amount of organization and offering (O&O) costs that is reimbursable or was paid
through June 30, 2010 is as follows:
Gross offering proceeds: |
||||
Private offering |
$ | 4,283,366 | ||
Public offering |
| |||
Total offering proceeds |
4,283,366 | |||
O&O limitation |
15 | % | ||
Total O&O costs available to be paid/reimbursed |
$ | 642,505 | ||
O&O expenses recorded: |
||||
Sales commissions paid |
$ | 203,356 | ||
Broker dealer fees paid |
126,576 | |||
Private offering costs reimbursements |
146,400 | |||
Private offering costs accrued |
166,173 | |||
Total O&O costs recorded by the Company |
$ | 642,505 | ||
The Company may also reimburse costs of bona fide training and education meetings held by the
Company (primarily the travel, meal and lodging costs of registered representatives of
broker-dealers), attendance and sponsorship fees and cost reimbursement of employees of the
Companys affiliates to attend seminars conducted by broker-dealers and, in special, cases,
reimbursement to participating broker-dealers for technology costs associated with the Public
Offering, costs and expenses related to such technology costs, and costs and expenses associated
with the facilitation of the marketing of the Companys shares and the ownership of the Companys
shares by such broker-dealers customers; provided, however, that the Company will not pay any of
the foregoing costs to the extent that such payment would cause total underwriting compensation to
exceed 10% of the gross proceeds of the Public Offering, as required by the rules of FINRA.
As of June 30, 2010, the Advisor had incurred on behalf of the Company organization and
offering costs of $2,742,009, as follows:
Incurred | ||||||||
through | Payable as of | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Organizational expenses |
$ | 98,765 | $ | | ||||
Private Offering costs |
916,315 | 166,173 | ||||||
Public Offering costs |
1,726,929 | | ||||||
$ | 2,742,009 | $ | 166,173 | |||||
When recorded by the Company, organization costs are expensed as incurred, offering costs,
which include selling commissions and dealer manager fees, are deferred and charged to
stockholders equity as such amounts are reimbursed to the Advisor, the Dealer Manager or their
affiliates from gross offering proceeds. During the three and six months ended June 30, 2010, the
Company reimbursed $146,400 of organization and offering costs to the Advisor, and accrued an
additional $166,173 all of which were charged to stockholders equity as the Company has elected to
first reimburse costs associated with the Private Offering. As of June 30, 2010 the Advisor had
incurred $98,765 of organization costs, $916,315 of offering costs in connection with the Private
Offering, and $1,726,929 of offering costs in connection with the Public Offering. After
reimbursing all costs associated with the Private Offering ($603,742 of which remain reimbursable
to the Advisor) the Company will reimburse the Advisor for organization costs and then offering
costs incurred in connection with the Public Offering. The Company did not
18
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
accrue for the reimbursement of any organization and offering costs in the financial
statements as of December 31, 2009, nor were any reimbursements made during the three and six
months ended June 30, 2009 because such costs did not become a liability of the Company until
$2,000,000 in proceeds were raised in the Private or Public Offerings which did not occur until
April 15, 2010.
Selling Commissions and Dealer Manager Fees
The Company will pay the Dealer Manager up to 6.5% and 3.5% of the gross offering proceeds
from the primary offering as selling commissions and dealer manager fees, respectively. A reduced
sales commission and dealer manager fee is paid in connection with volume discounts and certain
other categories of sales. No sales commission or dealer manager fee is paid with respect to
shares of common stock issued through the DRP. The Dealer Manager will reallow 100% of sales
commissions earned to participating broker-dealers. The Dealer Manager may also reallow to any
participating broker-dealer a portion of the dealer manager fee that is attributable to that
participating broker-dealer to defray the marketing costs of that participating broker-dealer. The
Dealer Manager will negotiate the reallowance on a case-by-case basis with each participating
broker-dealer subject to various factors associated with the cost of the marketing program. During
the three and six months ended June 30,
2010, the Company paid $203,356 of sales commissions and $126,576 of dealer manager fees from
the proceeds received from the sale of the Companys common stock, which were recorded as a
reduction of additional paid in capital.
Acquisition Fees
The Company will pay the Advisor an acquisition fee equal to 2.0% of (1) the purchase price in
connection with the acquisition or origination of any type of real property or real estate-related
asset acquired directly by the Company or (2) the Companys allocable portion of the purchase price
in connection with the acquisition or origination of any type of real property or real
estate-related asset acquired through a joint venture, including any acquisition and origination
expenses and any debt attributable to such investments.
In addition to acquisition fees, the Company will reimburse the Advisor for amounts it pays to
third parties in connection with the selection, acquisition or development of a property or
acquisition of real estate-related assets, whether or not the Company ultimately acquires the
property or the real estate-related assets. During the three and six months ended June 30, 2010,
the Advisor incurred $26,101 of acquisition costs paid to third parties.
The Charter limits the Companys ability to pay acquisition fees if the total of all
acquisition fees and expenses relating to the purchase would exceed 6.0% of the contract purchase
price. Under the Charter, a majority of the Companys board of directors, including a majority of
the independent directors, is required to approve any acquisition fees (or portion thereof) that
would cause the total of all acquisition fees and expenses relating to an acquisition to exceed
6.0% of the contract purchase price. In connection with the purchase of securities, the acquisition
fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer
if applicable FINRA rules would prohibit the payment of the acquisition fee to a firm that is not a
registered broker-dealer.
Investment Management Fee
With respect to investments in real estate, the Company will pay the Advisor a monthly asset
management fee equal to one-twelfth of 0.80% of (1) the cost of real properties and real
estate-related assets acquired directly by the Company or (2) the Companys allocable cost of each
real property or real estate-related asset acquired through a joint venture. Such fee will be
calculated including acquisition fees, acquisition expenses and any debt attributable to such
investments, or the Companys proportionate share thereof in the case of investments made through
joint ventures.
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Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
Other Operating Expense Reimbursement
In addition to the various fees paid to the Advisor, the Company is obligated to pay directly
or reimburse all expenses incurred in providing services to the Company, including the Companys
allocable share of the Advisors overhead, such as rent, employee costs, utilities and IT costs.
The Company will not reimburse for employee costs in connection with services for which the Advisor
or its affiliates receive acquisition fees or disposition fees or for the salaries the Advisor pays
to its executive officers.
The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating
expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the
Advisor at the end of any fiscal quarter for operating expenses that exceed the greater of 2% of
the Companys average invested assets, or 25% of the Companys net income (the 2% 25%
Guidelines), unless the independent directors have determined that such excess expenses were
justified based on unusual and non-recurring factors. Commencing upon the fourth fiscal quarter
following the fiscal quarter ended March 31, 2010 and at least annually thereafter, the Advisor
must reimburse the Company for the amount by which the Companys operating expenses for the
preceding four fiscal quarters then ended exceed the greater of 2%/25% Guidelines. Average
invested assets means the average monthly book value of the Companys assets invested directly or
indirectly in equity interests and loans secured by real estate during the 12-month period before
deducting depreciation, bad debts or other non-cash reserves. Total operating expenses means all
expenses paid or incurred by the Company, as determined under GAAP that are in any way related to
the Companys operation, including investment management fees, but excluding (a) the expenses of
raising capital such as organization and offering expenses, legal, audit, accounting, underwriting,
brokerage, listing, registration and other fees, printing and other such expenses and taxes
incurred in connection with the issuance, distribution, transfer, listing and registration of
shares of the Companys common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures
such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on
the gain in the sale of the Companys assets; (f) acquisition fees and acquisition expenses
(including expenses relating to potential acquisitions that the Company does not close); (g) real
estate commissions on the resale of investments; and (h) other expenses connected with the
acquisition, disposition, management and ownership of investments (including the costs of
foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real
property).
As of June 30, 2010 the Advisor had incurred $226,675 of total operating expenses which the
Company may be obligated to reimburse. As of June 30, 2010 the Company has no invested assets and
no net income; therefore, the Company has not recorded an accrual for any portion of the Advisors
operating expenses. The Company will accrue for the reimbursement of the Advisors operating
expenses up to the greater of the amount allowed by the 2%/25% Guidelines or the amount approved by
the independent directors.
Disposition Fee
If the Advisor or its affiliates provides a substantial amount of services, as determined by
the Companys independent directors, in connection with the sale of a property or real
estate-related asset, the Company will pay the Advisor or its affiliates 1.5% of the sales price of
each property or real estate-related asset sold.
No disposition fee will be paid for securities traded on a national securities exchange. To
the extent the disposition fee is paid upon the sale of any assets other than real property, it
will be included as an operating expense for purposes of the 2%/25% Guidelines.
In connection with the sale of securities, the disposition fee may be paid to an affiliate of
the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would
prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer.
20
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PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
The Companys charter limits the maximum amount of the disposition fees payable to the Advisor
for the sale of any real property to the lesser of one-half of the brokerage commission paid or
3.0% of the contract sales price.
6. Incentive Award Plan and Independent Director Compensation
The Company has adopted an incentive plan (the Incentive Award Plan) that provides for the
grant of equity awards to its employees, directors and consultants and those of the Companys
affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock
options, restricted stock awards, restricted stock units, stock appreciation rights, dividend
equivalents and other stock-based awards or cash-based awards. No awards have been granted under
such plan as of June 30, 2010 and December 31, 2009, except those awards granted to the independent
director as described below.
Under the Companys independent directors compensation plan, each of the Companys current
independent directors was entitled to receive 5,000 shares of restricted common stock in connection
with the initial meeting of the Companys full board of directors. The Companys board of
directors, and each of the independent directors, agreed to delay the initial grant of restricted
stock until the Company raised $2,000,000 in gross offering proceeds in the Private Offering. In
addition, on the date following an independent directors re-election to the Companys board of
directors, he or she will receive 2,500 shares of restricted common stock. One-fourth of the shares
of restricted common stock will generally vest upon issuance and the remaining portion in three
equal annual installments beginning on the date of grant and ending on the third anniversary of the
date of grant; provided, however, that the restricted stock will become fully vested on the earlier
to occur of (1) the termination of the independent directors service as a director due to his or
her death or disability, or (2) a change in control.
On April 15, 2010, after raising $2,000,000 in gross offering proceeds in the Private
Offering, the Company granted each independent director 5,000 shares of restricted common stock
upon election to the board of directors. The Company recorded stock-based compensation expense of
$38,742 during the three and six months ended June 30, 2010.
7. Conflicts of Interest
All of the Companys executive officers and some of its directors are also executive officers,
managers and/or holders of a direct or indirect controlling interest in the Advisor, the Dealer
Manager and other Sponsor affiliated entities. Through Sponsor affiliated entities, these persons
also serve as investment advisers to investors in real estate and real estate-related assets. As a
result, they owe fiduciary duties to each of these entities, their members and limited partners and
investors, which fiduciary duties may from time to time conflict with the fiduciary duties that
they owe to the Company and its stockholders.
Some of the material conflicts that the Advisor, the Dealer Manager or its Sponsors
affiliates will face are (1) the determination of whether an investment opportunity should be
recommended to the Company or another
sponsor affiliated entity; (2) the allocation of the time of key executive officers,
directors, and other real estate professionals among the Company or another sponsor affiliated
entity, and the activities in which they are involved; (3) the fees received by the Advisor and its
affiliates in connection with transactions involving the purchase, origination, management and sale
of investments regardless of the quality of the asset acquired or the service provided by the
Company; and (4) the fees received by the Advisor, the Dealer Manager, and its sponsors affiliates
in connection with the Companys public offering of equity securities.
8. Economic Dependency
The Company will be dependent on the Advisor and the Dealer Manager for certain services that
are essential to the Company, including the sale of the Companys shares of common and preferred
stock available for issue; the
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PART I FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)
STEADFAST INCOME REIT, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
June 30, 2010
(unaudited)
identification, evaluation, negotiation, purchase and disposition of properties and other
investments; management of the daily operations of the Companys real estate portfolio; and other
general and administrative responsibilities. In the event that these companies are unable to
provide the respective services, the Company will be required to obtain such services from other
sources.
9. Subsequent Events
The Company evaluates subsequent events up until the date the consolidated financial
statements are issued.
Property Acquisition
On August 11, 2010, the Company acquired a fee simple interest in a multifamily property
located in Springfield, Illinois, commonly known as the Lincoln Tower Apartments (the Property),
for an aggregate purchase price of approximately $9,500,000, exclusive of closing costs. The
Property was acquired through SIR Lincoln Tower, LLC, an indirect wholly-owned subsidiary of the
Operating Partnership (SIR Lincoln Tower). SIR Lincoln Tower financed the payment of the
purchase price for the Property with (1) proceeds from its Private and Public Offerings and (2) the
proceeds of a loan (the Loan) in the aggregate principal amount of $6,650,000 from the seller of
the Property (the Seller).
The Loan has a term of 60 months, ending September 1, 2015 (the Initial Maturity Date),
provided that SIR Lincoln Tower has the option to extend the Initial Maturity Date for up to two
successive periods of twelve months each. Interest on the outstanding principal balance of the Loan
accrues at a rate of 6.0% per annum through the Initial Maturity Date. A monthly payment of
interest only in the amount of $33,250 is due and payable on the first day of each
calendar month. Subject to any extension of the Initial Maturity Date, the entire outstanding
principal balance of the Loan, plus any accrued and unpaid interest thereon, is due and payable in
full on the Initial Maturity Date. SIR Lincoln Tower may prepay all or any portion of the
outstanding principal balance of the Loan without premium or penalty. The performance of SIR
Lincoln Towers obligations under the Loan is secured by a Purchase
Money Mortgage, Assignment of Rents, Leases and Security Agreement between SIR Lincoln Tower
and Seller of the Property. In addition, pursuant to an Acknowledgment and Agreement to Personal
Liability For Exceptions to Non-Recourse Liability, the Company has unconditionally and irrevocably
agreed to pay to Seller, or its assigns, on demand, all amounts for which SIR Lincoln Tower is
personally liable under the Loan.
Distribution Declared
In connection with the acquisition of the Property, the Companys board of directors declared
a cash distribution to stockholders. Distributions will (1) accrue daily to stockholders of record
as of the close of business on each day commencing on August 12, 2010, (2) be payable in cumulative
amounts on or before the 15th day of each calendar month with respect to the prior month,
commencing September 15, 2010, and (3) be calculated at a rate of $0.001917 per share of common
stock per day, which if paid each day over a 365-day period is equivalent to an 7.0% annualized
distribution rate based on a purchase price of $10.00 per share of common stock.
Status of the Private and Public Offerings
On July 9, 2010, the Company terminated the Private Offering. The Company had sold 640,275
shares of common stock in the Private Offering for gross proceeds of $5,869,946.
The Company commenced its Public Offering on July 19, 2010. As of August 18, 2010, the
Company had sold 20,110 shares of common stock in the Public Offering for gross proceeds of
$201,100.
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PART I FINANCIAL INFORMATION
Item 2. Managements Discussion and Analysis of Financial Condition And Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying
financial statements of Steadfast Income REIT, Inc. and the notes thereto. As used herein, the
terms we, our and us refer to Steadfast Income REIT, Inc., a Maryland corporation, and, as
required by context, Steadfast Income REIT Operating Partnership, L.P., a Delaware limited
partnership, which we refer to as our operating partnership, and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical
facts (including any statements concerning investment objectives, other plans and objectives of
management for future operations or economic performance, or assumptions or forecasts related
thereto) are forward-looking statements. These statements are only predictions. We caution that
forward-looking statements are not guarantees. Actual events or our investments and results of
operations could differ materially from those expressed or implied in any forward-looking
statements. Forward-looking statements are typically identified by the use of terms such as may,
should, expect, could, intend, plan, anticipate, estimate, believe, continue,
predict, potential or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans,
estimates, assumptions and beliefs, which involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. Although we believe that
the expectations reflected in such forward-looking statements are based on reasonable assumptions,
our actual results and performance could differ materially from those set forth in the
forward-looking statements. Factors which could have a material adverse effect on our operations
and future prospects include, but are not limited to:
| the fact that we have no operating history and, as of June 30, 2010, our assets total $3.9 million; | ||
| our ability to effectively deploy the proceeds raised in our private and public offerings of common stock; | ||
| changes in economic conditions generally and the real estate and debt markets specifically; | ||
| legislative or regulatory changes (including changes to the laws governing the taxation of REITs); | ||
| the availability of capital; | ||
| interest rates; and | ||
| changes to generally accepted accounting principles, or GAAP. |
Any of the assumptions underlying the forward-looking statements included herein could be
inaccurate, and undue reliance should not be placed on any forward-looking statements included
herein. All forward-looking statements are made as of the date this quarterly report is filed with
the Securities and Exchange Commission, or SEC, and the risk that actual results will differ
materially from the expectations expressed herein will increase with the passage of time. Except as
otherwise required by the federal securities laws, we undertake no obligation to publicly update or
revise any forward-looking statements made herein, whether as a result of new information, future
events, changed circumstances or any other reason.
All forward-looking statements included herein should be read in light of the factors
identified in the Risk Factors section of our Registration Statement on Form S-11 (File No.
333-160748) filed with the SEC, as the same may be amended and supplemented from time to time.
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Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
Overview
We are a newly formed Maryland corporation and have no operating history. We are dependent
upon proceeds received from our private and public offerings to conduct our proposed activities.
The capital required to purchase our investments will be obtained from our securities offerings and
from any indebtedness that we may incur in connection with the investment or thereafter. We have
initially been capitalized with $202,007; $200,007 of which was contributed by our sponsor on June
12, 2009 in exchange for 22,223 shares of our common stock and $1,000 of which was contributed by
Steadfast Income Advisor, LLC, which we refer to as our advisor, on July 10, 2009 in exchange for
1,000 shares of our convertible stock. In addition, our advisor has invested $1,000 in our
operating partnership in exchange for its limited partnership interests.
On October 13, 2009, we commenced a private offering of up to $94,000,000 in shares of our
common stock at a purchase price of $9.40 per share (with discounts available for certain
categories of purchasers), which we refer to as the private offering. We offered shares of our
common stock for sale in the private offering pursuant to a confidential private placement
memorandum and only to persons that were accredited investors, as that term is defined under the
Securities Act of 1933, as amended, or the Securities Act, and Regulation D promulgated thereunder.
As of June 30, 2010, we had received aggregate gross offering proceeds (including $166,474 that was
yet to be received from our transfer agent), net of certain discounts, of approximately $3,640,861
from the sale of approximately 467,309 shares in the private offering. On July 9, 2010, we
terminated our private offering, at which time we had raised $5,869,946 from the sale of 640,275
shares of our common stock.
On July 23, 2009, we filed a registration statement on Form S-11 with the SEC to offer a
maximum of 150,000,000 shares of common stock for sale to the public at an initial price of $10.00
per share, which we refer to as our initial public offering. We are also offering up to
15,789,474 shares of common stock pursuant to our distribution reinvestment plan, or DRP, at an
initial price of $9.50 per share. The SEC declared our registration statement effective on July 9,
2010 and we commenced the initial public offering on July 19, 2010. If we extend the initial
public offering beyond two years from the date of its commencement, our board of directors may,
from time to time, in its sole discretion, change the price at which we offer shares to the public
in the initial public offering or to its stockholders pursuant to the DRP to reflect changes in our
estimated net asset value per share and other factors that our board of directors deems relevant.
We may reallocate the shares registered for the initial public offering and those shares registered
pursuant to the DRP.
We intend to use substantially all of the net proceeds from the private offering and initial
public offering to invest in a diverse portfolio of real estate and real estate-related assets,
primarily in the multifamily sector. In addition, to our focus on multifamily properties, we may
also selectively invest in industrial properties and other types of commercial properties and real
estate-related assets.
Steadfast Income Advisor, LLC is our advisor. Subject to certain restrictions and limitations,
our advisor manages our day-to-day operations and will manage our portfolio of properties and real
estate-related assets. Our advisor sources and presents investment opportunities to our board of
directors. Our advisor also provides investment management, marketing, investor relations and other
administrative services on our behalf.
As of June 30, 2010, we had not yet acquired any real properties or other real estate assets.
On August 11, 2010, we acquired a fee simple interest in a multifamily property located in
Springfield, Illinois commonly known as
the Lincoln Tower Apartments, through SIR Lincoln Tower, LLC, or SIR Lincoln Tower, an
indirect wholly-owned subsidiary of our operating partnership, for an aggregate purchase
price of approximately $9,500,000, exclusive of closing costs. SIR Lincoln Tower financed the
payment of the purchase price for the Lincoln Tower Apartments with (1) proceeds from our private
and public offerings and (2) the proceeds of a loan in the aggregate principal amount of $6,650,000
from the seller of the Lincoln Tower Apartments.
Substantially all of our business will be conducted through Steadfast Income REIT Operating
Partnership, L.P., our operating partnership. We are the sole general partner of our operating
partnership. The initial limited partner of our operating partnership is our advisor. As we accept
subscriptions for shares, we will transfer substantially all of
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PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
the net proceeds of our offerings to our operating partnership as a capital contribution. The
limited partnership agreement of our operating partnership provides that our operating partnership
will be operated in a manner that will enable us to (1) satisfy the requirements for being
classified as a real estate investment trust, or REIT, for tax purposes, (2) avoid any federal
income or excise tax liability and (3) ensure that our operating partnership will not be classified
as a publicly traded partnership for purposes of Section 7704 of the Internal Revenue Code of
1986, as amended, or the Internal Revenue Code, which classification could result in our operating
partnership being taxed as a corporation, rather than as a partnership. In addition to the
administrative and operating costs and expenses incurred by our operating partnership in acquiring
and operating real properties, our operating partnership will pay all of our administrative costs
and expenses, and such expenses will be treated as expenses of our operating partnership. We will
experience a relative increase in liquidity as additional subscriptions for shares of our common
stock are received and a relative decrease in liquidity as offering proceeds are used to acquire
and operate our assets.
Our advisor may, but is not required to, establish working capital reserves from offering
proceeds out of cash flow generated by our investments or out of proceeds from the sale of our
investments. We do not anticipate establishing a general working capital reserve; however, we may
establish capital reserves with respect to particular investments. We also may, but are not
required to, establish reserves out of cash flow generated by investments or out of net sale
proceeds in non-liquidating sale transactions. Working capital reserves are typically utilized to
fund tenant improvements, leasing commissions and major capital expenditures. Our lenders also may
require working capital reserves.
To the extent that the working capital reserve is insufficient to satisfy our cash
requirements, additional funds may be provided from cash generated from operations or through
short-term borrowing. In addition, subject to certain limitations described in our Second Amended
Articles of Restatement, or our charter, we may incur indebtedness in connection with the
acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any
previously unfinanced property or reinvest the proceeds of financing or refinancing in additional
properties.
If we qualify as a REIT for federal income tax purposes, we generally will not be subject to
federal income tax on income that we distribute to our stockholders. If we fail to qualify as a
REIT in any taxable year after the taxable year in which we initially elect to be taxed as a REIT,
we will be subject to federal income tax on our taxable income at regular corporate rates and will
not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years
following the year in which qualification is denied. Failing to qualify as a REIT could materially
and adversely affect our net income.
Critical Accounting Policies
Below is a discussion of the accounting policies that we believe will be critical once we
commence operations. We consider these policies critical because they involve significant judgments
and assumptions, require estimates about matters that are inherently uncertain and because they are
important for understanding and evaluating our reported financial results. These judgments affect
the reported amounts of assets and liabilities and our disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. With different estimates or assumptions, materially
different amounts could be reported in our financial statements. Additionally, other companies may
utilize different estimates that may impact the comparability of our results of operations to those
of companies in similar businesses.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires
us to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could materially differ from those estimates.
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PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. Cash equivalents may include cash and short-term investments.
Short-term investments are stated at cost, which approximates fair value. As of December 31, 2009,
our cash on deposit was 100% within the federally insured limits. As of June 30, 2010, we had
amounts in excess of federally insured limits in deposit accounts with a financial institution. We
limit such deposits to financial institutions with high credit standing. There were no restrictions
on the use of our cash as of June 30, 2010 and December 31, 2009.
Real Estate Assets
Depreciation
Real estate costs related to the acquisition, development, construction and improvement of
properties will be capitalized. Repair and maintenance costs will be charged to expense as
incurred and significant replacements and betterments will be capitalized. Repair and maintenance
costs include all costs that do not extend the useful life of the real estate asset. We consider
the period of future benefit of an asset to determine its appropriate useful life. We anticipate
the estimated useful lives of our assets by class to be generally as follows:
Buildings
|
25-40 years | |
Building improvements
|
10-25 years | |
Tenant improvements
|
Shorter of lease term or expected useful life | |
Tenant origination and absorption costs
|
Remaining term of related lease | |
Furniture, fixtures, and equipment
|
7-10 years |
Real Estate Purchase Price Allocation
In accordance with Financial Accounting Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 805, Business Combinations, we will record above-market and
below-market in-place lease values for acquired properties based on the present value (using an
interest rate that reflects the risks associated with the leases acquired) of the difference
between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) our estimate
of fair market lease rates for the corresponding in-place leases, measured over a period equal to
the remaining non-cancelable term of the lease. We will amortize any capitalized above-market or
below-market lease values as an increase or reduction to rental income over the remaining
non-cancelable terms of the respective leases Acquisition costs will generally be expensed as
incurred.
We will measure the aggregate value of other intangible assets acquired based on the
difference between (1) the property valued with existing in-place leases adjusted to market rental
rates and (2) the property valued as if vacant. Our estimates of value are expected to be made
using methods similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors to be considered by us in our analysis include an estimate of carrying costs
during hypothetical expected lease-up periods, considering current market conditions and costs to
execute similar leases.
We will also consider information obtained about each property as a result of our
preacquisition due diligence, marketing and leasing activities in estimating the fair value of the
tangible and intangible assets acquired. In estimating carrying costs, we will also include real
estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates
during the expected lease-up periods. We will also estimate costs to execute similar leases,
including leasing commissions and legal and other related expenses to the extent that such costs
have not already been incurred in connection with a new lease origination as part of the
transaction.
The total amount of other intangible assets acquired will be further allocated to in-place
lease values and customer relationship intangible values based on our evaluation of the specific
characteristics of each tenants lease and our overall relationship with that respective tenant.
Characteristics that we will consider in allocating these values include the nature and extent of
our existing business relationships with the tenant, growth prospects for
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PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
developing new business with the tenant, the tenants credit quality and expectations of lease
renewals (including those existing under the terms of the lease agreement), among other factors.
We will amortize the value of in-place leases to expense over the initial term of the
respective leases. The value of customer relationship intangibles will be amortized to expense over
the initial term and any renewal periods in the respective leases, but in no event will the
amortization periods for the intangible assets exceed the remaining depreciable life of the
building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value
and customer relationship intangibles would be charged to expense in that period.
Impairment of Real Estate Assets
We will continually monitor events and changes in circumstances that could indicate that the
carrying amounts of our real estate and related intangible assets may not be recoverable. When
indicators of potential impairment suggest that the carrying value of real estate and related
intangible assets may not be recoverable, we will assess the recoverability of the assets by
estimating whether we will recover the carrying value of the asset through its undiscounted future
cash flows and its eventual disposition. If based on this analysis we do not believe that we will
be able to recover the carrying value of the asset, we will record an impairment loss to the extent
that the carrying value exceeds the estimated fair value of the real estate and related intangible
assets and liabilities.
Deferred Financing Costs
We will capitalize deferred financing costs such as commitment fees, legal fees and other
third party costs associated with obtaining commitments for financing that result in a closing of
such financing. We will amortize these costs over the terms of the respective financing agreements
using the interest method. We will expense unamortized deferred financing costs when the associated
debt is refinanced or repaid before maturity unless specific rules are met that would allow for the
carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions
that do not close will be expensed in the period in which it is determined that the financing will
not close.
Fair Value Measurements
Under GAAP, we are required to measure certain financial instruments at fair value on a
recurring basis. In addition, we are required to measure other financial instruments and balances
at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans
receivable and long-lived assets). Fair value is defined as the price that would be received upon
the sale of an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The GAAP fair value framework uses a three-tiered approach.
Fair value measurements are classified and disclosed in one of the following three categories:
| Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; | ||
| Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and | ||
| Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
When available, we will utilize quoted market prices from an independent third-party source to
determine fair value and will classify such items in Level 1 or Level 2. In instances where the
market for a financial instrument is not active, regardless of the availability of a nonbinding
quoted market price, observable inputs might not be relevant and could require us to make a
significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a
market price quoted from an independent third party may rely more on models with inputs based on
information available only to that independent third party. When we determine the market for a
financial instrument owned by us to be illiquid or when market transactions for similar instruments
do not appear orderly, we
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PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
will use several valuation sources (including internal valuations, discounted cash flow analysis
and quoted market prices) and will establish a fair value by assigning weights to the various
valuation sources.
Changes in assumptions or estimation methodologies can have a material effect on these
estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, may not be realized in an immediate
settlement of the instrument.
Rents and Other Receivables
We will periodically evaluate the collectibility of amounts due from tenants and maintain an
allowance for doubtful accounts for estimated losses resulting from the inability of tenants to
make required payments under lease agreements. We will maintain an allowance for deferred rent
receivable that arises from the straight-lining of rents in accordance with ASC Topic 840, Leases.
We will exercise judgment in establishing these allowances and consider payment history and current
credit status of our tenants in developing these estimates.
Noncontrolling Interest in Consolidated Real Estate Partnerships
We will report noncontrolling partners interest in consolidated real estate partnerships as
noncontrolling interest within the equity section of the consolidated balance sheet, and amounts
attributable to controlling and noncontrolling interests will be reported separately in the
consolidated income statement and consolidated statement of equity. As of June 30, 2010 and
December 31, 2009, we recorded the $1,000 contribution made by our advisor to our operating
partnership as noncontrolling interest within the equity section of the consolidated balance sheet.
Revenue Recognition
We will recognize minimum rent, including rental abatements, concessions and contractual fixed
increases attributable to operating leases, on a straight-line basis over the term of the related
lease and amounts expected to be received in later years will be recorded as deferred rents. We
will record property operating expense reimbursements due from tenants for common area maintenance,
real estate taxes, and other recoverable costs in the period the related expenses are incurred. We
will recognize revenues from property management, asset management, syndication and other services
when the related fees are earned and are realizable.
We will recognize gains on sales of real estate either in total or deferred for a period of
time, depending on whether a sale has been consummated, the extent of the buyers investment in the
property being sold, whether the receivable is subject to future subordination, and the degree of
our continuing involvement with the property after the sale. If the criteria for profit recognition
under the full-accrual method are not met, we will defer gain recognition and account for the
continued operations of the property by applying the percentage-of-completion, reduced profit,
deposit, installment or cost recovery method, as appropriate, until the appropriate criteria are
met.
Accounting for Stock-Based Compensation
We account for stock-based compensation in accordance with ASC Topic 718, CompensationStock
Compensation, or ASC 718. ASC 718 established a fair value based method of accounting for
stock-based compensation. Accounting for stock-based compensation under ASC 718 requires the fair
value of stock-based compensation awards to be amortized as an expense over the vesting period and
requires any dividend equivalents earned to be treated as dividends for financial reporting
purposes. Stock-based compensation awards are valued at the fair value on the date of grant and
amortized as an expense over the vesting period.
Distribution Policy
We intend to elect to be taxed as a REIT and to operate as a REIT beginning with its taxable
year ending December 31, 2010. To maintain our qualification as a REIT, we intend to make
distributions each taxable year equal to at least 90% of its REIT taxable income (which is
determined without regard to the dividends paid deduction or net capital gain and which does not
necessarily equal net income as calculated in accordance with GAAP). We expect to authorize and
declare daily distributions that will be paid on a monthly basis.
28
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
Distributions to stockholders will be determined by our board of directors and will
be dependent upon a number of factors relating to us, including funds available for the payment of
distributions, financial condition, the timing of property acquisitions, capital expenditure
requirements, and annual distribution requirements in order to maintain our status as a REIT under
the Internal Revenue Code.
Organization and Offering Costs
Organization and offering expenses include all expenses (other than sales commissions and the
dealer manager fee) to be paid by us in connection with our initial public offering and our private
offering, including legal, accounting, printing, mailing and filing fees, charges of our escrow
holder and transfer agent, expenses of organizing us, data processing fees, advertising and sales
literature costs, transfer agent costs, bona fide out-of-pocket due diligence costs and amounts to
reimburse our advisor or its affiliates for the salaries of its employees and other costs in
connection with preparing supplemental sales materials and providing other administrative services.
Any reimbursement of expenses paid to our advisor will not exceed actual expenses actually incurred
by our advisor.
After the termination of our initial public offering, our advisor will reimburse us to the
extent total organization and offering expenses plus sales commissions and dealer manager fees
borne by us in connection with the initial public offering exceed 15% of the gross proceeds raised
in our initial public offering. In addition, to the extent we do pay the full sales commissions or
dealer manager fee for shares sold in our initial public offering, we may also reimburse costs of
bona fide training and education meetings held by us (primarily the travel, meal and lodging costs
of registered representatives of broker-dealers), attendance and sponsorship fees and cost
reimbursement of employees of our affiliates to attend seminars conducted by broker-dealers and, in
special, cases, reimbursement to participating broker-dealers for technology costs associated with
our initial public offering, costs and expenses related to such technology costs, and costs and
expenses associated with the facilitation of the marketing of our shares and the ownership of our
shares by such broker-dealers customers; provided, however, that we will not pay any of the
foregoing costs to the extent that such payment would cause total underwriting compensation to
exceed 10% of the gross proceeds of our initial public offering, as required by the rules of the
Financial Industry Regulatory Authority, or FINRA.
Reimbursements to our advisor or its affiliates for offering costs paid by them behalf of the
Company with respect to our private offering is not limited to 15% of the gross offering proceeds
of the private offering. However, we will not make reimbursements of organization and offering
costs in excess of 15% of the gross offering proceeds of the private offering unless approval is
obtained from the independent directors. The independent directors have not approved the
reimbursement of excess private offering costs. Accordingly, we have not accrued for the
reimbursement of organization and offering costs of the private offering in excess of the 15% of
gross offering proceeds raised through June 30, 2010.
Income Taxes
We intend to elect to be taxed as a REIT under the Internal Revenue Code and intend to operate
as such beginning with its taxable year ending December 31, 2010. 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 (which is computed without regard to the dividends paid
deduction or net capital gain and which does not necessarily equal net income as calculated in
accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the
extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in
any taxable year, we will be subject to federal income tax on our taxable income at regular
corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT
for federal income tax purposes for the four taxable years following the year during which
qualification is lost, unless the Internal Revenue Service grants us relief under certain statutory
provisions. Such an event could materially adversely affect our net income and net cash available
for distribution to stockholders. However, we intend to organize and operate in such a manner as to
qualify for treatment as a REIT.
29
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
Recently Issued Accounting Standards
In January 2010, the FASB issued Accounting Standards Update, or ASU, No. 2010-01, Equity
(Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash, or ASU
No. 2010-01. This ASU clarifies that when the stock portion of a distribution allows stockholders
to elect to receive cash or stock with a potential limitation on the total amount of cash that all
stockholders can elect to receive in the aggregate, the distribution would be considered a share
issuance as opposed to a stock dividend and the share issuance would be reflected in earnings per
share prospectively. ASU No. 2010-01 is effective for interim and annual periods ending on or after
December 15, 2009 and should be applied on a retrospective basis. The adoption of ASU No. 2010-01
has no impact on our consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements, or ASU No. 2010-06.
ASU No. 2010-06 requires additional disclosures regarding significant transfers in and out of
Levels 1 and 2 fair value measurements, including a description of the reasons for the transfers.
Further, this ASU requires additional disclosures about purchases, sales, issuances and settlements
relating to the activity in Level 3 fair value measurements. ASU No. 2010-06 is effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances and settlements relating to the activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010
and for interim periods within those fiscal years. The adoption of ASU No. 2010-06 did not have a
material impact on our consolidated financial statements.
In May 2009, the FASB issued ASC Topic 855, Subsequent Events , or ASC 855. ASC 855
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. ASC
855 requires the disclosure of the date through which an entity has evaluated subsequent events and
the basis for that date. This ASC also requires public entities to evaluate subsequent events
through the date that the financial statements are issued. ASC 855 is effective for interim periods
and fiscal years ending after June 15, 2009. In February 2010, the FASB issued ASU No. 2010-09,
Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, or
ASU No. 2010-09. ASU No. 2010-09 amends ASC 855 and eliminates the requirement to disclose the date
through which subsequent events have been evaluated for SEC filers. ASU No. 2010-09 is effective
upon issuance. The adoption of ASC 855 and ASU No. 2010-09 did not have a material impact on our
consolidated financial statements.
In June 2009, the FASB updated ASC Topic 810, Consolidation, or ASC 810. ASC 810 requires us
to perform ongoing reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. ASC 810 also eliminates the quantitative approach previously required for
determining the primarily beneficiary of a variable interest entity. ASC 810 is effective for
fiscal years, and interim periods within those fiscal years, beginning
on or after November 15, 2009. We adopted the updated ASC 810 on January 1, 2010, which did
not have an impact on our financial statements.
Distribution Policy
We expect to authorize and declare daily distributions that will be paid on a monthly basis.
We intend to accrue distributions on a daily basis and make distributions on a monthly basis
beginning no later than the first calendar month after the month in which we make our first real
estate investment. Once we commence paying distributions, we expect to continue paying monthly
distributions unless our results of operations, our general financial condition, general economic
conditions or other factors prohibit us from doing so. During the early stages of our operations,
we may declare distributions in excess of funds from operations. As a result, our distribution rate
and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes,
we must make distributions equal to at least 90% of our REIT taxable income each year. As of
June 30, 2010, we had not declared or paid any distributions.
In connection with our acquisition of the Lincoln Tower Apartments on August 11, 2010, our
board of directors declared a cash distribution to our stockholders. Distributions will (1) accrue
daily to our stockholders of record as of the close of business on each day commencing on August
12, 2010, (2) be payable in cumulative amounts on or
30
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
before the 15th day of each calendar month with respect to the prior month commencing in September
2010, and (3) be calculated at a rate of $0.001917 per share of common stock per day, which, if
paid each day over a 365-day period, is equivalent to an 7.0% annualized distribution rate based on
a purchase price of $10.00 per share of common stock.
In order to provide additional available funds for us to pay distributions, under certain
circumstances our obligation to pay all fees due to the advisor pursuant to the advisory agreement
will be deferred up to an aggregate amount of $5 million during our offering stage. If, during any
calendar quarter during our offering stage, the distributions we pay exceed our funds from
operations (as defined by the National Association of Real Estate Investment Trusts, or NAREIT),
plus (1) any acquisition expenses and acquisition fees expensed by us that are related to any
property, loan or other investment acquired or expected to be acquired by us and (2) any
non-operating, non-cash charges incurred by us, such as impairments of property or loans, any other
than temporary impairments of marketable securities, or other similar charges, for the quarter,
which we refer to as our adjusted funds from operations, the payment of fees we are obligated to
pay our advisor will be deferred in an amount equal to the amount by which the distributions paid
to our stockholders for the quarter exceed our adjusted funds from operations up to an amount equal
to a 7.0% cumulative non-compounded annual return on stockholders invested capital, prorated for
such quarter. We are only obligated to pay our advisor for these deferred fees if and to the extent
that our cumulative adjusted funds from operations for the period beginning on the date of the
commencement of our private offering through the date of any such payment exceed the lesser of
(1) the cumulative amount of any distributions paid to our stockholders as of the date of such
payment or (2) an amount that is equal to a 7.0% cumulative, non-compounded, annual return on
invested capital for our stockholders for the period from the commencement of our initial public
offering through the date of such payment. Our obligation to pay the deferred fees will survive the
termination of the advisory agreement and will continue to be subject to the repayment conditions
above. We will not pay interest on the deferred fees if and when such fees are paid to our advisor.
The amount of fees that may be deferred as described above is limited to an aggregate of
$5 million.
We will accrue the probable and estimable amount of deferred fees and the deferred fees will
continue to accrue until the fees are either paid or it becomes remote that the fees will be paid
to our advisor. We anticipate that any deferred fees will ultimately be paid and therefore will be
accrued when incurred.
Results of Operations
During the period from our inception (July 6, 2009) to June 30, 2010, we had been formed and
had commenced our private offering but had not yet commenced real estate operations, as we had not
yet acquired any real estate investments. As a result, we had no material results of operations for
that period.
For the three and six months ended June 30, 2010, we had a net loss of $426,270 primarily due
to the costs associated with our organization and offering costs related to our private offering
and initial public offering further described in the notes to our consolidated financial
statements.
Liquidity and Capital Resources
If we raise substantially less funds in our initial public offering than the maximum offering
amount, we will make fewer investments resulting in less diversification in terms of the type,
number and size of investments we make and the value of an investment in us will fluctuate with the
performance of the specific assets we acquire. Further, we will have certain fixed operating
expenses, including certain expenses as a public REIT, regardless of whether we are able to raise
substantial funds in our initial public offering. Our inability to raise substantial funds would
increase our fixed operating expenses as a percentage of gross income, reducing our net income and
limiting our ability to make distributions.
We currently have no outstanding debt. Once we have fully invested the proceeds of our initial
public offering, we expect that our overall borrowings will be 65% or less of the cost of our
investments, although we expect to exceed this level during our offering stage in order to enable
us to quickly build a diversified portfolio. Under our charter, we have a limitation on borrowing
which precludes us from borrowing in excess of 300% of the value of our
31
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
net assets, which generally approximates to 75% of the aggregate cost of our assets, though we
may exceed this limit only under certain circumstances.
In addition to making investments in accordance with our investment objectives, we expect to
use our capital resources to make certain payments to our advisor and the dealer manager. During
our organization and offering stage, these payments include payments to the dealer manager for
sales commissions and the dealer manager fee and payments to our advisor for reimbursement of
certain organization and offering expenses. However, our advisor has agreed to reimburse us to the
extent that sales commissions, the dealer manager fee and other organization and offering expenses
incurred by us exceed 15% of our gross offering proceeds. During our operating stage, we expect to
make payments to our advisor in connection with the acquisition of investments, the management of
our assets and costs incurred by our advisor in providing services to us.
Our principal demand for funds will be to acquire properties and real estate-related assets,
to pay operating expenses and interest on our outstanding indebtedness and to make distributions to
our stockholders. Over time, we intend to generally fund our cash needs for items, other than asset
acquisitions, from operations. Otherwise, we expect that our principal sources of working capital
will include:
| current cash balances; | ||
| public offerings; | ||
| various forms of secured financing; | ||
| borrowings under master repurchase agreements; | ||
| equity capital from joint venture partners; | ||
| proceeds from our operating partnerships private placements, if any; | ||
| proceeds from our distribution reinvestment plan; and | ||
| cash from operations. |
Over the short term, we believe that our sources of capital, specifically our cash balances,
cash flow from operations, our ability to raise equity capital from joint venture partners, our
ability to obtain various forms of secured financing and proceeds from our operating partnerships
private placement, if any, will be adequate to meet our liquidity requirements and capital
commitments.
Over the longer term, in addition to the same sources of capital we will rely on to meet our
short term liquidity requirements, we may also utilize additional secured and unsecured financings
and equity capital from joint venture partners. We may also conduct additional public or private
offerings. We expect these resources will be adequate to fund our operating activities, debt
service and distributions, which we presently anticipate will grow over time, and will be
sufficient to fund our ongoing acquisition activities as well as providing capital for investment
in future development and other joint ventures along with potential forward purchase commitments.
As of June 30, 2010, we had not identified any sources for these types of financings; however,
we continue to evaluate possible sources for these types of financings and a credit facility. There
can be no assurance that we will be able to obtain any such financings or credit facility on
favorable terms, if at all.
Inflation
Substantially all of our multifamily property leases will be for a term of one year or less.
In an inflationary environment, this may allow us to realize increased rents upon renewal of
existing leases or the beginning of new leases. Short-term leases generally will minimize our risk
from the adverse effects of inflation, although these leases generally permit tenants to leave at
the end of the lease term and therefore will expose us to the effect of a decline in
32
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 2. Managements Discussion and Analysis of Financial Condition And
Results of Operations (continued)
market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly
under these shorter term leases.
With respect to other commercial properties, we expect to include provisions in our leases
designed to protect us from the impact of inflation. These provisions will include reimbursement
billings for operating expense pass-through charges, real estate tax and insurance reimbursements,
or in some cases annual reimbursement of operating expenses above a certain allowance. We believe
that shorter term lease contracts lessen the impact of inflation due to the ability to adjust
rental rates to market levels as leases expire.
As of June 30, 2010, we had not entered into any leases.
REIT Compliance
To qualify as a REIT for tax purposes, we will be required to distribute at least 90% of our
REIT taxable income (which is computed without regard to the dividends paid deduction or net
capital gain and which does not necessarily equal net income as calculated in accordance with GAAP)
to our stockholders. We must also meet certain asset and income tests, as well as other
requirements. We will monitor the business and transactions that may potentially impact our REIT
status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income
tax (including any applicable alternative minimum tax) on our taxable income at regular corporate
rates.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes
real estate values diminish over time. In an effort to overcome the difference between real estate
values and historical cost accounting for real estate assets, the Board of Governors of NAREIT
established the measurement tool of funds from operations, or FFO. Since its introduction, FFO has
become a widely used non-GAAP financial measure among REITs. We believe that FFO is helpful to
investors as an additional measure of the performance of an equity REIT. We intend to compute FFO
in accordance with standards established by the Board of Governors of NAREIT in its April 2002
White Paper, which we refer to as the White Paper, and related implementation guidance, which may
differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly,
may not be comparable to such other REITs. The White Paper defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate
related depreciation and amortization, and after adjustments for unconsolidated partnerships and
joint ventures. While FFO is a relevant and widely used measure of operating performance for REITs,
it should not be considered as an alternative to net income (determined in accordance with GAAP) as
an indication of financial performance, or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to
fund our cash needs, including our ability to make distributions.
As of June 30, 2010, we have not commenced real estate operations, and therefore had no
calculation of FFO for the three or six months ended June 30, 2010.
Off-Balance Sheet Arrangements
As of June 30, 2010, we had no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial conditions, changes in financial
conditions, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources.
Related-Party Transactions and Agreements
We have entered into agreements with our advisor and its affiliates, whereby we agree to pay
certain fees to, or reimburse certain expenses of, our advisor or its affiliates for acquisition
fees and expenses, organization and offering costs, sales commissions, dealer manager fees, asset
and property management fees and reimbursement of operating costs. Refer to Note 5 to our condensed
consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a
discussion of the various related-party transactions, agreements and fees.
33
Table of Contents
PART I FINANCIAL INFORMATION (continued)
Item 3. Qualitative and Quantitative Disclosure About Market Risk.
Market risk is the adverse effect on the value of a financial instrument that results from a
change in interest rates. We may be exposed to interest rate changes primarily as a result of
long-term debt used to maintain liquidity, fund capital expenditures and expand our real estate
investment portfolio and operations. Market fluctuations in real estate financing may affect the
availability and cost of funds needed to expand our investment portfolio. In addition, restrictions
upon the availability of real estate financing or high interest rates for real estate loans could
adversely affect our ability to dispose of real estate in the future. We will seek to limit the
impact of interest rate changes on earnings and cash flows and to lower our overall borrowing
costs. We may use derivative financial instruments to hedge exposures to changes in interest rates
on loans secured by our assets. The market risk associated with interest-rate contracts is managed
by establishing and monitoring parameters that limit the types and degree of market risk that may
be undertaken. With regard to variable rate financing, our advisor will assess our interest rate
cash flow risk by continually identifying and monitoring changes in interest rate exposures that
may adversely impact expected future cash flows and by evaluating hedging opportunities. Our
advisor will maintain risk management control systems to monitor interest rate cash flow risk
attributable to both our outstanding and forecasted debt obligations as well as our potential
offsetting hedge positions. While this hedging strategy will be designed to minimize the impact on
our net income and funds from operations from changes in interest rates, the overall returns on
your investment may be reduced. Because we have not commenced real estate operations, we currently
have limited exposure to financial market risks. As of June 30, 2010, an increase or decrease in
interest rates would have no effect on our interest expense as we had no outstanding debt as of
that date.
We will also be exposed to credit risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. If the fair value of a derivative contract is
positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a
derivative contract is negative, we will owe the counterparty and, therefore, do not have credit
risk. We will seek to minimize the credit risk in derivative instruments by entering into
transactions with high-quality counterparties.
Item 4T. Controls and Procedures.
Disclosure Controls and Procedures
As of the end of the period covered by this report, our management, including our chief
executive officer and our chief financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based upon and as of
the date of the evaluation, our chief executive officer and chief financial officer concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
report to ensure that information required to be disclosed in the reports we file and submit under
the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by us in the reports we file and submit under the
Exchange Act is accumulated and communicated to our management, including our chief executive
officer and our chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during
our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
34
Table of Contents
PART IIOTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 1A. Risk Factors.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three and six months ended June 30, 2010, we did not repurchase any of our
securities.
On April 15, 2010, we granted 5,000 shares of restricted stock to each of our three
independent directors pursuant to our independent directors compensation plan in a private
transaction exempt from registration pursuant to Section 4(2) of the Securities Act. One-fourth of
the independent directors restricted stock become non-forfeitable on the date of grant and
one-fourth will become non-forfeitable on each of the first three anniversaries of the date of
grant.
We conducted a private offering for up to of up to $94,000,000 in shares of common stock at
$9.40 per share (subject to discounts) to accredited investors (as defined in Rule 501 under the
Securities Act) pursuant to a confidential private placement memorandum dated October 13, 2009, as
supplemented. From October 13, 2009 through June 30, 2010, we received offering proceeds of
approximately $3,640,861(including $166,474 that was yet to be received from our transfer agent)
for shares of common stock through this private placement; this amount is net of offering costs of
$642,505. We terminated the private offering on July 9, 2010, at which time we had raised
$5,869,946 from the sale of 640,275 shares of our common stock.
Each of the purchasers of our common shares in the private offering has represented to us that
he or she is an accredited investor. Based upon these representations, we believe that the
issuances of our common shares were exempt from the registration requirements pursuant to
Section 4(2) of the Securities Act and Regulation D promulgated thereunder.
On July 9, 2010 our Registration Statement on Form S-11 (File No. 333-160748), registering a
public offering of up to $1,650,000,000 in shares of our common stock, was declared effective under
the Securities Act of 1933, as amended, or the Securities Act, and we commenced our initial public
offering on July 19, 2010. We are offering up to 150,000,000 shares of our common stock to the
public in our primary offering at $10.00 per share and up to 15,789,474 shares of our common stock
pursuant to our distribution reinvestment plan at $9.50 per share. Because our public offering had
not commenced, as of June 30, 2010, we had issued no shares of common stock pursuant to our public
offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Reserved.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Effective February 1, 2010, Steadfast Secure Income REIT, Inc., Steadfast Secure Income
Advisor, LLC and Steadfast Secure Income REIT Operating Partnership, L.P. changed their names to
Steadfast Income REIT, Inc.,
35
Table of Contents
PART IIOTHER INFORMATION (continued)
Steadfast Income Advisor, LLC and Steadfast Income REIT Operating Partnership, L.P., respectively.
With respect to documents executed prior to the name change, the following Exhibit List refers to
the entity names used prior to the name changes in order to accurately reflect the names of the
entities that appear on such documents.
3.1
|
Second Articles of Amendment and Restatement of Steadfast Income REIT, Inc. (filed as Exhibit 3.1 to Pre-Effective Amendment No. 4 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
3.2
|
Bylaws of Steadfast Secure Income REIT, Inc. (filed as Exhibit 3.2 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
4.1
|
Form of Subscription Agreement (included as Appendix B to prospectus, incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
4.2
|
Steadfast Income REIT, Inc. Distribution Reinvestment Plan (included as Appendix C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.1
|
Second Advisory Agreement among Steadfast Income REIT, Inc., Steadfast Income REIT Operating Partnership, L.P. and Steadfast Income Advisor, LLC (filed as Exhibit 10.1 to Pre-Effective Amendment No. 4 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.2
|
Amended and Restated Limited Partnership Agreement of Steadfast Secure Income REIT Operating Partnership, L.P. (filed as Exhibit 10.3 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.3
|
Steadfast Secure Income REIT, Inc. 2009 Incentive Plan (filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.4
|
Steadfast Secure Income REIT, Inc. Independent Directors Compensation Plan (filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.5
|
Amendment to the Steadfast Secure Income REIT, Inc. Independent Directors Compensation Plan (filed as Exhibit 10.5 to Pre-Effective Amendment No. 4 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.6
|
Amended and Restated Independent Directors Compensation Plan (filed as Exhibit 10.5 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-154975) and incorporated herein by reference). | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
36
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Steadfast Income REIT, Inc. |
||||
Date: August 20, 2010 | By: | /s/ Rodney F. Emery | ||
Rodney F. Emery | ||||
Chief Executive Officer, President and Chairman of the Board (Principal Executive Officer) |
||||
Date: August 20, 2010 | By: | /s/ Dinesh K. Davar | ||
Dinesh K. Davar | ||||
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
||||
Table of Contents
EXHIBIT INDEX
Effective February 1, 2010, Steadfast Secure Income REIT, Inc., Steadfast Secure Income
Advisor, LLC and Steadfast Secure Income REIT Operating Partnership, L.P. changed their names to
Steadfast Income REIT, Inc., Steadfast Income Advisor, LLC and Steadfast Income REIT Operating
Partnership, L.P., respectively. With respect to documents executed prior to the name change, the
following Exhibit List refers to the entity names used prior to the name changes in order to
accurately reflect the names of the entities that appear on such documents.
3.1
|
Second Articles of Amendment and Restatement of Steadfast Income REIT, Inc. (filed as Exhibit 3.1 to Pre-Effective Amendment No. 4 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
3.2
|
Bylaws of Steadfast Secure Income REIT, Inc. (filed as Exhibit 3.2 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
4.1
|
Form of Subscription Agreement (included as Appendix B to prospectus, incorporated by reference to Exhibit 4.1 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
4.2
|
Steadfast Income REIT, Inc. Distribution Reinvestment Plan (included as Appendix C to prospectus, incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.1
|
Second Advisory Agreement among Steadfast Income REIT, Inc., Steadfast Income REIT Operating Partnership, L.P. and Steadfast Income Advisor, LLC (filed as Exhibit 10.1 to Pre-Effective Amendment No. 4 to the Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.2
|
Amended and Restated Limited Partnership Agreement of Steadfast Secure Income REIT Operating Partnership, L.P. (filed as Exhibit 10.3 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.3
|
Steadfast Secure Income REIT, Inc. 2009 Incentive Plan (filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.4
|
Steadfast Secure Income REIT, Inc. Independent Directors Compensation Plan (filed as Exhibit 10.4 to Pre-Effective Amendment No. 1 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.5
|
Amendment to the Steadfast Secure Income REIT, Inc. Independent Directors Compensation Plan (filed as Exhibit 10.5 to Pre-Effective Amendment No. 4 to Companys Registration Statement on Form S-11 (No. 333-160748) and incorporated herein by reference). | |
10.6
|
Amended and Restated Independent Directors Compensation Plan (filed as Exhibit 10.5 to Pre-Effective Amendment No. 5 to the Companys Registration Statement on Form S-11 (No. 333-154975) and incorporated herein by reference). | |
31.1
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |