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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

 

 

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2014

 

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _____________

 

Commission File Number: 001-32365

 

Trade Street Residential, Inc.
(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 13-4284187
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
   
19950 West Country Club Drive  
Aventura, Florida 33180
(Address of Principal Executive Offices) (Zip Code)

 

(786) 248-5200
(Registrant’s Telephone Number, Including Area Code)

 

n/a
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

 

 

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.01 par value   NASDAQ

 

Securities registered pursuant to Section12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

 

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 x No ¨

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, 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.

 

Large accelerated filer ¨   Accelerated filer x
       
Non-accelerated filer ¨ (Do not check if a smaller reporting company)   Smaller reporting company ¨

 

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

 

As of June 30, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the registrant’s voting stock held by non-affiliates was approximately $140.5 million, as determined by reference to the listed price of the registrant’s common stock as of the close of business on such day. For purposes of the foregoing calculation only, all directors and executive officers of the registrant have been deemed affiliates.

 

As of March 5, 2015, 36,698,469 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.

 

 
 

 

TABLE OF CONTENTS

ANNUAL REPORT ON FORM 10-K

TRADE STREET RESIDENTIAL, INC.

 

    Page
     
PART I    
Item 1. Business 2
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 30
Item 2. Properties 30
Item3. Legal Proceedings 30
Item 4. Mine Safety Disclosures 30
PART II    
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31
Item 6. Selected Financial Data 32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 50
Item 8. Financial Statements and Supplementary Data 51
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 51
Item 9A. Controls and Procedures 51
Item 9B. Other Information 52
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions, and Director Independence 52
     
Item 14. Principal Accountant Fees and Services 52
PART IV    
Item 15. Exhibits, Financial Statement Schedules 53

 

i
 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s 2015 proxy statement (the “Proxy Statement”), anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K (the “Annual Report”).

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on management's beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

  the factors included in this Annual Report, including those set forth under the headings “Our Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”
     
  the competitive environment in which we operate;

 

  real estate risks, including fluctuations in real estate values and the general economic climate in local markets and competition for tenants in such markets;

 

  decreased rental rates or increasing vacancy rates;

 

  our ability to lease units in apartment communities that are newly constructed;

 

  potential defaults on or non-renewal of leases by tenants;

 

  potential bankruptcy or insolvency of tenants;

 

  costs related to, and uncertainty caused by, our review of strategic alternatives;

 

  acquisition risks, including failure of such acquisitions to perform in accordance with projections;

 

  the timing of acquisitions and dispositions, including our ability close any acquisitions or dispositions of properties under contract;

 

  potential natural disasters such as hurricanes;

 

  national, international, regional and local economic conditions;

 

  our ability to continue to pay distributions at our quarterly and annual dividend rate set forth in this Annual Report;

 

  the general level of interest rates;

 

  potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates;

 

  financing risks, including the risks that our cash flows from operations may be insufficient to meet required payments of principal and interest and we may be unable to refinance our existing debt upon maturity or obtain new financing on attractive terms or at all;

 

  lack of or insufficient amounts of insurance;

 

  our ability to maintain our qualification as a REIT;

 

  litigation, including costs associated with prosecuting or defending claims and any adverse outcomes;

 

  possible environmental liabilities, including costs, fines or penalties that may be incurred due to necessary remediation of contamination of properties presently owned or previously owned by us or a subsidiary owned by us or acquired by us; and

 

  uncertainty created by management turnover.

 

1
 

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Annual Report, except as required by applicable law. You should not place undue reliance on any forward-looking statements that are based on information currently available to us or the third parties making the forward-looking statements. For a further discussion of these and other factors that could impact our future results, performance or transactions, see the risk factors described in Item 1A herein and in other documents that we file from time to time with the Securities and Exchange Commission (the “SEC”).

 

PART I

 

Item 1. Business.

 

Overview

 

Trade Street Residential, Inc. is a full service, vertically integrated, self-administered and self-managed corporation incorporated in the state of Maryland on June 1, 2012, to acquire, own, operate and manage conveniently located, garden-style and mid-rise apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States and Texas. Unless the context requires otherwise, “we”, “our”, “us”, the “registrant” and the “Company” refer to Trade Street Residential, Inc. and its consolidated subsidiaries, including Trade Street Operating Partnership, LP, a Delaware limited partnership (the “Operating Partnership”). As of December 31, 2014, we owned and operated 19 apartment communities containing 4,889 apartment units in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. We refer to these apartment communities throughout this Annual Report as our “Operating Properties.” Our apartment communities are characterized by attractive features including substantial landscaping, well-maintained exteriors and high quality interior finishes, and amenities such as swimming pools, clubhouses and fitness facilities and controlled-access gated entrances.

 

Until June 1, 2012, the registrant conducted business as Feldman Mall Properties, Inc. (the “Predecessor”). Immediately prior to the recapitalization transaction described below, the registrant held a single land asset having minimal value and conducted no operations. On June 1, 2012, the registrant completed a reverse recapitalization transaction (the “2012 Recapitalization”). In the 2012 Recapitalization, the registrant acquired certain assets from Trade Street Property Fund I, LP and BCOM Real Estate Fund, LLC, which we collectively refer to as the “Trade Street Funds,” and Trade Street Capital, LLC, or Trade Street Capital, in exchange for shares of the registrant’s common and preferred stock and common and preferred units of limited partnership interest in the Operating Partnership. The registrant also changed its name to “Trade Street Residential, Inc.” and the management team of Trade Street Capital took over day-to-day management of our Company. Our business is a continuation of the multifamily residential real estate investment and management businesses of the Trade Street Funds and Trade Street Capital, which we collectively refer to as Trade Street Company. References to “Trade Street Company” do not refer to a legal entity, but instead refer to a combination of certain real estate entities and management operations based on common ownership and control by the Trade Street Funds and Trade Street Capital. For accounting purposes, Trade Street Investment Adviser, LLLP (“TSIA”), one of the entities contributed as part of the 2012 Recapitalization, is the accounting acquirer in the 2012 Recapitalization.

 

We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. All of our assets are held by, and we conduct substantially all of our activities through, the Operating Partnership and its consolidated subsidiaries. The majority of our operating expenses are borne by the Operating Partnership or our communities, as the case may be.

 

On November 3, 2014, our Board of Directors announced it would undertake a review of strategic alternatives to enhance stockholder value and retained J.P. Morgan Securities LLC as its financial advisor and Morrison & Foerster LLP as its legal advisor during this process. This review will include, among other alternatives, a sale, merger, acquisition or other form of business combination, or a sale or acquisition of assets, or a debt or equity recapitalization. However, we have not made a decision to pursue any specific strategic transaction or any other strategic alternative, and there is no set timetable for completion of this strategic review process.  There can be no assurance that the exploration of strategic alternatives will result in the completion of any transaction or other alternative.

 

Our corporate office is located at 19550 West Country Club Drive, Suite 800, Aventura, Florida 33180 and our telephone number is (786) 248-5200. As of December 31, 2014, we had approximately 140 full-time employees.

 

Recent Significant Developments

 

Management/Director Changes

 

On November 3, 2014, Ryan Hanks tendered his resignation as our Chief Investment Officer and interim Chief Operating Officer. Mr. Hanks will continue in a consulting capacity until completion of the Board of Directors review of strategic alternatives.

 

2
 

 

On June 25, 2014, Nirmal Roy was appointed to our Board of Directors to replace Evan Gartenlaub, who resigned from the Board of Directors on that same date.

 

On May 19, 2014, our Board of Directors appointed Randall Eberline to serve as our Chief Accounting Officer and principal financial officer to replace Arthur Levine, who tendered his resignation as our Chief Accounting Officer. As a result, as of that date, Richard Ross ceased to serve as interim Chief Financial Officer and ceased to perform the functions of principal financial officer.

 

Effective April 28, 2014, our Board of Directors appointed Richard Ross to the permanent position of Chief Executive Officer. Between February 2014 and his appointment as permanent Chief Executive Officer in April 2014, Mr. Ross had served as interim Chief Executive Officer and Chief Financial Officer. Also in February 2014, Mack Pridgen, chairman of our audit committee and its lead director, was appointed as Chairman of our Board of Directors and Ryan Hanks, our Chief Investment Officer, was appointed as interim Chief Operating Officer.

 

Effective March 18, 2014, David Levin tendered his resignation as our President and as Vice Chairman and as a member of the Board of Directors, and terminated his employment with us. As a result, Richard Ross was appointed our interim President.

 

Effective February 23, 2014, Michael Baumann tendered his resignation as a member of the Board of Directors and as our Chief Executive Officer and terminated his employment with us. On February 23, 2014, our Board of Directors appointed Richard Ross, our then Chief Financial Officer and Chief Operating Officer, to serve as the interim Chief Executive Officer for us in addition to his then current role as our Chief Financial Officer. The appointment of Mr. Ross filled the vacancy created by Mr. Baumann’s resignation as Chief Executive Officer. Our Board of Directors also appointed Ryan Hanks, our Chief Investment Officer, to serve as the interim Chief Operating Officer for us in addition to his then current role as our Chief Investment Officer. Upon the appointment of Mr. Hanks as Chief Operating Officer, Mr. Ross ceased to perform the duties of Chief Operating Officer.

 

Our Class A Preferred Stock Redemption

 

On October 17, 2014, we executed and closed on an agreement with the holders of our Class A preferred stock to redeem 100% of the outstanding 309,130 shares of our Class A preferred stock in exchange for:

 

·assignment of all interests in the following land investments:

oMaitland (“Maitland”), with a current indicated value of $9.4 million;

oMillenia Phase II (“Millenia II”), with a current indicated value of $6.25 million; and

oVenetian, with a current indicated value of $4.0 million.

·assignment of all interests in the Sunnyside land parcel, with a current indicated value of $1.5 million;

·cash payment of $5.0 million.

 

Our Rights Offering

 

On January 16, 2014, we completed our subscription rights offering (the “Rights Offering”). In connection with the Rights Offering, we entered into a Standby Purchase Agreement dated November 12, 2013 (the “Standby Purchase Agreement”) with investment entities managed or advised by Senator Investment Group LP (collectively, “Senator”) pursuant to which Senator committed to purchase from us, all of the unsubscribed shares of common stock in the Rights Offering minus the aggregate dollar value of the shares purchased pursuant to the Management Purchase Agreement (as defined below) such that the gross proceeds to us from the Rights Offering would be $100.0 million (the “Backstop Commitment”). Senator also agreed to purchase an aggregate of $50.0 million in shares of our common stock in addition to shares of common stock purchased pursuant to the Backstop Commitment (the “Additional Purchase Commitment”). We agreed to pay Senator a fee of $3.75 million for the Backstop Commitment and a fee of $3.75 million for the Additional Purchase Commitment, in each case payable in unregistered shares of common stock. In addition, we entered into a purchase agreement dated November 12, 2013 (the “Management Purchase Agreement”) with Michael Baumann and David Levin pursuant to which Messrs. Baumann and Levin agreed to purchase shares of common stock in connection with the Rights Offering.

 

Upon completion of the Rights Offering on January 16, 2014, we sold 15,797,789 shares of common stock (including 232,327 shares sold pursuant to the Backstop Commitment and 286,294 shares sold pursuant to the Management Purchase Agreement). We received net proceeds, after deduction of offering expenses, of $96.7 million. In addition, pursuant to the Standby Purchase Agreement, we issued to Senator 9,316,055 shares of our common stock for an aggregate purchase price of $51.5 million (including shares issued as payment of the $3.75 million Backstop Commitment fee and the $3.75 million Additional Purchase Commitment fee). Pursuant to the Management Purchase Agreement, we issued 286,294 shares of common stock for an aggregate purchase price of $1.8 million to certain former executive officers of the company.

 

3
 

 

On January 16, 2014, we received net cash proceeds from the sale of shares of our common stock offered in our Rights Offering and the related transactions of approximately $147.1 million after deducting offering expenses of approximately $2.9 million payable by us. We contributed the net proceeds we received from the Rights Offering and related transactions to our Operating Partnership in exchange for common units of our Operating Partnership. The Operating Partnership used approximately (i) $94.6 million, which included approximately $1.5 million for acquisition costs, to acquire five communities, (ii) $26.0 million to repay short-term borrowings under our secured revolving credit facility, (iii) $16.7 million to pay down, in part, certain indebtedness secured by two communities in conjunction with their refinancing, and (iv) $4.2 million to pay down certain indebtedness secured by land held for development, leaving approximately $6.0 million for working capital and general corporate purposes.

 

Pursuant to a stockholder agreement entered into with Senator (the “Stockholders Agreement”) in connection with the Backstop Commitment and the Additional Purchase Commitment, we were required to file and cause a resale registration statement to be declared effective by the SEC no later than January 16, 2015 (the “Effective Deadline”), the first anniversary of the closing of the Rights Offering. On December 16, 2014, Senator agreed to extend the Effective Deadline to April 16, 2015. If the resale registration statement is not declared effective by April 16, 2015, we will be required to pay Senator a fee, payable in additional shares of our common stock (the “Additional Shares”), equal to 0.5% of the aggregate purchase price paid by Senator for the shares acquired in the Backstop Commitment and the Additional Purchase Commitment for each full 30 calendar days (prorated for periods totaling less than 30 calendar days) thereafter until the resale registration statement is declared effective, divided by the average of the volume-weighted average prices of our common stock over the 10 trading days prior to the issuance of such shares. Further, Senator has a right to seek liquidity with respect to shares of common stock that it owns if, on or after the 3.5-year anniversary of the closing of the Rights Offering (the “Liquidity Right Measurement Date”), the closing price of our common stock has not exceeded $10.00 per share (subject to certain adjustments set forth in the Stockholders Agreement) during any consecutive 10 trading day period during the 180 days prior to the Liquidity Right Measurement Date and Senator continues to own 4.9% or greater of our outstanding common stock.

 

Recent Acquisitions and Dispositions

 

The acquisitions we choose to pursue are based on a series of strict and concise criteria that discourage us from pursuing investments in properties that do not coincide with our overall business plan and strategy. These criteria include generally investing in properties that:

 

  · are garden-style or mid-rise apartments;

 

  · fall within our target size of 150 to 500 units and are valued, either individually or as a portfolio acquisition, between $10 million and $50 million;

 

  · are located within close proximity to large and stable employment bases within our target markets and have a high degree of visibility;

 

  · produce an attractive cash on cash yield that is accretive to funds from operations per share; and

 

  · are less than ten years old, or can justify an older age based on differentiating and value-added characteristics.

 

Acquisitions and Refinancing

 

Completed Acquisitions

 

During the year ended December 31, 2014, we completed the following acquisitions:

 

  · On April 7, 2014, we acquired Waterstone at Big Creek, a 270-unit apartment community located in Alpharetta (Atlanta), Georgia for a total purchase price of $40.5 million. The purchase price was funded with cash on hand of approximately $3.5 million and $37.0 million drawn from our revolving credit facility.

 

  · On March 18, 2014, we acquired The Avenues of Craig Ranch, a 334-unit apartment community located in McKinney (Dallas), Texas for a total purchase price of $42.4 million. The purchase price was funded with $21.2 million cash proceeds from  our Rights Offering and a new mortgage loan in the amount of $21.2 million.

 

  · On March 10, 2014, we acquired Waterstone at Brier Creek, a 232-unit apartment community located in Raleigh, North Carolina for a total purchase price of $32.7 million. The purchase price was funded with $16.4 million cash proceeds from  our Rights Offering and a new mortgage loan in the amount of $16.3 million.

 

  · On March 10, 2014, we completed foreclosure proceedings on a non-performing mortgage loan receivable and obtained title to the Sunnyside asset, an undeveloped 22 acre parcel of land located in Panama City, Florida, that was permitted for 212 apartment units and 20,000 square feet of retail space.

 

  · On February 6, 2014, we acquired The Aventine Greenville, a 346-unit apartment community located in Greenville, South Carolina for a total purchase price of $41.9 million. The purchase price was funded with $20.9 million cash proceeds from our Rights Offering and a new mortgage loan in the amount of $21.0 million.

 

4
 

  

  · On February 11, 2014, we completed a refinancing of Millenia 700, a 297-unit apartment community located in Orlando, Florida, with a mortgage note payable in the amount of $25.0 million with a 7-year term. The mortgage bears a fixed interest rate of 3.83%.
     
  · On January 23, 2014, we completed a refinancing of Fountains Southend with a loan in the amount of $23.8 million, which has a 10-year term and bears a fixed interest rate of 4.31%.  
     
  · On January 21, 2014, we acquired Miller Creek at Germantown, a 330-unit apartment community located in Germantown (Memphis), Tennessee, for a total purchase price of $43.8 million. The purchase price was funded with $17.5 million of cash proceeds from our Rights Offering and a new mortgage loan in the amount of $26.3 million.
     
  · On January 21, 2014, we acquired The Estates of Wake Forest, a 288-unit apartment community located in Wake Forest (Raleigh), North Carolina for a total purchase price of $37.3 million. The purchase price was funded with $18.6 million of cash proceeds from our Rights Offering and a new mortgage loan in the amount of $18.7 million.

 

Pending Acquisition

 

As of the date of this Annual Report, we had a contract in place to acquire an additional 100 units that are currently under construction on a parcel adjacent to our Waterstone at Big Creek community for $15.0 million, for which we have paid a $0.2 million nonrefundable deposit and anticipate closing in late March 2015. There can be no assurance that we will complete this acquisition or that it will close within the expected timeframe.

 

Dispositions

 

During the year ended December 31, 2014, we completed the following dispositions:

 

  · On July 11, 2014, we completed the sale of Post Oak, a 126-unit apartment community located in Louisville, Kentucky. The net proceeds from the sale were approximately $7.8 million and the sale resulted in a gain of approximately $0.4 million.

 

  · On December 10, 2014, we and our joint venture partner sold our respective 50% membership interests in the Estates of Perimeter, a 240-unit apartment community located in Augusta, Georgia, to an unaffiliated third party for $26.0 million.  The net proceeds from the sale of the property were used to repay the mortgage note payable and other transaction related expenses and then make a distribution to each of the members, of which our proportionate share was approximately $3.4 million. We recognized a gain of approximately $1.1 million from this sale.

 

See Notes C and L to the consolidated financial statements for further discussion of our completed acquisitions and dispositions for 2014.

 

Our Business Objectives and Strategies

 

Our primary business objective is to maximize stockholder value by increasing cash flows at our existing properties and acquiring additional properties in our existing markets and in other strategic markets. We intend to achieve this objective by executing the following strategies:

 

  · Maintain Disciplined Focus on Mid-Sized Markets. We intend to maintain a disciplined investment focus on mid-sized cities and suburban submarkets of larger cities with strong economic and demographic drivers, reduced competition from larger multifamily REITs and limited existing and new supply of housing and apartment construction.

 

  · Intensely Manage Our Apartment Communities to Maintain Market Competitiveness and Cost Efficiency. We have overseen significant improvements at our Operating Properties that have added landscaping, exterior facelifts, and renovation of common areas such as clubhouses and refurbishment of apartment interiors.  We believe that by presenting attractive, aesthetically pleasing interiors and exteriors combined with modern amenities, our apartment communities have a competitive edge in our markets compared to other apartment communities owned by lesser capitalized operators.

 

  · Utilize Our Relationships and Industry Knowledge to Acquire High Yielding Properties in Our Target Markets. Our senior management team has significant experience in the acquisition, ownership, operation and management of commercial real estate, specifically apartment communities.  We believe adding scale in our existing markets based on our management’s experience and relationships will increase our operating efficiency, produce cost savings, enhance our market knowledge and strengthen our ability to be a market leader in each of our markets.

 

  · Selectively Dispose of Fully Stabilized Assets to Redeploy Capital in Newer, Higher Growth Investments. We will actively manage our portfolio to increase cash flow through the sale of fully stabilized assets to redeploy capital into newer higher yielding investments and actively seek to improve our average age and asset quality in our target markets or exit markets that we deem non-strategic going forward.

 

5
 

 

Our Properties

 

As of December 31, 2014, our portfolio primarily consisted of an aggregate of 4,889 apartment units located in 19 wholly-owned operating properties as detailed in the following table:

 

                Average   Average 
      Year Built  Date  Number of   Unit Size   Physical 
Property Name  Location   Renovated (1)  Acquired  Units   (Sq. Ft.)    Occupancy (2) 
                      
The Pointe at Canyon Ridge (3)  Sandy Springs, GA  1986/2007  09/18/08   494    920    96.7%
Arbors River Oaks  Memphis, TN  1990/2010  06/09/10   191    1,136    96.0%
Lakeshore on the Hill  Chattanooga, TN  1969/2005  12/14/10   123    1,168    96.6%
The Trails of Signal Mountain  Chattanooga, TN  1975  05/26/11   172    1,185    97.4%
Mercé Apartments  Addison, TX  1991/2007  10/31/11   114    653    94.2%
Fox Trails  Plano, TX  1981  12/06/11   286    960    96.9%
Millenia 700  Orlando, FL  2012  12/03/12   297    952    96.6%
Westmont Commons  Asheville, NC  2003/2008  12/12/12   252    1,009    97.3%
Bridge Pointe  Huntsville, AL  2002  03/04/13   178    1,047    98.2%
St. James at Goose Creek   Goose Creek, SC  2009  05/16/13   244    976    96.2%
Creekstone at RTP  Durham, NC  2013  05/17/13   256    1,043    94.4%
Talison Row at Daniel Island  Charleston, SC  2013  08/26/13   274    989    93.2%
Fountains Southend  Charlotte, NC  2013  09/24/13   208    844    97.5%
The Estates at Wake Forest  Wake Forest, NC  2013  01/21/14   288    1,047    92.7%
Miller Creek at Germantown   Memphis, TN  2012/2013  01/21/14   330    1,049    96.1%
The Aventine Greenville   Greenville, SC  2013  02/06/14   346    961    93.6%
Waterstone at Brier Creek   Raleigh, NC  2013/2014  03/10/14   232    1,137    93.8%
Avenues at Craig Ranch    McKinney, TX  2013  03/18/14   334    1,006    94.4%
Waterstone at Big Creek  Alpharetta, GA  2013  04/07/14   270    1,131    98.5%
Total / Weighted Average            4,889    1,008    95.7%

 

(1)The extent of the renovations included within the term “renovated” depends on the individual apartment community, but “renovated” generally refers to the replacement of siding, roof, wood, windows or boilers, updating of gutter systems, renovation of leasing centers and interior rehabilitation, including updated appliances, countertops, vinyl plank flooring, fixtures, fans and lighting, or some combination thereof.
(2)Average physical occupancy for the three months ended December 31, 2014 represents the average occupancy of the total number of units occupied at each apartment community during the period divided by the total number of units at each apartment community.
(3)On November 22, 2014, a 20-unit building at this community was destroyed by fire. We maintain insurance coverage on all of our properties and subsequently filed an insurance claim that is expected to cover the re-construction cost of this building, less our loss deductible, as well as loss of rents under a business interruption provision in the applicable insurance policy. Accordingly, for the period from the date of the fire through December 31, 2014, a recovery of lost rents relating to the 20 impacted units was recorded as additional rental income for this property. We anticipate that re-construction of this 20-unit building will be completed by the end of the second quarter of 2015.

 

For the three months ended December 31, 2014, the weighted average monthly rent per unit and monthly effective rent per occupied unit for operating properties was $1,020 and $1,009, respectively. Average rental rates are our market rents after “loss to lease” and concessions but before vacancy, discounted employee units, model units, and bad debt during the period. Effective rent per occupied unit is equal to the average of gross monthly rent minus any leasing discounts offered for each month during the period divided by the total number of occupied units each month during the period. Discounts include concessions, discounted employee units and model units. Operating properties acquired during the period are not included in these per unit results.

 

Our investment in land (the “Land Investments”) consists of the parcel described in the table below.

 

Property Name  Location  Potential Use  Acreage 
           
Midlothian Town Center – East (1)  Midlothian, VA  Apartments   8.4 

 

(1)Midlothian Town Center—East is currently approved for 246 apartment units and 10,800 square feet of retail space, including a parking deck structure. The project is currently going through a site plan modification process in Chesterfield County, Virginia that will allow the development of 238 apartment units, 10,800 square feet of retail space and the elimination of the parking deck structure. Costs, including the cost of the land, incurred to date as of December 31, 2014 for the property were approximately $3.5 million. In February 2014, we reclassified Midlothian Town Center as real estate assets held for sale. On October 7, 2014, we entered into a non-binding agreement with a third party to purchase our undivided interest in the Midlothian land parcel for $3.6 million. This agreement is subject to customary terms for similar transactions, including a period of examination during which the agreement could be cancelled by either party and is expected to close during the second quarter of 2015.

 

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Tax Status

 

We have elected to be treated as a REIT for U.S. federal income tax purposes. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”) relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and that our manner of operation will enable us to meet the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes.

 

As a REIT, we generally are not subject to U.S. federal income tax on our net taxable income that we distribute currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state and local taxes on our income and assets and to federal income and excise taxes on our undistributed income.

 

Insurance

 

We carry comprehensive general liability coverage on our communities, with limits of liability customary within the multi-family apartment industry, to insure against liability claims and related defense costs. We are also insured, with limits of liability customary within the multi-family apartment industry, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.

 

Regulation

 

Apartment communities are subject to various laws, ordinances and regulations, including regulations relating to common areas, such as swimming pools, activity centers, and recreational facilities. We believe that each of our properties has the necessary permits and approvals to operate its business.

 

Americans with Disabilities Act

 

Our properties must comply with Title III of the Americans with Disabilities Act of 1990, as amended (the “ADA”), to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, the obligation to make readily accessible accommodations is an ongoing one, and we will continue to assess our properties and make alterations as appropriate in this respect.

 

Fair Housing Act

 

The Fair Housing Amendment Act of 1988 (the “FHAA”), its state law counterparts and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability. A failure to comply with these laws in our operations could result in litigation, fines, penalties or other adverse claims, or could result in limitations or restrictions on our ability to operate, any of which could materially and adversely affect us. We believe that we operate our properties in substantial compliance with the FHAA.

 

Environmental Matters

 

Under various federal, state and local laws and regulations relating to the environment, as a current or former owner or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or toxic substances, waste or petroleum products at, on, in, under, or migrating from such property, including costs to investigate and clean up such contamination and liability for natural resources. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs could exceed the value of the property and/or our aggregate assets. In addition, the presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability for costs of remediation and/or personal or property damage or materially adversely affect our ability to sell, lease or develop our properties or to borrow using the properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs that the government incurs to address such contamination. Moreover, if contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures.

 

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Independent environmental consultants have conducted Phase I Environmental Site Assessments at all of the properties in our portfolio using the American Society for Testing and Materials, or ASTM Standard E 1527-05 or Standard E 1527-13. A Phase I Environmental Site Assessment is a report that identifies potential or existing environmental contamination liabilities. Site assessments are intended to discover and evaluate information regarding the environmental condition of the assessed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the site assessments identified any known past or present contamination that we believe would have a material adverse impact on our business, assets or operations. However, the assessments are limited in scope and may have failed to identify all environmental conditions or concerns. A prior owner or operator of a property or historic operations at our properties, or operations and conditions at nearby properties may have created a material environmental condition that is not known to us or the independent consultants preparing the site assessments. Material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or regulations may impose material additional environmental liability. Moreover, conditions identified in environmental assessments that did not appear material at that time, may in the future result in material liability.

 

Some of our properties have contained or currently contain, or are adjacent to or near other properties that have contained or currently contain, storage tanks for the storage of petroleum products or other hazardous or toxic substances. Similarly, some of our properties were used in the past for commercial or industrial purposes, or are currently used for commercial purposes, that involve or involved the use of petroleum products, pollutants or other hazardous or toxic substances, or are adjacent to or near properties that have been or are used for similar commercial or industrial purposes. As a result, some of our properties have been or may be subject to environmental laws regarding, or impacted by contamination arising from the releases of, such petroleum products, pollutants or hazardous or toxic substances. Where we have deemed appropriate, we have taken steps to address identified contamination or mitigate risks associated with such contamination; however, we are unable to ensure that further actions will not be necessary. As a result of the foregoing, we could potentially incur material liabilities.

 

Environmental laws also govern the presence, maintenance and removal of hazardous materials in building materials (e.g. asbestos and lead), and may impose fines and penalties for failure to comply with these requirements or expose us to third party liability (e.g., liability for personal injury associated with exposure to asbestos). Such laws require that owners or operators of buildings containing hazardous materials properly manage and maintain certain hazardous materials, adequately notify or train those who may come into contact with certain hazardous materials, and undertake special precautions, including removal or other abatement, if certain hazardous materials would be disturbed during renovation or demolition of a building. In addition, the properties in our portfolio are subject to various federal, state, and local environmental and health and safety requirements, such as state and local fire requirements.

 

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs. We are not presently aware of any material adverse indoor air quality issues at our properties.

 

The cost of future environmental compliance may materially and adversely affect us. See “Risk Factors–Risks Associated with Real Estate.”

 

Competition

 

We compete with a number of developers, owners and operators of multifamily real estate, many of which own properties similar to ours in the same markets in which our properties are located and some of which have greater financial resources than we do. In operating and managing our portfolio, we compete for tenants based on a number of factors, including location, rental rates, security, flexibility and expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated, maintained and marketed. As leases at our properties expire, we may encounter significant competition to renew or re-let space in light of the large number of competing properties within the markets in which we operate. As a result, we may be required to provide rent concessions or abatements, or we may not be able to timely lease vacant units.

 

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We also face competition when pursuing acquisition opportunities. Our competitors may be able to pay higher property acquisition prices, may have private access to opportunities not available to us and otherwise be in a better position to acquire or develop a property. Competition may also have the effect of reducing the number of suitable and acquisition opportunities available to us, increase the price required to consummate an acquisition opportunity.

 

Emerging Growth Company

 

We are an “emerging growth company” under the federal securities laws and, as such, we have elected to provide reduced public company reporting requirements in this and in future filings. In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with accounting standards newly issued or revised after April 5, 2012. In other words, an “emerging growth company” can delay the adoption of accounting standards until those standards would otherwise apply to private companies.

 

Employees

 

As of December 31, 2014, we had approximately 140 full-time employees. None of our employees are represented by a collective bargaining unit. We believe that our relationship with our employees is good.

 

Corporate Information

 

Our principal executive office is located at 19950 West Country Club Drive, Suite 800, Aventura, Florida 33180 and our telephone number is (786) 248-5200. We maintain an Internet site at www.tradestreetresidential.com. The information located on, or accessible from, our website is not, and shall not be deemed to be, incorporated into any filings that we make with the SEC.

 

Available Information

 

We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the SEC. You may obtain copies of these documents by visiting the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330 or by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public free of charge through our website or by contacting our Secretary at the address set forth above under “—Corporate Information.”

 

Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of our audit committee, compensation committee and nominating and corporate governance committee are all available in the Corporate Governance section of the Investor Relations section of our website.

 

Financial Information and Segments

 

We are primarily engaged in the ownership, management and acquisition of multifamily apartment communities. As each of our communities has similar economic characteristics, residents, amenities, and services, our operations have been aggregated into one reportable segment. For required financial information related to our operations, please refer to our consolidated financial statements, including the notes thereto, included elsewhere in this Annual Report.

 

Item 1A. Risk Factors.

 

Risks Related to Our Business and Operations

 

Our portfolio of properties consists primarily of apartment communities concentrated in certain markets and any adverse developments in local economic conditions or the demand for apartment units in these markets may negatively impact our operating results.

 

Our portfolio of properties consists primarily of apartment communities geographically concentrated in the Southeastern United States. Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas comprised 3.11%, 7.95%, 13.46%, 24.42%, 19.98%, 17.49%, and 13.59%, respectively, of our rental revenue for the year ended December 31, 2014. As such, we are susceptible to local economic conditions and the supply of and demand for apartment units in these markets. If there is a downturn in the local economy or an oversupply of or decrease in demand for apartment units in these markets, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.

 

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Adverse economic conditions may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders.

 

Our operating results may be affected by market and economic challenges, which may negatively affect our returns and profitability and, as a result, our ability to make distributions to our stockholders. These market and economic challenges include, but are not limited to, the following:

 

  any future downturn in the U.S. economy and the related reduction in spending, reduced home prices and high unemployment may result in tenant defaults under leases, vacancies at our apartment communities and concessions or reduced rental rates under new leases due to reduced demand;
  the rate of household formation or population growth in our markets or a continued or exacerbated economic slow-down experienced by the local economies where our properties are located or by the real estate industry generally may result in changes in supply of or demand for apartment units in our markets; and
  the failure of the real estate market to attract the same level of capital investment in the future that it attracts at the time of our purchases or a reduction in the number of companies seeking to acquire properties may result in the value of our investments not appreciating or decreasing significantly below the amount we pay for these investments.

 

The length and severity of any economic slow-down or downturn cannot be predicted. Our operations and, as a result, our ability to make distributions to our stockholders could be negatively affected to the extent that an economic slow-down or downturn is prolonged or becomes severe.

 

We depend on residents for revenue, and vacancies, resident defaults or lease terminations may materially adversely affect our operating results.

 

The success of our investments depends upon the occupancy levels, rental revenue and operating expenses of our apartment communities. Our revenues may be adversely affected by the general or local economic climate, local real estate considerations (such as oversupply of or reduced demand for apartment units), the perception by prospective residents of the safety, convenience and attractiveness of the areas in which our apartment communities are located (including the quality of local schools and other amenities) and increased operating costs (including real estate taxes and utilities).

 

Occupancy rates and rents at a community, including apartment communities that are newly constructed or in the lease-up phase, may fail to meet our original expectations for a number of reasons, including changes in market and economic conditions beyond our control and the development by competitors of competing communities and we may be unable to complete lease-up of a community on schedule, resulting in increased construction and financing costs and a decrease in expected rental revenues.

 

Vacancy rates may increase in the future and we may be unable to lease vacant units or renew expiring leases on attractive terms, or at all, and we may be required to offer reduced rental rates or other concessions to residents. Our revenues may be lower as a result of lower occupancy rates, increased turnover, reduced rental rates, increased economic concessions and potential increases in uncollectible rent. In addition, we will continue to incur expenses, including maintenance costs, insurance costs and property taxes, even though a property maintains a high vacancy rate. Our financial performance will suffer if our revenues decrease or our costs increase as a result of this trend.

 

The underlying value of our properties and our ability to make distributions to our stockholders will depend upon our ability to lease our available apartment units and the ability of our residents to generate enough income to pay their rents in a timely manner. Our residents’ inability to pay rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. Upon a resident default, we will attempt to remove the resident from the premises and re-lease the unit as promptly as possible. Our ability and the time required to evict a resident, however, will depend on applicable law. Substantially all of the leases for our properties are short-term leases (generally, one year or less in duration). As a result, our rental income and our cash flow are impacted by declines in market conditions more quickly than if our leases were for longer terms.

 

A change in the United States government policy with regard to Fannie Mae and Freddie Mac could impact our financial condition.

 

Fannie Mae and Freddie Mac are a major source of financing for the multifamily residential real estate sector. We and other multifamily companies depend heavily on Fannie Mae and Freddie Mac to finance growth by purchasing or guarantying apartment loans and to refinance outstanding indebtedness as it matures. In February 2011, the Obama Administration released a report to Congress which included options, among others, to gradually shrink and eventually shut down Fannie Mae and Freddie Mac. In August 2012, the U.S. Treasury modified its investment in Fannie Mae and Freddie Mac to accelerate the reduction of Fannie Mae’s and Freddie Mac’s investment portfolio and to require a sweep of all quarterly profits generated by Fannie Mae and Freddie Mac.

 

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In March 2013, proposed legislation was introduced in the U.S. Senate to sell the assets of Fannie Mae and Freddie Mac over the next five years and to replace the firms’ roles in the housing market with government bond insurance. If this or similar legislation is enacted, the absence of Fannie Mae and Freddie Mac may restrict financing for the multifamily residential real estate sector and, therefore, may adversely affect our business.

 

We do not know when or if Fannie Mae or Freddie Mac will further restrict their support of lending to the multifamily industry or to us in particular. If new U.S. government regulations (i) heighten Fannie Mae’s and Freddie Mac’s underwriting standards, (ii) adversely affect interest rates and (iii) continue to reduce the amount of capital they can make available to the multifamily sector, it could reduce or remove entirely a vital resource for multifamily financing. Any potential reduction in loans, guarantees and credit-enhancement arrangements from Fannie Mae and Freddie Mac could jeopardize the effectiveness of the multifamily sector’s available financing and decrease the amount of available liquidity and credit that could be used to acquire and diversify our portfolio of multifamily assets, as well as dispose of our multifamily assets upon our liquidation, and our ability to refinance our existing mortgage obligations as they come due and obtain additional long-term financing for the acquisition of additional multifamily apartment communities on favorable terms or at all.

 

If we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs, which may adversely affect our ability to make distributions to our stockholders.

 

As of December 31, 2014, the average age of our apartment communities was approximately 11 years, not accounting for renovations. While the majority of our properties are newly-constructed or have undergone substantial renovations by prior owners since they were constructed, older properties may carry certain risks including unanticipated repair costs associated with older properties, increased maintenance costs as older properties continue to age, and cost overruns due to the need for special materials and/or fixtures specific to older properties. Although we take a proactive approach to property preservation, utilizing a preventative maintenance plan, and selective improvements that mitigate the cost impact of maintaining exterior building features and aging building components, if we are not able to cost-effectively maximize the life of our properties, we may incur greater than anticipated capital expenditure costs which may adversely affect our ability to make distributions to our stockholders.

 

Management turnover creates uncertainties and could harm our business.

 

We had significant changes in executive leadership during 2014, as described under “Item 1 – Business – Recent Significant Developments – Management/Director Changes.” As a result of the recent changes in our management team, we currently have only two members of senior management, comprised of Messrs. Ross and Eberline, our Chief Executive Officer and Chief Accounting Officer, respectively. Messrs. Ross and Eberline have taken on substantially more responsibility for the management of our business, which has resulted in greater workload demands that could divert their attention away from certain key areas of our business. For instance, Mr. Ross has taken on the duties and responsibilities previously performed by our Chief Investment Officer in addition to his role as the Company’s Chief Executive Officer. Furthermore, in light of the Board of Directors’ ongoing review of strategic alternatives, Mr. Ross is devoting more time to strategic initiatives than might otherwise be the case.

 

Changes to strategic or operating goals, which can often times occur with the appointment of new executives, can create uncertainty, may negatively impact our ability to execute quickly and effectively, and may ultimately be unsuccessful. In addition, executive leadership transition periods are often difficult as the new executives gain detailed knowledge of our operations, and friction can result from changes in strategy and management style. Management turnover inherently causes some loss of institutional knowledge, which can negatively affect strategy and execution. Until we integrate new personnel, and unless they are able to succeed in their positions, we may be unable to successfully manage and grow our business, and our financial condition and profitability may suffer. Further, to the extent we experience additional management turnover, competition for top management is high and it may take months to find a candidate that meets our requirements. If we are unable to attract and retain qualified management personnel, our business could suffer.

 

Because we are a relatively small company, the requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, and the requirements of the Sarbanes-Oxley Act of 2002, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

 

As a public company with equity securities listed on a national exchange, we are required to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the SEC, including compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), and the requirements of the NASDAQ Stock Market (“NASDAQ”), with which we were not required to comply as a private company. Complying with these statutes, rules, regulations and requirements occupies a significant amount of time of our Board of Directors and management and has significantly increased our costs and expenses. As a result of becoming a public company upon completion of the IPO, we are required, or will be required in the future, to:

 

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  institute a more comprehensive compliance system;
  design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board (the “PCAOB”);
  comply with rules promulgated by NASDAQ;
  prepare and distribute current and periodic public reports in compliance with our obligations under the federal securities laws;
  establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;
  involve and retain to a greater degree outside counsel and accountants to accomplish the above activities; and
  establish an investor relations system.

 

If our profitability is adversely affected because of these additional costs, it could have a negative effect on the trading price of our common stock.

 

As we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies and the reduced disclosure requirements may make our common stock less attractive to investors.

 

In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”). The JOBS Act contains provisions that, among other things, relax certain reporting requirements for “emerging growth companies,” including certain requirements relating to accounting standards and compensation disclosure. We are classified as an emerging growth company. For as long as we are an emerging growth company unlike other public companies, we will not be required to:

 

  provide an auditor’s attestation report on the effectiveness of our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;
  comply with any new or revised financial accounting standards applicable to public companies until such standards are also applicable to private companies;
  comply with any new requirements adopted by the PCAOB, requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;
  comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise;
  provide certain disclosure regarding executive compensation required of larger public companies; or
  hold stockholder advisory votes on executive compensation matters, such as “say on pay” and “say on frequency.”

 

If investors find our common stock less attractive as a result of our reliance on certain of the JOBS Act exemptions, there may be a less active trading market for our common stock, and our stock price may be more volatile.

 

Also, as our business grows, we may no longer satisfy the conditions of an emerging growth company. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We will be deemed a large accelerated filer on the first day of the fiscal year after the market value of our common equity held by non-affiliates exceeds $700 million, measured on June 30.

 

If we fail to satisfy certain obligations under the Stockholders Agreement by April 16, 2015, we will be subject to certain penalties.

 

Pursuant to the Stockholders Agreement, we were required to file and cause the Resale Registration Statement to be declared effective by the SEC no later than January 16, 2015, the first anniversary of the closing of our Rights Offering. In December 2014, Senator agreed to defer the Company’s obligation to file and cause the Resale Registration Statement to be declared effective until April 16, 2015. If the Resale Registration Statement is not declared effective by April 16, 2015, we will be required to pay Senator a fee, payable in additional shares of our common stock (the “Additional Shares”), equal to 0.5% of the aggregate purchase price paid by Senator under the Standby Purchase Agreement for each full 30 calendar days (prorated for periods totaling less than 30 calendar days) thereafter until the Resale Registration Statement is declared effective, divided by the average of the volume-weighted average prices of our common stock over the 10 trading days prior to the issuance of such shares. In the event we fail to issue the Additional Shares in a timely manner, the Additional Shares issued to Senator will increase by 1.5% per month or portion thereof. As a result, if we are unable to have the Resale Registration Statement declared effective prior to April 16, 2015, we could be required to issue additional shares of common stock to Senator, which would increase Senator’s ownership in our company and further dilute the interests of our existing stockholders.

 

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Our exploration of strategic alternatives may adversely affect us.

 

On November 3, 2014, we announced that our Board of Directors had determined to undertake a review of strategic alternatives to enhance stockholder value, including, among other alternatives, a possible sale, merger, acquisition or other form of business combination, the sale or acquisition of assets, or a debt or equity recapitalization. We cannot assure you that the exploration of strategic alternatives will result in the completion of any transaction or other alternative. There are various risks and uncertainties related to our strategic alternatives review process, including:

 

·the process may disrupt operations and distract management;
·we may not be able to successfully achieve the benefits of any strategic alternative undertaken by us;
·the process may be time consuming and expensive and may result in the loss of business opportunities;
·regardless of whether the current process results in any transaction, we may be subject to a related proxy contest and/or stockholder litigation;
·perceived uncertainties as to our future direction may result in increased difficulties, including difficulties in: (1) recruiting and retaining employees, particularly senior management, (2) entering into deals with potential joint venture partners, (3) securing new loans or refinancing existing loans and (4) entering into new leases or renewing existing leases; and
·the trading price of our common stock may be highly volatile during the process, including following any further public announcements regarding the process.

 

The failure to maintain effective internal control over financial reporting in accordance with Section 404(a) of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

 

We are required to maintain internal control over financial reporting in a manner that meets the standards of publicly traded companies as promulgated under Section 404(a) of the Sarbanes-Oxley Act (“Section 404(a)”). As such, we completed the necessary evaluative procedures during the year ended December 31, 2014 and issued our annual report on internal control over financial reporting, which can be found in Item 9A of Part II of this Annual Report. Additionally, once we are no longer an emerging growth company, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting on an annual basis. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and, if necessary, remediation.

 

Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. During the year ended December 31, 2014, we reviewed, documented and tested our internal control over financial reporting based on the requirements of Section 404(a) and interpretive guidance thereunder. In the future, we may encounter problems or delays when implementing any changes necessary to make a favorable assessment of our internal control over financial reporting. Additionally, we may encounter problems or delays in completing the implementation of any required improvements and receiving a favorable attestation report in connection with the attestation provided by our independent registered public accounting firm. If we cannot favorably assess the effectiveness of our internal control over financial reporting in the future or if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our reported financial information and the price of our common stock could decline.

 

Moreover, the existence of a material weakness or significant deficiency would require management to devote considerable time and incur significant costs to remediate any such matter. Moreover, management may not be able to remediate any identified material weakness or significant deficiency in a timely manner. The existence of a material weakness in our internal control over financial reporting could also result in errors in our consolidated financial statements that could require us to restate such financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, each of which could materially and adversely affect us.

 

We depend on key personnel and the loss of their full service could adversely affect us.

 

Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, Messrs. Ross and Eberline, whose continued service is not guaranteed, and each of whom would be difficult to replace. We have entered into employment agreements with Messrs. Ross and Eberline; however, they may nevertheless cease to provide services to us at any time without penalty. If any of our key personnel were to cease employment with us, our operating results could suffer. Furthermore, as a result of the uncertainty created by the Board of Director’s decision to assess strategic alternatives, we may experience greater difficultly recruiting and retaining employees, including members of senior management.

 

Our ability to retain members of our management team or to attract suitable replacements should any members of our management team leave is dependent on the competitive nature of the employment market. The loss of services from key personnel in our management team or a limitation in their availability to provide their full service to us could adversely impact our financial condition and cash flows. Further, such a loss could be negatively perceived in the capital markets.

 

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We also believe that, as we expand, our future success depends, in large part, upon our ability to hire and retain highly skilled managerial, investment, financing, operational and marketing personnel. Competition for such personnel may be intense, and we cannot provide any assurance that we will be successful in attracting and retaining such skilled personnel.

 

Our growth will depend upon future acquisitions of multifamily apartment communities, and we may be unable to complete acquisitions on advantageous terms or acquisitions may not perform as we expect.

 

Our growth will depend upon future acquisitions of multifamily apartment communities, which entails various risks, including risks that our investments may not perform as we expect. Further, we will face competition for attractive investment opportunities from other real estate investors, including local real estate investors and developers, as well as other multifamily REITs, income-oriented non-traded REITs, and private real estate fund managers, and these competitors may have greater financial resources than us and a greater ability to borrow funds to acquire properties. This competition will increase as investments in real estate become increasingly attractive relative to other forms of investment. As a result of competition, we may be unable to acquire additional properties as we desire or the purchase price may be significantly elevated. In addition, our acquisition activities pose the following risks to our ongoing operations:

 

  we may not achieve the increased occupancy, cost savings and operational efficiencies projected at the time of acquiring a property;
  management may incur significant costs and expend significant resources evaluating and negotiating potential acquisitions, including those that we subsequently are unable to complete;
  we may acquire properties that are not initially accretive to our results upon acquisition, and we may not successfully manage and operate those properties to meet our expectations;
  we may acquire properties outside of our existing markets where we are less familiar with local economic and market conditions;
  some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of the acquisition;
  we may be unable to assume mortgage indebtedness with respect to properties we seek to acquire or obtain financing for acquisitions on favorable terms or at all;
  we may forfeit earnest money deposits with respect to acquisitions we are unable to complete due to lack of financing, failure to satisfy closing conditions or certain other reasons;  
  we may spend more than budgeted to make necessary improvements or renovations to acquired properties; and  
  we may acquire properties without any recourse, or with only limited recourse, for liabilities, whether known or unknown, such as clean-up of environmental contamination, claims by tenants, vendors or other persons against the former owners of the properties, and claims for indemnification by general partners, trustees, officers, and others indemnified by the former owners of the properties.  

 

Our growth depends on securing external sources of capital that are outside of our control, which may affect our ability to take advantage of strategic opportunities, satisfy debt obligations and make distributions to our stockholders.

 

In order to maintain our qualification as a REIT, we are generally required under the Code to distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we may rely on third-party sources to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted. Our access to third-party sources of capital depends, in part, on:

 

  general market conditions;
  the market’s perception of our growth potential;
  our current debt levels;
  our current and expected future earnings;
  our cash flow and cash distributions; and
  the market price per share of our common stock.

 

If we cannot obtain capital from third-party sources, we may not be able to acquire properties when strategic opportunities exist, meet the capital and operating needs of our existing properties or satisfy our debt service obligations. Further, in order to meet the REIT distribution requirements and maintain our REIT status and to avoid the payment of income and excise taxes, we may need to borrow funds on a short-term basis even if the then-prevailing market conditions are not favorable for these borrowings. These short-term borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for U.S. federal income tax purposes or the effect of non-deductible capital expenditures, the creation of reserves, certain restrictions on distributions under loan documents or required debt or amortization payments.

 

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To the extent that capital is not available to acquire properties, profits may not be realized or their realization may be delayed, which could result in an earnings stream that is less predictable than some of our competitors and result in us not meeting our projected earnings and distributable cash flow levels in a particular reporting period. Failure to meet our projected earnings and distributable cash flow levels in a particular reporting period could have an adverse effect on our financial condition and on the market price of our common stock.

 

We may increase our debt or raise additional capital in the future, which could adversely affect our financial condition and growth prospects.

 

To execute our business strategy, we will require additional capital. Debt or equity financing, however, may not be available to us on terms acceptable to us, if at all. If we incur additional debt or raise equity through the issuance of preferred stock, the terms of the debt or preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of any new debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional common equity, either through public or private offerings or rights offerings, the percentage ownership of our stockholders would decline. If we are unable to raise additional capital when needed, it could affect our financial condition and growth prospects.

 

Increased competition and increased affordability of residential homes could limit our ability to retain our residents, lease apartment units or increase or maintain rents.

 

Our apartment communities compete with numerous housing alternatives in attracting residents, including other multifamily apartment communities and single-family rental homes, as well as owner-occupied single-family and multifamily homes. Competitive housing in a particular area and an increase in the affordability of owner-occupied single-family and multifamily homes due to, among other things, declining housing prices, mortgage interest rates and tax incentives and government programs to promote home ownership, could adversely affect our ability to retain residents, lease apartment units and increase or maintain rents. As a result, our financial condition, results of operations and cash flows could be adversely affected.

 

We also compete with other major real estate investors with significant capital for attractive investment opportunities. These competitors include REITs, investment banking firms and private institutional investors.

 

Our ability to realize our strategies and capitalize on our competitive strengths are dependent on our ability to effectively operate our portfolio, maintain good relationships with our tenants, and remain well-capitalized, and our failure to do any of the foregoing could affect our ability to compete effectively in the markets in which we operate.

 

We may be subject to contingent or unknown liabilities related to properties or business that we have acquired or may acquire for which we may have limited or no recourse against the sellers.

 

The properties or businesses that we have acquired or may acquire, including our Operating Properties and the Land Investment, may be subject to unknown or contingent liabilities for which we have limited or no recourse against the sellers. Unknown liabilities might include liabilities for, among other things, cleanup or remediation of undisclosed environmental conditions, liabilities under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, claims of residents, vendors or other persons dealing with the entities prior to the acquisition of such property, tax liabilities, and accrued but unpaid liabilities whether incurred in the ordinary course of business or otherwise. Because many liabilities, including tax liabilities, may not be identified within the applicable contractual indemnification period, we may have no recourse against any of the owners from whom we acquire such properties for these liabilities. The existence of such liabilities could significantly adversely affect the value of the property subject to such liability. As a result, if a liability were asserted against us based on ownership of any of such properties, then we might have to pay substantial sums to settle it, which could adversely affect our cash flows.

 

The cash available for distribution to our stockholders may not be sufficient to pay distributions at expected levels, and we cannot provide any assurance of our ability to make or increase distributions in the future.

 

As a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, our actual and projected financial condition, results of operations, cash flows, liquidity and funds from operations, or FFO, maintenance of our REIT qualification and other factors as our Board of Directors may deem relevant from time to time. Any excess of dividends declared by our Board of Directors over our cash available for distribution will be required to be funded by borrowings under our revolving credit facilities to the extent we have available borrowing capacity, from proceeds of equity offerings or from other sources of available cash. If we borrow on our revolving credit facilities or use net proceeds equity offerings to pay dividends, we will have less funding for our acquisitions, which could adversely affect our ability to implement our growth strategy and our operating results and the market trading price of our common stock could be negatively impacted.

 

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We may not generate enough cash flow to pay dividends for the increased number of outstanding shares of common stock resulting from the issuance of additional common stock pursuant to future equity offerings. As a result, we may not be able to make or increase distributions in the future and we may as we have done in the past decide to reduce our quarterly distribution in the future. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for a description of our distribution policy.

 

In addition, we may choose to retain operating cash flow for investment purposes, working capital reserves or other purposes, and these retained funds, although increasing the value of our underlying assets, may not correspondingly increase the market price of our common stock. Our failure to meet the market’s expectations with regard to future cash distributions likely would adversely affect the market price of our common stock.

 

To the extent that our distributions represent a return of capital for tax purposes, stockholders could recognize an increased gain or a reduced loss upon subsequent sales of common stock.

 

Distributions in excess of our current and accumulated earnings and profits and not treated by us as a capital gain dividend will not be taxable to a U.S. stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in its common stock but instead will constitute a return of capital and will reduce the stockholder’s adjusted tax basis in its common stock. If distributions result in a reduction of a stockholder’s adjusted basis in such holder’s common stock, subsequent sales of such holder’s common stock potentially will result in recognition of an increased gain or reduced loss due to the reduction in such adjusted basis.

 

We face risks associated with land holdings.

 

We hold one Land Investment that is held for sale and may in the future acquire additional land holdings. The risks inherent in purchasing and owning land increase as demand for apartments, and/or rental rates, decrease. Real estate markets are highly uncertain and, as a result, the value of undeveloped land has fluctuated significantly and may continue to fluctuate. In addition, carrying costs can be significant and can result in losses or reduced profitability. As a result, we hold this Land Investment, at a cost we may not be able to fully recover. If there are subsequent changes in the fair value of our land holdings which we determine is less than the carrying basis reflected in our financial statements plus estimated costs to sell, we may be required to take future impairment charges which would reduce our net income and negatively impact the per share trading price of our common stock.

 

Our participation in joint ventures would create additional risks as compared to direct real estate investments, and the actions of our joint venture partners could adversely affect our operations or performance.

 

We may purchase properties jointly with other entities, including limited partnerships and limited liability companies, some of which may be unaffiliated with us. There are additional risks involved in these types of transactions as compared to other types of real estate investments, including, but not limited to, the risks that:

 

  our joint venture partner in an investment might become bankrupt, which would mean that we and any other remaining joint venture partners would bear an unexpectedly large portion of the economic responsibilities associated with the joint venture;
  our joint venture partner may at any time have economic or business interests or goals that are or which become inconsistent with our business interests or goals;
  our joint venture partner may take action contrary to our instructions, our policies or our objectives, including our policy with respect to maintaining our qualification as a REIT;
  joint venture agreements may restrict our ability to transfer our joint venture interest when we desire or on advantageous terms;
  our joint venture partner may exercise buy-sell, put-call and other similar liquidity mechanisms that could require us to fund additional capital to buy out our joint venture partner’s interests or sell our interest to our joint venture partner at a price that we would consider to be less than optimal; and
  we may in certain circumstances be liable for the actions of our joint venture partners.

 

Such investments could also have the potential risk of impasses on decisions, such as a sale, because, in certain situations, neither we nor our joint venture partner may have full control over the partnership or joint venture. Disputes between us and our joint venture partner may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with joint venture partners might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may owe a fiduciary obligation to our partner in a joint venture transaction, which may make it more difficult to enforce our rights. We generally will seek to maintain sufficient control of our joint venture partnerships to permit us to achieve our business objectives; however, we may not be able to do so. Any of the above risks could adversely affect our financial condition, results of operations, cash flows, ability to pay distributions, and the market price of our shares of common stock.

 

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Failure to succeed in new markets may have adverse consequences on our performance.

 

We may make acquisitions outside of our existing market areas if appropriate opportunities arise. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to accurately evaluate local market conditions, to identify appropriate acquisition opportunities, to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures. In addition, we may abandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.

 

We may become subject to litigation or threatened litigation, which may divert management time and attention, require us to pay damages and expenses or restrict the operation of our business.

 

We may become subject to litigation as a result of our recapitalization if prior investors dispute the valuation of their respective interests, the adequacy of the consideration received by them in the recapitalization or the interpretation of the agreements implementing the recapitalization. In addition, regardless of whether our current review of strategic alternatives results in any transaction, we may be subject to a related proxy contest and/or stockholder litigation. Any litigation could detract from management’s ability to operate our business or affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured, and/or adversely impact our ability to attract officers and directors.

 

Uninsured losses or losses in excess of insurance coverage could adversely affect our financial condition.

 

We carry comprehensive general liability and property (including fire, extended coverage and rental loss) insurance covering all of the properties in our portfolio under a blanket insurance policy. We consider the policy specifications and insured limits to be in line with coverage customarily obtained by owners of similar properties and appropriate given the relative risk of loss and the cost of the coverage. However, our insurance coverage may not be sufficient to fully cover all of our losses. There are certain types of losses, such as lease and other contract claims, acts of war or terrorism, acts of God, and in some cases, earthquakes, hurricanes and flooding that generally are not insured because such coverage is not available or it is not available at commercially reasonable rates. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future, as the costs associated with property and casualty renewals may be higher than anticipated.

 

Underlying demographic characteristics and trends in our markets, which we expect will increase demand for apartments, may not result in higher rental rates and reduced vacancies.

 

Over the long term, we believe strong underlying demographic characteristics and trends in our markets as described in this Annual Report under the section “Item 1. Business – Our Business, Objectives and Strategies” will increase demand for our apartment units resulting in higher rental rates and reduced vacancies. In the event that this is not the case, our ability to realize our growth strategies could be adversely affected.

 

Short-term leases expose us to the effects of declining market conditions.

 

Substantially all of the leases for our properties are short-term leases (generally, one year or less in duration). Our residents can leave after the end of their lease term without any penalty. As a result, our rental revenues may be impacted by declines in market conditions more quickly than if our leases were for longer terms. Moreover, high turnover in our resident base due to short term leases could result in higher turnover expense, which could adversely affect our results of operations and cash available for distribution.

 

Inflation or deflation may adversely affect our financial condition and results of operations.

 

Increased inflation could have an adverse impact on our general and administrative expenses, as these costs could increase at a rate higher than our rental revenue. In addition, if we incur variable rate debt in the future, inflation could have a negative impact on our mortgage and debt interest. Conversely, deflation could lead to downward pressure on rents and other sources of income.

 

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Breaches of our data security could materially harm our business and reputation.

 

We collect and retain certain personal information provided by our tenants and employees. While we have implemented a variety of security measures to protect the confidentiality of this information and periodically review and improve our security measures, there can be no assurance that we will be able to prevent unauthorized access to this information. Any breach of our data security measures and loss of this information may result in legal liability and costs (including damages and penalties), as well as damage to our reputation, that could materially and adversely affect our business and financial performance.

 

Risks Related to Our Organization and Structure

 

As the parent of the sole general partner of our Operating Partnership, we have fiduciary duties which may result in conflicts of interest in representing the interests of our stockholders.

 

Conflicts of interest could arise in the future as a result of the relationship between us, on one hand, and our Operating Partnership or any partner thereof, on the other, as the sole general partner of our Operating Partnership is our wholly-owned subsidiary, Trade Street OP GP, LLC. The general partner has fiduciary duties to the other limited partners in our Operating Partnership under Delaware law. At the same time, our directors and officers have duties to our Company under Maryland law in connection with their management of our Company. Our duties as the parent of the sole general partner of our Operating Partnership may come in conflict with the duties of our directors and officers to our Company.

 

Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

 

Our Articles of Restatement (our “Charter”), subject to certain exceptions, authorizes our Board of Directors to take such actions as are necessary and desirable to limit any person to beneficial or constructive ownership of no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or the outstanding shares of our common stock. Our Board of Directors, in its sole discretion, may exempt (prospectively or retroactively) a proposed transferee from the ownership limit. For instance, in connection with our Rights Offering, we granted Senator a waiver of our ownership limits.

 

Our Board of Directors may not grant an exemption from the ownership limit to any proposed transferee whose ownership of more than 9.8% of the value or number of the outstanding shares of our capital stock or the outstanding shares of our common stock could jeopardize our status as a REIT. The ownership limit contained in our Charter and the restrictions on ownership of our stock may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

 

Our Board of Directors may create and issue additional classes or series of preferred stock without stockholder approval.

 

Our Board of Directors is empowered under our Charter to amend our Charter from time to time to increase or decrease the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have authority to issue, to designate and issue from time to time one or more classes or series of preferred stock and to classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of stock without stockholder approval. Our Board of Directors may determine the preferences conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms and conditions of redemption of any class or series of preferred stock issued. As a result, we may issue preferred stock with preferences, distributions, powers and rights, voting or otherwise, senior to the rights of holders of our common stock. The issuance of preferred stock could also substantially impede the ability of stockholders to benefit from a change in control or change our management and Board of Directors and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium

 

Certain provisions in the partnership agreement of our Operating Partnership may delay or prevent unsolicited acquisitions of us.

 

Provisions in the partnership agreement of our Operating Partnership may delay or make more difficult unsolicited acquisitions of us or changes in our control. These provisions could discourage third parties from making proposals involving an unsolicited acquisition of us or change of our control, although some stockholders might consider such proposals, if made, desirable. These provisions include, among others:

 

  redemption rights of qualifying parties;
  transfer restrictions on our Operating Partnership units;
  the ability of the general partner in some cases to amend the partnership agreement without the consent of the limited partners; and
  the right of the limited partners to consent to transfers of the general partnership interest and mergers under specified circumstances.

 

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Certain provisions of Maryland law could inhibit changes in control.

 

Certain provisions of the Maryland General Corporation Law, (the “MGCL”), may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

 

  “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter impose special appraisal rights and supermajority stockholder voting requirements on these combinations; and
  “control share” provisions that provide that “control shares” of our Company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

 

We have elected to opt out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our Board of Directors and provided that the business combination is first approved by our Board of Directors (including a majority of disinterested directors), and in the case of the control share provisions of the MGCL, pursuant to a provision in our Third Amended and Restated Bylaws (our “Bylaws”). Our Board of Directors may by resolution elect to repeal the foregoing opt-outs from the business combination provisions of the MGCL and we may by amendment to our Bylaws opt in to the control share provisions of the MGCL in the future.

 

Additionally, Title 8, Subtitle 3 of the MGCL permits a Maryland corporation with a class of equity securities registered under Section 12 of the Exchange Act and at least three independent directors, without stockholder approval and regardless of what is currently provided in its charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not currently have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our Company or of delaying, deferring or preventing a change in control of our Company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.

 

Our Board of Directors can take many actions without stockholder approval.

 

Our Board of Directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility. For example, our Board of Directors can take the following actions without stockholder approval:

     
  amend or revise at any time and from time to time our investment, financing, borrowing and distribution policies and our policies with respect to all other activities, including growth, debt, capitalization and operations;
  amend our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements;
  within the limits provided in our Charter, prevent the ownership, transfer and/or accumulation of shares in order to preserve our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;
  issue additional shares, which could dilute the ownership of our then-current stockholders;
  amend our Charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series;
  classify or reclassify any unissued shares of our common stock or preferred stock into other classes or series of shares and set the preferences, rights and other terms of such classified or reclassified shares;
  employ and compensate affiliates;
  direct our resources toward investments that fail to ultimately appreciate over time;
  offer purchase money financing in connection with the sale of properties or make loans to joint-development projects in which we may participate in the future; and
  determine that it is no longer in our best interests to maintain our qualification as a REIT.

 

Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholder, the right to vote.

 

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Our rights and the rights of our stockholders to take action against our directors and officers are limited under Maryland law.

 

Maryland law provides that a director or officer has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, our Charter eliminates our directors’ and officers’ liability to us and our stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and which is material to the cause of action. Our Bylaws require us to indemnify our directors and officers to the maximum extent permitted by Maryland law for liability actually incurred in connection with any proceeding to which they may be made, or threatened to be made, a party, except to the extent that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was either committed in bad faith or was the result of active and deliberate dishonesty, the director or officer actually received an improper personal benefit in money, property or services, or, in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. Finally, we have entered into agreements with our directors and officers pursuant to which we have agreed to indemnify them to the maximum extent permitted by Maryland law.

 

Because of our UPREIT structure, we depend on our Operating Partnership and its subsidiaries for cash flow and we will be structurally subordinated in right of payment to the obligations of such Operating Partnership and its subsidiaries.

 

We are an umbrella partnership REIT (“UPREIT”) and conduct substantially all of our operations through our Operating Partnership. We do not have, apart from our ownership of our Operating Partnership, any independent operations. As a result, we rely on distributions from our Operating Partnership to pay any distributions to stockholders that we may declare on our common stock. We also rely on distributions from our Operating Partnership to meet our debt service and other obligations, including our obligations to make distributions required to maintain our REIT qualification. The ability of subsidiaries of our Operating Partnership to make distributions to the Operating Partnership, and the ability of our Operating Partnership to make distributions to us in turn, will depend on their operating results and on the terms of any loans that encumber the properties owned by them. Such loans may contain lockbox arrangements, reserve requirements, financial covenants and other provisions that restrict the distribution of funds. In the event of a default under these loans, the defaulting subsidiary would be prohibited from distributing cash. As a result, a default under any of these loans by the borrower subsidiaries could cause us to have insufficient cash to make distributions on our common stock required to maintain our REIT qualification. In addition, because we are a holding company, claims of our stockholders will be structurally subordinated to all existing and future liabilities and obligations of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy claims of our stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.

 

Our Operating Partnership may issue additional common units to third parties without the consent of our stockholders, which would reduce our ownership percentage in our Operating Partnership and would have a dilutive effect on the amount of distributions made to us by our Operating Partnership and, consequently, the amount of distributions we can make to our stockholders.

 

We may, in connection with our acquisition of properties or otherwise, issue additional common units to third parties. Such issuances would reduce our ownership percentage in our Operating Partnership and affect the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Our stockholders who do not directly own common units, you will not have any voting rights with respect to any such issuances or other partnership level activities of our Operating Partnership.

 

Investment entities managed or advised by Senator Investment Group LP and Monarch LLP are significant stockholders and may have conflicts of interest with us in the future.

 

As of the date of this Annual Report, investment entities managed or advised by Senator and Monarch LLP (“Monarch”) owned approximately 25.4% and 23.0%, respectively, of our issued and outstanding common stock. As a result, Senator and Monarch are our largest stockholders, while no other stockholder is permitted to own more than 9.8% of our common stock, except as approved by our Board of Directors pursuant to the terms of our Charter. In addition, in connection with our Rights Offering, we entered into a Stockholders Agreement (the “Stockholders Agreement”) with Senator which grants certain rights to Senator. See “—The Stockholders Agreement grants Senator certain rights that may restrain our ability to take various actions in the future” below.

 

This concentration of ownership in two stockholders could potentially be disadvantageous to other stockholders’ interests. In addition, if Senator or Monarch were to sell or otherwise transfer all or a large percentage of their holdings, our stock price could decline and we could find it difficult to raise capital, if needed, through the sale of additional equity securities. For example, pursuant to the Stockholders Agreement, subject to certain limitations, we have agreed to file a registration statement covering the resale of the shares of our common stock issued to Senator pursuant to the Standby Purchase Agreement (the “Resale Registration Statement”). Once the Resale Registration Statement is declared effective (or earlier to the extent Senator is eligible to sell shares of our common stock in accordance with Rule 144), Senator could sell, or otherwise transfer, a large percentage of its holdings, which could cause our stock price to decline significantly. In addition, even the perception that Senator could sell a large percentage of its shares, even if it does not intend to do so, could adversely affect the price of our common stock. In addition, if we file a registration statement for the purpose of selling additional shares to raise equity capital and are required to include shares held by Senator pursuant to the exercise of its rights under the Stockholders Agreement, our ability to raise capital may be materially impaired.

 

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In addition, Senator and Monarch may exercise their rights as stockholders so as to restrict our ability to take certain actions that may otherwise be in the best interests of our stockholders. Moreover, there can be no assurance that the interests of Senator or Monarch will be aligned with those of our other stockholders. The interests of Senator or Monarch may differ from the interests of our other stockholders in material respects. For example, Senator or Monarch may have an interest in directly or indirectly pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their other equity investments, even though such transactions might involve risks to us. Senator and Monarch are in the business of making or advising on investments in companies and may from time to time in the future acquire interests in, or provide advice to, businesses that directly or indirectly compete with certain portions of our business. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

 

The Stockholders Agreement grants Senator certain rights that may restrain our ability to take various actions in the future.

 

In connection with our Rights Offering, which closed in January 2014, we entered into the Stockholders Agreement pursuant to which we granted Senator certain rights that may restrain our ability to take various actions in the future. Pursuant to the terms of the Stockholders Agreement, Senator has the right to designate a specified number of directors to our Board of Directors for so long as Senator’s level of ownership of our Company is equal to or greater than 4.9% of our outstanding common stock. Specifically, Senator is entitled to designate to our Board of Directors (i) two directors if Senator’s ownership is equal to or greater than 19.9% of our total outstanding common stock and (ii) one director if Senator’s ownership is at least 4.9%, but less than 19.9% of our total outstanding common stock. Senator will have no Board of Directors designation rights if its level of ownership in our Company is less than 4.9%. In addition, Senator’s designated directors serve on all of our standing committees of our Board of Directors, except the Audit Committee, and Michael Simanovsky, one of Senator’s board designees, currently chairs the Compensation Committee of our Board of Directors. If Senator’s beneficial ownership of our outstanding common stock falls below any percentage threshold set forth above, Senator will promptly cause one or more, as applicable, of Senator’s nominated directors to resign from the Board of Directors, such that the remaining number of directors designated by Senator does not exceed the number of directors that Senator is then entitled to designate for nomination or appointment. Following such resignation, the number of directors that Senator is entitled to designate for nomination is forever reduced to such number of directors designated by Senator immediately after such resignation(s), even if Senator subsequently acquires additional shares of our common stock.

 

In addition, Senator also has the right to consent to the following actions for so long as Senator’s level of ownership of our Company is equal to or greater than 4.9% of our outstanding common stock (i) any guarantees of, incurrences or issuance of recourse debt or recourse capital stock redeemable at any time by us or our Operating Partnership, that in any calendar year are in a principal amount or create an obligation of the Company in excess of $50.0 million and any issuance of equity other than our common stock for consideration or value greater than $50.0 million in the aggregate in any calendar year; (ii) any future equity issuance at a price lower than $6.33 per share of common stock, the cash subscription price in our Rights Offering; (iii) entering into or granting any retention agreements, stock options, restricted stock or restricted stock unit awards, stock incentive rights or signing bonuses that, in the aggregate during any calendar year exceeds 10% of our market capitalization or that in the aggregate exceeds $5.0 million in any calendar year (which awards will also be subject to approval of the Compensation Committee of our Board of Directors); (iv) any purchase of shares of our common stock or capital stock from members of our Board of Directors, management or their affiliates (other than deemed repurchases in connection with the surrender of shares to the Company to satisfy any tax withholding in connection with vesting of restricted stock or cashless exercises of stock options); (v) any transaction, including any modification of rights, involving our existing shares of preferred stock or our preferred stockholders; (vi) any amendment to our Charter or Bylaws (whether by merger, consolidation or otherwise) in any manner adverse to Senator; (vii) the hiring or firing of our Chief Executive Officer, Chief Financial Officer, Chief Investment Officer, Chief Operating Officer or President or any similar position; (viii) any acquisition or series of related acquisitions whose purchase price equals or exceeds 50% of our market capitalization immediately prior to the execution of a definitive document for such transaction, and (ix) determination by our Board of Directors that it is no longer in our best interest to qualify as a real estate investment trust.

 

Senator has a liquidity right that could require us to repurchase its shares of common stock, and our failure to repurchase such shares could have adverse consequences to us and our stockholders.

 

Pursuant to the Stockholders Agreement, Senator has a right to seek liquidity with respect to shares of common stock that it owns (the “Liquidity Right”) if, on or after the 3.5-year anniversary of January 16, 2014, the closing of the Rights Offering (the “Liquidity Right Measurement Date”), the closing price of our common stock has not exceeded $10.00 per share (subject to certain adjustments set forth in the Stockholders Agreement) during any consecutive 10 trading day period during the 180 days prior to the Liquidity Right Measurement Date and Senator continues to own 4.9% or greater of our outstanding common stock. If Senator exercises its Liquidity Right, we will have the right of first offer to purchase the shares offered by Senator for the greater of $10.00 per share or an amount equal to a 5.0% discount to the average volume-weighted average prices of our common stock over the 10 trading days immediately prior to the Liquidity Right Measurement Date. If we choose not to, or are unable to, exercise our right to repurchase Senator’s common stock by the six-month anniversary of the Liquidity Right Measurement Date, we will be required to submit to Senator for approval quarterly business plans setting forth all material business activities planned for the ensuing quarter. To the extent that any expenditure or other items relating to the income statement, balance sheet or cash flows set forth in the quarterly business plan for any particular fiscal quarter deviates from the initial quarterly business plan in a manner adverse to the Company by 5.0% or greater, we will be prohibited from making such expenditure or taking any such action, and from adopting such quarterly business plan, unless we receive Senator’s approval, which may be given or withheld in Senator’s sole discretion.

 

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In addition, the Stockholders Agreement contains certain standstill provisions pursuant to which Senator has agreed, until the earlier of four years from January 16, 2014, the date of the closing of our Rights Offering, a change of control or at such time as Senator no longer owns at least 4.9% of our outstanding common stock, not to, among other things:

     
  · acquire, offer or propose to acquire or agree to acquire, beneficial ownership of any voting securities of the Company, other than voting securities acquired (A) as a result of the exercise of any rights or obligations set forth in the Standby Purchase Agreement or the Stockholders Agreement, (B) pursuant to a stock split, stock dividend, recapitalization, reclassification or similar transaction, (C) directly from us, or (D) to maintain their aggregate percentage interest in the our outstanding common stock; provided that Senator shall not be permitted to acquire, offer or propose to acquire or agree to acquire, beneficial ownership of any voting securities to account for the dilutive effect of any issuance of equity securities up to a maximum of the 4,329 shares of common stock authorized for issuance under our 2013 Equity Incentive Plan as of the date hereof;  
  · enter into or agree, offer, propose or seek (whether publicly or otherwise) to enter into, or otherwise be involved in or part of, any acquisition transaction, including a proposed negotiated private sale of its shares of common stock to a single purchaser or a “group” as defined in Section 13(d) of the Exchange Act, merger or other business combination relating to all or part of our or our subsidiaries or any acquisition transaction for all or part of our assets or any of our subsidiaries or any of our respective businesses; provided, however, that negotiated private sales to a single purchaser or a “group” will be permitted if the purchasing party agrees in writing to be bound by the provisions of the standstill;  
  · other than a “solicitation” of a “proxy” (as such terms are defined under Regulation 14A under the Exchange Act, disregarding clause (iv) of Rule 14a-1(1)(2) and including any otherwise exempt solicitation pursuant to Rule 14a-2(b)) seeking approval of the election to our Board of Directors solely with respect to any of Senator’s nominated directors permitted by the terms of the Stockholders Agreement to serve on our Board of Directors, make, or in any way participate in, any such “solicitation” of “proxies” to vote, or seek to advise or influence any person or entity with respect to the voting election of any director to our Board of Directors;  
  · call or seek to call a meeting of our common stockholders or any of our subsidiaries or initiate any stockholder proposal for action by our common stockholders;  
  · deposit any of our securities into a voting trust unless such voting trust is bound by the provisions of the standstill provisions of the Stockholders Agreement, or subject our securities to any agreement or arrangement with respect to the voting of such securities, or other agreement or arrangement having similar effect unless such agreement or arrangement conforms to the provisions of the standstill provisions of the Stockholders Agreement;  
  · seek representation on our Board of Directors or a change in the composition of our Board of Directors or number of directors elected by the holders of our common stock or a change in the number of such directors who represent Senator, other than as expressly permitted pursuant to the Stockholders Agreement; and  
  · bring any action or otherwise act to contest the validity of the standstill provisions of the Stockholders Agreement.  

 

If we have not repurchased Senator’s shares in connection with the Liquidity Right by the six-month anniversary of the Liquidity Right Measurement Date, the standstill provisions will cease to exist and Senator may own shares of common stock in sufficient amounts to elect its own slate of directors and otherwise assume control of our Company. Furthermore, if Senator exercises its Liquidity Right and we do not exercise our right to repurchase Senator’s shares by the six-month anniversary of the Liquidity Right Measurement Date, Senator will have the right to approve our quarterly business plans in its sole discretion, and we may be limited significantly in taking actions that are otherwise in our and our stockholders’ best interests. If we elect to repurchase Senator’s shares, we may not have access to sufficient funds to repurchase the shares and we may need to obtain debt or equity financing, which may not be available to us on acceptable terms or at all. Moreover, if we use cash or other funding sources to repurchase Senator’s shares, we would have less cash or other funding sources available to acquire additional properties or otherwise execute our business strategy, which could have a material adverse effect on our growth prospects and our business.

 

There can be no assurance that the interests of Senator are aligned with those of our other stockholders. Investor interests can differ from each other and from other corporate interests and it is possible that this significant stockholder with a stake in corporate management may have interests that differ from us and those of other stockholders.

 

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Risks Associated with Real Estate

 

We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs.

 

As a real estate company, we are subject to various changes in real estate conditions and any negative trends in such real estate conditions may adversely affect our results of operations through decreased revenues or increased costs. These conditions include:

     
  changes in national, regional and local economic conditions, which may be negatively impacted by concerns about inflation, deflation, government deficits, high unemployment rates, decreased consumer confidence and liquidity concerns, particularly in markets in which we have a high concentration of properties;
  fluctuations in interest rates, which could adversely affect our ability to obtain financing on favorable terms or at all;
  the inability of residents to pay rent;
  the existence and quality of the competition, such as the attractiveness of our properties as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record;
  increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs;
  weather conditions that may increase or decrease energy costs and other weather-related expenses;
  civil unrest, acts of God, including earthquakes, floods, hurricanes and other natural disasters, which may result in uninsured losses, and acts of war or terrorism;
  oversupply of multifamily housing or a reduction in demand for real estate in the markets in which our properties are located;
  a favorable interest rate environment that may result in a significant number of potential residents of our multifamily apartment communities deciding to purchase homes instead of renting;
  changes in, or increased costs of compliance with, laws and/or governmental regulations, including those governing usage, zoning, the environment and taxes; and
  rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.

 

Moreover, other factors may adversely affect our results of operations, including potential liability under environmental and other laws and other unforeseen events, many of which are discussed elsewhere in the following risk factors. Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs.

 

The illiquidity of real estate investments may significantly impede our ability to respond to changes in economic or market conditions, which could adversely affect our results of operations or financial condition.

 

Real estate investments are relatively illiquid generally, and may become even more illiquid during periods of economic downturn. As a result, we may not be able to sell a property or properties quickly or on favorable terms in response to changes in the economy or other conditions when it otherwise may be prudent to do so. This inability to respond quickly to changes in the performance of our properties as a result of an economic or market downturn could adversely affect our results of operations if we cannot sell an unprofitable property. Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity. In addition, as a result of the 100% prohibited transactions tax applicable to REITs, we intend to hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forgo or defer sales of properties that otherwise would be in our best interest. Mortgage financing on a property may also prohibit prepayment and/or impose a prepayment penalty upon the sale of a mortgaged property, which may decrease the proceeds from a sale or refinancing or make the sale or refinancing impractical. Therefore, we may be unable to vary our portfolio promptly in response to economic, market or other conditions, which could adversely affect our results of operations and financial position.

 

We are subject to significant regulations, which could adversely affect our results of operations through increased costs and/or an inability to pursue business opportunities.

 

Local zoning and use laws, environmental statutes and other governmental requirements may restrict or increase the costs of our development, expansion, renovation and reconstruction activities and thus may prevent or delay us from taking advantage of business opportunities. Failure to comply with these requirements could result in the imposition of fines, awards to private litigants of damages against us, substantial litigation costs and substantial costs of remediation or compliance. In addition, we cannot predict what requirements may be enacted in the future or that such requirements will not increase our costs of regulatory compliance or prohibit us from pursuing business opportunities that could be profitable to us, which could adversely affect our results of operations.

 

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The costs of compliance with environmental laws and regulations may adversely affect our income and the cash available for any distributions.

 

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Examples of federal laws include: the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and aboveground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal.

 

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing.

 

Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles govern the presence, maintenance, removal and disposal of certain building materials, including asbestos and lead-based paint. Such hazardous substances could be released into the air and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.

 

In addition, if any property in our portfolio is not properly connected to a water or sewer system, or if the integrity of such systems is breached, microbial matter or other contamination can develop. If this were to occur, we could incur significant remedial costs and we may also be subject to private damage claims and awards, which could be material. If we become subject to claims in this regard, it could materially and adversely affect us.

 

Property values may also be affected by the proximity of such properties to electric transmission lines. Electric transmission lines are one of many sources of electro-magnetic fields, or EMFs, to which people may be exposed. Research completed regarding potential health concerns associated with exposure to EMFs has produced inconclusive results. Notwithstanding the lack of conclusive scientific evidence, some states now regulate the strength of electric and magnetic fields emanating from electric transmission lines and other states have required transmission facilities to measure for levels of EMFs. On occasion, lawsuits have been filed (primarily against electric utilities) that allege personal injuries from exposure to transmission lines and EMFs, as well as from fear of adverse health effects due to such exposure. This fear of adverse health effects from transmission lines may be considered both when property values are determined to obtain financing and in condemnation proceedings. We may not, in certain circumstances, search for electric transmission lines near our properties, but are aware of the potential exposure to damage claims by persons exposed to EMFs.

 

The cost of defending against such claims of liability, of compliance with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.

 

We cannot provide any assurance properties which we acquire will not have any material environmental conditions, liabilities or compliance concerns. Accordingly, we have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of environmental conditions or violations with respect to the properties we own.

 

Costs associated with addressing indoor air quality issues, moisture infiltration and resulting mold remediation may be costly.

 

As a general matter, concern about indoor exposure to mold or other air contaminants has been increasing as such exposure has been alleged to have a variety of adverse effects on health. As a result, there have been a number of lawsuits in our industry against owners and managers of apartment communities relating to indoor air quality, moisture infiltration and resulting mold. Some of our properties may contain microbial matter such as mold and mildew. The terms of our property and general liability policies generally exclude certain mold-related claims. Should an uninsured loss arise against us, we would be required to use our funds to resolve the issue, including litigation costs. We make no assurance that liabilities resulting from indoor air quality, moisture infiltration and the presence of or exposure to mold will not have a future impact on our business, results of operations and financial condition.

 

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As the owner or operator of real property, we could become subject to liability for asbestos-containing building materials in the buildings on our properties.

  

Some of our properties may contain asbestos-containing materials. Environmental laws typically require that owners or operators of buildings with asbestos-containing building materials properly manage and maintain these materials, adequately inform or train those who may come in contact with asbestos and undertake special precautions, including removal or other abatement, in the event that asbestos is disturbed during building renovation or demolition. These laws may impose fines and penalties on building owners or operators for failure to comply with these requirements. In addition, third parties may be entitled to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

 

In addition, many insurance carriers are excluding asbestos-related claims from standard policies, pricing asbestos endorsements at prohibitively high rates or adding significant restrictions to this coverage. Because of our inability to obtain specialized coverage at rates that correspond to the perceived level of risk, we may not obtain insurance for asbestos-related claims. We will continue to evaluate the availability and cost of additional insurance coverage from the insurance market. If we decide in the future to purchase insurance for asbestos, the cost could have a negative impact on our results of operations.

 

Compliance or failure to comply with the Americans with Disabilities Act of 1990 and Fair Housing Amendment Act of 1988 could result in substantial cost.

 

Under the ADA and various state and local laws, all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons. Compliance with these requirements could involve removal of structural barriers from certain disabled persons’ entrances. Other federal, state and local laws may require modifications to or restrict further renovations of our properties with respect to such means of access. The FHAA prohibits discrimination in housing on the basis of race or color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under 18) or handicap (disability) and, in some states, financial capability. Noncompliance with the ADA, the FHAA or related laws or regulations could result in the imposition of fines by government authorities, awards to private litigants of damages against us, substantial litigation costs and the incurrence of additional costs associated with bringing the properties into compliance, any of which could adversely affect our financial condition, results of operations and cash flows. In order to comply with the requirements of the ADA and/or FHAA, we may make one or more corrective actions, including the disposition of one or more properties, possibly on disadvantageous terms. If this happens, we may default on our obligations or violate restrictive covenants, in which case the lenders or mortgagees may accelerate our debt obligations, foreclose on the properties that secure their loans and/or take control of our properties that secure their loans and collect rents and other property income, and our default under any future loan with cross default provisions could result in a default on other indebtedness.

 

If any one of these events were to occur, our financial condition, results of operations, cash flow, per share trading price of our common stock and our ability to satisfy our principal and interest obligations and to make distributions to our stockholders could be adversely affected.

 

Risks Associated with Indebtedness

 

Higher levels of debt or increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders.

 

We expect that we will incur additional indebtedness in the future. Interest we pay reduces our cash available for distributions. In addition, if we incur variable rate debt in the future, increases in interest rates could raise our interest costs, which would reduce our cash flows and our ability to make distributions to our stockholders. If we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected, and we may lose the property securing such indebtedness. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments.

 

Our Board of Directors may change our financing policies without stockholder approval and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

 

Our financing policies are exclusively determined by our Board of Directors. Accordingly, our stockholders do not control these policies. Further, our Charter and Bylaws contain no limitations on the amount or percentage of indebtedness that we may incur. Our Board of Directors could alter the balance between our total outstanding indebtedness and the value of our portfolio or our market capitalization at any time. If we become more leveraged in the future, the resulting increase in debt service requirements could materially and adversely affect us.

 

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Our secured revolving credit facility restricts our ability to engage in some business activities, including our ability to incur additional indebtedness, make capital expenditures and make certain investments, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock.

 

Our secured revolving credit facility contains customary negative covenants and other financial and operating covenants that, among other things:

 

  restrict our ability to incur additional indebtedness;
  restrict our ability to incur additional liens;
  restrict our ability to make certain investments;
  restrict our ability to make distributions under certain circumstances;
  restrict our ability to merge with another company; and
  require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements and maximum leverage ratios.

 

These limitations will restrict our ability to engage in some business activities, which could adversely affect our financial condition, results of operations and cash flow and the trading price of our common stock. In addition, it will constitute an event of default under the credit facilities if we default on any of our indebtedness that equals or exceeds $10.0 million for non-recourse debt or $5.0 million for recourse debt under our Revolver (as defined below), including any indebtedness we have guaranteed. These cross-default provisions may require us to repay or restructure the facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.

 

There is refinancing risk associated with our debt.

 

Certain of our outstanding debt contains, and we may in the future acquire or finance properties with debt containing, limited principal amortization, which would require that the principal be repaid at the maturity of the loan in a so-called “balloon payment.” As of December 31, 2014, the financing arrangements of our outstanding indebtedness could require us to make lump-sum or “balloon” payments of approximately $314.2 million at maturity dates that range from 2017 to 2025. At the maturity of these loans, assuming we do not have sufficient funds to repay the debt, we will need to refinance the debt. If the credit environment is constrained at the time of our debt maturities, we would have a very difficult time refinancing debt. In addition, for certain loans, we locked in our fixed-rate debt at a point in time when we were able to obtain favorable interest rate, principal payments and other terms. When we refinance our debt, prevailing interest rates and other factors may result in paying a greater amount of debt service, which will adversely affect our cash flow, and, consequently, our cash available for distribution to our stockholders. If we are unable to refinance our debt on acceptable terms, we may be forced to choose from a number of unfavorable options, including agreeing to otherwise unfavorable financing terms on one or more of our unencumbered assets, selling one or more properties at disadvantageous terms, including unattractive prices, or defaulting on the mortgage and permitting the lender to foreclose. Any one of these options could have a material adverse effect on our business, financial condition, results of operations and our ability to make distributions to our stockholders.

 

We were required to become a co-guarantor (and, with respect to certain properties, a co-environmental indemnitor) on certain outstanding mortgage indebtedness related to our properties in connection with our 2012 Recapitalization, which, in the event of certain prohibited actions, could trigger partial or full recourse to our Company.

 

In connection with our 2012 Recapitalization, as a condition to closing, we, along with our Operating Partnership, were required to become co-guarantors (and, with respect to certain properties, co-environmental indemnitors) on certain outstanding mortgage indebtedness related to our properties in order to replace, and cause the release of, the Trade Street Funds as the guarantors and indemnitors under the existing guarantees and environmental indemnity agreements, as applicable. Our position as a co-guarantor and co-indemnitor with respect to our properties could result in partial or full recourse liability to us or our Operating Partnership in the event of the occurrence of certain prohibited acts set forth in such agreements.

 

Some of our outstanding mortgage indebtedness contains, and we may in the future acquire or finance properties with, lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.

 

A lock-out provision is a provision that prohibits the prepayment of a loan during a specified period of time. Lock-out provisions may include terms that provide strong financial disincentives for borrowers to prepay their outstanding loan balance and exist in order to protect the yield expectations of lenders. Some of our outstanding mortgage indebtedness is, and we expect that many of our properties will be, subject to lock-out provisions. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties when we may desire to do so. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Lock-out provisions could impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.

 

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If mortgage debt is unavailable at reasonable rates, we may not be able to finance or refinance our properties, which could reduce the amount of cash distributions we can make.

 

If mortgage debt is unavailable at reasonable rates, we may not be able to finance the purchase of properties. In addition, we run the risk of being unable to refinance mortgage debt when the loans come due or of being unable to refinance such debt on favorable terms. If interest rates are higher when we refinance such debt, our income could be reduced. We may be unable to refinance such debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us or could result in the foreclosure of such properties. If any of these events occur, our cash flows would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.

 

Some of our mortgage loans have “due on sale” provisions.

 

Some of our outstanding mortgage indebtedness currently does contain, and we may in the future finance our property acquisitions using financing with, “due-on-sale” and/or “due-on-encumbrance” clauses. Due-on-sale clauses in mortgages allow a mortgage lender to demand full repayment of the mortgage loan if the borrower sells the mortgaged property. Similarly, due-on-encumbrance clauses allow a mortgage lender to demand full repayment if the borrower uses the real estate securing the mortgage loan as security for another loan.

 

These clauses may cause the maturity date of such mortgage loans to be accelerated and such financing to become due. In such event, we may be required to sell our properties on an all-cash basis, to acquire new financing in connection with the sale, or to provide seller financing. It is not our intent to provide seller financing, although it may be necessary or advisable for us to do so in order to facilitate the sale of a property. It is unknown whether the holders of mortgages encumbering our properties will require such acceleration or whether other mortgage financing will be available. Such factors will depend on the mortgage market and on financial and economic conditions existing at the time of such sale or refinancing.

 

Hedging strategies may not be successful in mitigating our risks associated with interest rates.

 

In the future we may use various derivative financial instruments to provide a level of protection against interest rate risks. These instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such agreements are not legally enforceable. In addition, we may be limited in the type and amount of hedging transactions that we may use in the future by our need to satisfy the REIT gross income tests under the Code. In addition, the nature and timing of hedging transactions may influence the effectiveness of our hedging strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. Moreover, hedging strategies involve transaction and other costs. We cannot provide any assurance that any future hedging strategy and the derivatives that we may use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses.

 

Risks Related to Qualification and Operation as a REIT

 

If we fail to maintain our qualification as a REIT, our operations and distributions to stockholders would be adversely impacted.

 

We intend to continue to be organized and to operate so as to maintain our qualification as a REIT under the Code. A REIT generally is not subject to corporate income tax on income it currently distributes to its stockholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations, including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. The determination of various factual matters and circumstances not entirely within our control may affect our ability to maintain our qualification as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws, possibly with retroactive effect, with respect to qualification as a REIT or the federal income tax consequences of such qualification.

 

If we were to fail to maintain our qualification as a REIT in any taxable year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT. As a result, we would face serious tax consequences that would substantially reduce the funds available for distributions to our stockholders because:

 

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  we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income;
  we would be subject to federal income tax at regular corporate rates and could be subject to the federal alternative minimum tax and increased state and local taxes; and
  unless we are entitled to relief under certain statutory provisions under the Code, we could not re-elect REIT status until the fifth calendar year after the year in which we failed to maintain our qualification as a REIT.

 

In addition, if we were to fail to maintain our qualification as a REIT, our cash available for stockholder distributions would be reduced, and we would no longer be required to make distributions. As a result of these factors, our failure to maintain our qualification as a REIT could impair our ability to expand our business and raise capital, force us to borrow additional funds or sell assets to pay corporate tax obligations and adversely affect the value of our common stock.

 

Even if we maintain our qualification as a REIT, we may be subject to other tax liabilities that reduce our cash flows.

 

Even if we qualify for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, taxes on net income from certain “prohibited transactions,” tax on income from certain activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain our qualification as a REIT. Also, our subsidiaries that are taxable REIT subsidiaries will be subject to regular corporate federal, state and local taxes. Any of these taxes would decrease our earnings and our cash available for distributions to stockholders.

 

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments.

 

To maintain our qualification as a REIT for U.S. federal income tax purposes, we must continually satisfy requirements concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.

 

In particular, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investments in securities (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of taxable REIT subsidiaries and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by the securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. In addition, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. As a result, we may be required to liquidate otherwise attractive investments, and may be unable to pursue investments that would otherwise be advantageous to us in order to satisfy the source-of-income or asset diversification requirements. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. Thus, compliance with the REIT requirements may hinder our ability to acquire, and, in certain cases, maintain ownership of certain attractive investments.

 

We may need to incur additional borrowings or issue additional securities to meet the REIT minimum distribution requirement and to avoid excise tax.

 

In order to maintain our qualification as a REIT, we are required to distribute to our stockholders at least 90% of our annual real estate investment trust taxable income (excluding any net capital gain and before application of the dividends paid deduction). To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of (i) 85% of our ordinary income for that year, (ii) 95% of our capital gain net income for that year and (iii) 100% of our undistributed taxable income from prior years. Although we intend to pay dividends to our stockholders in a manner that allows us to meet the 90% distribution requirement and avoid this 4% excise tax, we cannot provide any assurance that we will always be able to do so.

 

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The prohibited transactions tax may limit our ability to dispose of our properties.

 

A REIT’s taxable income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although the Code provides a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction, we cannot provide any assurance that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of our properties or may conduct such sales through a taxable REIT subsidiary.

 

We may make distributions consisting of both stock and cash, in which case stockholders may be required to pay income taxes in excess of the cash distributions they receive.

 

We may make distributions that are paid in cash and stock at the election of each stockholder and may distribute other forms of taxable stock dividends. Taxable stockholders receiving such distributions will be required to include the full amount of the distributions as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such distributions in excess of the cash received. If a stockholder sells the stock that it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, in the case of certain non-U.S. stockholders, we may be required to withhold federal income tax with respect to taxable dividends, including taxable dividends that are paid in stock. In addition, if a significant number of our stockholders decide to sell their shares in order to pay taxes owed with respect to taxable stock dividends, it may put downward pressure on the trading price of our stock.

 

Our ownership of taxable REIT subsidiaries will be subject to limitations, and our transactions with taxable REIT subsidiaries will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

 

Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. In addition, the Code limits the deductibility of interest paid or accrued by a taxable REIT subsidiary to its parent REIT to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis. We intend to monitor the value of our investment in our taxable REIT subsidiaries for the purpose of ensuring compliance with taxable REIT subsidiary ownership limitations and intend to structure our transactions with our taxable REIT subsidiary on terms that we believe are arm’s-length to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% taxable REIT subsidiary securities limitation or to avoid application of the 100% excise tax.

 

If our operating partnership were classified as a “publicly traded partnership” taxable as a corporation for U.S. federal income tax purposes under the Code, we would cease to maintain our qualification as a REIT and would suffer other adverse tax consequences.

 

We intend for our operating partnership to be treated as a partnership for U.S. federal income tax purposes. If the IRS were to successfully challenge the status of our operating partnership as a partnership, however, our operating partnership generally would be taxable as a corporation. In such event, we likely would fail to maintain our status as a REIT for U.S. federal income tax purposes, and the resulting corporate income tax burden would reduce the amount of distributions that our operating partnership could make to us. This would substantially reduce the cash available to pay distributions to our stockholders. In addition, if any of the partnerships or limited liability companies through which the operating partnership owns its properties, in whole or in part, loses its characterization as a partnership and is not otherwise disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to the operating partnership. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.

 

Our stockholders may be restricted from acquiring or transferring certain amounts of our common stock.

 

Certain provisions of the Code and the stock ownership limits in our Charter may inhibit market activity in our capital stock and restrict our business combination opportunities. In order to maintain our qualification as a REIT, five or fewer individuals, as defined in the Code, may not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least 335 days of a taxable year. To help insure that we meet these tests, our Charter restricts the acquisition and ownership of shares of our stock.

 

Our Charter, with certain exceptions, authorizes our Board of Directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our Board of Directors, our Charter prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of our common stock or capital stock. Our Board of Directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of ownership limits would result in our failing to maintain our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our Board of Directors determines that it is no longer in our best interest to continue to maintain our qualification as a REIT.

 

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The ability of our Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.

 

Our Charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to maintain our qualification as a REIT. If we cease to maintain our qualification as a REIT, we would become subject to U.S. federal income tax on our taxable income without the benefit of the dividends paid deduction and would no longer be required to distribute most of our taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.

 

Dividends paid by REITs generally do not qualify for the reduced tax rates available for some dividends.

 

The maximum tax rate applicable to income from “qualified dividends” paid to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends paid by REITs, however, generally are not eligible for the reduced rates. Although the tax rates applicable to qualified dividends do not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.

 

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

 

The provisions of the Code applicable to REITs substantially limit our ability to hedge our liabilities. Any income from a hedging transaction that we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute “gross income” for purposes of the gross income requirements applicable to REITs. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through taxable REIT subsidiaries. This could increase the cost of our hedging activities because any taxable REIT subsidiary that we may form would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in taxable REIT subsidiaries will generally not provide any tax benefit, except for being carried forward against future taxable income in the taxable REIT subsidiaries.

 

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

 

At any time, the U.S. federal income tax laws applicable to REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new federal income tax law, regulation or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in the federal income tax laws, regulations or administrative interpretations.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

Our Operating Properties and Land Investment are more fully described in “Item I. Business - Our Properties”.

 

Item 3. Legal Proceeding.

 

In the normal course of business, we are subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome of such matters, in management’s opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not expected to have a material adverse effect on our financial position, results of operations or liquidity. For discussion regarding legal proceeding, see “Note J, Commitments and Contingencies” in the notes to the Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock trades on NASDAQ under the symbol “TSRE". From July 2008 until May 14, 2013, our common stock traded on the OTC Pink market. The following table sets forth the quarterly high and low per share of our common stock as reported on NASDAQ and the OTC Pink market, as applicable, as adjusted to reflect the reverse stock split that was effected on January 17, 2013 and the quarterly distributions paid or payable per share to our stockholders.

 

           Declared 
   High   Low   Dividends 
Year ended December 31, 2014:               
First Quarter  $8.50   $6.25   $0.0950 
Second Quarter   8.46    7.07    0.0950 
Third Quarter   7.51    6.58    0.0950 
Fourth Quarter   8.15    6.58    0.0950 
                
Year ended December 31, 2013:               
First Quarter  $20.00   $12.00   $0.0855 
Second Quarter   17.00    7.81    0.1575 
Third Quarter   9.00    6.42    0.0950 
Fourth Quarter   7.34    6.10    0.0950 

 

On February 23, 2015, our Board of Directors declared a dividend of $0.095 per common share for the first quarter of 2015, payable on April 15, 2015 to stockholders of record on March 31, 2015. Future dividend payments are paid at the discretion of the Board of Directors and depend on cash flows generated from operations, our financial condition and capital requirements, distribution requirements under the REIT provisions of the Code, and other factors which may be deemed relevant by the Board of Directors. Assuming dividend distributions for the remainder of 2015 are similar to those declared for the first quarter of 2015, the annualized dividend rate for 2015 would be $0.38.

 

Stock Return Performance

 

The following graph compares the total stockholder return of our common stock against the cumulative total returns of the Standard & Poor’s Corporation Composite 500 Index and the Morgan Stanley Capital International United States REIT Index, or the MSCI US REIT Index, for the period from May 16, 2013, the date of the initial listing of our common stock on NASDAQ to December 31, 2014.

 

 

This graph assumes the investment of $100 on May 16, 2013 and quarterly re-investment of dividends. (Source: Google Finance)

 

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   Quarter Ended 
Index  Jun-13   Sep-13   Dec-13   Mar-14   Jun-14   Sep-14   Dec-14 
TSRE  $90.56   $72.38   $66.69   $80.99   $80.97   $78.09   $85.13 
MSCI REIT Index (RMS)   90.08    87.37    86.78    95.45    102.13    98.96    113.15 
S&P500   97.32    101.88    111.99    113.44    118.77    119.50    124.75 

  

Stockholder Information

 

As of March 5, 2015, there were 36,698,469 shares of our common stock outstanding that were held by approximately 44 record holders. This is based on the actual number of holders registered as of such date and does not consider holders of shares held in “street name” or persons, partnerships, associations, corporations or other entities in security position listings maintained by depositories.

 

Issuer Repurchases of Equity Securities

 

The table below summarizes the number of shares of our common stock that were withheld to satisfy tax withholding obligations for our stock-based compensation restricted stock that vested during the three months ended December 31, 2014.

 

           Total Number of   Maximum 
           Shares   Dollar Value of 
           Purchased as   Shares that May 
           Part of Publicly   Yet be 
   Total Number of   Average Price   Announced   Purchased 
   Shares   Paid per   Plans or   Under the Plans 
   Purchased (1)   Share (1)   Programs   or Programs 
                 
Period                    
October 1 to 31, 2014   -   $-    -    - 
November 1 to 30, 2014   24,684   $7.53    -    - 
December 1 to 31, 2014   -   $-    -    - 
Total   24,684                

 

(1)Represents the surrender of shares of our common stock to satisfy the tax withholding obligations with the vesting of restricted shares of common stock.

 

Item 6. Selected Financial Data

 

The following table sets forth selected financial and other data of Trade Street Residential, Inc. The historical financial statements of Trade Street Residential, Inc. should be read in conjunction with the Consolidated Financial Statements and accompanying notes in Item 8. The information for the periods prior to June 1, 2012 reflect the assets, liabilities and operations of Trade Street Company retroactively adjusted to reflect the legal capital of Trade Street Residential, Inc. Trade Street Company is not a legal entity, but instead represents a combination of certain real estate entities and management operations based on common ownership and control by the Trade Street Funds and Trade Street Capital.

 

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   Years Ended December 31, 
(in thousands, except per share data)  2014   2013   2012   2011 
Statement of operations data:                    
Total property revenues (1)  $56,867   $28,957   $14,460   $9,025 
Total property expenses   24,781    13,185    7,453    4,457 
Total other expenses, net (2) (3)   63,973    45,655    15,867    6,926 
Total other income, net (4)   1,570    7,055    313    1,129 
Loss from continuing operations   (30,317)   (22,828)   (8,547)   (1,229)
Income (loss) from discontinued operations (5)   -    6,272    (4)   (2,569)
Net loss   (30,317)   (16,556)   (8,551)   (3,798)
Net loss attributable to common stockholders of Trade Street Residential, Inc. (6)  $(27,797)  $(5,611)  $(7,218)  $(3,421)
                     
Earnings (loss) per common share—basic and diluted                    
Continuing operations  $(0.79)  $(1.36)  $(3.17)  $(8.85)
Discontinued operations   -    0.72    -    (26.68)
Weighted average number of shares outstanding - basic and diluted   35,325    8,762    2,278    96 
Cash dividend per common share  $0.38000   $0.43300   $0.16155   $- 

 

(1) Amounts exclude our discontinued operations, which are described in Note L to the consolidated financial statements.
(2) Total other expenses, net, for the years ended December 31, 2014 and 2012 include approximately $1.0 million and $1.9 million, respectively, of expenses incurred as a result of recapitalization activities.
(3) Total other expenses, net, for the years ended December 31, 2014 and 2013, include approximately $8.0 million and $12.4 million of impairment losses on the land investments, respectively (See Note L to the consolidated financial statements).
(4) Total other income, net, for the year ended December 31, 2013, includes a $6.9 million bargain purchase gain from the Fountains Southend acquisition (See Note C to the consolidated financial statements).
(5) Reflects net gains from sales and operating results of apartment communities sold in the applicable years.
(6) Net loss attributable to common stockholders for the years ended December 31, 2014 and 2013 include the following respective benefits: $1.2 million resulting from our redemption of all outstanding shares of Class A preferred stock in October 2014 and $11.7 million resulting from extinguishments related to Class B contingent units, less related adjustments attributable to participating securities of $2.5 million in February 2014 (see Note G to the consolidated financial statements).

 

   Years Ended December 31, 
(in thousands)  2014   2013   2012   2011 
Balance Sheet data (at the end of period):                    
Real estate assets, at cost  $568,542   $340,425   $175,354   $110,683 
Land held for future development  $-   $31,963   $42,623   $18,171 
Real estate held for sale  $3,492   $-   $58,638   $85,853 
Total assets  $568,668   $387,636   $291,910   $235,200 
Indebtedness (1)  $344,756   $249,584   $133,246   $81,559 
Total stockholders’ equity (2)  $210,002   $128,403   $46,239   $84,337 
                     
Cash flows data:                    
Operating activities  $15,066   $(3,264)  $(1,160)  $3,044 
Investing activities  $(127,217)  $(49,406)  $2,893   $(30,635)
Financing activities  $116,422   $56,809   $2,519   $26,532 
                     
Other data:                    
Funds from Operation (FFO) (3)  $(4,576)  $(5,836)  $(2,166)  $2,934 
Core FFO (3)  $10,688   $(836)  $1,474   $4,856 
Net Operating Income (NOI) (4)  $32,086   $15,772   $7,337   $4,919 
Number of properties at end of the period   19    15    13    13 

 

(1) Excludes liabilities of approximately $9.1 million, $6.4 million, $14.3 million, and $9.7 million related to real estate held for sale (Fontaine Woods, Beckanna, Terrace at River Oaks and Oak Reserve, respectively) included in discontinued operations as of December 31, 2012 and 2011, respectively.
(2) Excludes redeemable preferred stock of approximately $26.8 million recorded as temporary equity as of December 31, 2012.
(3) FFO for the year ended December 31, 2014 and 2012 includes recapitalization costs of approximately $1.0 million and $1.9 million, respectively. For a definition and reconciliation of FFO and Core FFO to net income (loss), the most directly comparable GAAP measurement and a statement disclosing the reasons why our management believes that the presentation of FFO and Core FFO provides useful information to investors and, to the extent material, any additional purposes for which our management uses FFO and Core FFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures.”
(4) For a definition and reconciliation of NOI to net income (loss), the most directly comparable GAAP measurement and a statement disclosing the reasons why our management believes that the presentation of NOI provides useful information to investors and, to the extent material, any additional purposes for which our management uses NOI, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion analyzes the financial condition and results of operations of Trade Street Residential, Inc. (“TSRE”) and Trade Street Operating Partnership, LP (the “Operating Partnership”). A wholly-owned subsidiary of TSRE, Trade Street OP GP, LLC is the sole general partner of the Operating Partnership. As of December 31, 2014, TSRE owned a 94.0% limited partner interest in the Operating Partnership. TSRE conducts all of its business and owns all of its properties through the Operating Partnership and the Operating Partnership’s various subsidiaries. Except as otherwise required by the context, the “Company,” “Trade Street,” “we,” “us” and “our” refer to TSRE and the Operating Partnership together, as well as the Operating Partnership’s subsidiaries, except where the context otherwise requires. You should read the following discussion of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and accompanying notes in Item 8.

 

Overview of Our Company

 

We are a vertically integrated and self-managed real estate investment trust (“REIT”), focused on acquiring, owning, operating and managing high-quality, conveniently-located apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States and Texas. We currently have approximately 140 full-time employees who provide property management, maintenance, landscaping, administrative and accounting services for the properties we own. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004.

 

We seek to own and operate apartment communities in cities that have:

 

a stable work force comprised of a large number of “echo boomers” augmented by positive net population migration;
well-paying jobs provided by a diverse mix of employers across the education, government, healthcare, insurance, manufacturing and tourist sectors;
a favorable cost of living;
reduced competition from larger multifamily REITs and large institutional real estate investors who tend to focus on select coastal and gateway markets; and
a limited supply of new housing and new apartment construction.

 

We recognize that economic conditions could deteriorate and that the current economic recovery may not be sustainable. However, with the growth in multi-family supply expected to continue below historical averages for the next few years and with employment in our markets steady or increasing, we do not anticipate any significant slowdown in the multi-family sector.

 

In addition, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our expected access to capital and the accordion feature in our Revolver (as defined below) along with our extensive industry relationships and management’s expertise, will allow us to compete successfully for such acquisitions and enable us to continue to make accretive acquisitions.

 

Outlook

 

The outlook and assumptions presented below contain forward-looking statements and are based on our future view of the apartment market and general economic conditions, as well as other risks outlined above under the caption “Cautionary Note Regarding Forward-Looking Statements” and in “Item 1.A. Risk Factors,” which includes the uncertain outcome of the strategic alternatives review currently being conducted by our Board of Directors. There can be no assurance that our actual results will not differ materially from the outlook and assumptions set forth below. We assume no obligation to update this outlook in the future.

 

Our outlook is based on the expectation that economic and employment conditions will continue to improve gradually. A limited supply of new apartment units over the past several years, coupled with improving multi-family housing demand, has generally supported improved operating fundamentals across our portfolio. Permits for construction of new apartments and rental units in our markets increased in 2014 as compared to 2013 and 2012, which will lead to increased supply in 2015. We believe that any new supply should be absorbed due to historically low supply in prior years and the consistent employment growth in our markets, but we recognize the potential challenge new lease-up competition can present while those communities attempt to stabilize. We maintain our belief that the relatively young age of our communities and best-in-class amenities keep us well positioned to maintain occupancy levels and to continue to increase effective rents.

 

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Rental and other revenues from same store properties are expected to increase modestly for 2015, compared to 2014, driven primarily by new and renewed leases being completed at slightly higher market rental rates or with reduced discounts and concessions, as we expect occupancy levels to remain relatively consistent with those in 2014. The rate of same store revenue growth is expected to moderate in 2015, compared to 2014, largely attributable to competitive pressures in our submarkets that may limit our ability to increase effective rental rates significantly above current levels. Operating expenses of same store properties are expected to remain generally consistent with 2014. On a year-over-year basis, we expect property taxes, personnel costs and utilities to be the largest contributors to operating expense growth, primarily due to the potential for property tax reassessments and increases in compensation and benefits costs in 2015. As a result, management expects same store property net operating income to moderately improve for 2015. However, management expects net operating income from newly stabilized, non-same store properties to increase considerably in 2015 as four of the six non-same store communities reached stabilized occupancy in the third and fourth quarters of 2014. Also, management is optimistic that the new 100 units at our Waterstone at Big Creek community (“Big Creek”) will experience a successful lease-up once that purchase is available to close late in the first quarter of 2015.

 

We expect general and administrative expenses to fluctuate seasonally around $2.0 million each quarter in 2015, which is substantially consistent with the rate of expense incurred during the second half of 2014, after the restructuring of management was completed. We also expect to continue to invest in information technology upgrades and incur costs associated with our review of strategic alternatives and our ongoing and future compliance with Sections 302 and 404 of the Sarbanes-Oxley Act. .

 

We expect interest expense for 2015 to be higher than in 2014 due primarily to our intention to draw on our revolving credit facility to fund the closing of the additional 100 units at Big Creek, which is under binding contract for $15.0 million, as well as our expectation that the interest rate environment will become less favorable than it has been in recent years. See “Liquidity and Capital Resources” section for further discussion. Future equity issuances will depend upon a variety of factors, including, among others, the volume of investment activities, market conditions, the trading price of our common stock relative to other sources of capital and our liquidity position.

 

During 2015, subject to the outcome of the aforementioned strategic alternatives review, we will look for opportunities to add additional scale in some of our current markets through select acquisitions of new apartment communities, depending on the availability of capital to pursue such acquisitions. We may also opportunistically pursue acquisitions of apartment communities in other geographic regions and markets that possess economic, demographic and other characteristics similar to our existing markets and fit within our strategic plan. In addition, we may take advantage of current market conditions to dispose of older assets and reinvest those proceeds in newer and more attractive communities.

 

One of our core focuses during 2014 was to strengthen our balance sheet and simplify our capital structure to (i) allow financial and operational flexibility and (ii) provide opportunities to recycle capital through strategic acquisitions and dispositions of our operating properties portfolio. In that regard:

 

·On February 23, 2014, pursuant to Amendment No. 1 to the Second Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP, we converted all of the outstanding 210,915 Class B Contingent Units of limited partnership interests with a stated value of $100.00 per Class B Unit held by a former executive and certain of his affiliates into 2,343,500 common units of partnership interest in the Operating Partnership.
·On July 11, 2014, we completed the sale of Post Oak, a 126-unit apartment community located in Louisville, Kentucky, receiving net proceeds of $7.8 million;
·On October 17, 2014, we completed the redemption of 100% of the outstanding 309,130 shares of class A preferred stock in exchange for all interests in four of the five undeveloped land parcels we owned and a $5.0 million cash payment;
·On October 7, 2014, we entered into a non-binding agreement to sell all interests in our last undeveloped land parcel for $3.6 million, which is expected to close during the second quarter of 2015; and
·On December 10, 2014, we closed on the sale of our 50% joint venture interest in the Estates of Perimeter, a 240-unit apartment community located in Augusta, Georgia, to an unaffiliated third party, receiving a distribution of net proceeds of $3.4 million from the joint venture.

 

Summary Results of Operations

 

2014 Overview

 

The following discussion of results of operations for the years ended December 31, 2014, 2013 and 2012 should be read in conjunction with the Consolidated Statements of Operations and the related notes thereto included in Item 8 of this Form 10-K.

 

Throughout this section, we have provided certain information on a “same store” property basis. We define “same store” properties as properties that were owned and stabilized since January 1, 2013 through December 31, 2014. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property stabilized at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. For comparison of the years ended December 31, 2014 and 2013, the same store properties included operating properties owned since January 1, 2013, excluding operating properties disposed of during the years ended 2014 and 2013 (see below). No operating properties owned since January 1, 2013 were under construction or undergoing redevelopment and, as a result, no operating properties owned since January 1, 2013 were excluded from the same store portfolio.

 

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For the year ended December 31, 2014, we reported net loss attributable to common stockholders of ($27.8) million compared with a net loss attributable to common stockholders of ($5.6) million for the comparable prior year period.

 

The principal factors, on a net basis, that impacted our results from continuing operations for the year ended December 31, 2014 included:

 

·Increases in same-store revenues of $1.1 million, or 5.2%, and net operating income of $0.7 million, or 6.3%;
·Increases in revenue and net operating income of $27.4 million and $15.9 million, respectively, from eleven operating properties acquired since March 2013;
·Management transition expenses of approximately $10.0 million related to the resignation of certain executive officers and other members of management during 2014;
·a $7.3 million increase in depreciation and amortization expense due to the eleven operating properties acquired since March 2013;
·a $4.0 million increase in interest expense associated with increased indebtedness used to partially fund the acquisition of eleven operating properties acquired since March 2013;
·a $0.7 million increase in the costs incurred to acquire operating properties;
·a $1.0 million increase in recapitalization costs;
·a $0.5 million increase in loss from early extinguishment of debt associated with refinancing of certain of the operating properties;
·a decrease of $4.4 million in charges for impairment of our Land Investments;
·an increase of $1.4 million in gains from real estate asset sales;
·a $0.6 million decrease in general and administrative expenses; and
·The prior year period also included a $6.9 million bargain purchase gain from the acquisition of an operating property. There was no similar gain recognized in 2014.

 

RESULTS OF OPERATIONS

 

Comparison of Years Ended December 31, 2014 to December 31, 2013

 

Below are the results of operations for the years ended December 31, 2014 and 2013. In the comparative tables presented below, increases in revenues/income or decreases in expenses (favorable variances) are shown without parentheses while decreases in revenues/income or increases in expenses (unfavorable variances) are shown with parentheses. For purposes of comparing our results of operations for the periods presented below, all of our properties in the “same store” reporting group were wholly owned from January 1, 2013 through December 31, 2014. Property revenues include rental revenue and other property revenues. Property expenses include property operations, real estate taxes and insurance.

 

   Years Ended December 31,   Change 
(in thousands)  2014   2013   $   % 
                 
Property revenues                    
Same Store (8 properties)  $21,436   $20,386   $1,050    5.2%
Non Same Store (11 properties)   34,797    7,406    27,391    369.8%
Other (1 property)   634    1,165    (531)   (45.6)%
Total property revenues  $56,867   $28,957   $27,910    96.4%
                     
Property expenses                    
Same Store (8 properties)  $9,766   $9,404   $(362)   (3.8)%
Non Same Store (11 properties)   14,633    3,174    (11,459)   (361.0)%
Other (1 property)   382    607    225    37.1%
Total property expenses  $24,781   $13,185   $(11,596)   (87.9)%

 

Same Store Properties—Property Revenues and Property Expenses

 

As presented in the table above, same store property revenues increased approximately $1.1 million, or 5.2%, for the year ended December 31, 2014 as compared to the same period in 2013 primarily due to a 3.3% increase in average rental rates, an increase of $0.2 million as the result of a 90 basis point increase in average occupancy and an increase of $0.1 million in other property revenues.

 

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   Years Ended December 31,             
(in thousands)  2014   2013   $ Change   % Change   % of 2014 Actual 
                     
Property expenses                         
Property taxes  $2,660   $2,537   $(123)   (4.8)%   27.2%
Salaries and benefits for on-site employees   2,570    2,535    (35)   (1.4)%   26.3%
Utilities   1,461    1,380    (81)   (5.9)%   15.0%
Repairs and maintenance   699    698    (1)   (0.1)%   7.2%
Make ready/turnover   574    492    (82)   (16.7)%   5.9%
Property insurance   483    484    1    0.2%   4.9%
Other   1,319    1,278    (41)   (3.2)%   13.5%
Total same store property expenses  $9,766   $9,404   $(362)   (3.8)%   100.0%

 

Same store property expenses increased approximately $0.3 million, or 2.5%, for the year ended December 31, 2014 as compared to the same period in 2013 after adjusting for the benefit of a $0.1 million 2012 property tax settlement received in the prior year period. The remainder of the increase was primarily a result of increased utilities and make ready/turnover expenses.

 

Non-Same Store Properties—Property Revenues and Property Expenses

 

The growth of non-same store property revenues accelerated during the second half of 2013 and first three quarters of 2014 due to our acquisition of three newly-constructed properties that were in lease-up during the second and third quarters of 2013 and six newly-constructed properties that were in lease-up during the first four months of 2014. The last two of the 2014 property acquisitions achieved stabilization during the fourth quarter of 2014.

 

Similar to the discussion of revenues, non-same store property expenses increased throughout 2013 and 2014 commensurate with the acquisition and lease-up of these properties. Non-same store property expenses are generally distributed in similar proportions as those of our same store portfolio, with property taxes, personnel expenses and the cost of utilities constituting the significant majority of property operating expenses.

 

(in thousands)  March 31, 2014   June 30, 2014   September 30, 2014   December 31, 2014   YTD 2014 
Property revenues                         
Total property revenues  $5,898   $9,043   $9,845   $10,011   $34,797 
                          
Property expenses                         
Property operations and maintenance  $1,632   $2,499   $2,592   $2,550   $9,273 
Real estate taxes and insurance   1,094    1,501    1,357    1,408    5,360 
Total property expenses  $2,726   $4,000   $3,949   $3,958   $14,633 
                          
Number of Communities, end of period   10    11    11    11      

 

   March 31, 2013   June 30, 2013   September 30, 2013   December 31, 2013   YTD 2013 
Property revenues                         
Total property revenues  $122   $1,049   $2,523   $3,712   $7,406 
                          
Property expenses                         
Property operations and maintenance  $35   $397   $787   $1,158   $2,377 
Real estate taxes and insurance   14    125    259    399    797 
Total property expenses  $49   $522   $1,046   $1,557   $3,174 
                          
Number of Communities, end of period   1    3    5    5      

 

Other Expenses

 

   Years Ended December 31,   Change 
(in thousands)  2014   2013   $   % 
Property expenses                    
General and administrative  $8,103   $8,683   $580    6.7%
Management transition expenses  $10,021   $-   $(10,021)   *
Interest expense  $12,942   $8,947   $(3,995)   (44.7)%
Depreciation and amortization  $19,250   $11,918   $(7,332)   (61.5)%
Development and pursuit costs  $369   $180   $(189)   (105.0)%
Acquisition and recapitalization costs  $2,675   $919   $(1,756)   (191.1)%
Amortization of deferred financing cost  $1,022   $1,443   $421    29.2%
Loss on early extinguishment of debt  $1,629   $1,146   $(483)   (42.1)%

 

* Not a meaningful percentage.

 

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General and administrative expense decreased approximately $0.6 million, or 6.7%, for the year ended December 31, 2014 as compared to the same period in 2013, primarily due to the net impact of decreases in short- and long-term incentive compensation ($0.8 million), professional fees primarily attributable to legal and audit services ($0.3 million) and travel expenses ($0.5 million), which were partially offset by increases in other professional and temporary services costs incurred during the transition of management ($0.5 million), information technology and software licensing costs ($0.3 million), costs associated with operating a public company ($0.1 million) and franchise taxes associated with property acquisitions in Texas and Tennessee ($0.1 million).

 

Management transition expenses for the year ended December 31, 2014 of approximately $10.0 million are associated with the our restructuring of our management team of which approximately $3.8 million was paid in cash, $3.7 million was paid in shares of our common stock, and a $2.5 million charge relating to the conversion of the Class B contingent units into common operating partnership units.

 

Interest expense increased approximately $4.0 million, or 44.7%, for the year ended December 31, 2014, substantially due to the increase in debt as a result of the aforementioned eleven acquisitions completed since March 2013.

 

Depreciation and amortization expense for year ended December 31, 2014 increased approximately $7.3 million, or 61.5%, as compared to the same period in 2013. This increase was primarily due to the aforementioned eleven acquisitions completed since March 2013.

 

Acquisition and recapitalization costs are comprised of costs incurred by us to acquire apartment communities and recapitalization costs not incurred by us as a result of our normal operations that relate to our review of strategic alternatives for us, as well as costs incurred as a result of the 2012 Recapitalization with the Predecessor, including any costs we incur to resolve claims involving the Predecessor’s previous business operations. Acquisition and recapitalization costs are charged to expense in the period incurred. Our acquisition expenses include direct costs to acquire apartment communities, including broker fees, certain transfer taxes, legal, accounting, valuation, and other professional and consulting fees. For the year ended December 31, 2014, aggregate acquisition expenses of approximately $1.6 million were incurred in the acquisition of Miller Creek, Wake Forest, Aventine, Brier Creek, Craig Ranch and Big Creek. Also during 2014, we incurred approximately $0.3 million in legal and other expense associated with our review of strategic alternatives and $0.7 million of settlement and legal expense associated with disputed charges on property previously owned by the Predecessor. For the year ended December 31, 2013, aggregate acquisition expenses of approximately $0.9 million were incurred in the acquisition of Bridge Pointe, Creekstone, St. James, Talison Row and Fountains Southend.

 

Amortization of deferred financing costs decreased approximately $0.4 million, or 29.2%, for the year ended December 31, 2014 as compared to the same periods in 2013. The decrease was primarily due to the refinancing of debt on Millenia 700 and The Pointe at Canyon Ridge, which are amortized over a longer period than the previous debt.

 

Loss on early extinguishment of debt for the year ended December 31, 2014 includes prepayment penalties and write-off of unamortized deferred loan costs related to the refinancing of a bridge loan for Fountains Southend, refinancing of the mortgage note payable for Millenia 700 and the pay down in full of indebtedness on Fox Trails, Mercé Apartments and our former Post Oak property. Loss on early extinguishment of debt for the year ended December 31, 2013 includes the early prepayment penalties related to the refinancing of the bridge loan for The Pointe at Canyon Ridge as well as the refinancing of debt on Arbor River Oaks.

 

Other Income and Expenses

 

   Years Ended December 31,   Change 
(in thousands)  2014   2013   $   % 
                 
Other income  $45   $88   $(43)   (48.9)%
Impairment associated with land holdings  $(7,962)  $(12,419)  $4,457    35.9%
Gains on sales of real estate assets  $1,419   $-   $1,419    *
Gain on bargain purchase  $-   $6,900   $(6,900)   *
Income from operation of discontinued rental property including gains/losses on disposals  $-   $6,272   $(6,272)   *
Loss allocated to noncontrolling interest  $1,935   $2,462   $(527)   (21.4)%

 

* Not a meaningful percentage.

 

During the year ended December 31, 2014, we recorded an approximate $8.0 million charge for impairment of the values of four of the five Land Investments. This non-cash impairment charge was based upon fair value estimates determined from unobservable market inputs, such as (i) opinions of value from independent commercial brokers and (ii) purchase offers or bids from unrelated third parties that we believe provide the best indication of the liquidation value of the Land Investments at the time given our intent was to dispose of these Land Investments in connection with the redemption of the outstanding shares of our Class A preferred stock. Approximately $0.7 million of this impairment charge was associated with the Midlothian Land Investment, on which we executed a non-binding contract for sale with an unrelated third party for $3.6 million on October 7, 2014.

 

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During the year ended December 31, 2013, we recorded an approximate $12.4 million charge for impairment of the values of three of the five Land Investments. This non-cash impairment charge was based on a change in classification of these properties to held for sale rather than hold these properties for future development. The impairment charge was based on independent broker opinions of value of the land which was determined to be the best indication of fair market value.

 

Gains on sales of real estate assets for the year ended December 31, 2014, represents the sale of Post Oak on July 11, 2014 (approximately $0.3 million) and the sale of our 50% joint venture of the Estate of Perimeter on December 10, 2014 (approximately $1.1 million). There were no comparable gains recorded in the year ended December 31, 2013.

 

Income from operations of discontinued rental property including gains/losses on disposals for the year ended December 31, 2013 primarily represents the sale of Fontaine Woods on March 1, 2013 (approximately $1.6 million), the sale of Oak Reserve on June 12, 2013 (approximately $0.5 million), the sale of Terrace River Oaks on December 16, 2013 (approximately $3.2 million) and the sale of Beckanna on December 24, 2013 (approximately $1.5 million). The 2013 gain was offset by $0.1 million for a post-closing purchase price reduction during the second quarter of 2013 related to the sale of Mill Creek property in the fourth quarter of 2012. The properties included in discontinued operations were all sold during 2013.

 

Loss allocated to noncontrolling interest for the above periods primarily represents the noncontrolling interest in our Operating Partnership. The percentage of loss allocated to noncontrolling interest decreased during the year ended December 31, 2014 as compared to the same period in 2013 due to the conversion of 210,915 Class B contingent units into 2,343,500 OP units.

 

Comparison of Years Ended December 31, 2013 to December 31, 2012

 

Below are the results of operations for the years ended December 31, 2013 and 2012. In the comparative tables presented below, increases in revenues/income or decreases in expenses (favorable variances) are shown without parentheses while decreases in revenues/income or increases in expenses (unfavorable variances) are shown with parentheses. For purposes of comparing our results of operations for the periods presented below, all of our properties in the “same store” reporting group were wholly owned from January 1, 2012 through December 31, 2013. Property revenues include rental revenue and other property revenues. Property expenses include property operations, real estate taxes and insurance and property management fees paid to third parties, as such fees were paid prior to the 2012 Recapitalization and will not be incurred in the future, since we are now self-administered.

 

   Years Ended December 31,   Change 
(in thousands)  2013   2012   $   % 
                 
Property revenues                    
Same Store (7 properties)  $14,939   $14,014   $925    6.6%
Non Same Store (7 properties)   14,018    446    13,572    3043.0%
Total property revenues  $28,957   $14,460   $14,497    100.3%
                     
Property expenses                    
Same Store (7 properties)  $7,234   $7,279   $45    0.6%
Non Same Store (7 properties)   5,951    174    (5,777)   (3,320.1)%
Total property expenses  $13,185   $7,453   $(5,732)   (76.9)%

 

Same Store Properties—Property Revenues and Property Expenses

 

Same store property revenues increased approximately $0.9 million, or 6.6%, for the year ended December 31, 2013 as compared to the same period in 2012 primarily due to an increase of $0.4 million as a result of a 2.9% increase in average rental rates, an increase of $0.4 million as the result of a 240 basis point increase in average occupancy and an increase of $0.1 million in other property revenues.

 

   Years Ended December 31,             
(in thousands)  2013   2012   $ Change   % Change   % of 2013 Total 
                     
Property expenses                         
Property taxes  $1,950   $1,792   $(158)   (8.8)%   27.0%
Salaries and benefits for on-site employees   2,011    1,845    (166)   (9.0)%   27.8%
Utilities   1,037    1,118    81    7.2%   14.3%
Repairs and maintenance   638    468    (170)   (36.3)%   8.8%
Make ready/turnover   415    551    136    24.7%   5.7%
Property insurance   316    323    7    2.2%   4.4%
Other   867    1,182    315    26.6%   12.0%
Total same store property expenses  $7,234   $7,279   $45    0.6%   100.0%

 

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Same store property expenses decreased approximately $0.1 million, or 0.6%, for the year ended December 31, 2013 as compared to the same period in 2012 primarily due to a decrease of $0.3 million in third party management fees, which were not incurred in 2013 as we were entirely self-managed, partially offset by an increase of $0.2 million in real estate taxes.

 

Non-Same Store Properties—Property Revenues and Property Expenses

 

Property revenues and property expenses for our non-same store properties increased significantly due to the acquisitions made late in the fourth quarter of 2012 and during the year ended December 31, 2013. The results of operations for these properties have been included in our consolidated statements of operations from the date of acquisition.

 

(in thousands)  March 31, 2013   June 30, 2013   September 30, 2013   December 31, 2013   YTD 2013 
Property revenues                         
Total property revenues  $1,683   $2,708   $4,243   $5,384   $14,018 
                          
Property expenses                         
Property operations and maintenance  $502   $856   $1,292   $1,626   $4,276 
Real estate taxes and insurance   274    312    488    601    1,675 
Total property expenses  $776   $1,168   $1,780   $2,227   $5,951 
                          
Number of Communities, end of period   3    5    7    7      

 

   March 31, 2012   June 30, 2012   September 30, 2012   December 31, 2012   YTD 2012 
Property revenues                         
Total property revenues  $-   $-   $-   $446   $446 
                          
Property expenses                         
Property operations and maintenance  $-   $-   $-   $153   $153 
Real estate taxes and insurance   -    -    -    21    21 
Total property expenses  $-   $-   $-   $174   $174 
                          
Number of Communities, end of period   -    -    -    2      

 

Other Expenses

 

   Years Ended December 31,   Change 
(in thousands)  2013   2012   $   % 
                 
General and administrative  $8,683   $3,748   $(4,935)   (131.7)%
Interest expense  $8,947   $3,751   $(5,196)   (138.5)%
Depreciation and amortization  $11,918   $4,844   $(7,074)   (146.0)%
Development and pursuit costs  $180   $19   $(161)   (847.4)%
Acquisition and recapitalization costs  $919   $2,331   $1,412    60.6%
Amortization of deferred financing cost  $1,443   $636   $(807)   (126.9)%
Loss on early extinguishment of debt  $1,146   $538   $(608)   (113.0)%

 

* Not a meaningful percentage.

 

General and administrative expense increased approximately $4.9 million, or 131.7%, for the year ended December 31, 2013 as compared to the same period in 2012. The increase was primarily due to (i) growth in the number of corporate personnel needed to manage a public company and to acquire, manage and maintain the increased number of properties that we acquired late in the fourth quarter 2012 and during 2013, (ii) separation costs relating to the resignation of an executive officer during 2013, (iii) increased stock-based compensation expense primarily attributable to the value of certain employee shares granted that fully vested during 2013, (iv) increased professional fees primarily attributable to legal fees and the audit of our annual financial statements and review of our quarterly financial statements, (v) directors fees and director and officers insurance which were not incurred prior to the 2012 Recapitalization and (vi) increased overhead from being a self-administered and self-managed company after the 2012 Recapitalization and after the IPO in May 2013.

 

Interest expense increased approximately $5.2 million, or 138.5% for the year ended December 31, 2013, which was primarily due to the debt increase as a result of the aforementioned seven acquisitions completed between December 2012 and during the year ended December 2013, the additional interest associated with the noncontrolling interests in four properties contributed in the 2012 Recapitalization, and the BMO Credit Facility that we entered in early 2013.

 

Depreciation and amortization expense for the year ended December 31, 2013 as compared to the same period in 2012 increased approximately $7.1 million, or 146.0%. This increase was primarily due to the seven acquisitions completed between December 2012 and December 2013.

 

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Development and pursuit costs increased approximately $0.2 million, or 847.4% for the year ended December 31, 2013 as compared to the same period in 2012. This increase was primarily due to interest and real estate taxes incurred for two of our four parcels of land held for future development. Since the beginning of the third quarter of 2013, we ceased capitalizing interest and costs for our Land Held for Future Development properties.

 

Amortization of deferred financing costs increased approximately $0.8 million for the year ended December 31, 2013 as compared to the same period in 2012. The increase was primarily due to the debt incurred in connection with the aforementioned seven acquisitions between December 2012 and during the year ended December 2013 as well as amortization of new loan costs for Pointe at Canyon Ridge and the line of credit.

 

Loss on early extinguishment of debt for the year ended December 31, 2013 includes prepayment penalties related to the refinancing of a bridge loan for Pointe at Canyon Ridge as well as the refinancing of debt on Arbor River Oaks. Loss on early extinguishment of debt for the year ended December 31, 2012 includes a prepayment penalty and the write-off of the remaining deferred loan costs for Pointe at Canyon Ridge.

 

Acquisition expenses are charged to current expense in the period incurred. Our acquisition expenses include direct costs to acquire apartment communities, including broker fees, certain transfer taxes, legal, accounting, valuation, and other professional and consulting fees. For the year ended December 31, 2013, acquisition expenses were approximately $0.9 million, primarily due to costs incurred in the acquisition of Talison Row, Fountains Southend, Creekstone at RTP, St. James at Goose Creek and Vintage at Madison Crossing. For the year ended December 31, 2012, acquisition expenses were approximately $0.5 million, primarily due to costs incurred in the acquisition of Westmont and Millenia 700. Approximately $1.8 million in recapitalization costs were incurred in connection with the 2012 Recapitalization and are included in the results for the year ended December 31, 2012.

 

Other Income and Expenses

 

   Years Ended December 31,   Change 
(in thousands)  2013   2012   $   % 
                 
Other income  $88   $267   $(179)   (67.0)%
Impairment associated with land holdings  $(12,419)  $-   $(12,419)   *
Gain on bargain purchase  $6,900   $-   $6,900    *
Income (loss) from operation of discontinued rental                    
  property including gains/losses on disposals  $6,272   $(4)  $6,276    *
Loss allocated to noncontrolling interest  $2,462   $1,709   $(753)   (44.1)%

 

* Not a meaningful percentage.

 

Approximately $12.4 million of impairment was recorded in the year ended December 31, 2013 to write down the carrying value of our Land Held for Future Development properties. In February 2014, management determined that we should sell these properties rather than hold them for future development. As a result, the carrying values of these properties as of December 31, 2013 were reduced. The impairment charges were based on recent independent broker opinions of value of the land, which were determined to be the best indication of fair market value. No impairment was recorded in the year ended December 31, 2012.

 

Gain on bargain purchase for the year ended December 31, 2013 represents a gain recorded on the acquisition of Fountains Southend. We placed the property under contract for a purchase price of $34.0 million in December 2012 while the property was early in the construction period. As a result of the strong leasing market in the Charlotte, North Carolina area and the compression in multi-family capitalization rates during construction and lease-up, the property appraised for $40.9 million at closing on September 24, 2013, resulting in the bargain purchase gain. There was no comparable gain recorded in the year ended December 31, 2012.

 

Income (loss) from operations of discontinued rental property including gains/losses on disposals for the year ended December 31, 2013 primarily represents the sale of Fontaine Woods on March 1, 2013 (approximately $1.6 million), the sale of Oak Reserve on June 12, 2013 (approximately $0.5 million), the sale of Terrace of River Oaks on December 16, 2013 (approximately $3.2 million) and the sale of Beckanna on December 24, 2013 (approximately $1.5 million). The gain was partially offset by $0.1 million for a post-closing purchase price reduction during the second quarter of 2013 related to the sale of the Mill Creek property in the fourth quarter of 2012.

 

Income (loss) from operations of discontinued rental property including gains/losses on disposals for the year ended December 31, 2012 primarily represents the sale of Mill Creek on November 16, 2012 (approximately $2.2 million). Offsetting this gain is the aforementioned five discontinued operating properties operating losses.

 

Loss allocated to noncontrolling interests for the above periods primarily represents the noncontrolling interest in our Operating Partnership since the 2012 Recapitalization. The loss allocated to noncontrolling interest as a percentage of net loss decreased significantly in the third quarter of 2013 due to dilution as a result of the initial public offering in May 2013.

 

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Non-GAAP Financial Measures

 

Net Operating Income

 

We believe that net operating income (“NOI”) is a useful measure of our operating performance. NOI meets the definition of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the SEC. We define NOI as total property revenues less total property operating expenses, excluding depreciation and amortization. Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs.

 

We believe that this measure provides an operating perspective not immediately apparent from GAAP operating income or net income. NOI should not be considered an alternative to net income (determined in accordance with GAAP) as an indication of our performance. We use NOI to evaluate our performance on a same store and non-same store basis because NOI allows us to evaluate the operating performance of our properties as it measures the core operations of property performance by excluding corporate level expenses and other items not related to property operating performance and captures trends in rental housing and property operating expenses. In addition, results for the years ended December 31, 2014 and 2013 represent continuing operations; therefore, NOI for the year ended December 31, 2013 excludes discontinued property operations (Oak Reserve at Winter Park, The Beckanna on Glenwood, Fontaine Woods, Terrace at River Oaks and Estates of Mill Creek).

 

   Years Ended December 31, 
(in thousands)  2014   2013 
Net Operating Income          
Same Store (8 properties) (1)  $11,670   $10,982 
Non Same Store (11 properties)   20,164    4,232 
Other (1 property)   252    558 
Total property NOI  $32,086   $15,772 
           
Reconciliation of NOI to GAAP Net Loss          
           
Total property NOI  $32,086   $15,772 
Other income   45    88 
Gains on sales of real estate assets   1,419    - 
Gain on bargain purchase   -    6,900 
Depreciation and amortization   (19,250)   (11,918)
Development and pursuit costs   (369)   (180)
Interest expense   (12,942)   (8,947)
Amortization of deferred financing costs   (1,022)   (1,443)
Loss on early extinguishment of debt   (1,629)   (1,146)
General and administrative   (8,103)   (8,683)
Management transition expenses   (10,021)   - 
Impairment associated with land holdings   (7,962)   (12,419)
Acquisition and recapitalization costs   (2,675)   (919)
Income from unconsolidated joint venture   106    67 
Loss from continuing operations   (30,317)   (22,828)
Discontinued operations   -    6,272 
Net loss   (30,317)   (16,556)
Loss allocated to noncontrolling interests   1,953    2,462 
Adjustments related to earnings per share computation (2)   567    8,483 
           
Net loss attributable to common stockholders  $(27,797)  $(5,611)

 

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(1) We define “Same Store” as properties owned and stabilized since January 1, 2013 through December 31, 2014. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property to be stabilized at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. No properties owned since January 1, 2013 were under construction or undergoing redevelopment and, as a result, no properties owned since January 1, 2013 were excluded from the same store portfolio. For the periods presented, "Same Store" properties are comprised of: The Pointe at Canyon Ridge, Arbor River Oaks, Lakeshore on the Hill, The Trails of Signal Mountain, Mercé Apartments, Fox Trails, Millenia 700, and Westmont Commons.
(2)

See Notes B and G to the accompanying Consolidated Financial Statements. 

 

The results for the years ended December 31, 2013 and 2012 represent continuing operations and; therefore, exclude NOI from discontinued property operations (2013: Oak Reserve at Winter Park, The Beckanna on Glenwood, Fontaine Woods, Terrace at River Oaks and Estates of Mill Creek and 2012: Estates of Mill Creek).

 

   Years Ended December 31, 
(in thousands)  2013   2012 
Net Operating Income          
Same Store (7 properties) (1)  $7,705   $7,065 
Non Same Store (7 properties)   8,067    272 
Total property NOI  $15,772   $7,337 
           
Reconciliation of NOI to GAAP Net Loss          
           
Total property NOI  $15,772   $7,337 
Add (subtract):          
Property management fees paid to third parties   -    (330)
Property NOI, continuing operations   15,772    7,007 
Other income   88    267 
Gain on bargain purchase   6,900    - 
Depreciation and amortization   (11,918)   (4,844)
Development and pursuit costs   (180)   (19)
Interest expense   (8,947)   (3,751)
Amortization of deferred financing costs   (1,443)   (636)
Loss on early extinguishment of debt   (1,146)   (538)
General and administrative   (8,683)   (3,748)
Impairment associated with land holdings   (12,419)   - 
Acquisition and recapitalization costs   (919)   (2,331)
Income from unconsolidated joint venture   67    46 
Loss from continuing operations   (22,828)   (8,547)
Discontinued operations   6,272    (4)
Net loss   (16,556)   (8,551)
Loss allocated to noncontrolling interests   2,462    1,709 
Adjustments related to earnings per share computation (2)   8,483    (376)
Net loss attributable to common stockholders  $(5,611)  $(7,218)

 

(1) We define “Same Store” as properties owned and stabilized since January 1, 2012 through December 31, 2013. For newly constructed or lease-up properties or properties undergoing significant redevelopment, we consider a property to be stabilized at the earlier of (i) attainment of 90% physical occupancy or (ii) the one-year anniversary of completion of development or redevelopment. No properties owned since January 1, 2013 were under construction or undergoing redevelopment and, as a result, no properties owned since January 1, 2012 were excluded from the same store portfolio. For the periods presented, "Same Store" properties are comprised of: The Pointe at Canyon Ridge, Arbor River Oaks, Lakeshore on the Hill, The Trails of Signal Mountain, Mercé Apartments, Fox Trail and our former Post Oak property.
(2) See Notes B and G to the accompanying Consolidated Financial Statements.

 

Funds from Operations, Core FFO and Adjusted FFO

 

Funds from operations (“FFO”) is defined by the National Association of Real Estate Investment Trusts (“NAREIT”), as net income (computed in accordance with GAAP), excluding gains (losses) from sales of property, bargain purchase gains, and recognized impairment of real estate assets, plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Our calculation of FFO is in accordance with the NAREIT definition. FFO meets the definition of “non-GAAP financial measures” as set forth in Item 10(e) of Regulation S-K promulgated by the SEC.

 

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Management considers FFO to be useful in evaluating potential property acquisitions and measuring operating performance. FFO does not represent net income or cash flows from operations as defined by GAAP. You should not consider FFO to be an alternative to net income as a reliable measure of our operating performance; nor should you consider FFO to be an alternative to cash flows from operating, investing or financing activities (as defined by GAAP) as measures of liquidity. Further, FFO as disclosed by other REITs might not be comparable to our calculation of FFO.

 

Management believes that the computation of FFO in accordance with NAREIT’s definition includes certain items, such as gains and losses on early extinguishment of debt, transaction costs related to acquisitions and recapitalization, management transition expenses and certain other non-cash or non-comparable items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance with other multifamily REITs. Accordingly, management believes that it is helpful to investors to add back non-comparable and non-cash items to arrive at Core FFO.

 

Management also uses Adjusted FFO (“AFFO”) as an operating measure, which is defined as FFO or, alternatively, Core FFO, depending on the existence of any non-cash, non-comparable items as described above, less recurring and non-recurring capital expenditures. Management believes that AFFO is a relevant operating measure as it provides an indication as to whether a REIT can fund from its operating performance the capital expenditures necessary to maintain the condition of its operating real estate assets.

 

The following table sets forth a reconciliation of FFO, Core FFO and AFFO for the periods presented to net loss attributable to common stockholders, as computed in accordance with GAAP:

 

   Years Ended December 31, 
(in thousands, except per share data)  2014   2013   2012 
             
Net loss attributable to common stockholders  $(27,797)  $(5,611)  $(7,218)
Net loss allocated to noncontrolling interest   (1,953)   (2,462)   (1,709)
Adjustments related to earnings per share computation (1)   (1,260)   (9,475)   - 
Impairment associated with land holdings   7,962    12,419    - 
Real estate depreciation and amortization - continuing operations   19,589    12,006    4,844 
Real estate depreciation and amortization - discontinued operations   -    476    3,709 
Real estate depreciation and amortization - unconsolidated joint venture   302    396    391 
Gain on bargain purchase   -    (6,900)   - 
Gains on sales of real estate assets (2)   (1,419)   (6,685)   (2,183)
Funds from operations (3)   (4,576)   (5,836)   (2,166)
Management transition expenses   10,021    -    - 
Acquisition and recapitalization costs   2,675    919    2,331 
Loss on early extinguishment of debt   1,629    1,558    538 
Non-cash straight-line adjustment for ground lease expenses   -    401    395 
Non-cash portion of stock awards   477    1,471    - 
Non-cash accretion of preferred stock and units   462    651    376 
Core funds from operations (3)  $10,688   $(836)  $1,474 
Recurring capital expenditures   (1,212)   (729)   (515)
Non-recurring capital expenditures   (1,204)   (902)   (161)
Adjusted funds from operations (3)  $8,272   $(2,467)  $798 
                
Per share data diluted:               
Funds from operations  $(0.12)  $(0.52)  $(0.47)
Core funds from operations  $0.28   $(0.07)  $0.32 
Adjusted funds from operations  $0.22   $(0.22)  $0.17 
                
Weighted average common shares outstanding (4)   35,525    8,935    2,278 
Weighted average common units outstanding   2,344    2,344    2,344 
Weighted average common shares and units outstanding (4)   37,869    11,279    4,622 

 

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(1) See Notes B and G to the accompanying Consolidated Financial Statements.
(2) Includes gains from sale of real estate assets reflected as part of continued and discontinued operations in the accompanying consolidated statement of operations.  
(3) Individual line items include results from discontinued operations where applicable.  
(4) Includes non-vested portion of restricted stock awards.

 

Liquidity and Capital Resources

 

As of December 31, 2014, our outstanding indebtedness was $344.8 million, which is comprised of $297.8 million mortgage indebtedness secured by our properties and $47.0 million of borrowings under our Revolver (as defined below).

 

Factors which could increase or decrease our future liquidity include, but are not limited to, access to and volatility in capital and credit markets; sources of financing; our ability to complete asset purchases, sales or developments; and the effect our debt level and changes in credit ratings could have on our cost of funds.

 

Financial Condition and Sources of Liquidity

 

Our primary sources of liquidity are cash on hand, availability under our Revolver, proceeds from refinancing of existing mortgaged apartment communities, proceeds from new mortgage loans on newly stabilized apartment communities, net cash from the operation of our apartment communities, net proceeds from the sale of certain properties, and net proceeds from offerings of our securities. As of December 31, 2014, we had $13.3 million of available cash on hand, and $11.1 million available for future borrowings under the Revolver that can be used for general corporate purposes.

 

As of the date of this Annual Report, we had approximately $11.0 million of available cash on hand and approximately $11.1 million available for future borrowings under the Revolver that can be used for acquisitions and general corporate purposes.

 

Share Issuances

 

On January 16, 2014, we received net cash proceeds of approximately $147.1 million after deducting offering expenses of approximately $2.9 million payable by us from the sale of 24,881,517 shares of our common stock offered in our Rights Offering and the related transactions. We contributed the net proceeds we received from the Rights Offering and the related transactions to our Operating Partnership in exchange for common units of our Operating Partnership. The Operating Partnership used approximately (i) $94.6 million, which included approximately $1.5 million for acquisition costs, to acquire five communities, (ii) $26.0 million to repay short-term borrowings under our Revolver, which were repaid within five business days after initially being borrowed, (iii) $16.7 million to pay down, in part, certain indebtedness secured by two communities in conjunction with their refinancing, and (iv) $4.2 million to pay down certain indebtedness secured by land held for development, leaving approximately $5.6 million for working capital and general corporate purposes.

 

Secured Revolving Credit Facility

 

On January 31, 2014, we and the Operating Partnership entered into a revolving credit agreement (the Revolver) with Regions Bank as Lead Arranger and U.S. Bank National Association as a participant. The Revolver is comprised of an initial $75.0 million commitment with an accordion feature allowing us to increase borrowing capacity to $250.0 million subject to certain approvals and meeting certain criteria. The Revolver has an initial three-year term that can be extended at our option for up to two, one-year periods and has a variable interest rate of LIBOR, as defined in the agreement, plus a margin of 175 basis points to 275 basis points, depending on our consolidated leverage ratio. As of December 31, 2014, the weighted average interest rate was approximately 2.70%.

 

The Revolver is guaranteed by us and certain of our subsidiaries and is secured by first priority mortgages on designated properties that make up the borrowing base (Borrowing Base) as defined in the loan documents. Availability under the Revolver is permitted up to sixty-five percent (65%) of the value of the Borrowing Base subject to the limitations set forth in the loan documents. The loan documents contain customary affirmative and negative covenants with respect to, among other things, insurance, maintaining at least one class of exchange listed common shares, the guaranty in connection with the Revolver, liens, intercompany transfers, transactions with affiliates, mergers, consolidation and asset sales, ERISA plan assets, modification of organizational documents and material contracts, derivative contracts, environmental matters, and management agreements and fees. In addition, the loan documents require us to satisfy certain financial covenants, including the following:

 

·minimum tangible net worth of at least $123.0 million plus 75.0% of the proceeds of any future equity issuances by the Operating Partnership or any of its subsidiaries;
·maintaining a ratio of funded indebtedness to total asset value of no greater than 0.65 to 1.0;

 

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·maintaining a ratio of adjusted EBITDA to fixed charges of no less than (i)1.3 to 1.0 from the effective date of the loan documents to and including March 31, 2014, (ii) 1.4 to 1.0 from April 1, 2014 to and including June 30, 2014, and (iii) 1.5 to 1.0 from July 1, 2014 and at all times thereafter;
·limits on investments in unimproved land, mortgage receivables, interests in unconsolidated affiliates, construction-in-progress on development properties, and marketable securities and non-affiliated entities, in each case, based on the value of such investments relative to total asset value, as set forth in the loan documents; and
·restrictions on certain dividend and distribution payments.

 

As of December 31, 2014, we were in compliance with all applicable covenants, including these financial covenants.

 

In conjunction with the closing of the Revolver, we borrowed approximately $27.0 million to pay down, in full, indebtedness secured by Fox Trails of $14.9 million, Mercé Apartments of $5.5 million and our former Post Oak property of $5.3 million as these properties served as collateral on the Revolver and to pay fees associated therewith. The remainder of the amount borrowed of approximately $0.9 million was used for closing costs and other expenses related to the Revolver and approximately $0.4 million for working capital purposes.

 

On February 24, 2014, the parties executed a First Amendment to the Credit Agreement with Regions to modify the definition of the components of EBITDA to include non-recurring cash costs in an amount not to exceed $4.0 million incurred during the first quarter of 2014, as a result of the separation of various officers from management.

 

On April 7, 2014, we entered into a Second Amendment to our Revolver and an Accession Agreement with the participating banks in the Revolver to modify certain terms and conditions of the Revolver related to the additions of new borrowing base properties. Also, on April 7, 2014, we drew $37.0 million from the Revolver to complete the purchase of Big Creek. During the year ended December 31, 2014, we repaid $17.0 million under the Revolver.

 

On August 5, 2014, we and the Operating Partnership executed a Third Amendment to the Credit Agreement to modify certain terms and conditions of the Revolver related to cash dividends paid by us for any fiscal year ending after December 31, 2014, such dividends shall not exceed the greater of (i) the amount required to be distributed for us to maintain our REIT status or (ii) 95.0% of our Funds From Operations for such period.

 

On October 16, 2014, we and the Operating Partnership executed a Fourth Amendment to the Credit Agreement to modify certain terms and conditions in the Revolver related to the weighting of the borrowing base properties value with any one geographic area and to reduce the required minimum tangible net worth to $123.0 million, plus 75.0% of the net proceeds of any equity issuances by the Operating Partnership or any of its subsidiaries.

 

Short-Term Liquidity Requirements

 

Our short-term liquidity requirements will primarily be to fund operating expenses, recurring capital expenditures, property taxes and insurance, interest and scheduled debt principal payments, general and administrative expenses and distributions to stockholders and unitholders, as well as the acquisition described below. We expect to meet these requirements using our cash on hand, the net cash provided by operations, the net cash proceeds from the sale of certain properties and, to the extent available, by accessing our Revolver.

 

Dividend Declared

 

On February 23, 2015 the Board approved a dividend in the amount of $0.095 per share, payable to holders of record of shares of common stock and common Operating Partnership units as of March 31, 2015, totaling approximately $3.7 million which is payable on April 15, 2015.

 

As a REIT, we are required to distribute at least 90% of our REIT taxable income, excluding net capital gains, to stockholders on an annual basis. We expect that these needs will be met from cash generated from operations and other sources, including proceeds from secured mortgage and unsecured indebtedness, proceeds from additional equity issuances, cash generated from the sale of property and the formation of joint ventures.

 

Acquisition of Big Creek Phase II

 

As of December 31, 2014, we are party to an agreement to purchase an additional 100 units adjacent to our Waterstone at Big Creek community for $15.0 million for which a $0.2 million nonrefundable deposit has been paid by us. The closing of this acquisition is expected near the end of the first quarter of 2015.

 

Long-Term Liquidity Requirements

 

Our principal long-term liquidity requirements will primarily be to fund additional property acquisitions, major renovation and upgrading projects and debt payments and retirements at maturities. We do not expect that net cash provided by operations will be sufficient to meet all of these long-term liquidity needs. We anticipate meeting our long-term liquidity requirements by using cash, short-term credit facilities and net proceeds from the sale of certain properties as an interim measure, to be replaced by funds from borrowing under public and private equity and debt offerings, long-term secured and unsecured indebtedness, or joint venture investments. In addition, we may use Operating Partnership units issued by our Operating Partnership to acquire properties from existing owners seeking a tax-deferred transaction.

 

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Cash Flows Summary

 

Below is a summary of our recent cash flow activity:

 

   Years Ended December 31, 
(In thousands)  2014   2013   2012 
Sources (uses) of cash and cash equivalents:               
Operating activities  $15,066   $(3,264)  $(1,160)
Investing activities   (127,217)   (49,406)   2,893 
Financing activities   116,422    56,809    2,519 
Net change in cash and cash equivalents  $4,271   $4,139   $4,252 

 

Cash Flows for the Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013

 

Operating Activities

 

Net cash provided by operating activities increased $18.3 million to $15.0 million for the year ended December 31, 2014 compared to approximately $3.3 million net cash used in operating activities for the year ended December 31, 2013. This increase was primarily the result of a $16.6 million increase in net operating income primarily associated with our operating communities, a $12.6 million reduction in prepaid expenses and other assets, primarily from applying deposits to acquisitions and deferred offering costs, a $0.5 million reduction in restricted cash, and a $0.2 million increase from security deposits, deferred rents and other liabilities. Partially offsetting these increases is $3.8 million in cash expenditures associated with the restructuring of management, a $1.0 million increase in net cash paid for acquisition and recapitalization costs, a $4.4 million increase in net interest payments, a $1.0 million decrease from accounts payable and other accrued expenses, a $0.4 million increase in general and administrative expenses, a $0.2 million increase in development and pursuit costs, and $0.8 million reduction in net cash provided by discontinued operations.

 

Investing Activities

 

Net cash used in investing activities was approximately $127.2 million during the year ended December 31, 2014 compared to approximately $49.4 million net cash used in investing activities during the year ended December 31, 2013. The increase in net cash used in investing activities was primarily the result of the use of approximately $135.1 million during year ended December 31, 2014 for the acquisition of six properties compared to the use of approximately $62.2 million during the year ended December 31, 2013 for the acquisition of five properties. Additions from property capital expenditures during the year ended December 31, 2014 totaled $3.4 million as compared to $2.3 million in the comparable prior year period and $1.5 million in cash paid for the acquisition of a mortgage note during the year ended December 31, 2013. Partially offsetting the cash used in investing activities during the year ended December 31, 2014 is approximately $11.2 million of net proceeds from the sale of an operating property and an unconsolidated joint venture operating property which are included in continued operations and $16.2 million from the sale of four operating properties included in discontinued operations during the year ended December 31, 2013.

 

Financing Activities

 

Net cash provided by financing activities was approximately $116.4 million during the year ended December 31, 2014 compared to approximately $56.8 million net cash provided by financing activities during the year ended December 31, 2013. The increase in net cash provided by financing activities was primarily due to $92.6 million of net proceeds from the issuance of our common stock, net of offering costs, a $72.8 million increase in proceeds from indebtedness, a $0.7 million reduction in related parties receivable, a $0.3 million reduction in prepayment fees for early extinguishment of debt, a $3.7 million reduction in payments for redemption of noncontrolling interest, and a $4.2 million reduction in net cash used in discontinued operations. Partially offsetting these increases is $98.9 million increase in debt repayment, a $1.2 million increase in payments of deferred loan costs, a $8.1 million increase in distributions to stockholders and unit holders, cash payments of $5.3 million for the redemption of our Class A preferred shares, and cash payments of $1.2 million to cover withholding taxes related to restricted shares vested during the year ended December 31, 2014.

 

Cash Flows for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

 

Operating Activities

 

Net cash used in operating activities was approximately $3.3 million for the year ended December 31, 2013 compared to net cash used in operating activities of approximately $1.2 million for the year ended December 31, 2012. The increase in net cash used in operating activities of $2.1 million is primarily a result of an increase of $0.4 million in restricted cash, increase of $0.3 million in prepaid and other assets, reduction of $0.9 million in accounts payable and accrued expenses, reduction of $1.7 million in cash provided by discontinued operations and other increases of $1.3 million from continuing operations.

 

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Investing Activities

 

Net cash used in investing activities was approximately $49.4 million during the year ended December 31, 2013 compared to net cash provided by investing activities of approximately $2.9 million during the year ended December 31, 2012. The increase in net cash used in investing activities was primarily the result of the use of approximately $62.2 million during the year ended December 31, 2013 for the acquisition of five properties compared to the use of approximately $4.5 million during the year ended December 31, 2012 for the acquisition of two properties. The purchase of real estate assets during the year ended December 31, 2013 totaled $2.3 million, including $1.5 million in cash paid for the acquisition of a mortgage note, compared to $1.5 million during the year ended December 31, 2012. Partially offsetting the cash used in investing activity is the net proceeds of approximately $16.3 million from the sale of four properties held for sale during the year ended December 31, 2013 compared to net proceeds of approximately $7.9 million from the sale of a property and net proceeds of approximately $0.8 million from the sale of land that was owned by Feldman prior to the 2012 Recapitalization during the year ended December 31, 2012.

 

Financing Activities

 

Net cash provided by financing activities was approximately $56.8 million during the year ended December 31, 2013 compared to net cash provided by financing activities of approximately $2.5 million during the year ended December 31, 2012. The increase in net cash provided by financing activities was primarily due to $54.5 million of net proceeds received from our public equity offering during the second quarter of 2013 and increased borrowings to finance acquisitions, partially offset by payments to redeem noncontrolling interests and for distributions to stockholders.

 

Income Taxes

 

No provision has been made for income taxes since all of our operations are held in pass-through entities and accordingly the income or loss of the company is included in the individual income tax returns of the partners or members.

 

We elected to be taxed as a REIT under the Code beginning with our taxable year ended December 31, 2004. As a REIT, we generally are not 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, we will be subject to federal income tax on our taxable income at regular corporate tax rates. We believe that we are organized and operate in a manner to qualify and be taxed as a REIT and we intend to operate so as to remain qualified as a REIT for federal income tax purposes.

 

Inflation

 

Inflation in the United States has been relatively low in recent years and did not have a significant impact on the results of operations for the company’s business for the periods shown in the consolidated historical financial statements. We do not believe that inflation poses a material risk to the company. The leases at our apartment properties are short term in nature. None are longer than two years, and most are one year or less.

 

Although the impact of inflation has been relatively insignificant in recent years, it does remain a factor in the United States economy and could increase the cost of acquiring or replacing properties in the future.

 

Contractual Obligations

 

As of December 31, 2014, we were subject to the contractual obligations summarized in the table below. Interest rates effective as of December 31, 2014 were used in the table to estimate interest payments on variable rate debt.

 

 

   Obligation Due Date 
Contractual Obligations      Less than 1           More than 5 
(in thousands)  Total   Year   1-3 Years   3-5 Years   Years 
Long-term debt (1)  $436,255   $14,455   $83,739   $37,770   $300,291 
Operating lease (2)   424    267    157    -    - 
                          
Total contractual obligations  $436,679   $14,722   $83,896   $37,770   $300,291 

 

(1)Amounts include principal and interest payments.
(2)Amounts relate to obligations under operating lease for our headquarters in Aventura, Florida.

 

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Off-Balance Sheet Arrangements

 

As of December 31, 2014, we had no off-balance sheet arrangements that have had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures.

 

Critical Accounting Policies

 

The preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) , which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses in the reporting periods. Our actual results may differ from these estimates.

 

We consider the following critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our consolidated financial statements. For a discussion of all of our significant accounting policies, see Note A to the Consolidated Financial Statements.

 

Purchase Price Allocation and Related Depreciation and Amortization

 

When we acquire apartment communities, management analyzes and determines the relative value of the components of real estate assets and intangible assets acquired and assigns useful lives to such components based on age and condition at the time of original acquisition. The allocation among components of real estate assets and intangible assets and the estimates of useful lives are highly subjective and are based in part on assumptions that could differ materially from actual results in future periods.

 

Capital Expenditures and Depreciation

 

Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized to the extent the total carrying value of the property does not exceed the estimated net realizable value of the completed property. Capitalization of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete and ready for its intended use, at which time the project is placed in service and depreciation commences. Real estate taxes, construction costs, insurance, and interest costs incurred during construction periods are capitalized. Capitalized real estate taxes and interest costs are amortized over periods which are consistent with the constructed assets. Real estate investments are stated at the lower of cost less accumulated depreciation or fair value, if deemed impaired, as described below. Depreciation on real estate is computed using the straight-line method over the estimated useful lives of the related assets, generally 35 to 50 years for buildings, two to 15 years for long-lived improvements and 3 to 7 years for furniture, fixtures and equipment. Ordinary repairs and maintenance costs are expensed. Significant improvements, renovations and replacements that extend the life of the assets are capitalized and depreciated over their estimated useful lives.

 

Impairment of Real Estate Assets

 

We evaluate our real estate assets when events or occurrences, which may include significant adverse changes in operations and/or economic conditions, indicate that the carrying amounts of such assets may not be recoverable. We assess a property’s recoverability by comparing the carrying amount of the property to our estimate of the undiscounted future operating cash flows expected to be generated over the holding period of the property, including cash flow from its eventual disposition. If our evaluation indicates that we may be unable to recover the carrying value of a property, we record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the property. Recording an impairment loss results in an immediate negative charge to net income. For real estate owned through unconsolidated real estate joint ventures or other similar real estate investment structures, if there are indicators of impairment, we compare the estimated fair value of our real estate investment to the carrying value, and record an impairment charge to the extent the fair value is less than the carrying amount and the decline in value is determined to be other than a temporary decline. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future operating results that could differ materially from actual results in future periods. For a discussion of our impairments see Note K to the Consolidated Financial Statements.

 

Revenue Recognition

 

Revenues are recorded when earned. Residential properties are leased under operating leases with terms of generally one year or less. Rental income is recognized when earned on a straight-line basis. Sales of real estate property occur through the use of a sales contract where gains or losses from real estate property sales are recognized upon closing of the sale. We use the accrual method and recognize gains or losses on the sale of our properties when the earnings process is complete, we have no significant continuing involvement and the collectability of the sales price and additional proceeds is reasonably assured, which is typically when the sale of the property closes.

 

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Property Expenses

 

Operating expenses associated with the rental properties include costs to maintain the property on a day to day basis as well as any utility costs, real estate taxes and insurance premiums. Operating expenses are recognized as incurred.

 

Share-Based Compensation

 

From time to time, we award restricted stock awards (“RSAs”) under the 2013 Equity Incentive Plan (as amended, the “2013 EIP”), which has approximately nine years remaining, to attract and retain independent directors, executive officers and other key employees. The RSAs issued to independent directors, executives and employees generally vest over four years. We recognize compensation expense for non-vested shares with service conditions on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures. The 2013 EIP was amended in April 2014. The shares can be issued as RSAs, stock appreciation rights, performance units, incentive awards and other equity-based awards.

 

Accounting for Recapitalization

 

For legal purposes, our 2012 Recapitalization consisted of the contribution by the Trade Street Funds of all of their respective interests in the entities that own the Contributed Properties and the Contributed Land Investments and the contribution by Trade Street Advisor GP, Inc., Trade Street Capital and Mr. Baumann and his wife and all of their interest in the real estate investment advisory and management platform to the surviving legal entity, Trade Street Residential, Inc., a Maryland corporation, formerly known as Feldman Mall Properties, Inc. prior to June 1, 2012. For accounting purposes the transaction was accounted for as a recapitalization, and TSIA, which was owned and controlled by Mr. Baumann, was deemed to be the “accounting acquirer.” Accordingly, the accompanying historical audited financial statements of Trade Street Residential, Inc. and the audited historical consolidated financial statements of Trade Street Residential, Inc. included elsewhere in this Annual Report and the discussion below represent the historical financial statements of the entities contributed to the Operating Partnership prior to June 1, 2012, which have been retroactively adjusted to reflect the legal capital of the recapitalized corporation, and Trade Street Residential Inc. subsequent to June 1, 2012. See Note A to the consolidated financial statements for further discussion.

 

Accounting for the Variable Interest Entity

 

Under Financial Accounting Standards Board, or FASB, Accounting Standard Codification, or ASC 810, “Consolidation,” when a reporting entity is the primary beneficiary of an entity that is a variable interest entity as defined in FASB ASC 810, the variable interest entity must be consolidated into the financial statements of the reporting entity. The determination of the primary beneficiary requires management to make significant estimates and judgments about rights, obligations, and economic interests in such entities as well as the same of the other owners. A primary beneficiary has both the power to direct the activities that most significantly impact the variable interest entity, and the obligation to absorb losses and the right to receive benefits from the variable interest entity. Unconsolidated joint ventures in which we do not have a controlling interest but exercise significant influence are accounted for using the equity method, under which we recognize our proportionate share of the joint venture’s earnings and losses. The entities contributed to the Operating Partnership in the 2012 Recapitalization were under common control, directly or indirectly owned by an individual.

 

Recent Accounting Standards

 

See Note A, “Nature of Business and Significant Accounting Policies” in the notes to the consolidated financial statements for a discussion of recent accounting standards issued during the year ended December 31, 2014.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Our future income, cash flows and fair value relevant to our financial instruments depends upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Based upon the nature of our operations, we are not subject to foreign exchange rate or commodity price risk. The principal market risk to which we are exposed is the risk related to interest rate fluctuations. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control contribute to interest rate risk. Our interest rate risk objective is to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve this objective, we manage our exposure to fluctuations in market interest rates for our borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. All of our financial instruments were entered into for other than trading purposes.

 

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Fixed Interest Rate Debt

 

As of December 31, 2014, we had approximately $297.8 million of fixed rate debt, or approximately 86.4% of our total outstanding debt, which limits our risk to fluctuating interest rates. Though a change in the market interest rates affects the fair market value, it does not impact net income to stockholders or cash flows. Our total outstanding fixed rate debt had a weighted average effective interest rate as of December 31, 2014 of 4.03% per annum with an average duration to maturity of 7.75 years.

 

Variable Interest Rate Debt

 

As of December 31, 2014, we had approximately $47.0 million of variable rate debt, or approximately 13.6% of our total outstanding debt, which was associated with the Revolver, but we did not have any interest rate swaps, caps or other derivative instruments in place, leaving the variable debt subject to interest rate fluctuations. The impact of a 1% increase or decrease in interest rates on the Revolver would result in a decrease or increase of annual net income of approximately $0.5 million, respectively. The Revolver had a weighted average effective interest rate as of December 31, 2014 of approximately 2.7% per annum with 2.1 years to maturity.

 

Item. 8 Financial Statements and Supplementary Data.

 

Our response to this item is included in a separate section at the end of this report beginning on page F-1.

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.

 

Not applicable.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, under the supervision of our Chief Executive Officer and Chief Accounting Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”). Based on such evaluation, our Chief Executive Officer and Chief Accounting Officer (principal financial officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the Evaluation Date. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control system was designed under the supervision of our Chief Executive Officer and Chief Accounting Officer (principal financial officer) and with the participation of management to provide reasonable assurance regarding the reliability of our financial reporting and our preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

All internal control systems, no matter how well designed and tested, have inherent limitations, including, among other things, the possibility of human error, circumvention or disregard. Therefore, even those systems of internal control that have been determined to be effective can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

 

Under the supervision of our Chief Executive Officer and Chief Accounting Officer (principal financial officer), management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2014.

 

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting due to an exemption for emerging growth companies under the JOBS Act.

 

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Changes in Internal Control Over Financial Reporting

 

During the quarter ended December 31, 2014, there were no changes in our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

This information is incorporated by reference from our Proxy Statement with respect to the 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2015.

 

Item 11. Executive Compensation.

 

This information is incorporated by reference from our Proxy Statement with respect to the 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2015.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Except as set forth below, the information required by this Item 12 is incorporated into this Form 10-K by reference from our Proxy Statement to be issued in connection with the 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2015.

 

Securities Authorized for Issuance under Equity Compensation Plans as of December 31, 2014

 

Equity Compensation Plan Information

 

           Number of securities 
           remaining available for 
           future issuance under 
   Number of securities to   Weighted-average   equity compensation 
   be issued upon exercise   exercise price of   plans (excluding 
   of outstanding options,   outstanding options,   securities reflected 
Plan category  warrants and rights   warrants and rights   in column (a)) 
   (a)   (b)   (c) 
             
Equity compensation plans approved by security holders(1)   179,927   $7.85    2,428,479 
Equity compensation plans not approved by security holders   -    -    - 
                
Totals   179,927   $7.85    2,428,479 

 

(1)See Note H to the Consolidated Financial Statements for more information about our stock-based compensation plan.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

This information is incorporated by reference from our Proxy Statement with respect to the 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2015.

 

Item 14. Principal Accountant Fees and Services.

 

This information is incorporated by reference from our Proxy Statement with respect to the 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 30, 2015.

 

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PART IV

 

Item 15. Exhibits and Financial Statements.

 

The exhibits listed on the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Report.

 

The following documents are filed as part of this report.

 

(1)Financial Statements

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2014 and 2013

Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

Notes to Consolidated Financial Statements

 

(2)Financial Statement Schedule

 

Schedule III – Real Estate and Accumulated Depreciation

 

All other schedules have been omitted since the required information is presented in the financial statements and the related notes or is not applicable.

 

(3)Index to Exhibits:

 

The following exhibits are filed as part of or incorporated by reference into this report.

 

Exhibit
No.
  Description
     
2.1   Contribution Agreement by and among Trade Street Property Fund I, LP, Trade Street Capital, LLC, Feldman Mall Properties, Inc., Feldman Equities Operating Partnership, LP, and BCOM Real Estate Fund, LLC, dated April 23, 2012, (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-11/A filed by the Registrant on February 14, 2013 (File No. 333-185936)).
     
2.2   First Amendment to Contribution Agreement, dated May 31, 2012 (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-11/A filed by the Registrant on February 14, 2013 (File No. 333-185936)).
     
3.1   Articles of Restatement of Trade Street Residential, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-11/A filed by the Registrant on March 29, 2013 (File No. 333-185936)).
     
3.2   Third Amended and Restated Bylaws of Trade Street Residential, Inc. (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-11/A filed by the Registrant on January 24, 2013 (File No. 333-185936)).
     
10.1   Standby Purchase Agreement, dated as of November 12, 2013, by and among Trade Street Residential, Inc., Senator Global Opportunity Fund LP, and Senator Global Opportunity Intermediate Fund L.P. (incorporated by reference to Exhibit 10.1 to the Current Report filed on Exhibit 8-K filed by the Registrant on November 12, 2013 (File No. 001-32365)).
     
10.2   Stockholders Agreement, dated as of January 16, 2014, by and among Trade Street Residential, Inc. and the Investors party thereto (incorporated by reference to Exhibit 10.1 to the Current Report filed on Form 8-K filed by the Registrant on January 21, 2014 (File No. 001-32365)).
     
10.3   Management Purchase Agreement, dated as of November 12, 2013, by and among Trade Street Residential, Inc., Michael Baumann and David Levin (incorporated by reference to Exhibit 10.2 to the Current Report filed on Form 8-K filed by the Registrant on November 12, 2013 (File No. 001-32365)).
     
10.4   First Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP, dated February 8, 2013 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-11/A filed by the Registrant on February 14, 2013 (File No. 333-185936)).

 

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Exhibit
No.
  Description
     
10.5   Second Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP, dated March 26, 2013 (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-11/A filed by the Registrant on March 29, 2013 (File No. 333-185936)).
     
10.6   Amendment No. 1 to Second Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP, dated February 23, 2014 (incorporated by reference to Exhibit 10.2 to the Current Report filed on Form 8-K filed by the Registrant on February 27, 2014 (File No. 001-32365)).
     
10.7   Credit Agreement, dated as of January 31, 2014, by and among Trade Street Residential, Inc., Trade Street Operating Partnership, LP, Regions Bank, as lead arranger, U.S. Bank National Association and the other lenders named therein (the “Regions Credit Agreement”) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on February 5, 2014 (File No. 001-32365)).
     
10.8   First Amendment to Credit Agreement, dated as of February 24, 2014, by and among Trade Street Operating Partnership, LP, Trade Street Residential, Inc., each of the Lenders party thereto, and Regions Bank, as Administrative Agent (incorporated by reference to Exhibit 10.4 to the Current Report filed on Form 8-K filed by the Registrant on February 27, 2014 (File No. 001-32365)).
     
10.9*   Second Amendment to Credit Agreement, dated as of April 7, 2014, by and among Trade Street Operating Partnership, LP, Trade Street Residential, Inc., each of the Lenders party thereto, and Regions Bank, as Administrative Agent.
     
10.10*   Third Amendment to Credit Agreement dated, as of August 5, 2014, by and among Trade Street Operating Partnership, LP, Trade Street Residential, Inc., each of the Lenders party thereto, and Regions Bank, as Administrative Agent.
     
10.11   Fourth Amendment to Credit Agreement, dated as of October 16, 2014, by and among Trade Street Operating Partnership, LP, Trade Street Residential, Inc., each of the Lenders party thereto, and Regions Bank, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on October 21, 2014 (File No. 001-32365)).
     
10.12   Revolving Note by Trade Street Residential Operating Partnership, LP in the amount of $25,000,000 for Regions Bank, dated January 31, 2014 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on February 5, 2014 (File No. 001-32365)).
     
10.13   Revolving Note by Trade Street Residential Operating Partnership, LP in the amount of $50,000,000 for Regions Bank, dated January 31, 2014 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on February 5, 2014 (File No. 001-32365)).
     
10.14   Swingline Note by Trade Street Residential Operating Partnership, LP for Regions Bank in the amount of $10,000,000, dated January 31, 2014 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Registrant on February 5, 2014 (File No. 001-32365)).
     
10.15   Guaranty, dated as of January 31, 2014, executed and delivered by Trade Street Residential, Inc., BSF-Arbors River Oaks, LLC, Post Oak JV, LLC, Fox Partners, LLC and Merce Partners LLC in favor of Regions Bank, in its capacity as Administrative Agent for the lenders named in the Regions Credit Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on February 5, 2014 (File No. 001-32365)).
     
10.16   Third Amendment to Purchase and Sale Agreement by and between Miller Creek Residences, LLC and Trade Street Operating Partnership, LP, dated December 3, 2013 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.17   Deed of Trust, Assignment of Leases and Rents and Security Agreement and Fixture Filing by TS Miller Creek, LLC to David J. Harris, as Trustee, for the benefit of New York Life Insurance Company, dated January 21, 2014 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.18   Promissory Note by TS Miller Creek, LLC to New York Life Insurance Company, dated January 21, 2014 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.19   Guaranty executed by Trade Street Residential, Inc. and Trade Street Operating Partnership, LP for the benefit of New York Life Insurance Company, dated January 21, 2014, with respect to Miller Creek (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).

 

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Exhibit
No.
  Description
     
10.20   Purchase and Sale Agreement by and between Wake Forest Apartments LLC and Trade Street Operating Partnership, LP, dated October 29, 2012 (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.21   Amendment to Purchase and Sale Agreement by and between Wake Forest Apartments LLC and Trade Street Operating Partnership, LP, dated January 14, 2014 (incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.22   Deed of Trust, Assignment of Leases and Rents and Security Agreement and Fixture Filing by Wake Forest Apartments LLC to The Fidelity Company, as Trustee, for the benefit of New York Life Insurance Company, dated January 21, 2014 (incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.23   Promissory Note by Wake Forest Apartments, LLC to New York Life Insurance Company, dated January 21, 2014 (incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.24   Guaranty executed by Trade Street Residential, Inc. and Trade Street Operating Partnership, LP for the benefit of New York Life Insurance Company, dated as of January 21, 2014, with respect to the Estate of Wake Forest (incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K filed by the Registrant on January 27, 2014 (File No. 001-32365)).
     
10.25   Second Amendment to Purchase and Sale Agreement, by and between The Aventine Greenville, LLC and Trade Street Operating Partnership, LP, dated December 26, 2013 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.26   Third Amendment to Purchase and Sale Agreement, by and between The Aventine Greenville, LLC and Trade Street Operating Partnership, LP, dated January 3, 2014 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.27   Fourth Amendment to Purchase and Sale Agreement, by and between The Aventine Greenville, LLC and Trade Street Operating Partnership, LP, dated January 17, 2014 (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.28   Promissory Note by TS Aventine, LLC to The Northwestern Mutual Life Insurance Company, dated February 3, 2014 (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.29   Guarantee of Recourse Obligations executed by Trade Street Residential, Inc. for the benefit of The Northwestern Mutual Life Insurance Company, dated February 3, 2014 (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.30   Purchase and Sale Agreement by and among Morrow Investors, Inc., Trade Street Operating Partnership, LP, and the sellers named therein, dated February 26, 2013 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 4, 2014 (File No. 001-32365)).
     
10.31   Deed of Trust and Security Agreement by and among TS Craig Ranch, LLC, Kevin L. Westra and The Northwestern Mutual Life Insurance Company, dated March 12, 2014 (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on March 24, 2014 (File No. 001-32365)).
     
10.32   Promissory Note by TS Craig Ranch, LLC to The Northwestern Mutual Life Insurance Company, dated March 12, 2014 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on March 24, 2014 (File No. 001-32365)).
     
10.33   Guarantee of Recourse Obligations executed by Trade Street Residential, Inc. for the benefit of The Northwestern Mutual Life Insurance Company, dated March 12, 2014 (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on March 24, 2014 (File No. 001-32365)).
     
10.34   Binding Term Sheet for the Repurchase of Class A Preferred Stock by and among Trade Street Residential, Inc., BCOM Real Estate Fund Liquidating Trust and BREF/BUSF Millenia Associates, LLC, dated February 23, 2014 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on February 27, 2014 (File No. 001-32365)).

 

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Exhibit
No.
  Description
     
10.35   Separation Agreement and Release by and between Michael D. Baumann and Trade Street Residential, Inc., dated February 23, 2014 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on February 27, 2014 (File No. 001-32365)).
     
10.36   Separation Agreement and Release by and between David Levin and Trade Street Residential, Inc., dated as of March 17, 2014 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 18, 2014 (File No. 001-32365)).
     
10.37+   Indemnification Agreement, dated as of January 16, 2014, by and between Trade Street Residential, Inc. and Michael Simanovsky (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 21, 2014 (File No. 001-32365)).
     
10.38+   Indemnification Agreement, dated as of February 11, 2014, by and between Trade Street Residential, Inc. and Evan Gartenlaub (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed by the Registrant on February 12, 2014 (File No. 001-32365)).
     
10.39   Indemnification Agreement by and between Trade Street Residential, Inc. and each of its directors and officers listed on Schedule A thereto (incorporated by reference to Exhibit 10.1 to the Quarterly Report on 10-Q filed by the Registrant on August 11, 2014 (File No. 001-32365)).
     
10.40   Separation Agreement and Release by and between Ryan Hanks and Trade Street Residential, Inc., dated November 3, 2014 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on 10-Q filed by the Registrant on November 7, 2014 (File No. 001-32365)).
     
10.41+   Employment Agreement, effective as of April 30, 2014, by and between Richard Ross and Trade Street Residential, Inc. (incorporated by reference to Exhibit 10.2 to the Quarterly Report on 10-Q filed by the Registrant on August 11, 2014 (File No. 001-32365)).
     
10.42+   Employment Agreement, effective as of August 7, 2014, by and between Ryan Hanks and Trade Street Residential, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on 10-Q filed by the Registrant on August 11, 2014 (File No. 001-32365)).
     
10.43+   Employment Agreement, effective as of May 19, 2014, by and between Randall Eberline and Trade Street Residential, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 22, 2014 (File No. 001-32365)).
     
10.44   Class A Preferred Stock Redemption Agreement, dated as of October 17, 2014, by and among Trade Street Residential, Inc., Trade Street Operating Partnership, LP, BCOM Real Estate Fund, LLC Liquidating Trust, Trade Street Property Fund I, LP Liquidating Trust and Michael D. Baumann (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on October 21, 2014 (File No. 001-32365)).
     
10.45+   Trade Street Residential, Inc. Amended and Restated 2013 Equity Incentive Plan, as amended and restated April 28, 2014 (incorporated by reference to Appendix A to Trade Street Residential, Inc.’s definitive Proxy Statement filed on April 29, 2014).
     
21.1*   List of subsidiaries of Trade Street Residential, Inc.
     
23.1*   Consent of Grant Thornton LLP.
     
31.1*   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2*   Certification of Chief Accounting Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1*   Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2*   Certification of Chief Accounting Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

56
 

 

For the years ended December 31, 2014, 2013 and 2012

101.INS   XBRL Instance Document   Submitted electronically with this report
101.SCH   XBRL Taxonomy Extension Schema Document   Submitted electronically with this report
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   Submitted electronically with this report
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document   Submitted electronically with this report
101.LAB   XBRL Taxonomy Extension Label Linkbase Document   Submitted electronically with this report
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document   Submitted electronically with this report

 

+Denotes a management contract or compensatory plan or arrangement.
*Filed herewith.

 

57
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  TRADE STREET RESIDENTIAL, INC.
     
Date: March 13, 2015 By: /s/ Richard H. Ross
   

Richard H. Ross, Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated:

 

SIGNATURE   TITLE   DATE
         
 /s/ Richard H. Ross   Chief Executive Officer (principal executive officer)   March 13, 2015
Richard H. Ross        
         
/s/ Randall Eberline   Chief Accounting Officer (principal financial officer)   March 13, 2015
Randall Eberline        
         
/s/ Mack D. Pridgen III   Chairman of the Board   March 13, 2015
Mack D. Pridgen III        
         
/s/ Randolph C. Coley   Director   March 13, 2015
Randolph C. Coley        
         
/s/ Nirmal Roy   Director   March 13, 2015
Nirmal Roy        
         
/s/ Michael Simanovsky   Director   March 13, 2015
Michael Simanovsky        
         
/s/ Adam Sklar   Director   March 13, 2015
Adam Sklar        

 

58
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders of

Trade Street Residential, Inc.

 

We have audited the accompanying consolidated balance sheets of Trade Street Residential, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Trade Street Residential, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

/s/ Grant Thornton LLP

Miami, Florida

March 13, 2015

 

F-1
 

 

TRADE STREET RESIDENTIAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 

   December 31, 
   2014   2013 
         
ASSETS          
Real estate assets          
Land and improvements  $88,766   $58,560 
Buildings and improvements   464,002    272,849 
Furniture, fixtures, and equipment   15,774    9,016 
    568,542    340,425 
Less accumulated depreciation   (27,475)   (14,369)
Net investment in operating properties   541,067    326,056 
           
Land held for future development (including $0 and $1,477 of consolidated variable interest entity, respectively)   -    31,963 
Real estate assets held for sale   3,492    - 
Net real estate assets   544,559    358,019 
Other assets          
Investment in unconsolidated joint venture   -    2,421 
Cash and cash equivalents (including $0 and $148 of consolidated variable interest entity, respectively)   13,308    9,037 
Restricted cash and lender reserves   2,590    3,203 
Deferred financing costs, net   4,599    3,022 
Intangible assets, net   588    1,571 
Prepaid expenses and other assets   2,475    9,560 
Due from related parties   -    803 
Assets related to real estate assets held for sale   549    - 
    24,109    29,617 
           
TOTAL ASSETS  $568,668   $387,636 
           
LIABILITIES          
Indebtedness  $344,756   $249,584 
Accrued interest payable   887    840 
Accounts payable and accrued expenses   7,531    6,119 
Dividends payable   3,709    1,247 
Security deposits, deferred rent and other liabilities   1,783    1,443 
TOTAL LIABILITIES   358,666    259,233 
           
Commitments & contingencies   -    - 
           
STOCKHOLDERS' EQUITY          
Class A preferred stock; $0.01 par value; 423 shares authorized, 0 and 309 shares issued and outstanding at December 31, 2014 and 2013, respectively   -    3 
Common stock, $0.01 par value per share; 1,000,000 authorized; 36,699 and 11,469 shares issued and outstanding at December 31, 2014 and 2013, respectively   367    115 
Additional paid-in capital   274,733    162,681 
Accumulated deficit   (80,417)   (52,053)
TOTAL STOCKHOLDERS' EQUITY - TRADE STREET RESIDENTIAL, INC.   194,683    110,746 
Noncontrolling interest   15,319    17,657 
TOTAL STOCKHOLDERS' EQUITY   210,002    128,403 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $568,668   $387,636 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2
 

 

TRADE STREET RESIDENTIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

   Years Ended December 31, 
   2014   2013   2012 
Property revenues               
Rental revenue  $51,372   $26,261   $13,212 
Other property revenues   5,495    2,696    1,248 
Total property revenues   56,867    28,957    14,460 
                
Property expenses               
Property operations and maintenance   16,186    9,243    5,331 
Real estate taxes and insurance   8,595    3,942    2,122 
Total property expenses   24,781    13,185    7,453 
                
Other expenses               
General and administrative   8,103    8,683    3,748 
Management transition expenses   10,021    -    - 
Interest expense   12,942    8,947    3,751 
Depreciation and amortization   19,250    11,918    4,844 
Development and pursuit costs   369    180    19 
Acquisition and recapitalization costs   2,675    919    2,331 
Amortization of deferred financing costs   1,022    1,443    636 
Loss on early extinguishment of debt   1,629    1,146    538 
Total other expenses   56,011    33,236    15,867 
                
Other income   45    88    267 
Income from unconsolidated joint venture   106    67    46 
Impairment associated with land holdings   (7,962)   (12,419)   - 
Gains on sales of real estate assets   1,419    -    - 
Gain on bargain purchase   -    6,900    - 
                
Loss from continuing operations   (30,317)   (22,828)   (8,547)
                
Income (loss) from operation of discontinued rental property, including gains/losses on disposals (See Note L)   -    6,272    (4)
                
Net loss   (30,317)   (16,556)   (8,551)
Loss allocated to noncontrolling interest holders   1,953    2,462    1,709 
Dividends declared and accreted on preferred stock and units   (693)   (940)   (376)
Dividends to restricted stockholders   -    (52)   - 
Extinguishment of equity securities   1,216    11,716    - 
Adjustments attributable to participating securities   44    (2,241)   - 
Net income (loss) attributable to common stockholders  $(27,797)  $(5,611)  $(7,218)
                
Earnings (loss) per common share - basic and diluted:               
Continuing operations  $(0.79)  $(1.36)  $(3.17)
Discontinued operations   -    0.72    - 
Net loss per share attributable to common stockholders  $(0.79)  $(0.64)  $(3.17)
                
Weighted average number of shares - basic and diluted   35,325    8,762    2,278 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3
 

 

TRADE STREET RESIDENTIAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2014, 2013 AND 2012

(in thousands)

 

   Trade Street Residential, Inc.                 
                   Additional                   Class A 
   Preferred Stock   Common Stock   Paid-in   Accumulated   Noncontrolling   Total   Temporary   Preferred 
   Shares   Amount   Shares   Amount   Capital   Deficit   Interests   Equity   Equity   Shares 
                                         
Equity, January 1, 2012   -   $-    96   $1   $108,303    $(31,117)  $7,150   $84,337   $       
Contributions from partners and members   -    -    -    -    3,731    -    74    3,805    -    - 
Distributions to partners and members   -    -    -    -    (4,209)   -    (254)   (4,463)   -    - 
Net loss   -    -    -    -         (6,842)   (572)   (7,414)   (1,137)   - 
Recapitalization of Feldman Mall Properties   -    -    3,408    34    (9,927)   -    10,182    289    -    - 
Recapitalization costs   -    -    -    -    (868)   -    -    (868)   -    - 
Transfer of stock and units to temporary equity   -    -    -    -    (37,696)   -    -    (37,696)   37,696    173 
Accretion of preferred stock and preferred units   -    -    -    -    (376)   -    -    (376)   376    - 
Redemption of noncontrolling interests   -    -    53    1    (1,669)   -    (5,989)   (7,657)   -    - 
Private placement   -    -    178    2    2,673    -    -    2,675    -    - 
Shares issued for acquisition   -    -    940    9    14,094    -    -    14,103    9,268    100 
Distributions to stockholders   -    -    42    -    (496)   -    -    (496)   -    - 
Equity, December 31, 2012   -    -    4,717    47    73,560    (37,959)   10,591    46,239    46,203    273 
                                                   
Proceeds from sale of common stock, net   -    -    6,354    64    54,299    -    -    54,363    -    - 
Distributions   -    -    -    -    -    -    (70)   (70)   -    - 
Net loss   -    -    -    -    -    (14,094)   (2,462)   (16,556)   -    - 
Dividends to stockholders   -    -    -    -    (4,998)   -    (621)   (5,619)   -    - 
Shares issued for acquisition   36    -    -    -    3,318    -    -    3,318    -    - 
Stock based compensation, net of forfeitures   -    -    377    4    1,257    -    -    1,261    -    - 
Shares issued to directors   -    -    21    -    210    -    -    210    -    - 
Accretion of preferred stock and preferred units   -    -    -    -    (47)   -    -    (47)   47    - 
Transfer of stock and units to permanent equity   273    3    -    -    26,850    -    19,397    46,250    (46,250)   (273)
Exchange of Common OP for Class B contingent units   -    -    -    -    8,232    -    (8,232)   -    -    - 
Noncontrolling interest in rental property sold   -    -    -    -    -    -    (946)   (946)   -    - 
                                                   
Equity, December 31, 2013   309    3    11,469    115    162,681    (52,053)   17,657    128,403    -    - 
Proceeds from sale of common stock, net   -    -    24,882    249    146,881    -    -    147,130    -    - 
Net loss   -    -    -    -    -    (28,364)   (1,953)   (30,317)   -    - 
Distributions to stockholders and unit holders   -    -    -    -    (14,171)   -    (890)   (15,061)   -    - 
Stock-based compensation - management transition   -    -    375    4    3,748    -    -    3,752    -    - 
Stock-based compensation, net of forfeitures   -    -    130    1    476    -    -    477    -    - 
Surrender of shares to cover tax withholding of stock compensation   -    -    (157)   (2)   (1,194)   -    -    (1,196)          
Redemption of preferred A stock   (309)   (3)   -    -    (25,636)   -    -    (25,639)   -    - 
Conversion of Class B contingent units into Common OP units   -    -    -    -    1,948    -    505    2,453    -    - 
                                                   
Equity balance, December 31, 2014   -   $-    36,699   $367   $274,733   $(80,417)  $15,319   $210,002   $-    - 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4
 

 

TRADE STREET RESIDENTIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Years Ended December 31, 
   2014   2013   2012 
Cash flows from operating activities:               
Net loss  $(30,317)  $(16,556)  $(8,551)
(Income) loss from discontinued operations   -    (6,272)   4 
Loss from continuing operations   (30,317)   (22,828)   (8,547)
                
Adjustments to reconcile net loss to net cash provided by operating activities:               
Depreciation and amortization   19,250    11,918    4,844 
Impairment associated with land holdings   7,962    12,419    - 
Amortization of tax abatement   339    88    - 
Amortization of deferred financing costs   1,022    1,443    636 
Loss on early extinguishment of debt   1,629    1,146    538 
Non-cash compensation from conversion of Class B contingent units into common OP units   2,453    -    - 
Stock compensation   4,229    1,471    - 
Income of unconsolidated joint venture   (106)   (67)   (46)
Interest accrued on related party receivable   (15)   (78)   (76)
Gains on sales of real estate assets   (1,419)   -    - 
Gain on bargain purchase   -    (6,900)   - 
Net changes in assets and liabilities:               
Restricted cash and lender reserves   63    (406)   (10)
Prepaid expenses and other assets   7,884    (4,679)   (4,407)
Accounts payable, accrued expenses and accrued interest payable   1,458    2,030    2,968 
Due to related parties   (120)   (83)   99 
Security deposits, deferred rent and other liabilities   754    505    337 
Net cash provided by (used in) operating activities - continuing operations   15,066    (4,021)   (3,664)
Net cash provided by operating activities - discontinued operations   -    757    2,504 
Net cash provided by (used in) operating activities   15,066    (3,264)   (1,160)
                
Cash flows from investing activities:               
Proceeds from sales of real estate assets   11,209    -    844 
Cash distributions received from unconsolidated joint venture   225    228    446 
(Deconsolidation) / consolidation of variable interest entity   (148)   148    - 
Acquisitions of communities   (135,098)   (62,178)   (4,480)
Acquisition of mortgage loan   -    (1,450)   - 
Property capital expenditures   (3,405)   (2,313)   (1,469)
Net cash used in investing activities - continuing operations   (127,217)   (65,565)   (4,659)
Net cash provided by investing activities - discontinued operations   -    16,159    7,552 
Net cash provided by (used in) investing activities   (127,217)   (49,406)   2,893 
                
Cash flows from financing activities:               
Proceeds from issuance of common stock, net of offering costs   147,130    54,528    - 
Proceeds from indebtedness   134,750    62,000    32,274 
Repayments of indebtedness   (142,903)   (43,983)   (27,852)
Payments of deferred loan costs   (3,597)   (2,428)   (1,833)
Prepayment fees for early extinguishment of debt   (706)   (1,014)   (269)
Distributions to stockholders and unit holders   (12,600)   (4,511)   (359)
Decrease (increase) in related party receivable   845    146    (803)
Payment of redemption of Class A preferred stock   (5,301)   -    - 
Payments for redemption of noncontrolling interest   -    (3,758)   - 
Shares surrendered for payment of withholding taxes   (1,196)   -    - 
Distributions to noncontrolling interest   -    -    (61)
Contributions from noncontrolling interest   -    -    74 
Distributions to partners and members   -    -    (786)
Capital contributions from partners and members   -    -    2,629 
Cash acquired from recapitalization   -    -    23 
Recapitalization costs   -    -    (868)
Proceeds received from private placement   -    -    2,675 
Net cash provided by financing activities - continuing operations   116,422    60,980    4,844 
Net cash used in financing activities - discontinued operations   -    (4,171)   (2,325)
Net cash provided by financing activities   116,422    56,809    2,519 
                
Net change in cash and cash equivalents   4,271    4,139    4,252 
Cash and cash equivalents at beginning of period   9,037    4,898    646 
Cash and cash equivalents at end of period  $13,308   $9,037   $4,898 

 

The accompanying notes are an integral part of these consolidated financial statements. (continued)

 

F-5
 

 

TRADE STREET RESIDENTIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

 

   Years Ended December 31, 
   2014   2013   2012 
             
Supplemental Disclosure of Cash Flow Information:               
Cash paid during the period for interest, net of capitalized interest of  $0, $145, and $355 respectively.  $12,895   $8,492   $5,044 
                
Supplemental Disclosure of Non-Cash Investing & Financing Activities:               
Note payable issued as consideration for purchase of business  $103,325   $98,322   $44,996 
Stock issued in connection with rights offering  $7,500   $-   $- 
Redemption of Class A preferred stock  $26,855   $-   $- 
Acquisition consideration payable in preferred stock  $-   $294   $3,674 
Stock issued for consideration of business acquisition  $-   $3,318   $23,371 
Transfer preferred shares/units to permanent equity  $-   $46,250   $- 
Offering costs included in accounts payable and accrued expenses  $-   $164   $- 
Transfer preferred shares/units to temporary equity  $-   $-   $37,696 
Reclassification of loan from real estate loans to land and improvements  $-   $-   $11,000 
Payable for the redemption of noncontrolling interest  $-   $-   $7,657 
Non cash distribution of accounts receivables to partners and members  $-   $-   $645 
Net assets acquired from recapitalization  $-   $-   $266 
Stock dividend to common stockholders  $-   $-   $64 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6
 

 

TRADE STREET RESIDENTIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A—NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Trade Street Residential, Inc. (the “Company” or “TSRE”), formerly Feldman Mall Properties, Inc. (the “Predecessor”), is a Maryland corporation that qualifies and has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company conducts substantially all of its operations through Trade Street Operating Partnership (the “Operating Partnership”). The Company’s consolidated financial statements as of and for the years ended December 31, 2014 and 2013, represent the combination of certain real estate entities and management operations under common control that were contributed to the Company on June 1, 2012 in a transaction accounted for as a reverse recapitalization (the “2012 Recapitalization”), as it was a capital transaction in substance, rather than a business combination, with no goodwill being recorded. For accounting purposes, the legal acquiree (the Company) was treated as the continuing reporting entity that acquired the legal acquirer (the Predecessor). See Note G for more information regarding the Company’s 2012 Recapitalization. The consolidated financial statements for the year ended December 31, 2012 include the operations and cash flows of the contributed companies for the five months ended May 31, 2012, the day prior to effectiveness of the 2012 Recapitalization. The Company completed its initial public offering in May 2013. On January 16, 2014, the Company completed a Rights Offering to the Company’s existing stockholders (see Note G – “Common Stock Offerings”).

 

The Company is engaged in the business of acquiring, owning, operating and managing high quality, conveniently located apartment communities in mid-sized cities and suburban submarkets of larger cities primarily in the southeastern United States, including Texas.

 

As of December 31, 2014, the Company had interests in 4,889 apartment units in 19 communities. The Company’s revenues are primarily derived from rents received from residents in its apartment communities. Under the terms of those leases, residents are obligated to reimburse the Company for certain utility costs. These utility reimbursements are recorded as other property revenues in the consolidated statements of operations. In 2012, prior to the Recapitalization, the Company earned fees from serving as an adviser to affiliates and other third parties with transactions involving real estate assets.

 

The Company, through its affiliates, actively manages the acquisition and operations of its real estate assets.

 

Strategic Alternative Review

 

On November 3, 2014, the Company’s Board of Directors announced it would undertake a review of strategic alternatives to enhance stockholder value and retained J.P. Morgan Securities LLC as its financial advisor and Morrison & Foerster LLP as its legal advisor during this process. This review will include, among other alternatives, a sale, merger, acquisition or other form of business combination, or a sale or acquisition of assets, or a debt or equity recapitalization.  However, the Company has not made a decision to pursue any specific strategic transaction or any other strategic alternative, and there is no set timetable for completion of this strategic review process.  There can be no assurance that the exploration of strategic alternatives will result in the completion of any transaction or other alternative (see Note G – “Recapitalization”).

 

Summary of Significant Accounting Policies

 

Basis of Presentation: The accompanying consolidated financial statements have been prepared by the Company’s management pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with U.S. generally accepted accounting principles (“GAAP”) and represent the assets and liabilities and operating results of the Company, the Operating Partnership and their wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 810, “Consolidation,” when a reporting entity is the primary beneficiary of an entity that is a variable interest entity (“VIE”) as defined in FASB ASC 810, the VIE must be consolidated into the financial statements of the reporting entity. The determination of which owner is the primary beneficiary of a VIE requires management to make significant estimates and judgments about the rights, obligations, and economic interests of each interest holder in the VIE. A primary beneficiary has both the power to direct the activities that most significantly impact the VIE and the obligation to absorb losses or the right to receive benefits from the VIE. During the first quarter of 2013, the Company sold its 70% interest in a VIE to its joint venture partner (see Note L) and began consolidation of another VIE, which was deconsolidated during the first quarter of 2014 upon completion of foreclosure proceedings (see Note C).

 

Joint ventures in which the Company does not have a controlling interest but exercises significant influence are accounted for using the equity method, under which the Company recognizes its proportionate share of the joint venture’s earnings and losses. The Company held a 50% interest in BSF/BR Augusta JV, LLC, the owner of The Estates at Perimeter, an operating property, which was accounted for under the equity method until the Company sold its interest in that operating property on December 10, 2014 (see Note F).

 

F-7
 

 

Use of Estimates: The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in these Consolidated Financial Statements and accompanying notes. The more significant estimates include those related to whether the carrying values of real estate assets have been impaired and estimates related to the valuation of the Company’s investment in a joint venture. While management believes that the estimates used are reasonable, actual results could differ from the estimates.

 

Acquisition of Operating Properties: The Company has accounted for acquisitions of its operating properties, consisting of multifamily apartment communities and land held for future development, as business combinations in accordance with GAAP. Estimates of fair value based on future cash flows and other valuation techniques are used to allocate the purchase price between land, buildings, building improvements, equipment, identifiable intangible assets such as in-place leases and tax abatements, and other assets and liabilities.

 

Transaction costs related to the acquisition of an operating property, such as broker fees, certain transfer taxes, legal, accounting, valuation, and other professional and consulting fees, are expensed as incurred and are included in acquisition and recapitalization costs in the consolidated statements of operations.

 

Real Estate Assets: Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired, as described below. Depreciation on real estate is computed using the straight-line method over the estimated useful lives of the related assets, generally 35 to 50 years for buildings, 2 to 15 years for long-lived improvements and 3 to 7 years for furniture, fixtures and equipment. Expenditures that enhance the value of existing real estate assets or substantially extend the lives of those assets are capitalized and depreciated over the expected useful lives of such enhancements. Expenditures necessary to maintain a real estate asset in ordinary operating condition are expensed as incurred.

 

Construction and improvement costs incurred in connection with the development of new properties or the redevelopment of existing properties are capitalized to the extent the total carrying value of the property does not exceed the estimated net realizable value of the completed property. Capitalization of these costs begins when the activities and related expenditures commence and ceases when the project is substantially complete and ready for its intended use, at which time the project is placed in service and depreciation commences. Real estate taxes, construction costs, insurance, and interest costs incurred during construction periods are capitalized. Capitalized real estate taxes and interest costs are amortized over periods which are consistent with the constructed assets. If the Company determines the completion of development or redevelopment is no longer probable, it expenses all capitalized costs which are not recoverable.

 

Land Held for Future Development: Land held for future development represented real estate the Company planned to develop in the future, but for which no construction or predevelopment activities were ongoing. Accordingly, interest, property taxes, insurance and all other costs are expensed as incurred and are included in development and pursuit costs in the accompanying consolidated statements of operations.

 

Real Estate Assets Held for Sale: The Company periodically classifies real estate assets, including land, as held for sale. An asset is classified as real estate assets held for sale after the Company’s Board of Directors commits to a plan to sell an asset, the asset is ready to be sold in its current condition, an active program to locate buyers has been initiated and the sale is expected to be completed in one year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reported at the lower of net book value or estimated fair value, less costs to sell the asset. Real estate assets held for sale are stated separately in the accompanying consolidated balance sheets. Subsequent to classifying an operating property as held for sale, no further depreciation expense is recorded. For periods beginning January 1, 2014, operating results from real estate assets held for sale are included in loss from continuing operations in the accompanying statements of operations (see Note L).

 

Impairment of Real Estate Assets: The Company periodically evaluates its real estate assets when events or circumstances indicate that the carrying amounts of such assets may not be recoverable. The Company assesses the recoverability of such carrying amounts by comparing the carrying amount of the property to its estimate of the undiscounted future operating cash flows expected to be generated over the holding period of the asset including its eventual disposition. If the carrying amount exceeds the aggregate undiscounted future operating cash flows, an impairment loss is recognized to the extent the carrying amount exceeds the estimated fair value of the property and is reported as a component of continuing operations. For real estate owned through unconsolidated real estate joint ventures or other similar real estate investment structures, at each reporting date, the Company compares the estimated fair value of these investments to their carrying value and records an impairment charge to the extent fair value is less than the carrying amount and the decline in value is determined to be other than temporary. In estimating fair value, management uses appraisals, internal estimates, and discounted cash flow calculations, which maximizes inputs from a marketplace participant’s perspective (see Note L).

 

Cash and Cash Equivalents: The Company classifies highly liquid investments with an original maturity of three months or less, at the time of purchase, as cash equivalents. The Company maintains its cash (including restricted cash) in bank deposit accounts and may at times maintain balances in excess of federal insured limits.

 

F-8
 

 

Restricted Cash and Lender Reserves: Restricted cash consists of escrow accounts for real estate taxes and insurance and restricted cash reserves for capital improvements and repairs on certain properties. As improvements and repairs are completed, related costs incurred by the Company are funded from these reserve accounts. Restricted cash also includes cash held in escrow accounts by mortgage companies on behalf of the Company for payment of property taxes, insurance, interest and security deposits.

 

Revenue Recognition: Revenues are recorded when earned. Residential properties are leased under operating leases with terms of generally one year or less. Rental income is recognized when earned on a straight-line basis. Income from related party advisory fees and related accounts receivables are recorded when earned. Interest income and any related receivable is recorded when earned.

 

Sales of real estate property occur through the use of a sales contract and gains or losses from real estate property sales are recognized upon closing of the sale. The Company uses the accrual method and recognizes gains or losses on the sale of its properties when the earnings process is complete, there is no significant continuing involvement and the collectability of the sales price and collection of additional proceeds is reasonably assured, which is typically when the sale of the property closes.

 

Property Expenses: Operating expenses associated with the Company’s rental properties include the costs of labor and costs to maintain the property on a day-to-day basis as well as any utility costs, real estate taxes and insurance premiums. Operating expenses are recognized as incurred.

 

Stock-Based Compensation: The Company accounts for stock-based compensation under the fair value method discussed in ASC Topic 718, “Compensation—Stock Compensation,” which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures. The fair value of stock awards is equal to the fair value of the Company's stock on the grant date. This guidance requires the Company to expense the fair value of employee restricted stock over the requisite service period.

 

Noncontrolling Interests: Until March 1, 2013, the Company held majority interests in certain properties through wholly-owned subsidiaries that were party to operating agreements with third parties. The Company recorded noncontrolling third-party interests in these properties at their historical allocated cost, adjusting the basis prospectively for their share of the respective consolidated investments’ net income or loss or equity contributions and distributions. These noncontrolling interests were not redeemable by the third-party owners and were presented as part of permanent equity. Subsequent to the Company’s initial public offering on May 16, 2013, noncontrolling interests also include common units in the Operating Partnership held by certain limited partners other than the Company. Through December 31, 2013, income and losses were allocated to the noncontrolling interest holders based on their economic ownership percentage. For periods beginning January 1, 2014, due to the conversion of all remaining contingent B units into common units of the Operating Partnership as discussed in Note G, the Company allocates income and loss to noncontrolling interests based on the weighted-average common unit ownership interest in the Operating Partnership, which was 6.2% for the year ended December 31, 2014.

 

Intangible Assets: The Company allocates the purchase price of acquired properties to net tangible and identified intangible assets (consisting of the value of in-place leases and any property tax abatement agreements) based on relative fair values. Fair value estimates are based on information obtained from a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data.

 

The value of in-place leases is 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. As lease terms are typically one year or less, rates on in-place leases generally approximate market rental rates. Factors considered in the valuation of in-place leases include an estimate of the carrying costs during the expected lease-up period considering current market conditions, nature of the tenancy, and costs to execute similar leases. Carrying costs include estimates of lost rentals at market rates during the expected lease-up period, as well as marketing and other operating expenses. The value of in-place leases is amortized over the remaining initial term of the respective leases, typically a period of six months. The purchase prices of acquired properties are not expected to include allocations to tenant relationships, considering the short terms of the leases and the high expected levels of renewals.

 

Property tax abatements provide graduated tax relief for a defined period of time from the completion of development of the respective property. Amortization of tax abatement intangible assets is recorded based on the actual tax savings in each period and is included in real estate taxes and insurance in the consolidated statements of operations.

 

See Note C for a detailed discussion of the property acquisitions completed during the years ended December 31, 2014, 2013 and 2012.

 

Fair Value of Financial Instruments: For financial assets and liabilities recorded at fair value on a recurring basis, fair value is the price the Company would receive to sell an asset, or pay to transfer a liability, in an orderly transaction with a market participant at the measurement date. In the absence of such data, fair value is estimated using internal information consistent with what market participants would use in a hypothetical transaction.

 

F-9
 

 

 

In determining fair value, observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect management’s market assumptions; preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

·Level 1: Quoted prices for identical instruments in active markets.
·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 whose inputs are observable or whose significant value drivers are observable.
·Level 3: Significant inputs to the valuation model are unobservable.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

·The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, restricted cash and lender reserves, amounts due from related parties, accounts payable and accrued expenses, security deposits, deferred rent and other liabilities approximate their fair values due to the short-term nature of these items.

 

·There is no material difference between the carrying amounts and fair values of mortgage notes payable as interest rates and other terms approximate current market rates and terms for similar types of debt instruments available to the Company (Level 2).

 

Disclosures about the fair value of financial instruments are based on pertinent information available to management as of December 31, 2014 and 2013.

 

Non-recurring Fair Value Disclosures: Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets primarily include long-lived assets, which are recorded at fair value when they are impaired. The fair value methodologies used to measure long-lived assets are described above at “Impairment of Real Estate Assets”. The inputs associated with the valuation of long-lived assets are generally included in Level 3 of the fair value hierarchy.

 

The following table sets forth by level, within the fair value hierarchy the Company’s Land Investments that are measured at fair value on a non-recurring basis as of December 31, 2014 and 2013 (see Note L for additional information on impairment associated with these Land Investments recognized during the years ended December 31, 2014 and 2013):

 

   As of December  31, 2014 
(in thousands)  Level 1   Level 2   Level 3   Total 
Midlothian Town Center - East  $-   $-   $3,492   $3,492 
   $-   $-   $3,492   $3,492 

 

   As of December 31, 2013 
(in thousands)  Level 1   Level 2   Level 3   Total 
Venetian  $-   $-   $4,360   $4,360 
Midlothian Town Center - East   -    -    4,165    4,165 
The Estates at Maitland   -    -    9,000    9,000 
   $-   $-   $17,525   $17,525 

 

Land Investments classified as land held for future development at December 31, 2013 were either disposed of or reclassified to real estate assets held for sale during the year ended December 31, 2014 (see Note L).

 

Deferred Financing Costs: Deferred financing costs are amortized over the terms of the related debt obligations, using the straight-line method which approximates the effective interest method. If the debt obligations are paid down prior to their maturity, the related unamortized loan costs are charged to loss on early extinguishment of debt.

 

Gross deferred financing costs were approximately $5.7 million and $4.4 million as of December 31, 2014 and 2013, respectively. Accumulated amortization of deferred financing costs was approximately $1.1 million and $1.4 million as of December 31, 2014 and 2013, respectively. For the years ended December 31, 2014, 2013 and 2012, amortization of deferred financing costs of approximately $1.0 million, $1.4 million and $0.6 million, respectively, is included in the consolidated statements of operations.

 

F-10
 

 

Estimated amortization of deferred financing costs for each of the next five years and thereafter is as follows:

 

For the year ending December 31,  (in thousands) 
2015  $916 
2016   916 
2017   546 
2018   466 
2019   451 
Thereafter   1,304 
   $4,599 

 

Prepaid expenses and other assets: As of December 31, 2014, prepaid expenses and other assets primarily consist of prepaid expenses of approximately $0.7 million, insurance recovery receivable of approximately $0.7 million (discussed below), deferred rent concessions of approximately $0.3 million, and a deposit made for the potential future acquisition of real estate assets of $0.2 million. As of December 31, 2013, prepaid expenses and other assets primarily consist of deferred offering costs of approximately $2.7 million as well as deposits made for potential future acquisitions of real estate assets of $5.9 million.

 

On November 22, 2014, a 20-unit apartment building at the Company’s Pointe at Canyon Ridge property in Sandy Springs, Georgia, was destroyed by fire. At the time of the fire, the affected building had a carrying value of approximately $0.6 million. The Company maintains insurance coverage on all of its properties and subsequently filed an insurance claim that is expected to cover the re-construction cost of the affected building, less the Company’s loss deductible, as well as loss of rents under a business interruption provision of the applicable insurance policy. During the year ended December 31, 2014, the Company recorded a casualty loss of approximately $0.7 million within property taxes and insurance in the Company’s consolidated statements of operations relating to the carrying value of the affected building plus the Company’s insurance loss deductible, which has been offset by an expected $0.7 million insurance recovery. In addition, the Company recorded a recovery of lost rents relating to the 20 impacted units for the period from the date of the fire through December 31, 2014 as additional rental income in the Company’s consolidated statements of operations. These insurance recovery receivables have been included within prepaid expenses and other assets in the Company’s consolidated balance sheets at December 31, 2014. The Company anticipates that re-construction of this 20-unit building will be completed by the end of the second quarter of 2015.

 

Income Taxes: The Company has maintained, and intends to maintain, its election as a REIT under the Internal Revenue Code of 1986, as amended. In order for the Company to continue to qualify as a REIT, it must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to its stockholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. As a REIT, the Company generally will not be subject to federal income tax on its taxable income at the corporate level to the extent such income is distributed to our stockholders annually. The Company’s Operating Partnership is a flow through entity and is not subject to federal income taxes at the entity level. No provision has been made for income taxes, since all of the Company’s operations are held in pass-through entities and accordingly, the income or loss of the Company is included in the individual income tax returns of the members. The Company’s tax years that remain subject to examination for U.S. federal and state purposes range from 2012 through 2014.

 

Commitments and Contingencies: The Company may from time to time be involved in legal proceedings arising from the normal course of business. Due the nature of the Company’s operations, it is possible that existing properties, or properties that the Company will acquire in the future, have asbestos or other environmental related liabilities. As of December 31, 2014, the Company is not aware of any claims or potential liabilities that would need to be accrued or disclosed that have not been disclosed in Note J.

 

Risks and Uncertainties: The Company’s investments in real estate are subject to various risks, including the risks associated with the general economic climate. Due to the level of risk associated with real estate investments, it is at least reasonably possible that changes in their values will occur in the near term, and that such changes could materially affect the amounts reported in the Consolidated Financial Statements.

 

The decision by investors and lenders to enter into transactions with the Company will depend upon a number of factors, such as the Company’s historical and projected financial performance, industry and market trends, the availability of capital and investors, lenders’ policies, future interest rates, and the relative attractiveness of alternative investment or lending opportunities compared to other investment vehicles.

 

Future changes in market trends and conditions may occur which could cause actual results to differ materially from the estimates used in preparing the accompanying consolidated financial statements.

 

The Company is subject to the following risks in the course of conducting its business activities:

 

F-11
 

 

Investment and Financing Risk: The Company’s revolving credit agreement bears a variable interest rate, exposing the Company to interest rate risk (see Note D).

 

Liquidity Risk: Liquidity risk is the risk that the Company will not have sufficient funds available to meet its operational requirements and investing plans. The Company’s primary source of liquidity is net operating income from its rental properties, which is used as working capital and to fund capital expenditure requirements. The Company regularly monitors and manages its liquidity to ensure access to sufficient funds. Access to funding is achieved through mortgage financing, credit markets, sales of existing properties and cash reserves. As of December 31, 2014, the Company had mortgage debt totaling $344.8 million, of which $1.2 million matures in 2015.

 

Credit Risks: The Company is exposed to credit risk in that tenants may be unable to pay the contracted rents. Management mitigates this risk by carrying out appropriate credit checks and related due diligence on prospective tenants. The Company may require certain tenants to provide security deposits. Though these security deposits are insufficient to meet the terminal value of a tenant's lease obligation, they are a measure of good faith and a source of funds to offset the economic costs associated with lost rent and the costs associated with re-tenanting the space. There is no dependence upon any single tenant.

 

Concentrations of Risk: The Company’s success depends to a certain extent on the general economic conditions of the geographic markets that the Company operates in. For the years ended December 31, 2014, 2013 and 2012, the Company’s consolidated percent of property revenues were concentrated in the following states:

 

 

   Years Ended December 31, 
(in thousands)  2014   2013   2012 
Alabama   3.1%   5.0%    -%
Florida   7.9    14.8    2.4 
Georgia   13.5    15.6    29.4 
North Carolina   24.4    19.4    1.0 
South Carolina   20.0    10.9    - 
Tennessee   17.5    19.8    39.5 
Texas   13.6    14.5    27.7 
    100.0%   100.0%   100.0%

 

Any adverse general economic conditions impacting the geographic markets that the Company operates in could adversely affect our overall results of operations and financial conditions.

 

The Company maintains its cash (including restricted cash) in bank deposit accounts and may at times maintain balances in excess of federally insured limits.

 

Recent Accounting Standards: In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial doubt about an entity’s ability to continue as a going concern. This guidance is effective for annual periods ending after December 31, 2016 and is not expected to have an impact on the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. This is effective for the fiscal years and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements or related disclosures.

 

In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which changes the criteria for determining which disposals qualify to be accounted for as discontinued operations and modifies related reporting and disclosure requirements. This standard is effective for fiscal years beginning after December 15, 2014 and for interim periods within those fiscal years with early adoption permitted. As a result of ASU 2014-08, the disposal of a component of an entity or a group of components is required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also requires an entity to provide certain disclosures about a disposal of an individually significant component of such entity that does not qualify for discontinued operations presentation in the financial statements. Effective January 1, 2014, the Company elected to adopt this standard on a prospective basis for transactions that may occur after the adoption. Adoption of ASU 2014-008 did not have a material impact on the Company’s consolidated financial position or results of operations. Under this standard, the Company anticipates that the majority of any future property sales will not be classified as discontinued operations.

 

F-12
 

 

NOTE B—EARNINGS PER SHARE

 

The Company reports earnings per share (“EPS”) using the two-class method as required under GAAP. The two-class method is an earnings allocation method for computing EPS when an entity’s capital structure includes either two or more classes of common stock or includes common stock and participating securities. The two-class method calculates EPS based on distributed earnings and undistributed earnings. Undistributed losses are not allocated to participating securities under the two-class method unless the participating security has a contractual obligation to share in losses on a basis that is objectively determinable.

 

Potentially dilutive shares of common stock, and the related impact to earnings, are considered when calculating EPS on a diluted basis using the treasury stock method. For periods where the Company reports a net loss available for common stockholders, the effect of dilutive shares is excluded from EPS calculations because including such shares would be anti-dilutive.

 

As further described in Note G, on January 17, 2013, the Company effected a 1-for-150 reverse stock split of its common stock, which is reflected in the weighted average shares of common stock in the table below.

 

A reconciliation of basic and diluted EPS computations for the years ended December 31, 2014, 2013 and 2012 is presented below:

 

   Years Ended December 31, 
(in thousands, except per share amounts)  2014   2013   2012 
             
Net loss  $(30,317)  $(16,556)  $(8,551)
Loss allocated to noncontrolling interest   1,953    2,462 (1)    1,709 
Dividends declared and accreted on preferred stock and units   (693)   (940)   (376)
Dividends to restricted stockholders   -    (52)   - 
Extinguishment of equity securities (Note G)   1,216    11,716    - 
Adjustments attributable to participating securities   44    (2,241)   - 
Net loss attributable to common stockholders  $(27,797)  $(5,611)  $(7,218)
                
Continuing operations  $(27,797)  $(11,883)  $(7,214)
Discontinued operations (Note L)   -    6,272    (4)
Net loss attributable to common stockholders  $(27,797)  $(5,611)  $(7,218)
                
Earnings (loss) per common share - basic and diluted               
Continuing operations  $(0.79)  $(1.36)  $(3.17)
Discontinued operations   -    0.72    - 
Net earnings (loss) per share attributable to common stockholders  $(0.79)  $(0.64)  $(3.17)
                
Weighted average number of shares - basic and diluted   35,325    8,762    2,278 
                
Weighted average, potentially dilutive securities excluded from diluted earnings (loss) per share because they were antidilutive or performance conditions were not met:               
Warrants (2)   139    139    139 
Common units of the Operating Partnership (3)   2,344    -    - 
Unvested restricted stock awards (4)   217    173    - 

 

(1)Net of $0.04 million income allocated to discontinued operations in the first quarter of 2013.
(2)Exercisable until May 14, 2015 at a split-adjusted exercise price of $21.60 of the Company’s common stock.
(3)Class B contingent units were converted into common OP units in February 2014 and were excluded from potentially dilutive shares of common stock in the 2013 and 2012 periods presented since their conversion had been contingent upon the achievement of future conditions (see Notes A and G).
(4)Granted pursuant to the Company’s Equity Incentive Plan (see Note H).

 

F-13
 

 

NOTE C—ACQUISITIONS OF MULTIFAMILY APARTMENT COMMUNITIES

 

During the years ended December 31, 2014, 2013 and 2012, the Company through its Operating Partnership completed various acquisitions of multifamily apartment communities from unrelated, third-party sellers. The acquisitions involved the acquisition of the operating real estate, but no management or other business operations were acquired in such acquisitions. The fair value of the net assets acquired and the related purchase price allocation are summarized below.

 

2014 Acquisitions:

 

Waterstone at Big Creek (“Big Creek”) - On April 7, 2014, the Company acquired Big Creek, a 270-unit apartment community located in Alpharetta (Atlanta), Georgia for a total purchase price of $40.5 million. The purchase price was funded with cash on hand of approximately $3.5 million and $37.0 million drawn from the Revolver (see Note D). From the date of acquisition through December 31, 2014, Big Creek generated revenue of approximately $2.9 million and a net income of approximately $0.5 million. As of December 31, 2014, the Company is party to an agreement to purchase an additional 100 units that are currently under construction on a parcel adjacent to Big Creek for $15.0 million, for which a $0.2 million nonrefundable deposit has been paid by the Company (see Note J).

 

Avenues of Craig Ranch (“Craig Ranch”) - On March 18, 2014, the Company acquired Craig Ranch, a 334-unit apartment community located in McKinney (Dallas), Texas. The purchase price of $42.4 million was funded with approximately $21.2 million cash proceeds from the net proceeds of the common stock offering and subscription rights granted to TSRE’s existing stockholders (“Rights Offering”) (as more fully described in Note G) and a new mortgage loan in the amount of $21.2 million (see Note D). From the date of acquisition through December 31, 2014, Craig Ranch generated revenue of approximately $3.3 million and a net loss of approximately ($0.5) million.

 

Waterstone at Brier Creek (“Brier Creek”) - On March 10, 2014, the Company acquired Brier Creek, a 232-unit apartment community located in Raleigh, North Carolina. The purchase price of $32.7 million was funded with approximately $16.4 million cash proceeds from the Rights Offering and the related transactions and a new mortgage loan in the amount of $16.3 million (see Note D). From the date of acquisition through December 31, 2014, Brier Creek generated revenue of approximately $1.8 million and a net loss of approximately ($0.7) million.

 

The Aventine Greenville (“Aventine”) - On February 6, 2014, the Company acquired Aventine, a 346-unit apartment community located in Greenville, South Carolina. The purchase price of $41.9 million was funded with approximately $20.9 million cash proceeds from the Rights Offering and the related transactions and a new mortgage loan in the amount of $21.0 million (see Note D). From the date of acquisition through December 31, 2014, Aventine generated revenue of approximately $3.7 million and a net loss of approximately ($0.4) million.

 

The Estates at Wake Forest (“Wake Forest”) - On January 21, 2014, the Company acquired Wake Forest, a 288-unit apartment community located in Wake Forest (Raleigh), North Carolina. The purchase price of $37.3 million was funded with approximately $18.7 million of cash proceeds from the Rights Offering and the related transactions and a new mortgage loan in the amount of $18.6 million (see Note D). From the date of acquisition through December 31, 2014, Wake Forest generated revenue of approximately $2.6 million and a net loss of approximately ($1.3) million.

 

Miller Creek at Germantown (“Miller Creek”) - On January 21, 2014, the Company acquired Miller Creek, a 330-unit apartment community located in Germantown (Memphis), Tennessee. The purchase price of approximately $43.8 million was funded with approximately $17.5 million of cash proceeds from the Rights Offering and the related transactions and a new mortgage loan in the amount of $26.3 million (see Note D). From the date of acquisition through December 31, 2014, Miller Creek generated revenue of approximately $4.2 million and a net loss of approximately ($0.9) million.

 

The table below details the total fair values assigned to the assets and liabilities acquired related to the above acquisitions during the year ended December 31, 2014:

 

(in thousands)  Miller Creek   Wake Forest   Aventine   Brier Creek   Craig Ranch   Big Creek   Total 
                             
Fair Value of Net Assets Acquired  $43,750   $37,250   $41,866   $32,682   $42,375   $40,500   $238,423 
Purchase Price  $43,750   $37,250   $41,866   $32,682   $42,375   $40,500   $238,423 
Net Assets Acquired/Purchase Price Allocated:                                   
Land  $2,173   $2,677   $2,888   $3,031   $3,444   $3,910   $18,123 
Site Improvements   2,460    2,618    1,926    1,681    3,210    1,763    13,658 
Building   37,332    30,633    34,720    26,989    33,317    33,106    196,097 
Furniture, fixtures and equipment   1,011    860    1,494    679    1,673    978    6,695 
Intangible assets - in place leases   774    462    838    302    731    743    3,850 
Total  $43,750   $37,250   $41,866   $32,682   $42,375   $40,500   $238,423 

 

F-14
 

 

 

2013 Acquisitions:

 

Fountains Southend (“Southend”) - On September 24, 2013, the Company acquired a 100% equity interest in Fountains at New Bern Station, LLC which owned 100% of Southend (f/k/a Fountains at New Bern), a 208-unit apartment community located in Charlotte, North Carolina. The purchase price of $34.0 million was funded by net proceeds of a new mortgage loan of $30.0 million (see Note D) and cash of $4.0 million. In conjunction with the acquisition of Southend, the Company recorded a gain on bargain purchase in the amount of $6.9 million which has been included in the consolidated statement of operations for the year ended December 31, 2013. The Company placed the property under contract for a purchase price of $34.0 million in December 2012 while the property was early in its construction period. As a result of the strong leasing market in Charlotte, North Carolina and the compression in multi-family capitalization rates during the construction and lease-up, the property appraised for $40.9 million as of the time of purchase. The gain represents the difference between the fair value of net assets acquired of $40.9 million and the fair value of the consideration paid of $34.0 million. The Company performed a reassessment and verified that all assets acquired and liabilities assumed were properly identified. From the date of acquisition through December 31, 2013, Southend generated revenue of approximately $0.9 million and a net loss of approximately ($0.8) million, excluding the gain on bargain purchase. The mortgage on this property was refinanced in February 2014 (see Note D).

 

Talison Row (“Talison”) - On August 26, 2013, the Company acquired Talison, a 274-unit apartment community located in Charleston, South Carolina. The purchase price of $48.1 million was funded by net proceeds of a new mortgage loan of approximately $33.6 million (see Note D) and cash of approximately $14.5 million. From the date of acquisition through December 31, 2013, Talison generated revenue of approximately $1.2 million and a net loss of approximately ($1.0) million.

 

Creekstone at RTP (“Creekstone”) - On May 17, 2013, the Company acquired Creekstone, (f/k/a/ Woodfield Creekstone), a 256-unit apartment community located in Durham, North Carolina. The purchase price of $35.8 million was comprised of a mortgage note payable of $23.3 million and cash of $12.5 million from proceeds of the Company's public offering. From the date of acquisition through December 31, 2013, Creekstone generated revenue of approximately $2.0 million and a net loss of approximately ($0.7) million.

 

St. James at Goose Creek (“St. James”) - On May 16, 2013, the Company acquired St. James, (f/k/a/ Woodfield St. James), a 244-unit apartment community located in Goose Creek (Charleston), South Carolina for $27.4 million. The purchase was funded with proceeds from the Company’s public offering of its common stock. In connection with the acquisition, the Company obtained mortgage financing for $19.0 million. From the date of acquisition through December 31, 2013, St. James generated revenue of approximately $1.9 million and a net loss of approximately ($0.5) million.

 

Bridge Pointe - On March 4, 2013, the Company acquired Bridge Pointe, (f/k/a Vintage at Madison Crossing), a 178-unit apartment community located in Huntsville, Alabama. The purchase price of $15.3 million was funded by net proceeds of a new mortgage loan of $11.4 million plus cash on hand of $3.8 million. From the date of acquisition through December 31, 2013, Bridge Pointe generated revenue of approximately $1.4 million and a net loss of approximately ($0.8) million.

 

The table below details the total fair values assigned to the assets and liabilities acquired related to the above acquisitions during the year ended December 31, 2013:

 

(in thousands)  Bridge Pointe   St. James   Creekstone   Talison   Southend   Total 
                         
Fair Value of Net Assets Acquired  $15,250   $27,400   $35,800   $48,050   $40,900   $167,400 
Purchase Price  $15,250   $27,400   $35,800   $48,050   $34,000   $160,500 
Net Assets Acquired/Purchase Price Allocated:                              
Land  $1,140   $3,003   $2,970   $4,018   $6,263   $17,394 
Site Improvements   943    1,033    1,024    1,161    1,380    5,541 
Building   12,437    22,255    30,823    41,294    30,740    137,549 
Furniture, fixtures and equipment   311    441    302    804    730    2,588 
Intangible assets - in place leases   419    668    681    773    772    3,313 
Intangible assets - property tax abatement   -    -    -    -    1,015    1,015 
Total  $15,250   $27,400   $35,800   $48,050   $40,900   $167,400 

 

F-15
 

 

Sunnyside Loan - BSP/Sunnyside, LLC (“Sunnyside”), the owner of undeveloped land located in Panama City, Florida, was a subsidiary of BCOM Real Estate Fund, LLC Liquidating Trust, a successor to one of the contributors of entities in the 2012 Recapitalization, which is also a stockholder of the Company. Sunnyside was not contributed to the Company in the 2012 Recapitalization. On October 2, 2012, Sunnyside executed a Settlement Stipulation, which provided Sunnyside or its assignee the option, for a non-refundable fee of $0.2 million, to acquire its delinquent loan (with a principal balance of $4.5 million) from its lender within 120 days of the date of the Settlement Stipulation for the net amount of $1.4 million, after a credit of the $0.2 million paid for the option. On January 30, 2013, the Company exercised its rights under the option and purchased the loan for $1.4 million. As a result of the acquisition of the loan on January 30, 2013, pursuant to ASC 810, the Company was considered the primary beneficiary and, as such, began consolidation of Sunnyside in the Company’s financial statements. The total consideration paid of $1.6 million was not considered a business combination and was allocated as follows to the assets of Sunnyside (in thousands):

 

Cash  $148 
Land  $1,477 

 

In December 2013, the Company initiated foreclosure proceedings, which were completed on March 10, 2014, with the Company obtaining title to the Sunnyside asset. As a result of the foreclosure, the Company deconsolidated Sunnyside due to lack of ongoing variable interest. The deconsolidation of Sunnyside did not have a material impact on the consolidated financial statements of the Company. During the year ended December 31, 2014, the Company recorded an impairment charge of $0.1 million associated with the Sunnyside asset due to its inclusion in the consideration exchange for the redemption of the Company’s outstanding shares of Class A preferred stock on October 17, 2014 (see Notes G and L).

 

2012 Acquisitions:

 

Westmont Commons On December 13, 2012, the Company acquired Westmont Commons, an apartment community located in Asheville, North Carolina. Westmont Commons contains 252 apartment units in ten three-story buildings on approximately 17.5 acres of land. The purchase price of $22.4 million was comprised of a mortgage note payable of $17.9 million (see Note D) plus cash of $4.5 million. From the date of acquisition through December 31, 2012, Westmont Commons generated revenue of approximately $0.1 million and a net loss of approximately ($0.3) million.

 

Estates at Millenia (“Millenia 700”) On December 3, 2012, the Company and the Operating Partnership entered into a Contribution Agreement with BREF/BUSF Millenia Associates, LLC (the “Seller”) for the purchase of all of the Seller’s membership interests in Millenia 700, LLC, the owner of the 297 unit apartment complex located in Orlando, Florida known as the Estates at Millenia (the “Developed Property”) and the 7-acre development site adjacent to the Developed Property (the “Development Property”) that is currently approved for 403 apartment units. The Developed Property and the Development Property were contributed to the Operating Partnership.

 

Consideration for the purchase consisted of:

 

  For the Developed Property, a total of $43.2 million, consisting of approximately $29.1 million in cash to pay off the existing loan and shares of the Company’s common stock valued at approximately $14.1 million;
     
  For the Development Property: 100,000 shares of Class A preferred stock valued at approximately $9.3 million as of the acquisition date based on a valuation performed by the Company of the stock. On March 14, 2013, the Company issued an additional 35,804 shares of Class A preferred stock having an aggregate value of approximately $3.6 million, equal to the amount of certain development costs incurred up to the date of contribution. Upon receipt of the final certificate of occupancy for the development property, the Company was required to issue to the Seller a number of additional shares of Class A preferred stock equal to 20% of the increase in value of the Development Property, for which a liability for the contingent consideration of $0.3 million has been recorded in the accompanying consolidated balance sheets as of December 31, 2013. The contingent consideration was valued using the Black-Scholes option pricing model. The fair value of the Class A preferred stock was determined as the “as converted” value adjusted for the difference in relative dividend yields of the Class A preferred stock over the period until conversion.  The Development Property was included in a transaction to redeem all of the Company’s outstanding shares of Class A preferred stock, which closed on October 17, 2014 (see Notes G and L).

 

The shares of Class A preferred stock were not registered under the Securities Act of 1933 and were, therefore, subject to certain restrictions on transfer.

 

In connection with the acquisition of Millenia 700, the Company obtained new mortgage financing in the amount of $35.0 million which was refinanced on February 11, 2014 (see Note D).

 

From the date of acquisition through December 31, 2012, Millenia 700 generated revenue of approximately $0.3 million and a net loss of approximately ($0.5) million.

 

F-16
 

 

The table below details the total fair values assigned to the assets and liabilities acquired related to the above acquisitions during the year ended December 31, 2012:

 

(in thousands)  Millenia 700   Westmont Commons   Total 
             
Fair Value of Net Assets Acquired  $56,121   $22,400   $78,521 
Purchase Price  $56,121   $22,400   $78,521 
Net Assets Acquired/Purchase Price Allocated:               
Land  $4,022   $1,409   $5,431 
Site Improvements   584    866    1,450 
Land held for future developments   12,942    -    12,942 
Building   36,070    19,184    55,254 
Furniture, fixtures and equipment   1,245    302    1,547 
Intangible assets - in place leases   1,258    639    1,897 
Total  $56,121   $22,400   $78,521 

 

The Company incurred approximately $1.6 million, $0.9 million and $0.4 million of acquisition-related costs during the years ended December 31, 2014, 2013, and 2012 respectively.

 

Pro Forma Financial Information:

 

The revenues and results of operations of the acquired apartment communities are included in the consolidated financial statements beginning on the date of each respective acquisition. The following unaudited consolidated pro forma information for the years ended December 31, 2014 and 2013 is presented as if the Company had acquired each apartment community on January 1, 2013.

 

The information presented below is not necessarily indicative of what the actual results of operations would have been had the Company completed these transactions on January 1, 2013, nor does it purport to represent the Company’s future operations.

 

(in thousands)  Years Ended December 31, 
   2014   2013 
Unaudited pro forma financial information:          
Pro forma revenue  $58,954   $37,455 
Pro forma loss from continuing operations  $(26,733)  $(34,152)

 

NOTE D—INDEBTEDNESS

As of December 31, 2014 and 2013, the Company had total indebtedness of approximately $344.8 million and $249.6 million, respectively. Borrowings relate to individual property mortgages as well as the Company’s Revolver (as defined below).

 

The following is a summary of debt originated during the years ended December 31, 2014 and 2013:

 

Craig Ranch - On March 18, 2014, in conjunction with the acquisition of Craig Ranch (see Note C above) the Company, through its subsidiary, entered into a mortgage note payable in the amount of $21.2 million, which bears a fixed interest rate of 3.78% and requires monthly payments of interest only for the term of the loan and a payment of the unpaid principal amount due at maturity on April 10, 2021. The mortgage note is secured by Craig Ranch.

 

Brier Creek - On March 10, 2014, in conjunction with the acquisition of Brier Creek (see Note C above) the Company, through its subsidiary, entered into a mortgage note payable in the amount of $16.3 million, which bears a fixed interest rate of 3.70% and requires monthly payments of interest only for the term of the loan and a payment of the unpaid principal amount due at maturity on April 5, 2022. The mortgage note is secured by Brier Creek.

 

Aventine - On February 6, 2014, in conjunction with the acquisition of Aventine (see Note C above) the Company, through its subsidiary, entered into a mortgage note payable in the amount of $21.0 million, which bears a fixed interest rate of 3.70% and requires monthly payments of interest only for the initial 60 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures on February 10, 2021. The mortgage note is secured by Aventine.

 

Wake Forest - On January 21, 2014, in conjunction with the acquisition at Wake Forest (see Note C above) the Company, through its subsidiary, entered into a mortgage note payable in the amount of $18.6 million, which bears a fixed interest rate of 3.94% and requires monthly payments of interest only for the term of the loan and a payment of the unpaid principal amount due at maturity on February 10, 2021. The mortgage note is secured by Wake Forest.

 

Miller Creek - On January 21, 2014, in conjunction with the acquisition of Miller Creek (see Note C above) the Company, through its subsidiary entered into a mortgage note payable in the amount of $26.3 million, which bears a fixed rate interest rate of 4.6% and requires monthly payments of interest only for the initial 36 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures on February 10, 2024. The mortgage note is secured by Miller Creek.

 

F-17
 

 

Revolving Credit Facility

 

On January 31, 2014, the Company and the Operating Partnership entered into a Credit Agreement (the “Credit Agreement”) for a $75 million senior secured credit facility (the “Revolver”) with Regions Bank as lead arranger and U.S. Bank National Association as a participant. The Revolver is comprised of an initial $75 million commitment with an accordion feature allowing the Company to increase borrowing capacity to $250 million (the “Revolver Amount”), subject to certain approvals and meeting certain criteria. The Revolver also includes a sublimit for the issuance of standby letters of credit (“Letter of Credit”) for up to the greater of $10.0 million and 10.0% of the Revolver Amount and a sublimit for discretionary swingline loans (“Swingline Loan”) for up to the greater of $10.0 million and 10.0% of the Revolver Amount, in each case subject to borrowing availability under the Revolver. No Swingline Loan may be outstanding for more than ten consecutive business days.

 

The Revolver has an initial three-year term that can be extended at the Company's option for up to two additional one-year periods and has a variable interest rate of LIBOR (as defined in the Credit Agreement) plus a spread of 1.75% to 2.75%, depending on the Company’s consolidated leverage ratio. The current borrowing rate of the Revolver is LIBOR plus 2.50%. The Revolver is guaranteed by the Company and certain subsidiaries of the Company and is secured by first priority mortgages on designated properties that make up the borrowing base (“Borrowing Base”) as defined in the Credit Agreement. Availability under the Revolver is permitted up to 65% of the value of the Borrowing Base subject to the limitations set forth in the Revolver. The Revolver contains customary affirmative and negative covenants with respect to, among other things, insurance, maintaining at least one class of exchange listed common stock, the guaranty in connection with the Revolver, liens, intercompany transfers, transactions with affiliates, mergers, consolidation and asset sales, ERISA plan assets, modification of organizational documents and material contracts, derivative contracts, environmental matters, and management agreements and fees. In addition, the Operating Partnership pays a commitment fee of 0.20% to 0.30% quarterly in arrears based on the unused portion of the revolving credit commitment. As of December 31, 2014, the commitment fee was 0.20%. As of December 31, 2014 the weighted average interest rate was approximately 2.70%.

 

The Revolver requires the Company to satisfy certain financial covenants, including the following:

 

·minimum tangible net worth of at least $123.0 million plus 75% of the net proceeds of any equity issuances effected at any time after September 30, 2013 by the Operating Partnership or any of its subsidiaries;
·maintaining a ratio of funded indebtedness to total asset value of no greater than 0.65 to 1.0;
·maintaining a ratio of adjusted EBITDA to fixed charges of no less than (i) 1.3 to 1.0 from the effective date of the Credit Agreement to and including March 31, 2014, (ii) 1.4 to 1.0 from April 1, 2014 to and including June 30, 2014, and (iii) 1.5 to 1.0 from July 1, 2014 and at all times thereafter;
·limits on investments in unimproved land, mortgage receivables, interests in unconsolidated affiliates, construction-in-progress on development properties, and marketable securities and non-affiliated entities, in each case, based on the value of such investments relative to total asset value, as set forth in the Credit Agreement; and

·restrictions on certain dividend and distribution payments.

 

The Company was in compliance with all applicable covenants, including these financial covenants as of December 31, 2014.

 

In conjunction with the closing of Credit Agreement, the Company made an initial draw of approximately $27.0 million to pay down, in full, indebtedness secured by Fox Trails ($14.9 million), Mercé Apartments ($5.5 million) and Post Oak ($5.3 million) and to pay fees associated therewith, as these properties serve as collateral on the Revolver. The remainder of the amount borrowed was used for closing costs and other expenses related to the Revolver of approximately $0.9 million and approximately $0.4 million for general corporate and working capital purposes, respectively. Post Oak was released from collateral securing the Revolver effective July 11, 2014, on which date the sale of the property closed (see Note L).

 

During the year ended December 31, 2014, in addition to the initial draw described above, the Company borrowed approximately $37.0 million to acquire Big Creek (see Note C above) and subsequently repaid approximately $17.0 million. As of December 31, 2014, the Revolver had an outstanding principal balance of $47.0 million, which is secured by the Borrowing Base properties, and there remained approximately $11.1 million available for draw on the Revolver.

 

On February 24, 2014, the parties executed a First Amendment to the Credit Agreement with Regions to modify the definition of the components of EBITDA to include non-recurring cash costs in an amount not to exceed $4.0 million incurred during the first quarter of 2014, as a result of the separation of various officers of the Company.

 

On April 7, 2014, the Company and the Operating Partnership executed a Second Amendment to the Credit Agreement and an Accession Agreement with the banks participating in the Revolver to modify certain terms and conditions of the Revolver related to the addition of new borrowing base properties.

 

On August 5, 2014, the Company and the Operating Partnership executed a Third Amendment to the Credit Agreement to modify certain terms and conditions of the Revolver related to cash dividends paid by the Company for any fiscal year ending after December 31, 2014, such dividends shall not exceed the greater of (i) the amount required to be distributed by the Parent to maintain its REIT status or (ii) 95.0% of Funds From Operations of the Parent and its Subsidiaries for such period.

 

F-18
 

 

On October 16, 2014, the Company and the Operating Partnership executed a Fourth Amendment to the Credit Agreement to modify certain terms and conditions in the Revolver related to the weighting of the Borrowing Base properties value within any one geographic area and to reduce the required minimum tangible net worth to $123.0 million plus 75% of the net proceeds of any equity issuances by the Operating Partnership or any of its subsidiaries as a result of the redemption of the Company’s Class A preferred stock on October 17, 2014 (see Note G).

 

Talison - On August 26, 2013, in conjunction with the acquisition of Talison (see Note C above), the Company, through a subsidiary, entered into a mortgage note payable in the amount of $33.6 million, which bears a fixed rate of 4.06% with monthly payments of interest only for the initial 36 months and monthly payments of principal and interest thereafter until maturity on September 10, 2023. The mortgage note is secured by the Talison property.

 

St. James - On June 20, 2013, the Company, through a subsidiary, entered into a mortgage note payable in the amount of $19.0 million, which bears a fixed rate of 3.75% with monthly payments of interest only for the initial 24 months and monthly payments of principal and interest payments thereafter until maturity on July 1, 2023. The mortgage note is secured by the St. James.

 

Creekstone - On May 17, 2013, in conjunction with the acquisition of Creekstone (see Note C above), the Company, through a subsidiary, entered into a mortgage note payable in the amount of $23.3 million, which bears interest at a fixed rate of 3.88% with monthly payments of interest only for the initial 36 months and monthly payments of principal and interest payments thereafter until maturity on June 10, 2023. The mortgage note is secured by the Creekstone property.

 

Bridge Pointe - On March 4, 2013, in conjunction with the acquisition of Bridge Pointe (see Note C above), the Company, through a subsidiary, entered into a mortgage note payable in the amount of $11.4 million which bears interest at a fixed rate of 4.19% with monthly payments of interest only for the initial 12 months and monthly payments of principal and interest thereafter until maturity on April 1, 2023. The mortgage note is secured by the Bridge Pointe property.

 

Indebtedness Refinancing and Payoffs

 

2014

 

On February 11, 2014, the Company, through a subsidiary, completed the refinancing of Millenia 700 with a mortgage note payable in the amount of $25.0 million with a 7-year term. The mortgage loan bears a fixed interest rate of 3.83% with monthly payments of interest only for the initial 48 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures on March 5, 2021. The mortgage note is secured by Millenia 700. In conjunction with obtaining this loan, the Company repaid the existing $35.0 million mortgage note payable with the proceeds from the new mortgage note payable and $10.0 million from cash proceeds from the Company’s Rights Offering and the related transactions. In connection with the refinancing of the mortgage indebtedness, the Company wrote-off of deferred financing costs (net of accumulated amortization) and incurred a prepayment penalty of $0.1 million and $0.2 million, respectively, which are included in loss on early extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2014 and 2013.

 

On January 23, 2014, the Company, through a subsidiary, completed the refinancing of Southend with a mortgage note payable in the amount of $23.8 million with a 10-year term. The mortgage loan bears a fixed interest rate of 4.31% with monthly payments of interest only for the initial 36 months and monthly payments of principal and interest thereafter based on a 30-year amortization schedule. The loan matures on February 5, 2024. The mortgage note is secured by the Southend property. In conjunction with obtaining this loan, the Company repaid the $30.0 million interim mortgage note payable with the proceeds from the new mortgage note payable and $6.2 million from cash proceeds from the Company’s Rights Offering and the related transactions. In connection with the refinancing of the mortgage indebtedness, the Company wrote-off deferred financing costs (net of accumulated amortization) and incurred a prepayment penalty of $0.1 million and $0.3 million, respectively, which are included in loss on early extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2014.

 

On January 21, 2014, the Company, through a subsidiary, paid in full the indebtedness secured by the Estates at Maitland property in the amount of $4.2 million from the cash proceeds from the Company’s Rights Offering and the related transactions.

 

On January 17, 2014 the Company, through a subsidiary, paid in full the BMO Harris Bank N.A. secured revolving credit facility indebtedness secured by the Arbors River Oaks property in the amount of $9.0 million from the cash proceeds from the Company’s Rights Offering and the related transactions. In connection with the payoff of the indebtedness, the Company wrote-off deferred financing costs (net of accumulated amortization) of $0.2 million, which is included in loss on early extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2014.

 

F-19
 

 

2013

 

On May 31, 2013, the Company refinanced the mortgage for The Pointe at Canyon Ridge property with a mortgage note payable in the amount of $25.8 million. The loan bears interest at a fixed rate of 4.10% with two years of interest only payments followed by principal and interest payments based on a 30-year amortization schedule thereafter until maturity on June 1, 2025. The mortgage note is secured by the Pointe at Canyon Ridge property. In connection with the refinancing of the mortgage indebtedness, a prepayment penalty of $0.3 million has been included in loss on early extinguishment of debt in the consolidated statements of operations for the year ended December 31, 2013.

 

On April 25, 2013, a subsidiary of the Company refinanced The Estates at Maitland property with a mortgage note payable in the amount of $4.2 million. The Company was the guarantor of this indebtedness. The loan had a term of one year and provided a variable rate of prime rate plus 3.50% and required monthly interest-only payments for the term of the loan. In connection with the refinancing of the mortgage indebtedness, $0.1 million of deferred financing costs (net of accumulated amortization) were written off and have been included in loss on early extinguishment of debt in the consolidated statements of operations for the year ended December 31, 2013.

 

BMO Secured Revolving Credit Facility

 

On January 31, 2013, the Operating Partnership entered into a $14.0 million senior secured revolving credit facility (“BMO Credit Facility”) for which BMO Harris Bank N.A. served as sole lead arranger and administrative agent. The Company guaranteed the obligations of the Operating Partnership as the borrower under the BMO Credit Facility. The BMO Credit Facility had a term of three years and allowed for borrowings of up to $14.0 million, with an accordion feature that allowed the Operating Partnership to increase the availability thereunder by $66.0 million to an aggregate of $80.0 million under certain conditions as additional properties are included in the borrowing base. The Arbors River Oaks property was the only property included in the borrowing base. During the year ended December 31, 2013, the Operating Partnership used borrowings of $10.5 million drawn on the BMO Credit Facility to repay in full a mortgage loan on the Arbors River Oaks property, which had a balance of approximately $9.0 million as of December 31, 2012, as well as to fund prepayment penalties, closing costs and other related fees. The prepayment penalty of $0.7 million is included in loss on early extinguishment of debt in the consolidated statement of operations for the year ended December 31, 2013. During the first quarter of 2013, the Operating Partnership borrowed an additional $2.5 million under the BMO Credit Facility, which was used for general corporate purposes. The Operating Partnership could elect whether interest on the option was calculated either at a base rate plus a margin of 150 basis points to 225 basis points, or at the rate of LIBOR plus a margin of 250 basis points to 325 basis points, in each case depending on the Company’s leverage ratio. As of December 31, 2013, the weighted average interest rate was 3.42%. In addition, the Operating Partnership paid a commitment fee of 0.25% to 0.35% quarterly in arrears based on the unused revolving credit commitment. As of December 31, 2013, the commitment fee was 0.25%.

 

As of December 31, 2014, the Company’s indebtedness consists of the following:

 

           Remaining 
   Carrying Value as of       Term in 
Property  December 31, 2014   Interest Rate   Years 
   (in thousands)         
Fixed Rate Secured Indebtedness               
Lakeshore on the Hill  $6,625    4.48%   3.00 
The Trails of Signal Mountain   8,137    4.92%   3.42 
Westmont Commons   17,920    3.84%   8.00 
Bridge Pointe   11,314    4.19%   8.25 
The Pointe at Canyon Ridge   25,800    4.10%   10.42 
St. James   19,000    3.75%   8.50 
Creekstone   23,250    3.88%   8.44 
Talison   33,635    4.06%   8.69 
Millenia 700   25,000    3.83%   6.18 
Southend   23,750    4.31%   9.10 
Miller Creek   26,250    4.60%   9.11 
Craig Ranch   21,200    3.78%   6.28 
Wake Forest   18,625    3.94%   6.11 
Aventine   21,000    3.70%   6.11 
Brier Creek   16,250    3.70%   7.26 
Total fixed rate secured indebtedness   297,756    4.03%   7.75 
Variable Rate Secured Indebtedness               
Revolver   47,000    2.70%   2.08 
Total outstanding indebtedness  $344,756    3.85%   6.98 

 

F-20
 

 

The scheduled maturities of outstanding indebtedness as of December 31, 2014 are as follows:

 

For the year ending December 31,  (in thousands) 
2015  $1,210 
2016   1,976 
2017   56,669 
2018   11,468 
2019   4,307 
Thereafter   269,126 
   $344,756 

 

The weighted average interest rate on the indebtedness balance outstanding at December 31, 2014 and 2013 was 3.85% and 4.42%, respectively. The mortgage notes evidencing the fixed rate secured indebtedness may be prepaid subject to a prepayment penalty equal to a yield-maintenance premium, defeasance, or a percentage of the loan balances as defined in the respective loan agreements.

 

NOTE E – INTANGIBLE ASSETS

 

The following table provides gross and net carrying amounts for each major class of intangible assets:

 

   As of December  31, 2014   As of December 31, 2013 
   Gross carrying   Accumulated   Net book   Gross carrying   Accumulated   Net book 
(in thousands)  amount   amortization   Value   amount   amortization   Value 
Intangible assets - in place leases  $10,988   $(10,988)  $-   $7,401   $(6,757)  $644 
Intangible assets - property tax abatement   1,015    (427)   588    1,015    (88)   927 
   $12,003   $(11,415)  $588   $8,416   $(6,845)  $1,571 

 

Amortization expense related to the in-place leases included in depreciation and amortization expense in the consolidated statements of operations was $4.5 million, $4.4 million and $1.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Amortization expense pertaining to the tax abatement intangible asset of approximately $0.3 million and $0.1 million during the years ended December 31, 2014 and 2013, respectively, is included in real estate taxes and insurance expense in the consolidated statements of operations. There was no tax abatement amortization expense during the year ended December 31, 2012.

 

Estimated amortization expense for the next five years related to the tax abatement intangible asset is as follows:

 

For the year ending December 31,  (in thousands) 
2015  $274 
2016   181 
2017   102 
2018   31 
2019   - 
   $588 

 

NOTE F—INVESTMENT IN UNCONSOLIDATED JOINT VENTURE

 

The Company owned 50% of the membership interests of BSF/BR Augusta JV, LLC (the “JV”), which owned 100% of the membership interests of BSF/BR Augusta, LLC, a legal entity that was formed for the sole purpose of owning the real property known as The Estates at Perimeter (“Perimeter”), a multifamily apartment community located in Augusta, Georgia. The property contains 240 garden-style apartment units contained in ten three-story residential buildings located on approximately 13 acres of land. The Company, through its subsidiaries, acquired its interest in the JV in September 2010 for $3.8 million. The carrying value of this investment was $2.4 million as of December 31, 2013.

 

In September 2014, the Company along with its JV partner committed to a plan to sell Perimeter by entering into a contract to sell their respective 50% membership interests in that property to an unaffiliated third party for $26.0 million. This sale transaction subsequently closed on December 10, 2014. The net proceeds from the sale of the property were used to repay in full the mortgage note payable and other transaction related expenses and then make distributions to the members of the JV, of which the Company’s proportionate share was approximately $3.4 million. In conjunction with the sale of Perimeter interests, the Company recorded a gain of approximately $1.1 million which is included in gains on sales of real estate assets in the consolidated statements of operations.

 

F-21
 

 

The JV followed GAAP and its accounting policies were similar to those of the Company. The Company shared in profits and losses of the JV in accordance with the JV operating agreement, which was reported as income from unconsolidated joint venture in the Company’s consolidated statements of operations. The Company received operating cash distributions of $0.2 million for each of the years ended December 31, 2014 and 2013. No contributions were made during the years ended December 31, 2014 and 2013. As of December 31, 2014, the Company accrued a receivable of approximately $0.1 million relating to final funds to be distributed by the JV during the second quarter of 2015 which is included in prepaid expenses and other assets in the accompanying consolidated balance sheets.

 

The following table summarizes the consolidated financial information for this unconsolidated JV for the periods presented:

 

 

   As of 
(in thousands)  December 31, 2013 
Assets     
Real estate investment in an operating property  $22,294 
Cash and cash equivalents   269 
Other Assets   20 
Total assets  $22,583 
      
Liabilities and members' equity     
Indebtedness  $17,601 
Accounts payable and other liabilities   139 
Total liabilities   17,740 
Member's equity   4,843 
Total liabilities and members' equity  $22,583 

 

   Years ended December 31, 
(in thousands)  2014   2013   2012 
Revenue  $2,653   $2,755   $2,789 
Property operations and maintenance   862    793    872 
Real estate taxes and insurance   271    273    269 
Interest expense   705    763    775 
Depreciation and amortization   603    792    782 
Net Income  $212   $134   $91 
Company share of income from unconsolidated joint venture activities  $106   $67   $46 

 

NOTE G—STOCKHOLDERS’ EQUITY

 

Common Stock Offerings

 

On January 16, 2014, the Company completed a transaction, which consisted of an offering of 15,797,789 shares of common stock at $6.33 per share to the holders of subscription rights granted to the Company’s existing stockholders and the related transactions (the "Rights Offering") and a concurrent $50 million private placement (the "Private Placement") of shares of common stock to certain investment entities managed or advised by Senator Investment Group LP (collectively, "Senator") at $6.33 per share. In addition, Senator agreed to purchase all shares not purchased by holders of rights in the Rights Offering (the "Backstop Commitment"). Former executives of the Company agreed to purchase an aggregate of approximately $1.8 million of common stock in a private placement concurrently with the closing of the Rights Offering.

 

In addition, the holders of subscription rights in the Rights Offering, including these former executives who acquired their entire allotment in a private placement, acquired an aggregate of 15,565,462 shares for gross proceeds to the Company of approximately $98.5 million, or approximately 98.5% of the shares available in the Rights Offering. Pursuant to its Backstop Commitment, Senator acquired 232,327 shares of common stock for gross proceeds to the Company of approximately $1.5 million, or approximately 1.5% of the shares available in the Rights Offering. Combined with the shares acquired by Senator in the Private Placement and the shares issued to Senator as a fee for Senator's Backstop Commitment and the Private Placement, Senator owned 9,316,055 shares, representing approximately 25.6% of the 36,350,182 shares of outstanding common stock of the Company after this recapitalization.

 

F-22
 

 

Pursuant to a stockholder agreement entered into with Senator (the “Stockholders Agreement”) in connection with the Private Placement and Backstop Commitment, the Company is required to file and cause a Resale Registration Statement to be declared effective by the SEC no later than January 16, 2015 (the “Effective Deadline”), the first anniversary of the closing of the Rights Offering. On December 16, 2014, Senator agreed to extend the Effective Deadline to April 16, 2015. If the Resale Registration Statement is not declared effective by April 16, 2015, the Company will be required to pay Senator a fee, payable in additional shares of the Company’s common stock (the “Additional Shares”), equal to 0.5% of the aggregate purchase price paid by Senator for the shares acquired in the Private Placement and Backstop Commitment for each full 30 calendar days (prorated for periods totaling less than 30 calendar days) thereafter until the Resale Registration Statement is declared effective, divided by the average of the volume-weighted average prices of the Company’s common stock over the 10 trading days prior to the issuance of such shares. Further, Senator has a right to seek liquidity with respect to shares of common stock that it owns if, on or after the 3.5-year anniversary of the closing of the Rights Offering (the “Liquidity Right Measurement Date”), the closing price of the Company’s common stock has not exceeded $10.00 per share (subject to certain adjustments set forth in the Stockholders Agreement) during any consecutive 10 trading day period during the 180 days prior to the Liquidity Right Measurement Date and Senator continues to own 4.9% or more of the Company’s outstanding common stock.

 

The Company contributed the net cash proceeds from the sale of 24,881,517 shares of the Company’s common stock offered in the Rights Offering and the related transactions of approximately $147.1 million after deducting offering expenses of approximately $2.9 million to the Operating Partnership in exchange for common units of the Operating Partnership. The Operating Partnership used approximately (i) $94.6 million to acquire five communities, (ii) $26.0 million to repay borrowings under the Revolver, (iii) $16.7 million to pay down, in part, certain indebtedness secured by two communities in conjunction with refinancing, and (iv) $4.2 million to pay down certain indebtedness secured by land held for development leaving approximately $5.6 million for working capital and general corporate purposes.

 

On May 16, 2013, the Company closed a public offering of 6,250,000 shares of its common stock, $0.01 par value per share, at a public offering price of $10.00 per share. The shares of common stock began trading on NASDAQ Global Market under the symbol “TSRE” on May 14, 2013. The Company received approximately $53.2 million in total net proceeds from the offering after deducting underwriting discounts and commissions and offering expenses payable by the Company, prior to any exercise of the underwriters' over-allotment option. Deferred offering costs, which totaled approximately $5.1 million, were recorded against additional paid-in capital in the statement of stockholders’ equity.

 

On June 13, 2013, the Company sold an additional 103,443 shares of its common stock, $0.01 par value per share, at a price per share of $10.00 upon the partial exercise of the underwriters’ over-allotment option (the “Over-Allotment”), generating aggregate gross proceeds of $1.03 million. The proceeds to the Company of the Over-Allotment were $0.97 million, net of the underwriting discounts and commissions.

 

Reverse Stock Split

 

On January 17, 2013, the Company effected a 1-for-150 reverse stock split of its common stock and the common units of the Operating Partnership. All common stock and per share data included in these consolidated financial statements give effect to the reverse stock split and have been adjusted retroactively for all periods presented. Prior to the reverse stock split, the redemption of shares of the Class A preferred stock and the preferred units was not solely within the Company’s control since there were not sufficient shares of common stock available to cover all equity instruments potentially convertible into common stock, and accordingly, the Company classified the shares of common stock and common units as temporary equity in the consolidated balance sheet as of December 31, 2012. As a result of the amendment to the terms of the Class A preferred stock and Class B contingent units to provide for a minimum share price of $9.00 for purposes of the conversion of shares of Class A preferred stock into common stock and Class B contingent units into common units, as well as the reverse stock split, there are sufficient available shares of the Company’s common stock to cover all equity instruments potentially convertible into common stock and, accordingly, $26.8 million for Class A preferred stock and $19.4 million for the Class B and Class C preferred units are included in permanent equity in the consolidated balance sheet as of December 31, 2013.

 

F-23
 

 

Recapitalization

 

On June 1, 2012, the Company completed the 2012 Recapitalization with Predecessor. Immediately prior to the 2012 Recapitalization, Predecessor held a single parcel of land having minimal value (which was sold shortly after the 2012 Recapitalization) and conducted no operations. In the 2012 Recapitalization, Predecessor exchanged shares of common and preferred stock in Predecessor and common and preferred units in the newly formed Operating Partnership for certain multifamily residential real estate assets that were contributed by certain real estate entities and management operations under common control of affiliates of the Company. Immediately following the 2012 Recapitalization, these affiliates collectively owned approximately 96% of the voting stock of Predecessor. For accounting purposes, Trade Street Investment Adviser, LLLP (“TSIA”) was deemed to be the acquirer in the 2012 Recapitalization, although Predecessor was the legal acquirer and surviving entity in the transaction. Concurrent with the 2012 Recapitalization, Predecessor’s name was changed to Trade Street Residential, Inc. In connection with the 2012 Recapitalization, costs of approximately $2.7 million were incurred during 2012, of which $0.9 million was recorded as charges against additional paid-in capital in the accompanying statement of stockholders’ equity and $1.8 million was recorded as recapitalization expenses in the accompanying consolidated statements of operations. During the year ended December 31, 2014, the Company incurred additional recapitalization expense of approximately $1.0 million that is included in acquisition and recapitalization costs in the accompanying consolidated statements of operations. This recapitalization expense is comprised of $0.7 million relating to the settlement of a legal claim against Predecessor and $0.3 million relating to the evaluation of strategic alternatives for the Company. There were no recapitalization expenses incurred during the year ended December 31, 2013.

 

Private Placement

 

In May 2012, the Company entered into stock subscription agreements with 13 investors (including the Company’s Chief Executive Officer and certain directors) for the purchase of an aggregate of 178,333 shares of common stock at $15.00 per share, for a total of $2.7 million. The consideration was received from the investors from the end of June 2012 to the beginning of July 2012 and the shares of common stock were issued in August 2012. The shares of common stock issued pursuant to the private placement were not registered pursuant to Section Five of the Securities Act and, as a result, are subject to restrictions regarding their transfer.

 

Dividends Declared

 

The following table summarizes the dividends declared and/or paid by the Company during the years ended December 31, 2014, 2013 and 2012:

 

   Distributions Per   Total       
   Share of Common   Dividend declared   Dividend  Dividend
   Stock/Common Unit   (in thousands)   Declared Date  Payable Date
2014              
Fourth Quarter  $0.09500   $3,709   November 19, 2014  January 15, 2015
Third Quarter  $0.09500   $3,711   August 12, 2014  October 15, 2014
Second Quarter  $0.09500   $3,713   May 13, 2014  July 15, 2014
First Quarter  $0.09500   $3,697   February 12, 2014  April 15, 2014
2013                
Fourth Quarter  $0.09500   $1,090   December 2, 2013  January 17, 2014
Third Quarter  $0.09500   $1,082   August 29, 2013  October 14, 2103
Second Quarter  $0.15750   $1,795   April 22, 2013  July 12, 2013
First Quarter  $0.08550   $403   April 15, 2013  May 31, 2013
2012                
Fourth Quarter  $0.08549   $450   January 25, 2013  March 15, 2013
Third Quarter  $0.07605   $400   December 14, 2012  December 31, 2012

 

In addition, in connection with each dividend prior to October 17, 2014, the Company declared that all cumulative unpaid dividends on its Class A preferred stock through each declaration date were payable, as required by the terms of the Class A preferred stock in the Company’s charter, of which approximately $0.1 million remained payable as of December 31, 2013. There were no dividends in arrears as of December 31, 2014.

 

Class A Preferred Stock, Common OP Units and Contingent B Units

 

The following table presents the Company’s issued and outstanding Class A preferred stock, common OP units and Class B contingent units in the consolidated balance sheets as of December 31, 2014 and 2013:

 

F-24
 

  

   Optional             
   Redemption   Annual   As of   As of 
(in thousands, except  share amounts)  Date   Dividend   December 31, 2014   December 31, 2013 
Class A Preferred Stock, cumulative redeemable, liquidation preference $100.00 per share plus all accumulated, accrued and unpaid dividends (if any), 0 and 309,130 shares outstanding at December 31, 2014 and 2013, respectively   June 2019    (1)  $-   $26,624 
                     
Common OP Units, 2,343,500 units and 0 units outstanding at  December 31, 2014 and  2013, respectively (4)   February 2015    (2)  $15,319   $- 
                     
Class B Contingent Units, 0 units and 210,915 units outstanding at December 31, 2014 and  2013, respectively (4)   June 2015    (3)  $-   $17,657 

 

(1)Cumulative annual cash dividends were at the rate of 1% of the liquidation preference per share, which increased to 2% on June 1, 2015 and 3% on June 1, 2016.
(2)Dividend per common OP unit is the same as the dividend per share on the Company’s common stock.
(3)Non-cumulative distribution of 1.5% per annum of the stated value per Class B contingent unit were to be ($0.375 per quarter) until December 31, 2014; 3.0% per annum of the stated value per Class B contingent unit ($0.75 per quarter) from January 1, 2015 through December 31, 2015; and 4.5% per annum of the stated value per Class B contingent unit ($1.125 per quarter) thereafter.
(4)On February 23, 2014, 210,915 Class B contingent units were converted into 2,343,500 common OP units.

 

Class A Preferred Stock

 

On October 17, 2014, the Company executed and closed on an agreement with the holders of the Class A preferred stock to redeem 100% of the outstanding 309,130 shares of Class A preferred stock in exchange for:

 

·Assignment of all interests in the following Land Investments:
oMaitland, with a current indicated value of $9.4 million;
oMillenia II, with a current indicated value of $6.25 million; and
oVenetian, with a current indicated value of $4.0 million.
·Assignment of all interests in the Sunnyside land parcel, with a current indicated value of $1.5 million;
·Cash payment of $5.0 million.

 

The redemption of the Class A preferred stock was accounted for as an extinguishment that resulted in an increase of $1.2 million in net income attributable to common stockholders presented for the year ended December 31, 2014 in the accompanying consolidated statement of operations.

 

The Class A preferred stock ranked senior in preference to the Company’s common stock with respect to the payment of dividends and the distribution of assets in the event of liquidation, dissolution or winding up of the Company (but excluding a merger, change of control, sale of substantially all assets or bankruptcy of the Company, upon the occurrence of any of which all shares of Class A preferred stock would be automatically converted). The Class A preferred stock ranked junior to any class or series of stock the terms of which specifically provided that the holders thereof were entitled to receive dividends or amounts distributable upon liquidation, dissolution or winding up of the Company in preference or priority to the holders of shares of Class A preferred stock. The Class A preferred stock ranked on parity with any class or series of stock the terms of which specifically provided that the holders thereof were entitled to receive dividends or amounts distributable upon liquidation, dissolution or winding up of the Company without preference or priority of one over the other. The Class A preferred stock had no voting rights except in certain limited instances.

 

On January 14, 2013, the terms of the Class A preferred stock were amended to provide that in calculating the number of shares of common stock to be issued upon conversion of shares of Class A preferred stock, the average market price of the Company’s common stock in the conversion calculation would not be less than $9.00 per share. As amended, shares of the Class A preferred stock are convertible into shares of the Company’s common stock at such time as the last of the properties contributed to the Company to be developed and opened for occupancy has attained 90% physical occupancy or has previously been disposed of by the Company. The shares are convertible at a conversion rate equal to the liquidation preference (as adjusted for certain decreases in value, in any, below June 1, 2012 levels) divided by the average market price of the Company’s common stock for the 20 trading days immediately preceding conversion, subject to a minimum price of $9.00 per share, subject to adjustments for any subsequent stock split, combination or exchange of the common stock after the date of issuance of the Class A preferred stock. The addition of the minimum conversion price of $9.00 per share and other changes in terms related to the Class A preferred stock was accounted for as an extinguishment that resulted in an increase of $3.5 million in net income attributable to common stockholders presented for year ended December 31, 2013 in the accompanying consolidated statement of operations.

 

F-25
 

 

On December 3, 2012, the Company and the Operating Partnership entered into a Contribution Agreement with BREF/BUSF Millenia Associates, LLC (the “Seller”) for the purchase of all of the Seller’s membership interests in Millenia 700, LLC, the owner of the 297 unit apartment community located in Orlando, Florida known as the Estates at Millenia (the “Developed Property”) and the 7-acre development site adjacent to the Developed Property (the “Development Property”) that is currently approved for 403 apartment units. The Developed Property and the Development Property were contributed to the Operating Partnership on December 3, 2012. Consideration for the purchase included 100,000 shares of Class A preferred stock, plus an additional 35,804 shares of Class A preferred stock issued on March 14, 2013, for which a liability of $3.3 million was included in acquisition consideration payable in preferred stock as of December 31, 2012. The issued shares were not registered under the Securities Act, and were, therefore, subject to certain restrictions on transfer. Upon receipt of the final certificate of occupancy for the Development Property, the Company was to issue to the Seller that number of additional shares of Class A preferred stock equal to 20% of the increase in value of the Development Property. The Class A preferred stock were redeemable, at the Company’s option, on or after the 7th anniversary of issuance.

 

Common and Preferred OP Units, Contingent B Units

 

On February 23, 2014, Amendment No. 1 to the Second Amended and Restated Agreement of Limited Partnership of Trade Street Operating Partnership, LP converted all of the 210,915 Class B contingent units discussed below into 2,343,500 common units of limited partnership interest in the Operating Partnership. The conversion of Class B contingent units into the common OP units was accounted for as an extinguishment that increased additional paid-in capital and noncontrolling interest in the accompanying consolidated balance sheet by approximately $1.9 million and $0.5 million, respectively. The common units are redeemable after February 23, 2015, at the Company’s option, for cash or shares of the Company’s common stock on a one-for-one basis.

 

In conjunction with the 2012 Recapitalization, the following units were issued and accounted for as noncontrolling interests in the financial statements of the Company:

 

·546,132 common units
·98,304 Class B preferred units
·98,304 Class C preferred units

 

Common units were redeemable at the option of the holder at any time after June 1, 2013. On February 8, 2013, the agreement of limited partnership for the Operating Partnership was amended and restated to combine the 98,304 Class B preferred units and the 98,304 Class C preferred units into a single class of partnership units, designated as Class B contingent units, and to amend certain other terms. The Operating Partnership issued one Class B contingent unit for each outstanding Class C preferred unit and all Class B preferred units became Class B contingent units, resulting in a total of 196,608 Class B contingent units.

 

On March 26, 2013, the partners of the Operating Partnership executed the Second Amended and Restated Agreement of Limited Partnership to amend the terms of the Class B contingent units at which time the 546,132 common units were exchanged for 14,307 additional Class B contingent units. The exchange of the common units for additional Class B contingent units was accounted for as an extinguishment that reduced noncontrolling interest in the accompanying consolidated balance sheet by approximately $8.2 million, which resulted in an increase of $8.2 million in net income attributable to common stockholders presented for the year ended December 31, 2013 in the accompanying consolidated statement of operations. As amended, the Class B contingent units were entitled to non-cumulative quarterly distributions that were preferred with respect to the payment of distributions on common units and pari passu with the payment of distributions on Class A preferred units. The quarterly distributions on the Class B contingent units were to be declared and set aside for payment prior to any distributions being declared on the common units for that quarterly period. The amount of the distributions were to be $0.375 per quarter (1.5% per annum of the stated value per Class B contingent unit) until December 31, 2014, $0.75 per quarter (3.0% per annum of the stated value per Class B contingent unit) from January 1, 2015 through December 31, 2015 and $1.125 per quarter (4.5% per annum of the stated value per Class B contingent unit) thereafter.

 

The Class B contingent units were convertible into common units in four tranches based upon the sale or stabilization which was defined as the achievement of 90% physical occupancy, of the Land Investments, as follows (except that all Class B contingent units would automatically be converted into common units upon, among other events, a change of control, sale of substantially all assets or bankruptcy of the company):

52,728.75 units upon the earlier to occur of (i) the stabilization of the development property, The Estates at Maitland, and (ii) the sale of The Estates at Maitland.
52,728.75 units upon the earlier to occur of (i) the stabilization of the development property, Millenia Phase II, and (ii) the sale of Millenia Phase II.
105,457.50 units upon the earlier to occur of (i) the stabilization of either the development property, Midlothian Town Center-East or the development property, Venetian, and (ii) the sale of either Midlothian Town Center-East or Venetian.

 

F-26
 

 

The Class B contingent units were convertible into common units on the schedule set forth above at a conversion rate equal to $100.00 per unit divided by, generally, the average closing price of common stock for the 20 trading days prior to the date of conversion, subject to a minimum price of $9.00 per share (subject to further adjustment for subsequent stock splits, stock dividends, reverse stock splits and other capital changes). The Class B contingent units ranked equally with common units with respect to losses of the Operating Partnership and shared in profits only to the extent of the distributions. The Class B contingent units did not have a preference with respect to distributions upon any liquidation of the Operating Partnership.

 

Redemption of Noncontrolling interests

 

On June 1, 2012, four of the Company’s property owning subsidiaries entered into an agreement to purchase their respective noncontrolling interests for approximately $7.7 million. During 2013, payments were made to redeem these noncontrolling interests of which $3.8 million is reported in net cash provided by financing activities within continuing operations and $3.9 million is reported in net cash used by financing activities within discontinued operations in the accompanying consolidated statements of cash flows. Upon payment in full of the outstanding amounts, the noncontrolling interests were canceled.

 

NOTE H – MANAGEMENT TRANSITION EXPENSES, STOCK-BASED COMPENSATION AND BENEFIT PLAN

 

Management Transition Expenses: Pursuant to the terms of a Separation Agreement and Release (the "Baumann Separation Agreement"), effective February 23, 2014, between Michael D. Baumann and the Company, Mr. Baumann resigned his employment as Chief Executive Officer of the Company and as Chairman and a member of the Company's Board of Directors. In consideration of a mutual release of claims against the Company and other related parties, and certain other agreements and covenants, Mr. Baumann received payments totaling approximately $2.4 million pursuant to the terms of the Separation Agreement. In addition, the Baumann Separation Agreement provided for the accelerated vesting of 54,338 shares of unvested restricted stock and Mr. Baumann surrendered 14,373 shares to cover tax withholding obligations applicable to the vesting of the shares. The agreement also provided for the conversion of 210,915 Class B contingent units held by Mr. Baumann into 2,343,500 common units in the Operating Partnership, which resulted in a non-cash compensation charge of $2.5 million that has been included in management transition expenses in the consolidated statement of operations for the year ended December 31, 2014.

 

Pursuant to the terms of a Separation Agreement and Release (the "Levin Separation Agreement"), effective March 18, 2014, between David Levin and the Company, Mr. Levin resigned his employment as President and as Vice Chairman and a member of the Company’s Board of Directors. In consideration of a mutual release of claims against the Company and other related parties, and certain other agreements and covenants, pursuant to the terms of the Levin Separation Agreement, Mr. Levin received 375,000 fully vested shares of common stock in a private placement, of which he surrendered 102,563 shares to cover tax withholding obligations applicable to the issuance of the shares. This resulted in a non-cash compensation charge of $2.8 million which is included in management transition expenses in the consolidated statement of operations for the year ended December 31, 2014.

 

Pursuant to the terms of a Separation Agreement and Release (the “Hanks Separation Agreement”), effective November 3, 2014, between Ryan Hanks and the Company, Mr. Hanks resigned his employment as Chief Investment Officer of the Company. In consideration of a mutual release of claims against the Company and certain other agreements and covenants, the Hanks Separation Agreement provided for the accelerated vesting of 75,142 shares of unvested restricted stock and Mr. Hanks surrendered 24,694 shares to cover tax withholding obligations applicable to the vesting of the shares. Pursuant to the Separation Agreement, Mr. Hanks has agreed to make himself available to the Company in a consulting capacity at no cost (other than reasonable expense reimbursement) until the earlier of November 3, 2015 and the occurrence of a Change in Control (as defined in the Company’s 2013 EIP).

 

During the year ended December 31, 2014, certain other members of management resigned and received cash payments totaling $0.5 million, as well as accelerated vesting of an aggregate of 24,150 share of unvested restricted stock that was reduced by an aggregate of 6,491 shares to cover tax withholding obligations applicable to the vesting of the shares. The Company also incurred legal and certain other expenses related to this management transition of $0.9 million for the year ended December 31, 2014.

 

As a result of the above, the Company recognized an aggregate expense of $10.0 million for the year ended December 31, 2014, which is reported as management transition expenses in the accompanying consolidated statements of operations.

 

Stock-based Compensation: On January 24, 2013, the Company’s stockholders approved the Trade Street Residential, Inc. 2013 Equity Incentive Plan (as amended, the “2013 EIP”), which is intended to attract and retain independent directors, executive officers and other key employees and individual service providers, including officers and employees of the Company’s affiliates. On May 15, 2014, the Company’s stockholders approved an amendment to the 2013 EIP, which increased the number of shares of the Company’s common stock available for issuance under the EIP by 2,500,000 shares to a new total of 2,881,206 shares. The shares can be issued as restricted stock awards (“RSAs”), stock appreciation rights (“SARs”), performance units, incentive awards and other equity-based awards.

 

F-27
 

 

On May 16, 2014, the Company issued an aggregate of 174,310 RSAs, of which 5,283 were issued, vested and are unrestricted and 169,027 were issued subject to (i) vesting over a period of four years and (ii) the employees’ and directors’ continued service with the Company. On May 16, 2013, the Company issued an aggregate of 301,877 RSAs for which all shares were issued subject to similar vesting requirements as those associated with the May 16, 2014 grant. RSA’s are entitled to receive any dividends paid by the Company on those shares during the vesting period.

 

Compensation expense associated with RSAs is based on the market price of the shares on the date of the grant, net of estimated forfeitures, and is amortized on a straight-line basis over the applicable vesting period (generally four years). The forfeiture rate is revised, as necessary, in subsequent periods if actual forfeiture experience exceeds prior expectations. As of December 31, 2014, the weighted-average forfeiture rate for the two grants under the 2013 EIP was approximately 7.0%. Compensation expense associated with RSAs of $0.5 million and $0.2 million for the years ended December 31, 2014 and 2013, respectively, is recorded in general and administrative expense in the consolidated statements of operations.

 

During the year ended December 31, 2014, a total of 193,999 shares vested and became unrestricted of which 153,630 shares vested in connection with the resignation of two former executive officers and certain other members of management, which was treated as a modification of stock based awards, resulting in additional cost of $0.9 million that is included in management transition expenses in the consolidated statement of operations for the year ended December 31, 2014.

 

During the year ended December 31, 2013, 58,866 shares vested and became unrestricted in connection with the resignation of a former executive officer, which was treated as a modification of stock based awards, resulting in additional cost of $0.3 million, and is included in general and administrative expense in the condensed consolidated statement of operations. In addition, during the year ended December 31, 2013, 75,000 fully vested shares of common stock were granted to a former executive officer and the related grant date fair value of $0.5 million was included in general and administrative expense in the condensed consolidated statement of operations.

 

As of December 31, 2014, there was $1.1 million of unrecognized compensation cost related to non-vested restricted stock granted under the 2013 EIP. This cost is expected to be recognized over a period of 2.9 years.

 

Following is a summary of the RSAs granted, vested and forfeited to participants with the related weighted average grant value. Of the shares that vested during the year ended December 31, 2014, the Company withheld 30,381 shares to satisfy the tax obligations for those participants who elected this option, as permitted under the 2013 EIP.

 

       Weighted 
       Average 
   Shares   Grant Value 
Balances at January 1, 2013 (non-vested)   -   $- 
Granted   376,877    9.23 
Vested   (133,866)   6.78 
Forfeited   -    - 
Balances at December 31, 2013 (non-vested)   243,011    9.80 
Granted   174,310    7.26 
Vested   (193,999)   8.02 
Forfeited   (43,395)   9.80 
Balances at December 31, 2014 (non-vested)   179,927   $7.85 

 

In addition the Company issued 21,000 fully vested shares of common stock at a price of $10.00 per share in a private placement to its independent directors in lieu of 2013 director fees in connection with the Company’s public offering on May 16, 2013. A non-cash expense of $0.2 million was recorded in general and administrative expense in the consolidated statement of operations for the year ended December 31, 2013.

 

401 (k) Savings Plan: In October, 2013, the Company adopted a voluntary defined contribution retirement plan pursuant to Section 401 of the Code (the “401K Plan”) that allows eligible employees to contribute a percentage of their compensation to the 401K Plan. The Company matched 50% of the employee’s pre-tax contribution up to a maximum employee contribution of 6% of salary. The Company made contributions of approximately $0.2 million and $0.03 million, respectively, to the 401K Plan during the years ended December 31, 2014 and 2013.

 

F-28
 

 

NOTE I—TRANSACTIONS WITH RELATED PARTIES

 

Due From / To Related Parties: Due from related parties as of December 31, 2013 is comprised primarily of a $0.6 million promissory note which the Company acquired from one of the contributors of entities in the 2012 Recapitalization. The note, which was due on demand, bore interest at 12% per annum. Accrued interest included in due from related parties was approximately $0.2 million as of December 31, 2013. The Company received payment in full during the year ended December 31, 2014.

 

NOTE J – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings: The Company may from time to time be involved in legal proceedings arising from the normal course of business. Other than routine litigation arising out of the ordinary course of business, with the exception of the following matter, the Company is not presently subject to any litigation nor, to the Company’s knowledge, is any litigation threatened against the Company.

 

Due to the nature of the 2012 Recapitalization, as described in Note G, the Company could find itself subject to a legal claim or proceeding associated with the previous business operations of the Predecessor. During the fourth quarter of 2014, the Company resolved a claim involving disputed charges on property previously owned by the Predecessor for which a settlement of approximately $0.7 million was negotiated and subsequently closed on February 13, 2015 (see Note N).  The charge associated with this settlement is reflected in acquisition and recapitalization costs in the accompanying consolidated statements of operations and in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

 

Due to the nature of the Company’s operations, it is possible that the Company’s existing properties have or properties that the Company will acquire in the future have asbestos or other environmental related liabilities.

 

Operating Leases: The Company leases office space for the Company’s headquarters in Aventura, Florida. Rent expense included in the accompanying statement of operations was approximately $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2014, 2013 and 2012, respectively. Amounts of minimum future annual rental commitments under the operating lease commencing January 1, 2015 and expiring July 31, 2016 are $0.3 million for 2015 and $0.2 million for 2016.

 

Property Management Agreements: Prior to the 2012 Recapitalization, the Company was externally managed and was a party to property management agreements with third parties with respect to the management of certain of the Companies operating properties. The agreements provided for monthly management fees that ranged from 3.0% to 4.0% of gross monthly collections of rent. The total property management fees for the year ended December 31, 2012 was approximately $0.3 million and is included in property operations and maintenance expenses in the accompanying consolidated statements of operations. There were no property management agreements or fees paid during the years ended December 31, 2014 and 2013.

 

Guarantee: In connection with the 2012 Recapitalization described above, as a condition to closing, the Company and the Operating Partnership were required to become co-guarantors (and, with respect to certain properties, co-environmental indemnitors) on certain outstanding mortgage indebtedness related to the properties contributed as part of the 2012 Recapitalization discussed in Note G, in order to replace, and cause the release of certain affiliated contributing entities as the guarantors and environmental indemnitors under the existing guarantees and environmental indemnity agreements, as applicable. The Company’s position as a co-guarantor and co-indemnitor with respect to the contributed properties could result in partial or full recourse liability to the Company or the Operating Partnership in the event of the occurrence of certain prohibited acts set forth in such agreements.

 

Other Contingencies: In the ordinary course of business, the Company issues letters of intent indicating a willingness to negotiate for acquisitions, dispositions, or joint ventures and also enter into arrangements contemplating various transactions. Such letters of intent and other arrangements are typically non-binding as to either party unless and until a definitive contract is entered into by the parties. Even if definitive contracts relating to the purchase or sale of real property are entered into, these contracts generally provide the purchaser with time to evaluate the property and conduct due diligence, during which periods the purchaser will have the ability to terminate the contracts without penalty or forfeiture of any deposit or earnest money. There can be no assurance definitive contracts will be entered into with respect to any matter covered by letters of intent or the Company will consummate any transaction contemplated by any definitive contract. Furthermore, due diligence periods for real property are frequently extended as needed. An acquisition or sale of real property generally becomes probable at the time the due diligence period expires and the definitive contract has not been terminated. The Company is then at risk under a real property acquisition contract unless the agreement provides for a right of termination, but generally only to the extent of any earnest money deposits associated with the contract, and are obligated to sell under a real property sales contract. As of December 31, 2014, the Company had non-refundable earnest money deposits of approximately $0.2 million included in prepaid expenses and other assets in the accompanying balance sheets. As of December 31, 2013, the Company had earnest money deposits of approximately $5.9 million included in prepaid expenses and other assets in the accompanying balance sheets, of which approximately $5.4 million was non-refundable.

 

F-29
 

 

NOTE K—INCOME TAXES

 

The Company has maintained and intends to maintain its election as a REIT under the Internal Revenue Code of 1986, as amended. In order for the Company to continue to qualify as a REIT it must meet a number of organizational and operational requirements, including a requirement to distribute annual dividends to its stockholders equal to a minimum of 90% of our REIT taxable income, computed without regard to the dividends paid deduction and our net capital gains. As a REIT, the Company generally will not be subject to federal income tax on its taxable income at the corporate level to the extent such income is distributed to its stockholders annually. If taxable income exceeds dividends in a tax year, REIT tax rules allow the Company to designate dividends from the subsequent tax year in order to avoid current taxation on undistributed income. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income taxes at regular corporate rates, including any applicable alternative minimum tax. In addition, the Company may not be able to re-qualify as a REIT for the four subsequent taxable years. Historically, the Company has incurred only non-income based state and local taxes. The Company’s Operating Partnership is a flow through entity and is not subject to federal income taxes at the entity level.

 

The Company has provided for non-income based state and local taxes in the consolidated statement of operations for all periods presented. Prior to June 1, 2012, the Company operated solely through partnerships which were flow-through entities and were not subject to federal income taxes at the entity level. Other tax expense has been recognized related to entity level state and local taxes on certain ventures. The Company accounts for the uncertainty in income taxes in accordance with GAAP, which requires recognition in the financial statements of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following a tax audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applied this guidance to its tax positions for the year ended December 31, 2014. The Company has no material unrecognized tax benefits and no adjustments to its financial position, results of operations or cash flows were required. The Company recognizes accrued interest and penalties related to uncertain tax positions, if any, as income tax expense.

 

For certain entities that are part of the Company, tax returns are open for examination by federal and state tax jurisdictions for the years 2012 through 2014. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws, the amounts reported in the accompanying consolidated financial statements may be subject to change at a later date upon final determination by the respective taxing authorities. No such examination is presently in progress.

 

NOTE L – REAL ESTATE ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

 

In April 2014, the FASB issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Company has adopted the provisions of ASU 2014-08 effective January 1, 2014 and has applied the provisions prospectively.

 

Prior to January 1, 2014, the Company accounted for properties as discontinued operations when all of the criteria of ASC 360-45-9 were met. The results of operations and cash flows from discontinued operations are included in the Company’s accompanying consolidated financial statements up to the date of disposition. Accordingly, prior period operating activity of such properties has been reclassified as discontinued operations in the accompanying financial statements for the year ended December 31, 2013 and 2012.

 

Real estate assets held for sale or sold subsequent to January 1, 2014

 

The Company’s real estate assets held for sale as of or sold during the year ended December 31, 2014 included the following:

 

Property Name   Location   Date Sold
Operating Property        
Post Oak   Louisville, Kentucky   July 11, 2014
         
Land Investments        
Venetian   Fort Myers, Florida   October 17, 2014
Midlothian Town Center – East (“Midlothian”)   Midlothian, Virginia   Held for sale
The Estates at Maitland (“Maitland”)   Maitland, Florida   October 17, 2014
Millenia Phase II (“Millenia II”)   Orlando, Florida   October 17, 2014
Sunnyside   Panama City, Florida   October 17, 2014

 

F-30
 

 

Operating Property

 

In May 2014, the Company committed to a plan to actively market the Post Oak operating property and on July 11, 2014, the Company completed that sale. The net cash proceeds were approximately $7.8 million and the Company recognized a gain of approximately $0.4 million that is included in gains on sales of real estate assets on the consolidated statement of operations for the year ended December 31, 2014.

 

Land Investments

 

In February 2014, the Company committed to a plan to actively market for sale the Venetian, Midlothian and Maitland Land Investments. As a result of this plan, the Company recorded an impairment charge in the consolidated statement of operations related to these properties for $12.4 million to reduce their carrying value of the aforementioned assets to their estimated fair value during the year ended December 31, 2013.

 

Also, in March 2014, upon completion of foreclosure proceedings, the Company committed to a plan to actively market for sale the Sunnyside Land Investment (see also Note C).

 

On October 17, 2014, the Company executed and closed on an agreement with the holders of the Class A preferred stock to redeem all 309,130 shares outstanding in exchange for the transfer of title to all of the Company’s Land Investments except for the Midlothian Land Investment, in which the Company retained all rights and interests, plus a cash payment of $5.0 million. See Note G for additional disclosure regarding the Company’s redemption of all of the outstanding shares of the Company’s Class A preferred stock.

 

As a result of this agreement, the Company recorded an approximate $8.0 million charge for impairment of the values of four of the five Land Investments during the year ended December 31, 2014. This non-cash impairment charge was based upon fair value estimates determined from unobservable market inputs, such as (i) opinions of value from independent commercial brokers and (ii) purchase offers or bids from unrelated third parties, that the Company believes provide the best indication of the current liquidation value of the Land Investments given the Company’s intent to dispose of these Land Investments in connection with the transaction to redeem all of the Company’s outstanding shares of Class A preferred stock (see Note G). Approximately $0.7 million of this impairment charge was associated with the Midlothian Land Investment as discussed below.

 

A summary of the impairment charges recognized by the Company during the years ended December 31, 2014 and 2013 is as follows:

 

      Years Ended December 31, 
Asset  Location  2014   2013 
      (in thousands) 
            
Millenia - Phase II  Orlando, FL  $6,774   $- 
The Estates at Maitland  Maitland, FL   -    1,613 
Midlothian Town Center - East  Midlothian, VA   673    4,079 
Venetian  Fort Myers, FL   400    6,727 
Sunnyside  Panama City, FL   115    - 
      $7,962   $12,419 

 

Contract for Sale – Midlothian Land Parcel

 

On October 7, 2014, the Company entered into a non-binding agreement with a third party to purchase the Company’s undivided interest in the Midlothian land parcel for $3.6 million. This agreement is subject to customary terms for similar transactions, including a period of examination during which the agreement could be cancelled by the Company or the purchaser, and would be expected to close during the second quarter of 2015.

 

The real estate assets held for sale as of December 31, 2014 were as follows:

 

   As of 
(in thousands)  December 31, 2014 
Real estate assets held for sale  $3,492 
Other assets, primarily restricted cash   549 
   Real estate assets held for sale  $4,041 

 

F-31
 

 

The Company’s net loss from real estate assets held for sale or sold which is included in loss from continuing operations for the years ended December 31, 2014, 2013 and 2012 is as follows.

 

   Years Ended December 31, 
(in thousands)  2014   2013   2012 
             
Total property revenues  $633   $1,156   $1,088 
Expenses:               
Property expenses   378    607    592 
Interest expense   31    330    240 
Depreciation and amortization   120    342    339 
Development and pursuit costs   229    159    - 
Loss on early extinguishment of debt   177    -    - 
Other expenses   15    124    23 
Total expenses   950    1,562    1,194 
Impairment associated with land holdings   (7,962)   (12,419)   - 
Gains on sales of real estate assets   353    -    - 
Loss from real estate assets held for sale  $(7,926)  $(12,825)  $(106)

 

See Note F for information regarding the Company’s JV investment in Perimeter which was also sold during the year ended December 31, 2014. The Company had no real estate assets held for sale as of December 31, 2013.

 

Discontinued Operations prior to January 1, 2014

 

The Company’s discontinued operations during the year ended December 31, 2013 and 2012 included the following:

 

Property Name   Location
Beckanna on Glenwood - “Beckanna”   Raleigh, North Carolina
Terrace at River Oaks  - “River Oaks”   San Antonio, Texas
Oak Reserve at Winter Park – “Oak Reserve”   Winter Park, Florida
Fontaine Woods – “Fontaine”   Chattanooga, Tennessee
The Estates at Mill Creek – “Mill Creek”   Buford, Georgia

 

The results of operations and cash flows from discontinued operations are included in the Company’s accompanying consolidated financial statements up to the date of disposition. Additionally, as required by GAAP, the results of operations, assets and liabilities and cash flows of the abovementioned properties have been separately presented as discontinued operations in the accompanying consolidated financial statements.

 

In January 2013 the Company committed to a plan to actively market the Beckanna operating property and on December 24, 2013, the Company completed the sale for $8.8 million, including the assumption by the buyer of the existing mortgage loan balance and a non-cancellable operating ground lease of $6.2 million and $7.5 million, respectively. The sale resulted in a gain to the Company of approximately $1.5 million, which has been included in discontinued operations during the year ended December 31, 2013.

 

As a result of the purchase of Beckanna on October 31, 2011, the Company assumed a non-cancellable operating ground lease. The term of the lease was through March 23, 2055, with the option to extend the lease for five additional ten-year periods, from the expiration date of the initial term of the lease. The payments related to this operating lease were expensed on a straight-line basis. Amortization of the unfavorable ground lease obligation was recognized over its respective term, for which amortization expense was recorded, in the amount of approximately $0.2 million for each of the years ended December 31, 2013 and 2012. Net rent expense incurred under this operating lease amounted to approximately $1.2 million for each of the years ended December 31, 2013 and 2012 and which are reported in loss on operations of rental property in discontinued operations.

 

In July 2013 the Company committed to a plan to actively market the River Oaks operating property and on December 16, 2013 the Company completed the sale for $22.5 million, including the assumption by the buyer of the existing mortgage loan balance in the amount of $14.3 million. The sale resulted in a gain to the Company of approximately $3.2 million, which has been included in discontinued operations during the year ended December 31, 2013.

 

F-32
 

 

On June 12, 2013, the Company sold its 100% interest in Oak Reserve for $11.7 million. The decision to sell this property was made in January 2013. The sale resulted in a gain to the Company of approximately $0.5 million, which has been included in discontinued operations for the year ended December 31, 2013.

 

In November 2012 the Company committed to a plan to actively market its 70% interest in Fontaine to its joint venture partner and on March 1, 2013 the Company completed the sale for $10.5 million, including the assumption by the buyer of the Company’s 70% portion of a $9.1 million mortgage. The sale resulted in a gain to the Company of approximately $1.6 million, which has been included in discontinued operations during the year ended December 31, 2013.

 

On November 10, 2012, the Company sold the Mill Creek property for $27.5 million. The sale resulted in a net gain of approximately $2.1 million, consisting of a $2.2 million gain recorded in the fourth quarter of 2012 and $0.1 million reduction in the gain during the year ended December 31, 2013. The reduction in the gain resulted in a post-closing purchase price reduction during the year ended December 31, 2013.

 

The following table provides a summary of selected operating results the properties classified as discontinued operations in the consolidated statement of operations for the years ended December 31, 2013 and 2012:

 

   Year Ended December 31, 
(in thousands)  2013   2012 
Total property revenues  $6,387   $11,820 
Expenses:          
Property expenses   4,263    6,788 
Interest expense   1,534    2,924 
Depreciation and amortization   476    3,709 
Other expenses   527    586 
Loss before gain from sale of rental property   (413)   (2,187)
Gain from sale of rental property   6,685    2,183 
Income from operation of discontinued rental property, including gains/losses on disposals  $6,272   $(4)

 

The Company had no discontinued operations as of December 31, 2014.

 

NOTE M – QUARTERLY DATA (unaudited)

 

Quarterly financial information in 2014 and 2013 was as follows:

 

   Quarters During the Year Ended December 31, 2014 (1)  
(in thousands, except per share amounts)  First (2)   Second (2)   Third (3)   Fourth (2) (4) 
Total revenue  $11,410   $14,653   $15,306   $15,498 
Loss from continuing operations   (16,081)   (4,024)   (9,432)   (780)
Net loss   (16,081)   (4,024)   (9,432)   (780)
Net income (loss) attributable to common stockholders of Trade Street Residential, Inc.   (15,194)   (3,999)   (9,086)   482 
Earnings (loss) per common share - basic and diluted Continuing operations  $(0.48)  $(0.11)  $(0.25)  $0.01 
Weighted average number of shares outstanding:                    
Basic   31,746    36,452    36,468    36,500 
Diluted   31,746    36,452    36,468    38,844 

 

F-33
 

  

   Quarters During the Year Ended December 31, 2013 (1)  
(in thousands, except per share amounts)  First (5) (7)   Second   Third (6)   Fourth (7) 
Total revenue  $5,285   $6,437   $8,027   $9,208 
Income (loss) from continuing operations   (4,188)   (4,748)   1,961    (15,853)
Income (loss) from discontinued operations   1,487    289    (80)   4,576 
Net income (loss)   (2,701)   (4,459)   1,881    (11,277)
Net income (loss) attributable to common stockholders of Trade Street Residential, Inc.   6,795    (4,034)   1,360    (9,732)
Earnings (loss) per common share - basic and diluted                    
Continuing operations  $1.12   $(0.55)  $0.13   $(1.28)
Discontinued operations   0.32    0.04    (0.01)   0.41 
Net earnings (loss) attributable to common stockholders  $1.44   $(0.51)  $0.12   $(0.87)
Weighted average number of shares outstanding:                    
Basic and Diluted   4,717    7,907    11,099    11,226 

 

(1)Net income per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly net income per share amounts may not equal the total computed for the year.
(2)During the quarters ended March 31, 2014, June 30, 2014 and December 31, 2014, the Company recorded management transition expense of $9.0 million, $0.3 million and $0.7 million, respectively, related to the resignation of certain executive officers and other members of management (See Note H).
(3)During the quarter ended September 30, 2014, the Company recorded an $8.0 million charge for impairment of the values for four of the five Land Investments owned by the Company related to our transaction to redeem all of our outstanding share of Class A preferred stock (See Note G).
(4)During the quarter ended December 31, 2014, the Company recorded an increase of $1.2 million in net income attributable to common stockholders as a result of extinguishment related to our transaction to redeem all of our outstanding share of Class A preferred stock (See Note G).
(5)During the quarter ended March 31, 2013, the Company recorded an increase of $11.7 million in net income attributable to common stockholders as a result of extinguishments related to Class A preferred stock and Class B contingent units, less related adjustments attributable to participating securities for $2.5 million (see Note G).
(6)During the quarter ended September 30, 2013, the Company recorded a $6.9 million gain on bargain purchase from the Fountains Southend acquisition (See Note C).
(7)During the quarter ended March 31, 2013 and December 30, 2013, the Company recorded a $0.6 million $11.8 million, respectively, impairment loss on the land held for future development properties (See Note L).

 

NOTE N—SUBSEQUENT EVENTS

 

Legal Proceeding

 

As discussed in Note J, during the fourth quarter of 2014, the Company resolved a claim involving disputed charges on property previously owned by the Predecessor for which a settlement of approximately $0.7 million was negotiated and subsequently closed on February 13, 2015.  The charge associated with this settlement is reflected in acquisition and recapitalization costs in the accompanying consolidated statements of operations and in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

 

F-34
 

 

SCHEDULE III – Real Estate Assets and Accumulated Depreciation for the year ended December 31, 2014

 

(in thousands)            Initial cost                          
Property  City  State  Encumbrances   Land and
improvements
   Building and
improvements
   Costs
capitalized
subsequent to
acquisition
   Furniture &
Fixtures
   Gross
amounts at
close of
period
   Accumulated
depreciation
   Year
built/renovated
  Year of
acquisition
  Depreciable
lives in years
                                            
Real Estate:                                                  
The Pointe at Canyon Ridge  Sandy Springs  GA  $25,800   $16,689   $16,718   $526   $2,301   $36,234   4,209   1986/2007  September-08  10-40
Arbors River Oaks  Memphis  TN   -(1)   2,630    12,840    1,455    545    17,470    2,365   1990/2010  June-10  10-40
Lakeshore on the Hill  Chattanooga  TN   6,625    1,000    8,661    399    181    10,241    1,497   1969/2005  December-10  10-40
The Trails of Signal Mountain  Chattanooga  TN   8,137    1,461    9,815    593    411    12,280    1,923   1975  May-11  10-40
Mercé Apartments  Addison  TX   -(1)   1,182    6,113    140    582    8,017    1,287   1991/2007  October-11  10-40
Fox Trails  Plano  TX   -(1)   3,392    16,491    600    624    21,107    2,328   1981  December-11  10-40
Millenia 700  Orlando  FL   25,000    4,606    36,070    152    1,278    42,106    1,964   2012  December-12  10-50
Westmont Common  Ashville  NC   17,920    2,275    19,184    175    333    21,967    1,279   2003/2008  December-12  10-40
Bridge Pointe  Huntsville  AL   11,314    2,083    12,437    269    366    15,155    959   2002  March-13  10-40
St. James at Goose Creek  Goose Creek  SC   19,000    4,036    22,255    136    460    26,887    1,107   2009  May-13  10-50
Creekstone at RTP  Durham  NC   23,250    3,994    30,823    52    306    35,175    1,255   2012  May-13  10-50
Talison Row at Daniel Island  Charleston  SC   33,635    5,179    41,294    61    810    47,344    1,329   2013  August-13  10-50
Fountains Southend  Charlotte  NC   23,750    7,643    30,740    32    751    39,166    983   2013  September-13  10-50
The Estates at Wake Forest  Wake Forest  NC   18,625    5,295    30,633    357    866    37,151    904   2013  January-14  10-50
Miller Creek at Germantown   Memphis  TN   26,250    4,633    37,332    (14)   1,030    42,981    972   2012/2013  January-14  10-50
The Aventine Greenville   Greenville  SC   21,000    4,814    34,720    66    1,513    41,113    934   2013  February-14  10-50
Waterstone at Brier Creek   Raleigh  NC   16,250    4,712    26,989    194    692    32,587    643   2013/2014  March-14  10-50
Avenues at Craig Ranch    McKinney  TX   21,200    6,654    33,317    27    1,722    41,720    839   2013  March-14  10-50
Waterstone at Big Creek  Alpharetta  GA   -(1)   5,673    33,106    59    1,003    39,841    698   2013  April-14  10-50
Total Operating Properties        $297,756   $87,951   $459,538   $5,279   $15,774   $568,542   $27,475          
                                                   
Real estate held for sale:                                                  
MTC East  Richmond  VA   -    7,783    -    (4,291)   -    3,492    -   Held for sale  August-09  N/A
Total real estate held for sale         -    7,783    -    (4,291)   -    3,492    -          
                                                   
Total        $297,756   $95,734   $459,538   $988   $15,774   $572,034   $27,475          

 

(1)These properties are secured by the Revolver which had an outstanding principal balance of $47.0 million as of December 31, 2014 (see Note D to the consolidated financial statements).

 

         
Reconciliation of real estate owned:        
in thousands  2014   2013 
Balance at January 1  $372,388   $279,994 
Acquisitions of operating properties   234,573    164,524 
Improvements   2,559    2,488 
Reduction - impairments   (7,962)   (12,419)
Casualty write-off   (719)   - 
Cost of real estate sold   (28,805)   (62,199)
Balance at December 31  $572,034   $372,388 

 

Reconciliation of accumulated depreciation        
in thousands  2014   2013 
Balance at January 1  $14,369   $10,242 
Depreciation expense   14,758    7,550 
Dispositions   (1,652)   (3,423)
Balance at December 31  $27,475   $14,369