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EX-32.1 - EXHIBIT 32.1 - Steadfast Apartment REIT, Inc.ex321-star3312016.htm
EX-32.2 - EXHIBIT 32.2 - Steadfast Apartment REIT, Inc.ex322-star3312016.htm
EX-31.2 - EXHIBIT 31.2 - Steadfast Apartment REIT, Inc.ex312-star3312016.htm
EX-31.1 - EXHIBIT 31.1 - Steadfast Apartment REIT, Inc.ex311-star3312016.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
þ     
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2016
OR
 
 
 
o     
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from _________ to _________
Commission file number 000-55428
STEADFAST APARTMENT REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
Maryland
 
36-4769184
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
 
 
 
18100 Von Karman Avenue,  Suite 500
 
 
Irvine, California
 
92612
(Address of Principal Executive Offices)
 
(Zip Code)
 (949) 852-0700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large Accelerated filer o
Accelerated filer o
 
 
Non-Accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of May 6, 2016, there were 48,857,944 shares of the Registrant’s common stock issued and outstanding.
 




STEADFAST APARTMENT REIT, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements



STEADFAST APARTMENT REIT, INC.

CONSOLIDATED BALANCE SHEETS

 
March 31, 2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
Assets:
 
 
 

Real Estate:
 
 
 
Land
$
134,570,816

 
$
130,350,873

Building and improvements
1,130,304,157

 
1,094,714,957

Tenant origination and absorption costs
7,378,352

 
12,999,943

Total real estate, cost
1,272,253,325

 
1,238,065,773

Less accumulated depreciation and amortization
(42,096,763
)
 
(31,037,647
)
Total real estate, net
1,230,156,562

 
1,207,028,126

Cash and cash equivalents
155,862,935

 
31,386,377

Restricted cash
9,941,017

 
13,335,169

Rents and other receivables
13,879,009

 
4,504,879

Other assets
2,966,388

 
2,437,643

Total assets
$
1,412,805,911

 
$
1,258,692,194

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 

Accounts payable and accrued liabilities
$
17,569,993

 
$
18,988,582

Notes Payable:
 
 
 
    Mortgage notes payable, net
665,914,403

 
665,841,269

    Revolving credit facility, net
184,999,979

 
184,924,756

Total notes payable, net
850,914,382

 
850,766,025

Distributions payable
3,390,869

 
2,563,769

Due to affiliates
4,836,367

 
4,407,877

Total liabilities
876,711,611

 
876,726,253

Commitments and contingencies (Note 9)

 

Redeemable common stock
13,133,791

 
9,401,360

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value per share; 100,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.01 par value per share; 999,999,000 shares authorized, 48,618,779 and 35,504,854 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively
486,188

 
355,048

Convertible stock, $0.01 par value per share; 1,000 shares authorized, issued and outstanding as of March 31, 2016 and December 31, 2015, respectively
10

 
10

Additional paid-in capital
626,210,028

 
456,614,453

Cumulative distributions and net losses
(103,735,717
)
 
(84,404,930
)
Total stockholders’ equity
522,960,509

 
372,564,581

Total liabilities and stockholders’ equity
$
1,412,805,911

 
$
1,258,692,194

 
See accompanying notes to consolidated financial statements.

2


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
Revenues:
 
 
 
Rental income
$
28,796,084

 
$
7,008,979

Tenant reimbursements and other
3,723,835

 
736,840

Total revenues
32,519,919

 
7,745,819

Expenses:
 
 
 
Operating, maintenance and management
7,705,961

 
1,900,733

Real estate taxes and insurance
4,910,802

 
1,140,952

Fees to affiliates
4,910,716

 
3,464,033

Depreciation and amortization
17,355,776

 
5,356,169

Interest expense
6,531,549

 
1,760,583

General and administrative expenses
1,166,753

 
576,432

Acquisition costs
206,284

 
1,026,215

Total expenses
42,787,841

 
15,225,117

Net loss
$
(10,267,922
)
 
$
(7,479,298
)
Loss per common share — basic and diluted
$
(0.25
)
 
$
(0.61
)
Weighted average number of common shares outstanding — basic and diluted
40,634,788

 
12,235,415

Distributions declared per share
$
0.224

 
$
0.222

 
See accompanying notes to consolidated financial statements.

3


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2015
AND FOR THE THREE MONTHS ENDED MARCH 31, 2016 (Unaudited)
 
 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, December 31, 2014
 
9,179,536

 
$
91,795

 
1,000

 
$
10

 
$
117,443,760

 
$
(14,151,178
)
 
$
103,384,387

Issuance of common stock
 
26,344,086

 
263,441

 

 

 
392,921,328

 

 
393,184,769

Commissions on sales of common stock and related dealer manager fees to affiliates
 

 

 

 

 
(37,069,634
)
 

 
(37,069,634
)
Transfers to redeemable common stock
 

 

 

 

 
(8,999,601
)
 

 
(8,999,601
)
Redemption of common stock
 
(18,768
)
 
(188
)
 

 

 
(278,879
)
 

 
(279,067
)
Other offering costs to affiliates
 

 

 

 

 
(7,484,725
)
 

 
(7,484,725
)
Distributions declared
 

 

 

 

 

 
(19,559,628
)
 
(19,559,628
)
Amortization of stock-based compensation
 

 

 

 

 
82,204

 

 
82,204

Net loss
 

 

 

 

 

 
(50,694,124
)
 
(50,694,124
)
BALANCE, December 31, 2015
 
35,504,854

 
355,048

 
1,000

 
10

 
456,614,453

 
(84,404,930
)
 
372,564,581

Issuance of common stock
 
13,135,524

 
131,356

 

 

 
195,145,615

 

 
195,276,971

Commissions on sales of common stock and related dealer manager fees to affiliates
 

 

 

 

 
(17,658,517
)
 

 
(17,658,517
)
Transfers to redeemable common stock
 

 

 

 

 
(3,735,990
)
 

 
(3,735,990
)
Redemption of common stock
 
(21,599
)
 
(216
)
 

 

 
(291,666
)
 

 
(291,882
)
Other offering costs to affiliates
 

 

 

 

 
(3,882,612
)
 

 
(3,882,612
)
Distributions declared
 

 

 

 

 

 
(9,062,865
)
 
(9,062,865
)
Amortization of stock-based compensation
 

 

 

 

 
18,745

 

 
18,745

Net loss
 

 

 

 

 

 
(10,267,922
)
 
(10,267,922
)
BALANCE, March 31, 2016
 
48,618,779

 
$
486,188

 
1,000

 
$
10

 
$
626,210,028

 
$
(103,735,717
)
 
$
522,960,509

 
See accompanying notes to consolidated financial statements.

4


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended March 31,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 

Net loss
$
(10,267,922
)
 
$
(7,479,298
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
17,355,776

 
5,356,169

Amortization of deferred financing costs
211,290

 
43,578

Amortization of stock-based compensation
18,745

 
14,067

Change in fair value of interest rate cap agreements
499,740

 
664,110

Changes in operating assets and liabilities:
 
 
 
Restricted cash for operating activities
3,188,832

 
(739,097
)
Rents and other receivables
(617,787
)
 
(249,091
)
Other assets
71,615

 
(54,068
)
Accounts payable and accrued liabilities
(373,144
)
 
1,634,081

Due to affiliates
(1,341,386
)
 
(729,516
)
Net cash provided by (used in) operating activities
8,745,759

 
(1,539,065
)
Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate investments
(31,700,000
)
 
(154,364,900
)
Additions to real estate investments
(9,475,667
)
 
(1,134,746
)
Escrow deposits for pending real estate acquisitions
(1,800,100
)
 
(3,950,100
)
Restricted cash for investing activities
205,320

 
(109,224
)
Purchase of interest rate cap agreements

 
(592,150
)
Net cash used in investing activities
(42,770,447
)
 
(160,151,120
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of mortgage notes payable

 
75,680,500

Principal payments on mortgage notes payable
(62,933
)
 

Proceeds from issuance of common stock
182,078,189

 
100,645,056

Payments of commissions on sale of common stock and related dealer manager fees
(16,690,922
)
 
(9,772,776
)
Reimbursement of other offering costs to affiliates
(2,737,880
)
 
(607,480
)
Payment of deferred financing costs

 
(489,210
)
Distributions to common stockholders
(3,793,326
)
 
(1,113,641
)
Redemptions of common stock
(291,882
)
 
(33,551
)
Net cash provided by financing activities
158,501,246

 
164,308,898

Net increase in cash and cash equivalents
124,476,558

 
2,618,713

Cash and cash equivalents, beginning of period
31,386,377

 
28,595,826

Cash and cash equivalents, end of period
$
155,862,935

 
$
31,214,539


5


PART I — FINANCIAL INFORMATION (continued)
Item 1. Financial Statements (continued)

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

 
Three Months Ended March 31,
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 
 
Interest paid
$
5,899,331

 
$
972,481

Supplemental Disclosures of Noncash Flow Transactions:
 
 
 
Increase in distributions payable
$
827,100

 
$
499,349

Application of escrow deposits to acquire real estate
$
700,000

 
$
2,450,100

Increase/(Decrease) in amounts receivable from transfer agent
$
8,756,343

 
$
(63,814
)
Increase in amounts payable to affiliates for other offering costs
$
1,144,732

 
$
649,550

Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan
$
4,442,439

 
$
1,096,309

Increase in redeemable common stock
$
3,735,990

 
$
1,062,758

Increase in redemptions payable
$
3,559

 
$
36,349

(Decrease)/Increase in accounts payable and accrued liabilities from additions to real estate investments
$
(1,049,004
)
 
$
91,077

Decrease in due to affiliates from additions to real estate investments
$
(342,451
)
 
$

Increase in due to affiliates for commissions on sale of common stock and related dealer manager fees
$
967,595

 
$

 
See accompanying notes to consolidated financial statements.

6


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)


1.         Organization and Business
Steadfast Apartment REIT, Inc. (the “Company”) was formed on August 22, 2013, as a Maryland corporation that has elected to qualify as a real estate investment trust (“REIT”) commencing with the taxable year ended December 31, 2014. On September 3, 2013, the Company was initially capitalized with the sale of 13,500 shares of common stock to Steadfast REIT Investments, LLC (the “Sponsor”) at a purchase price of $15.00 per share for an aggregate purchase price of $202,500. Steadfast Apartment Advisor, LLC (the “Advisor”), a Delaware limited liability company formed on August 22, 2013, invested $1,000 in the Company in exchange for 1,000 shares of non-participating, non-voting convertible stock (the “Convertible Stock”) as described in Note 6.
Substantially all of the Company’s business is conducted through Steadfast Apartment REIT Operating Partnership, L.P. (the “Operating Partnership”), a Delaware limited partnership formed on August 27, 2013. The Company is the general partner of the Operating Partnership. The Company and Steadfast Apartment REIT Limited Partner, LLC, a Delaware limited liability company and a wholly-owned subsidiary of the Company, entered into a Limited Partnership Agreement (the “Partnership Agreement”) on September 3, 2013. As the Company accepted subscriptions for shares of its common stock, the Company transferred substantially all of the net offering proceeds from its Public Offering (defined below) to the Operating Partnership as a contribution in exchange for partnership interests and the Company’s percentage ownership in the Operating Partnership increased proportionately.
As of March 31, 2016, the Company owned 31 multifamily properties comprising a total of 10,075 apartment homes. For more information on the Company’s real estate portfolio, see Note 3.
Public Offering
On December 30, 2013, the Company commenced its initial public offering pursuant to a registration statement on Form S-11, filed with the Securities and Exchange Commission (the “SEC”), to offer a maximum of 66,666,667 shares of common stock for sale to the public at an initial price of $15.00 per share (with discounts available for certain categories of purchasers) (the “Primary Offering”). The Company also registered up to 7,017,544 shares of common stock for sale pursuant to the Company’s distribution reinvestment plan (the “DRP,” and together with the Primary Offering, the “Public Offering”) at an initial price of $14.25 per share. The Company terminated its Public Offering on March 24, 2016, but continues to offer shares of common stock pursuant to the DRP. As of March 24, 2016, the Company had sold 48,625,651 shares of common stock in the Public Offering for gross proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to the DRP for gross offering proceeds of $14,414,752.
On March 24, 2016, the Company’s board of directors determined an estimated value per share of the Company’s common stock of $14.46 as of December 31, 2015. In connection with the determination of an estimated value per share, the Company’s board of directors determined a price per share for the DRP of $14.46, effective May 1, 2016. The Company’s board of directors may again, from time to time, in its sole discretion, change the price at which the Company offers shares pursuant to the DRP to reflect changes in the Company’s estimated value per share and other factors that the Company’s board of directors deems relevant. 
The business of the Company is externally managed by the Advisor, pursuant to the Advisory Agreement dated December 13, 2013, by and among the Company, the Operating Partnership and the Advisor (as amended, the “Advisory Agreement”). The Advisory Agreement is subject to annual renewal by the Company’s board of directors. The current term of the Advisory Agreement expires on December 13, 2016. Subject to certain restrictions and limitations, the Advisor manages the Company’s day-to-day operations, manages the Company’s portfolio of properties and real estate-related assets, sources and presents investment opportunities to the Company’s board of directors and provides investment management services on the Company’s behalf. The Advisor has also entered into an Advisory Services Agreement with Crossroads Capital Advisors, LLC (“Crossroads Capital Advisors”), whereby Crossroads Capital Advisors provides advisory services to the Company on behalf of the Advisor. The Company retained Steadfast Capital Markets Group, LLC (the “Dealer Manager”), an affiliate of the

7


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Company, to serve as the dealer manager for the Public Offering. The Dealer Manager was responsible for marketing the Company’s shares of common stock offered pursuant to the Public Offering. The Advisor, along with the Dealer Manager, also provides offering services, marketing, investor relations and other administrative services on the Company’s behalf. 
The Partnership Agreement provides that the Operating Partnership is operated in a manner that will enable the Company to (1) satisfy the requirements for being classified as a REIT for tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that the Operating Partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), which classification could result in the Operating Partnership being taxed as a corporation. In addition to the administrative and operating costs and expenses incurred by the Operating Partnership in acquiring and operating real properties, the Operating Partnership will pay all of the Company’s administrative costs and expenses, and such expenses will be treated as expenses of the Operating Partnership.
The Company commenced its real estate operations on May 22, 2014, upon acquiring a fee simple interest in a multifamily property located in Spring Hill, Tennessee.
2.         Summary of Significant Accounting Policies
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015, other than Accounting Standard Update (“ASU”) 2015-03, as amended by ASU 2015-15, as further described below. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2016. 
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.
The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The unaudited consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Fair Value Measurements
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received

8


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
When available, the Company utilizes quoted market prices from an independent third-party source to determine fair value and will classify such items in Level 1 or Level 2. In instances where the market is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and will establish a fair value by assigning weights to the various valuation sources.
The following describes the valuation methodologies used by the Company to measure fair value, including an indication of the level in the fair value hierarchy in which each asset or liability is generally classified.
Interest rate cap agreements - These derivatives are recorded at fair value. Fair value was based on a model-driven valuation using the associated variable rate curve and an implied market volatility, both of which were observable at commonly quoted intervals for the full term of the interest rate cap agreements. Therefore, the Company’s interest rate cap agreements were classified within Level 2 of the fair value hierarchy and are included in other assets in the accompanying consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are recorded as interest expense in the accompanying consolidated statements of operations.
The following tables reflect the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:
 
 
March 31, 2016
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$

 
$
149,459

 
$

 
 
December 31, 2015
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$

 
$
649,199

 
$


9


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.
Fair Value of Financial Instruments
The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities, distributions payable, due to affiliates and notes payable.
The Company considers the carrying value of cash and cash equivalents, restricted cash, rents and other receivables, accounts payable and accrued liabilities and distributions payable to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization. The fair value of amounts due to affiliates is not determinable due to the related party nature of such amounts. The Company has determined that its notes payable are classified as Level 3 within the fair value hierarchy.
The fair value of the notes payable is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of March 31, 2016 and December 31, 2015, the fair value of the notes payable was $838,630,666 and $827,207,564, respectively, compared to the carrying value of $850,914,382 and $850,766,025, respectively.
Distribution Policy
The Company elected to be taxed as a REIT commencing with the taxable year ended December 31, 2014. To maintain its qualification as a REIT, the Company intends to make distributions each taxable year equal to at least 90% of its REIT taxable income (which is determined without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). Distributions declared during the year ended December 31, 2015 were based on daily record dates and calculated at a rate of $0.002466 per share per day. Distributions declared during the three months ended March 31, 2016 were based on daily record dates and calculated at a rate of $0.002459 per share per day. Each day during the period from January 1, 2015 to March 31, 2016 was a record date for distributions. 
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three months ended March 31, 2016 and 2015, the Company declared distributions totaling $0.224 and $0.222 per share of common stock, respectively.
Per Share Data
Basic loss per share attributable to common stockholders for all periods presented are computed by dividing net loss by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assume each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock and convertible stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation. These reclassifications have not changed the results of operations of prior periods. During the three months ended March 31, 2016, the Company adopted new accounting guidance to simplify the presentation of debt issuance costs following ASU 2015-03, as amended by ASU 2015-15, as further described below. As a result, the Company reclassified net debt issuance

10


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

costs of $4,091,494 and $1,375,244 from other assets as of December 31, 2015 to mortgage notes payable, net and revolving credit facility, net, respectively, on the consolidated balance sheets.
Segment Disclosure
The Company has determined that it has one reportable segment with activities related to investing in multifamily properties. The Company’s investments in real estate are in different geographic regions, and management evaluates operating performance on an individual asset level. However, as each of the Company’s assets has similar economic characteristics, tenants and products and services, its assets have been aggregated into one reportable segment.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new guidance supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. The new guidance does not apply to lease contracts within the scope of Leases (Topic 840). In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of the new guidance by one year, which will result in the new guidance being effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied retrospectively. Early adoption is permitted, but can be no earlier than the original public entity effective date of fiscal years, and interim periods within those years, beginning after December 15, 2016. The Company is still evaluating the impact of adopting the new guidance on its financial statements, but does not expect the adoption to have a material impact on its financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, that requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern. Until now, the requirement to perform a going concern evaluation existed only in auditing standards. The new guidance requires management to evaluate relevant conditions, events and certain management plans that are known or reasonably knowable as of the evaluation date when determining whether substantial doubt about an entity’s ability to continue as a going concern exists. Management will be required to make this evaluation for both annual and interim reporting periods. The standard states substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The guidance is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The Company does not expect there to be a material impact from adopting this new guidance.
In January 2015, the FASB issued ASU 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, that eliminates the concept of extraordinary items from GAAP. The objective of the new guidance is to simplify the income statement presentation requirements of GAAP. Eliminating the extraordinary classification simplifies income statement presentation by altogether removing the concept of extraordinary items from consideration. The guidance is effective for annual periods, including interim periods within that period, beginning after December 15, 2015. The Company did not experience a material impact from adopting this new guidance.
In February 2015, the FASB issued ASU 2015-02, Consolidation, that provides amendments to the consolidation analysis. The amendments in this new guidance affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The guidance is effective for annual periods, including interim periods within that period, beginning after December 15, 2015. The Company did not experience a material impact from adopting this new guidance.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, as amended in August 2015 by ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of a debt liability, consistent with debt discounts or premiums. The FASB will permit debt issuance costs related to line-

11


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

of-credit arrangements to be deferred and presented as an asset and subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs will not be affected by the new guidance. The guidance requires retrospective application and is effective for annual periods, including interim periods within that period, beginning after December 15, 2015. Early adoption is permitted. Upon adoption, the Company reclassified net debt issuance costs related to both mortgage notes payable and line-of-credit arrangements of $3,955,426 and $1,300,021, respectively, as of March 31, 2016 and $4,091,494 and $1,375,244, respectively, as of December 31, 2015, from other assets to mortgage notes payable, net and revolving credit facility, net on the consolidated balance sheets.
In February 2016, the FASB issued ASU 2016-02, Leases, amending the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The guidance will be effective in the first quarter of 2019 and allows for early adoption. The Company is assessing whether the new standard will have a material effect on its financial position or results of operations.
3.          Real Estate
As of March 31, 2016, the Company owned 31 multifamily properties comprising a total of 10,075 apartment homes. The total acquisition price of the Company’s real estate portfolio was $1,267,559,250. As of March 31, 2016 and December 31, 2015, the Company’s portfolio was approximately 93.4% and 93.6% occupied and the average monthly rent was $1,043 and $1,037, respectively.
Current Year Acquisitions
During the three months ended March 31, 2016, the Company acquired the following property:
 
 
 
 
 
 
 
 
Purchase Price Allocation
Property Name
 
Location
 
Purchase Date
 
Units
 
Land
 
Buildings and Improvements
 
Tenant Origination and Absorption Costs
 
 
Total Purchase Price
Fielder’s Creek
 
Englewood, CO
 
3/23/2016
 
217

 
$
4,219,943

 
$
27,504,988

 
$
675,069

 
 
$
32,400,000

 
 
 
 
 
 
217

 
$
4,219,943

 
$
27,504,988

 
$
675,069

 
 
$
32,400,000

As of March 31, 2016 and December 31, 2015, accumulated depreciation and amortization related to the Company’s consolidated real estate properties and related intangibles were as follows:
 
 
March 31, 2016
 
 
Assets
 
 
Land
 
Building and Improvements
 
Tenant Origination and Absorption
 
Total Real Estate
Investments in real estate
 
$
134,570,816

 
$
1,130,304,157

 
$
7,378,352

 
$
1,272,253,325

Less: Accumulated depreciation and amortization
 

 
(37,229,000
)
 
(4,867,763
)
 
(42,096,763
)
Net investments in real estate and related lease intangibles
 
$
134,570,816

 
$
1,093,075,157

 
$
2,510,589

 
$
1,230,156,562


12


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

 
 
December 31, 2015
 
 
Assets
 
 
Land
 
Building and Improvements
 
Tenant Origination and Absorption
 
Total Real Estate
Investments in real estate
 
$
130,350,873

 
$
1,094,714,957

 
$
12,999,943

 
$
1,238,065,773

Less: Accumulated depreciation and amortization
 

 
(25,498,027
)
 
(5,539,620
)
 
(31,037,647
)
Net investments in real estate and related lease intangibles
 
$
130,350,873

 
$
1,069,216,930

 
$
7,460,323

 
$
1,207,028,126

Depreciation and amortization expense was $17,355,776 and $5,356,169 for the three months ended March 31, 2016 and 2015, respectively.
Depreciation of the Company’s buildings and improvements was $11,730,973 and $2,512,825 for the three months ended March 31, 2016 and 2015, respectively.
Amortization of the Company’s tenant origination and absorption costs was $5,624,803 and $2,843,344 for the three months ended March 31, 2016 and 2015, respectively. Tenant origination and absorption costs had a weighted-average amortization period as of the date of acquisition of less than one year.
Operating Leases
As of March 31, 2016, the Company’s real estate portfolio comprised 10,075 apartment homes and was 93.4% occupied by a diverse group of residents. The residential lease terms consist of lease durations equal to twelve months or less.
Some residential leases contain provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in accounts payables and accrued liabilities in the accompanying consolidated balance sheets and totaled $2,571,800 and $2,332,451 as of March 31, 2016 and December 31, 2015, respectively.

As of March 31, 2016 and 2015, no tenant represented over 10% of the Company’s annualized base rent.
4.          Other Assets
As of March 31, 2016 and December 31, 2015, other assets consisted of:
 
March 31, 2016
 
December 31, 2015
Prepaid expenses
$
730,947

 
$
1,025,130

Interest rate cap agreements
149,459

 
649,199

Escrow deposits for pending real estate acquisitions
1,100,100

 

Other deposits
985,882

 
763,314

 
$
2,966,388

 
$
2,437,643


13


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

5.          Debt
Mortgage Notes Payable
The following is a summary of mortgage notes payable, net secured by real property as of March 31, 2016 and December 31, 2015.
 
 
March 31, 2016
 
 
 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type
 
Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)
 
21
 
12/1/2021 - 1/1/2026
 
1-Mo LIBOR + 1.68%

 
1-Mo LIBOR + 2.48%

 
2.51%
 
$
601,586,100

Fixed rate
 
2
 
7/1/2025 - 5/1/2054
 
4.34
%
 
4.60
%
 
4.51%
 
68,283,729

Mortgage notes payable, gross
 
23
 
 
 
 
 
 
 
2.71%
 
669,869,829

Deferred financing costs, net(2)
 
 
 
 
 
 
 
 
 
 
 
(3,955,426
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
665,914,403

 
 
December 31, 2015
 
 
 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type
 
Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)
 
21
 
12/1/2021 - 1/1/2026
 
1-Mo LIBOR + 1.68%

 
1-Mo LIBOR + 2.48%

 
2.50%
 
$
601,586,100

Fixed rate
 
2
 
7/1/2025 - 5/1/2054
 
4.34
%
 
4.60
%
 
4.51%
 
68,346,663

Mortgage notes payable, gross
 
23
 
 
 
 
 
 
 
2.71%
 
669,932,763

Deferred financing costs, net(2)
 
 
 
 
 
 
 
 
 
 
 
(4,091,494
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
665,841,269

___________
(1)
See Note 10 for a discussion of the interest rate cap agreements used to manage the exposure to interest rate movement on the Company’s variable rate loans.
(2)
Accumulated amortization related to deferred financing costs as of March 31, 2016 and December 31, 2015 was $506,313 and $370,246, respectively.
Revolving Credit Facility
On August 26, 2015, the Company entered into a revolving credit facility (the “Credit Facility”) with PNC Bank, National Association (“PNC Bank”), in an amount not to exceed $200,000,000, which provides for advances to purchase properties or refinance existing properties from time to time (subject to certain debt service and loan to value requirements). The Credit Facility has a maturity date of September 1, 2020, subject to extension (the “Maturity Date”). The maximum amount that may be drawn under the Credit Facility may be increased up to $350,000,000 at anytime during the period from January 1, 2016 to 12 months prior to the Maturity Date, as further described in the Credit Agreement (the “Credit Agreement”) entered into by

14


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

certain of the Company’s wholly-owned subsidiaries with PNC Bank in connection with property acquisitions. For each advance drawn under the Credit Facility, an Addition Fee, as defined in the Credit Agreement, is incurred. Advances made under the Credit Facility will be secured by the property for which such advances are used (each a “Loan” and collectively the “Loans”), as evidenced by the Credit Agreement, Multifamily Loan and Security Agreement (the “Loan Agreement”), the Multifamily Revolving Credit Note (the “Note”) and a Multifamily Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (the “Mortgage”) and a Guaranty from the Company (the “Guaranty,” together with the Credit Agreement, the Loan Agreement, the Note and the Mortgage, the “Loan Documents”). Each Loan will be purchased from PNC Bank by the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
As of March 31, 2016 and December 31, 2015, the advances obtained under the Credit Facility are summarized in the following table. Each property is pledged as collateral for repayment of amounts advanced under the Credit Facility.
 
 
 
 
Amount of Advance as of
Collateralized Property
 
Date of Advance
 
March 31, 2016
 
December 31, 2015
Delano at North Richland Hills
 
August 26, 2015
 
$
28,875,000

 
$
28,875,000

Meadows at North Richland Hills
 
August 26, 2015
 
24,450,000

 
24,450,000

Reveal on Cumberland
 
September 3, 2015
 
22,125,000

 
22,125,000

Monticello by the Vineyard
 
September 23, 2015
 
39,150,000

 
39,150,000

Park Valley Apartments
 
December 11, 2015
 
38,550,000

 
38,550,000

PeakView by Horseshoe Lake
 
December 18, 2015
 
33,150,000

 
33,150,000

 
 
 
 
$
186,300,000

 
$
186,300,000

Deferred financing costs, net(1)
 
 
 
(1,300,021
)
 
(1,375,244
)
Revolving credit facility, net
 
 
 
$
184,999,979

 
$
184,924,756

___________
(1)
Accumulated amortization related to deferred financing costs in respect of the Credit Facility as of March 31, 2016 and December 31, 2015, was $163,965 and $88,742, respectively.
Interest on the outstanding principal balances of the Loans accrues at the one-month London Interbank Offered Rate (LIBOR) plus (1) the servicing spread of 0.05% and (2) the net spread, based on the debt service coverage ratio, of between 1.80% and 2.10%, as further described in the applicable Notes. Monthly interest payments are due and payable on the first date of each month until the Maturity Date. The entire outstanding principal balance and any accrued and unpaid interest on the Loans are due and payable in full on the Maturity Date. The interest rate was 2.59% as of March 31, 2016. In addition to monthly interest payments, an unused commitment fee equal to 0.1% of the average daily difference between the amount of (i) the commitment and (ii) the maximum facility available is due and payable monthly. Additionally, an unused capacity fee equal to 1.0% of the average daily difference between the amount of the (i) maximum facility available and (ii) the outstanding borrowing tranches, each as defined in the Credit Agreement, is due and payable monthly. Upon the second anniversary of each advance pursuant to the Credit Facility, a seasoning fee equal to 0.25% of such advance is due and payable monthly. The seasoning fee will increase by 0.25% on each subsequent anniversary until the Maturity Date.

15


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

The following is a summary of the Company’s aggregate maturities as of March 31, 2016:
 
 
 
 
 
 
Maturities During the Years Ending December 31,
 
 
Contractual Obligations
 
Total
 
Remainder of 2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
Principal payments on outstanding debt(1)
 
$
856,169,829

 
$
214,771

 
$
354,196

 
$
2,500,933

 
$
4,696,197

 
$
195,957,640

 
$
652,446,092

___________
(1)
Projected principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude the amortization of deferred financing costs associated with the notes payable.
The Company’s notes payable contain customary financial and non-financial debt covenants. As of March 31, 2016, the Company was in compliance with all financial and non-financial debt covenants.
For the three months ended March 31, 2016 and 2015, the Company incurred interest expense of $6,531,549 and $1,760,583, respectively. Interest expense for the three months ended March 31, 2016 and 2015 includes amortization of deferred financing costs of $211,290 and $43,578, net unrealized losses from the change in fair value of interest rate cap agreements of $499,740 and $664,110 and Credit Facility commitment fees of $3,463 and $0, respectively.
Interest expense of $1,977,683 and $1,633,915 was payable as of March 31, 2016 and December 31, 2015, respectively, and is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
6.         Stockholders’ Equity
 General
Under the Company’s Articles of Amendment and Restatement (the “Charter”), the total number of shares of capital stock authorized for issuance is 1,100,000,000 shares, consisting of 999,999,000 shares of common stock with a par value of $0.01 per share, 1,000 shares of convertible stock with a par value of $0.01 per share and 100,000,000 shares designated as preferred stock with a par value of $0.01 per share.
Common Stock
The shares of the Company’s common stock entitle the holders to one vote per share on all matters upon which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law. The common stock has no preferences or preemptive, conversion or exchange rights.
On September 3, 2013, the Company issued 13,500 shares of common stock to the Sponsor for $202,500. From inception through March 31, 2016, the Company had issued 48,625,651 shares of common stock in its Public Offering for offering proceeds of $640,296,659, including 1,011,561 shares of common stock issued pursuant to the DRP for total proceeds of $14,414,752, net of offering costs of $84,552,972. The offering costs primarily consist of selling commissions and dealer manager fees. Offering proceeds include $11,875,418 and $3,119,075 of amounts due from the Company’s transfer agent as of March 31, 2016 and December 31, 2015, respectively, which are included in rents and other receivables in the accompanying consolidated balance sheets.
On February 27, 2014, the Company granted 3,333 shares of restricted common stock to each of its three independent directors pursuant to the Company’s independent directors’ compensation plan at a fair value of $15.00 per share in connection with the Company raising $2,000,000 in the Public Offering. On both August 7, 2014 and August 13, 2015, the Company granted 1,666 shares of restricted common stock to each of its three independent directors pursuant to the Company’s

16


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

independent directors’ compensation plan at a fair value of $15.00 per share as compensation for services in connection with their re-election to the board of directors at the Company’s annual meeting of stockholders. The shares of restricted common stock vest and become non-forfeitable in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant or will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company.
The issuance and vesting activity for the three months ended March 31, 2016 and year ended December 31, 2015 for the restricted stock issued to the Company’s independent directors as compensation for services in connection with the Company raising $2,000,000 in the Public Offering and the independent directors’ re-election to the board of directors at the Company’s annual meeting is as follows:
 
 
Three Months Ended March 31, 2016
 
Year Ended December 31, 2015
Nonvested shares at the beginning of the period
 
11,247

 
11,248

Granted shares
 

 
4,998

Vested shares
 
(2,500
)
 
(4,999
)
Nonvested shares at the end of the period
 
8,747

 
11,247

Included in general and administrative expenses is $18,745 and $14,067 for the three months ended March 31, 2016 and 2015, for compensation expense related to the issuance of restricted common stock. As of March 31, 2016, the compensation expense related to the issuance of the restricted common stock not yet recognized was $103,689. The weighted average remaining term of the restricted common stock was 1.09 years as of March 31, 2016. As of March 31, 2016, no shares of restricted common stock issued to the independent directors have been forfeited.
Convertible Stock
The Company issued 1,000 shares of Convertible Stock to the Advisor for $1,000. The Convertible Stock will convert into shares of common stock if and when: (A) the Company has made total distributions on the then-outstanding shares of its common stock equal to the original issue price of those shares plus an aggregate 6.0% cumulative, non-compounded, annual return on the original issue price of those shares, (B) the Company lists its common stock for trading on a national securities exchange, or (C) the Advisory Agreement is terminated or not renewed (other than for “cause” as defined in the Advisory Agreement). In the event of a termination or non-renewal of the Advisory Agreement for cause, all of the shares of the Convertible Stock will be redeemed for $1.00. In general, each share of Convertible Stock will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 15% of the excess of (1) the Company’s “enterprise value” plus the aggregate value of distributions paid to date on the then outstanding shares of the Company’s common stock over (2) the aggregate purchase price paid by stockholders for those outstanding shares of common stock plus an aggregated 6.0% cumulative, non-compounded, annual return on the original issue price of those outstanding shares, divided by (B) the Company’s enterprise value divided by the number of outstanding shares of common stock on an as-converted basis, in each case calculated as of the date of the conversion.
Preferred Stock
The Charter also provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of March 31, 2016 and December 31, 2015, no shares of the Company’s preferred stock were issued and outstanding.

17


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Distribution Reinvestment Plan
The Company’s board of directors has approved the DRP through which common stockholders may elect to reinvest an amount equal to the distributions declared on their shares of common stock in additional shares of the Company’s common stock in lieu of receiving cash distributions. The initial purchase price per share under the DRP was $14.25. On March 24, 2016, the Company’s board of directors determined a price per share for the DRP of $14.46, effective May 1, 2016. As a result, distributions that accrue during the month of April 2016, which will be paid in May 2016, will be reinvested at $14.25 per share on the May distribution payment date pursuant to the DRP. Beginning on the June distribution payment date, distributions will be reinvested at $14.46 per share.
The Company’s board of directors may again, in its sole discretion, from time to time, change this price based upon changes in the Company’s estimated value per share and other factors that the Company’s board of directors deems relevant.
No sales commissions or dealer manager fees are payable on shares sold through the DRP. The Company’s board of directors may amend, suspend or terminate the DRP at its discretion at any time upon ten days notice to the Company’s stockholders. Following any termination of the DRP, all subsequent distributions to stockholders will be made in cash.
Share Repurchase Plan and Redeemable Common Stock
The Company’s share repurchase plan may provide an opportunity for stockholders to have their shares of common stock repurchased by the Company, subject to certain restrictions and limitations. No shares can be repurchased under the Company’s share repurchase plan until after the first anniversary of the date of purchase of such shares; provided, however, that this holding period shall not apply to repurchases requested within two years after the death or disability of a stockholder.
Prior to the date the Company published an estimated value per share of its common stock, the purchase price for shares repurchased under the Company’s share repurchase plan was as follows:
Share Purchase Anniversary
 
Repurchase Price
on Repurchase Date(1)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of Purchase Price
2 years
 
95.0% of Purchase Price
3 years
 
97.5% of Purchase Price
4 years
 
100.0% of Purchase Price
In the event of a stockholder’s death or disability(2)
 
Average Issue Price for Shares(3)
Following March 29, 2016, the date upon which the Company published an estimated value per share, the purchase price for shares repurchased under the Company’s share repurchase plan is as follows:
Share Purchase Anniversary
 
Repurchase Price
on Repurchase Date(1)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of Estimated Value per Share(4)
2 years
 
95.0% of Estimated Value per Share(4)
3 years
 
97.5% of Estimated Value per Share(4)
4 years
 
100.0% of Estimated Value per Share(4)
In the event of a stockholder’s death or disability(2)
 
Average Issue Price for Shares(3)
________________

18


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

(1) 
As adjusted for any stock dividends, combinations, splits, recapitalizations or any similar transaction with respect to the shares of common stock. Repurchase price includes the full amount paid for each share, including all sales commissions and dealer manager fees. 
(2)
The required one year holding period to be eligible to redeem shares under the Company’s share repurchase plan does not apply in the event of death or disability of a stockholder.
(3)
The purchase price per share for shares repurchased upon the death or disability of a stockholder will be equal to the average issue price per share for all of the stockholder’s shares.
(4)
For purposes of the share repurchase program, the “Estimated Value per Share” will equal the most recently determined estimated value per share of the Company.
The purchase price per share for shares repurchased pursuant to the Company’s share repurchase plan will be further reduced by the aggregate amount of net proceeds per share, if any, distributed to the Company’s stockholders prior to the repurchase date as a result of the sale of one or more of the Company’s assets that constitutes a return of capital as a result of such sales.
Repurchases of shares of the Company’s common stock will be made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests will be honored approximately 30 days following the end of the applicable quarter (the “Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to three business days prior to the Repurchase Date. During the three months ended March 31, 2016, the Company redeemed a total of 21,599 shares with a total redemption value of $291,882 and received requests for the redemption of 21,764 shares with a total redemption value of $295,439. As of March 31, 2016, the Company had 21,764 shares of outstanding and unfulfilled redemption requests and recorded $295,439 in accounts payable and accrued liabilities on the accompanying consolidated balance sheets related to these unfulfilled redemption requests. The Company redeemed the outstanding redemption requests as of March 31, 2016 of $295,439 on the April 29, 2016 Repurchase Date.
During the three months ended March 31, 2015, the Company redeemed a total of 2,239 shares with a total redemption value of $33,551 and received requests for the redemption of 4,660 shares with a total redemption value of $69,900. The Company redeemed the outstanding redemption requests as of March 31, 2015 of $69,900 on the April 30, 2015 Repurchase Date.
The Company cannot guarantee that the funds set aside for the share repurchase plan will be sufficient to accommodate all repurchase requests made in any quarter. In the event that the Company does not have sufficient funds available to repurchase all of the shares of the Company’s common stock for which repurchase requests have been submitted in any quarter, priority will be given to redemption requests in the case of the death or disability of a stockholder. If the Company repurchases less than all of the shares subject to a repurchase request in any quarter, with respect to any shares which have not been repurchased, the Company will treat the shares that have not been repurchased as a request for repurchase in the following quarter pursuant to the limitations of the share repurchase plan and when sufficient funds are available, unless the stockholder withdraws the request for repurchase. Such pending requests will be honored among all requests for redemptions in any given repurchase period as follows: first, pro rata as to repurchases sought upon a stockholder’s death or disability; and, next, pro rata as to other repurchase requests.
The Company is not obligated to repurchase shares of its common stock under the share repurchase plan. The share repurchase plan limits the number of shares to be repurchased in any calendar year to (1) 5% of the weighted average number of shares of common stock outstanding during the prior calendar year and (2) those that could be funded from the net proceeds from the sale of shares under the DRP in the prior calendar year, plus such additional funds as may be reserved for that purpose by the Company’s board of directors. Such sources of funds could include cash on hand, cash available from borrowings and cash from liquidations of securities investments as of the end of the applicable month, to the extent that such funds are not otherwise dedicated to a particular use, such as working capital, cash distributions to stockholders or purchases of real estate assets. There is no fee in connection with a repurchase of shares of the Company’s common stock pursuant to the Company’s share repurchase plan.

19


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

The Company’s board of directors may, in its sole discretion, amend, suspend or terminate the share repurchase plan at any time upon 30 days’ notice to its stockholders if it determines that the funds available to fund the share repurchase plan are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase plan is in the best interest of the Company’s stockholders. Therefore, a stockholder may not have the opportunity to make a repurchase request prior to any potential termination of the Company’s share repurchase plan. The share repurchase plan will terminate in the event that a secondary market develops for the Company’s shares of common stock.
Pursuant to the share repurchase plan, for the three months ended March 31, 2016 and 2015, the Company reclassified $3,735,990 and $1,062,758, net of $291,882 and $33,551 of fulfilled redemption requests, respectively, from permanent equity to temporary equity, which is included as redeemable common stock on the accompanying consolidated balance sheets.
Distributions
The Company’s long-term policy is to pay distributions solely from cash flow from operations. However, because the Company may receive income from interest or rents at various times during the Company’s fiscal year and because the Company may need cash flow from operations during a particular period to fund capital expenditures and other expenses, the Company expects that at least during the early stages of the Company’s development and from time to time during the Company’s operational stage, the Company will declare distributions in anticipation of cash flow that the Company expects to receive during a later period, and the Company expects to pay these distributions in advance of its actual receipt of these funds. The Company’s board of directors has the authority under its organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by the Advisor, in its sole discretion. The Company has not established a limit on the amount of proceeds it may use from the Public Offering to fund distributions. If the Company pays distributions from sources other than cash flow from operations, the Company will have fewer funds available for investments and stockholders’ overall return on their investment in the Company may be reduced.
To maintain the Company’s qualification as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of its REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.
Distributions Declared
The Company’s board of directors approved a cash distribution that accrues at a rate of $0.002466 per day for each share of the Company’s common stock during the three months ended March 31, 2015 and $0.002459 per day for each share during the three months ended March 31, 2016, which, if paid over a 365-day period and 366-day period, respectively, is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of the Company’s common stock. The distributions declared accrue daily to stockholders of record as of the close of business on each day and are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month. There is no guarantee that the Company will continue to pay distributions at this rate or at all.
Distributions declared for the three months ended March 31, 2016 and 2015 were $9,062,865 and $2,709,299, including $4,863,892 and $1,374,500, or 341,326 shares and 96,456 shares, respectively, of common stock attributable to the DRP.
As of March 31, 2016 and December 31, 2015, $3,390,869 and $2,563,769 of distributions declared were payable, which included $1,801,733 and $1,380,280, or 126,438 shares and 96,862 shares of common stock attributable to the DRP, respectively.
Distributions Paid
For the three months ended March 31, 2016 and 2015, the Company paid cash distributions of $3,793,326 and $1,113,641, which related to distributions declared for each day in the period from December 1, 2015 through February 29, 2016 and December 1, 2014 through February 28, 2015, respectively. Additionally, for the three months ended March 31, 2016 and 2015,

20


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

311,750 and 76,934 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $4,442,439 and $1,096,309, respectively. For the three months ended March 31, 2016 and 2015, the Company paid total distributions of $8,235,765 and $2,209,950, respectively. 
7.          Related Party Arrangements
The Company has entered into the Advisory Agreement with the Advisor and a Dealer Manager Agreement with the Dealer Manager with respect to the Public Offering. Pursuant to the Advisory Agreement and Dealer Manager Agreement, the Company is obligated to pay the Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Public Offering, the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to the limitations described below, the Company is also obligated to reimburse the Advisor and its affiliates for organization and offering costs incurred by the Advisor and its affiliates on behalf of the Company, as well as acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.
Amounts attributable to the Advisor and its affiliates incurred for the three months ended March 31, 2016 and 2015 and amounts outstanding to the Advisor and its affiliates as of March 31, 2016 and December 31, 2015 are as follows:
 
 
Incurred For The Three Months Ended March 31,
 
Payable as of
 
 
2016
 
2015
 
March 31, 2016
 
December 31, 2015
Consolidated Statements of Operations:
 
 
 
 
 
 
 
 
Expensed
 
 
 
 
 
 
 
 
Investment management fees(1)
 
$
3,380,653

 
$
810,046

 
$
12,399

 
$
1,051,175

Acquisition fees(1)
 
333,641

 
1,609,063

 

 
510,718

Acquisition expenses(2)
 
164,558

 
667,265

 
9,092

 
145,600

Loan coordination fees(1)
 

 
756,805

 

 

Property management:
 
 
 
 
 
 
 
 
Fees(1)
 
928,519

 
223,849

 
312,696

 
288,488

Reimbursement of onsite personnel(3)
 
2,946,887

 
701,042

 
602,626

 
412,223

Other fees(1)
 
267,903

 
64,270

 
31,733

 
31,072

Other operating expenses(4)
 
411,353

 
259,167

 
195,562

 
66,218

Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
Capitalized
 
 
 
 
 
 
 
 
Construction management:
 
 
 
 
 
 
 
 
Fees(5)
 
482,083

 
87,313

 
93,808

 
127,375

Reimbursement of labor costs(5)
 
660,605

 
3,376

 
146,942

 
455,826

Additional paid-in capital
 
 
 
 
 
 
 
 
Other offering costs reimbursement
 
3,882,612

 
1,257,030

 
2,463,914

 
1,319,182

Selling commissions
 
12,016,140

 
6,729,532

 
967,595

 

Dealer manager fees
 
5,642,377

 
3,043,244

 

 

 
 
$
31,117,331

 
$
16,212,002

 
$
4,836,367

 
$
4,407,877


21


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

_____________________
(1)    Included in fees to affiliates in the accompanying consolidated statements of operations.
(2)    Included in acquisition costs in the accompanying consolidated statements of operations.
(3)    Included in operating, maintenance and management in the accompanying consolidated statements of operations.
(4)    Included in general and administrative expenses in the accompanying consolidated statements of operations.
(5)    Included in building and improvements in the accompanying consolidated balance sheets.
Organization and Offering Costs
Organization and offering expenses include all expenses (other than sales commissions and the dealer manager fee) to be paid by the Company in connection with the Public Offering, including legal, accounting, tax, printing, mailing and filing fees, charges of the Company’s transfer agent, expenses of organizing the Company, data processing fees, advertising and sales literature costs, out-of-pocket due diligence costs and amounts to reimburse the Advisor or its affiliates for the salaries of its employees and other costs in connection with preparing supplemental sales materials and providing other administrative services in connection with the Public Offering. Any such reimbursement will not exceed actual expenses incurred by the Advisor. After the termination of the Public Offering, the Advisor will reimburse the Company to the extent total organization and offering expenses (including sales commissions and dealer manager fees) borne by the Company exceed 15% of the gross proceeds raised in the Primary Offering. To the extent the Company did not pay the full sales commissions or dealer manager fee for shares sold in the Public Offering, the Company could also reimburse costs of training and education meetings held by the Company (primarily the travel, meal and lodging costs of registered representatives of broker-dealers), attendance and sponsorship fees and cost reimbursement of employees of the Company’s affiliates to attend seminars conducted by broker-dealers and, in certain cases, reimbursement to participating broker-dealers for technology costs associated with the offering, costs and expenses related to such technology costs, and costs and expenses associated with the facilitation of the marketing of the Company’s shares and the ownership of the Company’s shares by such broker-dealers’ customers; provided, however, that the Company could not pay any of the foregoing costs to the extent that such payment would cause total underwriting compensation paid by the Company to exceed 10% of the gross offering proceeds of the Public Offering, as required by the rules of Financial Industry Regulatory Authority, Inc. (“FINRA”). Through the termination of the Public Offering, underwriting compensation paid by the Company did not exceed 10% of the gross offering proceeds raised in the Public Offering.
Organization and offering costs include payments made to Crossroads Capital Advisors, an affiliate of the Sponsor, for certain specified services provided to the Company on behalf of the Advisor, including, without limitation, establishing operational and administrative processes; engaging and negotiating with vendors; providing recommendations and advice for the development of marketing materials and ongoing communications with investors; and assisting in public relations activities and the administration of the DRP and share repurchase plan. As of March 31, 2016 and December 31, 2015, the Advisor had incurred $5,013,881 and $3,492,993, respectively, of amounts payable to Crossroads Capital Advisors for the services described above on the Company’s behalf, all of which was recorded by the Company as offering costs during the applicable periods.

22


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

The amount of reimbursable organization and offering (“O&O”) costs that have been paid or recognized from inception through March 31, 2016 is as follows: 
 
 
Amount
 
Percentage of Gross Offering Proceeds
Gross offering proceeds:
 
$
710,434,879

 
100.00
%
O&O limitation
 
15.00
%
 
 
Total O&O costs available to be paid/reimbursed
 
$
106,565,232

 
15.00
%
 
 
 
 
 
O&O expenses recorded:
 
 
 
 
Sales commissions
 
$
46,366,205

 
6.53
%
Broker dealer fees
 
21,151,573

 
2.98
%
Offering cost reimbursements
 
17,035,194

 
2.40
%
Organizational costs reimbursements
 
42,882

 
0.01
%
Total O&O cost reimbursements recorded by the Company
 
$
84,595,854

 
11.91
%
When recognized, organization costs are expensed as incurred. From inception through March 31, 2016, the Advisor incurred $42,882 of organizational costs on the Company’s behalf, all of which was reimbursed to the Advisor.
Investment Management Fee
The Company paid the Advisor a monthly investment management fee equal to one-twelfth of 0.50% of (1) the cost of the Company’s investments in real properties and real estate-related assets until the aggregate cost of the Company’s investments in real properties and real estate related assets equaled $300,000,000, which occurred in December 2014. Thereafter, the Company pays the Advisor a monthly investment management fee equal to one-twelfth of 1.0% of the cost of the Company’s investments in real properties and real estate-related assets. Such fee will be calculated including acquisition fees, acquisition expenses and any debt attributable to such investments, or the Company’s proportionate share thereof in the case of investments made through joint ventures.
Acquisition Fees and Expenses
The Company pays the Advisor an acquisition fee equal to 1.0% of the cost of investment, which includes the amount actually paid or budgeted to fund the acquisition, origination, development, construction or improvement (i.e. value-enhancement) of any real property or real estate-related asset acquired. In addition to acquisition fees, the Company reimburses the Advisor for amounts directly incurred by the Advisor and amounts the Advisor pays to third parties in connection with the selection, evaluation, acquisition and development of a property or acquisition of real estate-related assets, whether or not the Company ultimately acquires the property or the real estate-related assets.
The Charter limits the Company’s ability to pay acquisition fees if the total of all acquisition fees and expenses relating to the purchase would exceed 4.5% of the contract purchase price. Under the Charter, a majority of the Company’s board of directors, including a majority of the independent directors, is required to approve any acquisition fees (or portion thereof) that would cause the total of all acquisition fees and expenses relating to an acquisition to exceed 4.5% of the contract purchase price. In connection with the purchase of securities, the acquisition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the acquisition fee to a firm that is not a registered broker-dealer. 

23


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Loan Coordination Fee
The Company pays the Advisor or its affiliate a loan coordination fee equal to 1.0% of the initial amount of the new debt financed or outstanding debt assumed in connection with the acquisition, development, construction, improvement or origination of a property or a real estate-related asset. In addition, in connection with any financing or the refinancing of any debt (in each case, other than identified at the time of the acquisition of a property or a real estate-related asset), the Company will pay the Advisor or its affiliate a loan coordination fee equal to 0.75% of the amount of debt financed or refinanced.
Property Management Fees and Expenses
The Company has entered into Property Management Agreements with Steadfast Management Company, Inc., an affiliate of the Sponsor (the “Property Manager”), in connection with the management of each of the Company’s properties. The property management fee payable with respect to each property under the Property Management Agreements (each a “Property Management Agreement”) at March 31, 2016 ranges from 2.75% to 3.0% of the annual gross revenue collected at the property, as determined by the Advisor and approved by a majority of the Company’s board of directors, including a majority of the independent directors.
In addition to the property management fee, the Property Management Agreements also specify certain other fees payable to the Property Manager for benefit administration, information technology infrastructure, licenses, and support and training services. The Company also reimburses the Property Manager for the salaries and related benefits of on-site property management employees.
Construction Management Fees and Expenses
The Company has entered into Construction Management Agreements with Pacific Coast Land & Construction, Inc., an affiliate of the Sponsor (the “Construction Manager”), in connection with capital improvements and renovation or value-enhancement projects for certain properties the Company acquires. The construction management fee payable with respect to each property under the Construction Management Agreements (each a “Construction Management Agreement”) has ranged from 8.0% to 12.0% of the costs of the improvements for which the Construction Manager has planning and oversight authority. For all properties acquired after October 15, 2014, such fees are an amount equal to 8.0% of the total cost of the project. Generally, each Construction Management Agreement can be terminated by either party with 30 days prior written notice to the other party. Construction management fees are capitalized to the respective real estate properties in the period in which they are incurred, as such costs relate to capital improvements and renovations for apartment homes taken out of service while they undergo the planned renovation.
The Company may also reimburse the Construction Manager for the salaries and related benefits of its employees for time spent working on capital improvements and renovations.
Other Operating Expense Reimbursement
In addition to the various fees paid to the Advisor, the Company is obligated to pay directly or reimburse all expenses incurred by the Advisor in providing services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor or its affiliates receive acquisition fees or disposition fees or for the salaries the Advisor pays to the Company’s executive officers.
The Charter limits the Company’s total operating expenses during any four fiscal quarters to the greater of 2% of the Company’s average invested assets or 25% of the Company’s net income for the same period (the “2%/25% Limitation”). The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceed the 2%/25% Limitation, unless approved by the independent directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the

24


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

average monthly book value of the Company’s assets invested directly or indirectly in equity interests and loans secured by real estate during the 12-month period before deducting depreciation, bad debts reserves or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company that are in any way related to the Company’s operation, including the Company’s allocable share of Advisor overhead and investment management fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, listing and registration of shares of the Company’s common stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of the Company’s assets; (f) acquisition fees and acquisition expenses (including expenses relating to potential acquisitions that the Company does not close); (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).
As of March 31, 2016, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation test.
Disposition Fee
If the Advisor or its affiliates provide a substantial amount of services in connection with the sale of a property or real estate-related asset as determined by a majority of the Company’s independent directors, the Company will pay the Advisor or its affiliates one-half of the brokerage commissions paid, but in no event to exceed 1% of the sales price of each property or real estate-related asset sold. To the extent the disposition fee is paid upon the sale of any assets other than real property, it will be included as an operating expense for purposes of the 2%/25% Limitation. In connection with the sale of securities, the disposition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer. As of March 31, 2016 the Company had not sold or otherwise disposed of property or any real estate-related assets. Accordingly, the Company had not incurred any disposition fees as of March 31, 2016
Selling Commissions and Dealer Manager Fees
The Company paid the Dealer Manager up to 7% and 3% of the gross offering proceeds from the Primary Offering as selling commissions and dealer manager fees, respectively. The Company allowed a participating broker-dealer to elect to receive the 7% selling commission at the time of sale or elect to have the selling commission paid on a trailing basis. A participating broker-dealer that elected to receive a trailing selling commission will be paid as follows: 2% at the time of sale and the remaining 5% paid ratably (1% per year) on each of the first five anniversaries of the sale. A reduced sales commission and dealer manager fee was paid in connection with volume discounts and certain other categories of sales. No sales commission or dealer manager fee was paid with respect to shares of common stock issued pursuant to the DRP. The Dealer Manager reallowed 100% of sales commissions earned to participating broker-dealers. The Dealer Manager could reallow to any participating broker-dealer a portion of the dealer manager fee that was attributable to that participating broker-dealer for certain marketing costs of that participating broker-dealer. The Dealer Manager would negotiate the reallowance of the dealer manager fee on a case-by-case basis with each participating broker-dealer subject to various factors associated with the cost of the marketing program. The Company terminated the Public Offering on March 24, 2016, and as of March 31, 2016, expects to pay trailing selling commissions subsequent to that date of $967,595, which were charged to additional paid-in capital and is included within amounts due to affiliates in the accompanying consolidated balance sheets.
8.          Incentive Award Plan and Independent Director Compensation
The Company has adopted an incentive plan (the “Incentive Award Plan”) that provides for the grant of equity awards to its employees, directors and consultants and those of the Company’s affiliates. The Incentive Award Plan authorizes the grant of non-qualified and incentive stock options, restricted stock awards, restricted stock units, stock appreciation rights, dividend equivalents and other stock-based awards or cash-based awards.

25


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Under the Company’s independent directors’ compensation plan, which is a sub-plan of the Incentive Award Plan, each of the Company’s independent directors was entitled to receive 3,333 shares of restricted common stock once the Company raised $2,000,000 in gross offering proceeds in the Public Offering. Each subsequent independent director that joins the Company’s board of directors receives 3,333 shares of restricted common stock upon election to the Company’s board of directors. In addition, on the date following an independent director’s re-election to the Company’s board of directors, he or she receives 1,666 shares of restricted common stock. One-fourth of the shares of restricted common stock generally vest and become non-forfeitable upon issuance and the remaining portion will vest in three equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant; provided, however, that the restricted stock will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company. These awards entitle the holders to participate in distributions.
On February 27, 2014, the Company raised over $2,000,000 in gross offering proceeds in the Public Offering and granted each of the three independent directors 3,333 shares of restricted common stock. On both August 7, 2014 and August 13, 2015, the Company granted 1,666 shares of restricted common stock to each of its three independent directors upon their re-election to the Company’s board of directors at the 2014 and 2015 annual meetings of stockholders. The Company recorded stock-based compensation expense of $18,745 and $14,067 for the three months ended March 31, 2016 and 2015, respectively, related to the independent directors restricted common stock.
In addition to the stock awards, the Company pays each of its independent directors an annual retainer of $55,000, prorated for any partial term (the audit committee chairperson receives an additional $10,000 annual retainer, prorated for any partial term). In addition, the independent directors are paid for attending meetings as follows: (i) $2,500 for each board meeting attended in person, (ii) $1,500 for each committee meeting attended in person in such director’s capacity as a committee member, (iii) $1,000 for each board meeting attended via teleconference (not to exceed $4,000 for any one set of meetings attended on any given day). All directors also receive reimbursement of reasonable out of pocket expenses incurred in connection with attendance at meetings of the board of directors. Director compensation is an operating expense of the Company that is subject to the operating expense reimbursement obligation of the Advisor discussed in Note 7. The Company recorded an operating expense of, and paid, $63,750 and $60,750 for the three months ended March 31, 2016 and 2015 related to the independent directors annual retainer, which is included in general and administrative expenses in the accompanying consolidated statements of operations.
9.          Commitments and Contingencies
Economic Dependency 
The Company is dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common and preferred stock available for issue; the identification, evaluation, negotiation, purchase and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other sources. The Company may not be able to retain services from such other sources on favorable terms or at all.
Concentration of Credit Risk
The geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Atlanta, Georgia, and Dallas/Fort Worth, Texas apartment markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, relocations of businesses, increased competition from other apartment communities, decrease in demand for apartments or any other changes, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

26


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. The Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.
Legal Matters
From time to time, the Company is subject, or party, to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on the Company’s results of operations or financial condition nor is the Company aware of any such legal proceedings contemplated by government agencies.
10.          Derivative Financial Instruments
The Company uses interest rate derivatives with the objective of managing exposure to interest rate movements thereby minimizing the effect of interest rate changes and the effect they could have on future cash flows. Interest rate cap agreements are used to accomplish this objective. The following table provides the terms of the Company’s interest rate derivative instruments that were in effect at March 31, 2016 and December 31, 2015:
March 31, 2016
Type
 
Maturity Date Range
 
Based on
 
Number of Instruments
 
Notional Amount
 
Variable Rate
 
Weighted Average Rate Cap
 
Fair Value
Interest Rate Cap
 
6/1/2018 - 1/1/2020
 
One-Month LIBOR
 
21
 
$
601,586,100

 
0.44%
 
2.54%
 
$
149,459

December 31, 2015
Type
 
Maturity Date Range
 
Based on
 
Number of Instruments
 
Notional Amount
 
Variable Rate
 
Weighted Average Rate Cap
 
Fair Value
Interest Rate Cap
 
6/1/2018 - 1/1/2020
 
One-Month LIBOR
 
21
 
$
601,586,100

 
0.43%
 
2.50%
 
$
649,199

The interest rate cap agreements are not designated as effective cash flow hedges. Accordingly, the Company records any changes in the fair value of the interest rate cap agreements as interest expense. The change in the fair value of the interest rate cap agreements for the three months ended March 31, 2016 and 2015 resulted in an unrealized loss of $499,740 and $664,110, respectively, which is included in interest expense in the accompanying consolidated statements of operations. During the three months ended March 31, 2016 and 2015, the Company acquired interest rate cap agreements of $0 and $592,150, respectively. The fair value of the interest rate cap agreements of $149,459 and $649,199 as of March 31, 2016 and December 31, 2015, respectively, is included in other assets on the accompanying consolidated balance sheets.
11.          Pro Forma Information (unaudited)
The following table summarizes, on an unaudited basis, the consolidated pro forma results of operations of the Company for the three months ended March 31, 2016 and 2015. The Company acquired one property during the three months ended March 31, 2016. This property contributed $65,114 of revenues and $178,534 of net loss, including $58,866 of depreciation and amortization, to the Company’s results of operations from the date of acquisition to March 31, 2016. The following unaudited pro forma information for the three months ended March 31, 2016 and 2015 have been provided to give effect to the acquisition of the property as if it had occurred on January 1, 2015. This pro forma information does not purport to represent what the

27


PART I — FINANCIAL INFORMATION (continued)
 
Item 1. Financial Statements (continued)

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(unaudited)

actual results of operations of the Company would have been had this acquisition occurred on this date, nor does it purport to predict the results of operations for future periods.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Revenues
 
$
33,113,179

 
$
8,396,958

Net loss
 
$
(10,264,464
)
 
$
(11,527,963
)
Loss per common share, basic and diluted
 
$
(0.21
)
 
$
(0.24
)
The pro forma information reflects adjustments for actual revenues and expenses of the property acquired during the three months ended March 31, 2016 for the respective period prior to acquisition by the Company. Net loss has been adjusted as follows: (1) interest expense has been adjusted to reflect the additional interest expense that would have been charged had the Company acquired the property on January 1, 2015 under the same financing arrangements as existed as of the acquisition date; (2) depreciation and amortization has been adjusted based on the Company’s basis in the property; and (3) transaction costs have been adjusted for the acquisition of the property.
12.          Subsequent Events
Distributions Paid
On April 1, 2016, the Company paid distributions of $3,390,869, which related to distributions declared for each day in the period from March 1, 2016 through March 31, 2016 and consisted of cash distributions paid in the amount of $1,589,136 and $1,801,733 in shares issued pursuant to the DRP.
On May 2, 2016, the Company paid distributions of $3,602,776, which related to distributions declared for each day in the period from April 1, 2016 through April 30, 2016 and consisted of cash distributions paid in the amount of $1,685,742 and $1,917,034 in shares issued pursuant to the DRP.
Distribution Reinvestment Plan
On April 5, 2016, the Company filed a Form S-3 with the SEC to offer up to 10,000,000 shares of common stock to existing stockholders pursuant to the DRP.


28


PART I — FINANCIAL INFORMATION (continued)


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated unaudited financial statements of Steadfast Apartment REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Steadfast Apartment REIT, Inc., a Maryland corporation, and, as required by context, Steadfast Apartment REIT Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are only predictions. We caution that forward-looking statements are not guarantees. Actual events or our investments and results of operations could differ materially from those expressed or implied in any forward-looking statements. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to:
the fact that we have a limited operating history and commenced operations on May 22, 2014;
the fact that we have had a net loss for each quarterly and annual period since inception; 
our ability to effectively deploy the remaining proceeds raised in our initial public offering, which terminated on March 24, 2016; 
changes in economic conditions generally and the real estate and debt markets specifically; 
our ability to successfully identify and acquire multifamily properties on terms that are favorable to us; 
our ability to secure resident leases for our multifamily properties at favorable rental rates; 
risks inherent in the real estate business, including resident defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; 
the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us; 
our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor; 
Our ability to generate sufficient cash flows to pay distributions for our stockholders;
legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts, or REITs); 
the availability of capital; 
changes in interest rates; and 
changes to generally accepted accounting principles, or GAAP.
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this quarterly report. All forward-looking statements are made as of the date of this quarterly report and the risk that actual results will differ materially from the expectations expressed in this

29


PART I — FINANCIAL INFORMATION (continued)


quarterly report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this quarterly report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this quarterly report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this quarterly report will be achieved.
All forward looking statements included herein should be read in light of the factors identified in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission, or the SEC, on March 29, 2016.
Overview
We were formed on August 22, 2013, as a Maryland corporation that has elected to qualify as a real estate investment trust, or REIT. We intend to use the remaining net proceeds from our ongoing initial public offering, which terminated on March 24, 2016 (as further described below), to invest in and manage a diverse portfolio of multifamily properties located in targeted markets throughout the United States. In addition to our focus on multifamily properties, we may also make selective strategic acquisitions of other types of commercial properties. We may also acquire or originate mortgage, mezzanine, bridge and other real estate loans and equity securities of other real estate companies.
On December 30, 2013, we commenced our initial public offering pursuant to a registration statement on Form S-11 filed with the SEC to offer a maximum of 66,666,667 shares of common stock for sale to the public at an initial price of $15.00 per share (subject to certain discounts). We also offered up to 7,017,544 shares of common stock pursuant to our distribution reinvestment plan at an initial price of $14.25 per share. On March 24, 2016, we terminated our initial public offering. As of March 24, 2016, we had sold 48,625,651 shares of common stock for gross proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $14,414,752. We continue to offer shares of our common stock pursuant to our distribution reinvestment plan.
On March 24, 2016, our board of directors determined an estimated value per share of our common stock of $14.46 as of December 31, 2015. In connection with the determination of our estimated value per share, our board of directors increased the purchase price of shares offered pursuant to our distribution reinvestment plan to $14.46, effective May 1, 2016. Our board of directors may again, in its sole discretion and from time to time, change the price at which we offer shares pursuant to our distribution reinvestment plan to reflect changes in our estimated value per share and other factors that our board of directors deems relevant.
Steadfast Apartment Advisor, LLC is our advisor. Subject to certain restrictions and limitations, our advisor manages our day-to-day operations and our portfolio of properties and real estate-related assets. Our advisor sources and presents investment opportunities to our board of directors. Our advisor also provides investment management, marketing, investor relations and other administrative services on our behalf.
Substantially all of our business is conducted through Steadfast Apartment REIT Operating Partnership, L.P., our operating partnership. We are the sole general partner of our operating partnership and one of our wholly-owned subsidiaries is the only limited partner of our operating partnership. As we accepted subscriptions for shares of common stock, we transferred substantially all of the net proceeds of the offering to our operating partnership as a capital contribution. The limited partnership agreement of our operating partnership provides that our operating partnership will be operated in a manner that will enable us to (1) satisfy the requirements for being classified as a REIT for federal income tax purposes, (2) avoid any federal income or excise tax liability and (3) ensure that our operating partnership will not be classified as a “publicly traded partnership” for purposes of Section 7704 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which classification could result in our operating partnership being taxed as a corporation, rather than as a disregarded entity. In addition to the administrative and operating costs and expenses incurred by our operating partnership in acquiring and operating our investments, our operating partnership will pay all of our administrative costs and expenses, and such expenses will be treated as expenses of our operating partnership.
We have elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2014. As a REIT, we generally will not be subject to federal income tax to the extent that we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which qualification is lost, unless the Internal Revenue Service grants us relief

30


PART I — FINANCIAL INFORMATION (continued)


under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.
Market Outlook
During times of economic downturn, market conditions could negatively impact the multifamily real estate sector, resulting in lower occupancy, lower rental rates and declining values. The economy in the United States has improved; however, there is no assurance that economic conditions will continue to improve or will not worsen in the future. We believe we currently have unique investment opportunities, particularly in the multifamily sector. Home ownership rates are the lowest they have been since 1967. Demographic and economic factors favor the flexibility of rental housing and discourage the potential financial burden associated with home ownership. Additionally, Millennials and Baby Boomers, the two largest demographic groups comprising roughly half of the total population in the United States, are increasingly choosing to live in a variety of rental housing. Our plan is to provide rental housing for these multi-generational groups as they age. Millennials are getting married and having children later and are choosing to live in apartment communities until their mid-30s. Today, 30% of Millennials are still living with their parents or are still in school. When they get a job, Millennials will likely rent moderate income apartments based upon an average income of $35,000. We believe this creates a demand for multifamily housing.
Our Real Estate Portfolio
As of March 31, 2016, we owned the 31 multifamily apartment communities listed below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
1
 
Villages at Spring Hill Apartments
 
Spring Hill, TN
 
5/22/2014
 
176

 
$
14,200,000

 
$
9,868,891

 
97.7
%
 
97.2
%
 
$
908

 
$
901

2
 
Harrison Place Apartments
 
Indianapolis, IN
 
6/30/2014
 
307

 
27,864,250

 
19,404,493

 
93.8
%
 
94.1
%
 
850

 
860

3
 
Club at Summer Valley
 
Austin, TX
 
8/28/2014
 
260

 
21,500,000

 
14,951,211

 
95.0
%
 
94.6
%
 
880

 
886

4
 
Terrace Cove Apartment Homes
 
Austin, TX
 
8/28/2014
 
304

 
23,500,000

 
16,342,021

 
94.7
%
 
93.8
%
 
874

 
870

5
 
The Residences on McGinnis Ferry
 
Suwanee, GA
 
10/16/2014
 
696

 
98,500,000

 
73,332,963

 
92.0
%
 
93.8
%
 
1,137

 
1,128

6
 
The 1800 at Barrett Lakes
 
Kennesaw, GA
 
11/20/2014
 
500

 
49,000,000

 
34,136,395

 
95.0
%
 
96.0
%
 
897

 
873

7
 
The Oasis
 
Colorado Springs, CO
 
12/19/2014
 
252

 
40,000,000

 
27,819,538

 
94.4
%
 
93.7
%
 
1,112

 
1,102

8
 
Columns on Wetherington
 
Florence, KY
 
2/26/2015
 
192

 
25,000,000

 
17,377,747

 
91.1
%
 
91.7
%
 
1,050

 
1,014

9
 
Preston Hills at Mill Creek
 
Buford, GA
 
3/10/2015
 
464

 
51,000,000

 
35,533,029

 
90.9
%
 
92.7
%
 
971

 
955

10
 
Eagle Lake Landing Apartments
 
Speedway, IN
 
3/27/2015
 
277

 
19,200,000

 
13,291,708

 
91.3
%
 
91.7
%
 
792

 
809

11
 
Reveal on Cumberland
 
Fishers, IN
 
3/30/2015
 
220

 
29,500,000

 
21,996,967

 
92.3
%
 
88.6
%
 
1,103

 
846

12
 
Randall Highlands Apartments
 
North Aurora, IL
 
3/31/2015
 
146

 
32,115,000

 
22,338,878

 
95.9
%
 
97.3
%
 
1,686

 
1,688


31


PART I — FINANCIAL INFORMATION (continued)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
13
 
Heritage Place Apartments
 
Franklin, TN
 
4/27/2015
 
105

 
$
9,650,000

 
$
7,056,237

 
95.2
%
 
93.3
%
 
$
953

 
$
942

14
 
Rosemont at East Cobb
 
Marietta, GA
 
5/21/2015
 
180

 
16,450,000

 
11,349,704

 
94.4
%
 
91.1
%
 
846

 
811

15
 
Ridge Crossings Apartments
 
Hoover, AL
 
5/28/2015
 
720

 
72,000,000

 
50,174,781

 
91.7
%
 
95.1
%
 
901

 
893

16
 
Bella Terra at City Center
 
Aurora, CO
 
6/11/2015
 
304

 
37,600,000

 
26,140,599

 
93.1
%
 
93.1
%
 
970

 
943

17
 
Hearthstone at City Center
 
Aurora, CO
 
6/25/2015
 
360

 
53,400,000

 
37,158,702

 
92.2
%
 
93.9
%
 
1,094

 
1,053

18
 
Arbors at Brookfield
 
Mauldin, SC
 
6/30/2015
 
702

 
66,800,000

 
45,093,478

 
91.0
%
 
92.0
%
 
781

 
786

19
 
Carrington Park
 
Kansas City, MO
 
8/19/2015
 
298

 
39,480,000

 
29,461,240

 
93.3
%
 
95.3
%
 
1,022

 
989

20
 
Delano at North Richland Hills
 
North Richland Hills, TX
 
8/26/2015
 
263

 
38,500,000

 
28,799,288

 
92.4
%
 
94.3
%
 
1,273

 
1,292

21
 
Meadows at North Richland Hills
 
North Richland Hills, TX
 
8/26/2015
 
252

 
32,600,000

 
24,385,890

 
95.2
%
 
94.0
%
 
1,205

 
1,217

22
 
Kensington by the Vineyard
 
Euless, TX
 
8/26/2015
 
259

 
46,200,000

 
34,018,352

 
97.3
%
 
93.1
%
 
1,466

 
1,389

23
 
Monticello by the Vineyard
 
Euless, TX
 
9/23/2015
 
354

 
52,200,000

 
39,036,257

 
95.5
%
 
92.9
%
 
1,160

 
1,227

24
 
The Shores
 
Oklahoma City, OK
 
9/29/2015
 
300

 
36,250,000

 
24,683,729

 
91.7
%
 
91.0
%
 
983

 
1,018

25
 
Lakeside at Coppell
 
Coppell, TX
 
10/7/2015
 
315

 
60,500,000

 
45,139,644

 
97.1
%
 
96.2
%
 
1,683

 
1,667

26
 
Meadows at River Run
 
Bolingbrook, IL
 
10/30/2015
 
374

 
58,500,000

 
43,185,394

 
89.3
%
 
90.1
%
 
1,289

 
1,292

27
 
PeakView at T-Bone Ranch
 
Greeley, CO
 
12/11/2015
 
224

 
40,300,000

 
28,055,670

 
91.5
%
 
92.4
%
 
1,123

 
1,226

28
 
Park Valley Apartments
 
Smyrna, GA
 
12/11/2015
 
496

 
51,400,000

 
38,442,280

 
94.2
%
 
95.2
%
 
842

 
868

29
 
PeakView by Horseshoe Lake
 
Loveland, CO
 
12/18/2015
 
222

 
44,200,000

 
33,056,976

 
95.5
%
 
90.5
%
 
1,321

 
1,337

30
 
Stoneridge Farms
 
Smyrna, TN
 
12/30/2015
 
336

 
47,750,000

 

 
97.0
%
 
97.3
%
 
1,022

 
1,024

31
 
Fielder’s Creek
 
Englewood, CO
 
3/23/2016
 
217

 
32,400,000

 

 
97.2
%
 
%
 
1,037

 

 
 
 
 
 
 
 
 
10,075

 
$
1,267,559,250

 
$
851,632,062

 
93.4
%
 
93.6
%
 
$
1,043

 
$
1,037

(1)
At March 31, 2016, our portfolio was approximately 96.0% leased, calculated using the number of occupied and contractually leased units divided by total units.
(2)
Average monthly rent is based upon the effective rental income after considering the effect of vacancies, concessions and write-offs.
(3)
Mortgage debt outstanding is net of deferred financing costs associated with the loans for each individual property listed above but excludes deferred financing costs of $717,680 related to the revolving credit facility at the company level.
Critical Accounting Policies 
The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial

32


PART I — FINANCIAL INFORMATION (continued)


statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 29, 2016. There have been no significant changes to our accounting policies during the period covered by this report other than described in Note 2 to our condensed consolidated unaudited financial statements in this quarterly report in the discussion of our significant accounting policies.
Organization and Offering Costs
Organization and offering expenses included all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with our initial public offering, including legal, accounting, printing, mailing and filing fees, charges of our escrow agent and transfer agent, expenses of organizing our company, data processing fees, advertising and sales literature costs, transfer agent costs, out-of-pocket due diligence costs and amounts to reimburse our advisor or its affiliates for the salaries of its employees and other costs in connection with preparing supplemental sales materials and providing other administrative services in connection with our initial public offering. Any such reimbursement did not exceed actual expenses incurred by our advisor. After the termination of our initial public offering, our advisor will reimburse us to the extent total organization and offering expenses borne by us (including selling commissions and dealer manager fees) exceed 15% of the gross proceeds raised in our initial public offering. No amounts were owed to us by our advisor pursuant to the advisory agreement.
In addition, to the extent we did not pay the full sales commissions or dealer manager fee for shares sold in our initial public offering, we could also reimburse costs of training and education meetings held by us (primarily the travel, meal and lodging costs of registered representatives of broker-dealers), attendance and sponsorship fees and cost reimbursement of employees of our affiliates to attend seminars conducted by broker-dealers and, in certain cases, reimbursement to participating broker-dealers for technology costs associated with our initial public offering, costs and expenses related to such technology costs, and costs and expenses associated with the facilitation of the marketing of our shares and the ownership of our shares by such broker-dealers’ customers; provided, however, that we would not pay any of the foregoing costs to the extent that such payment would cause total underwriting compensation to exceed 10% of the gross offering proceeds of our primary offering, as required by the rules of the Financial Industry Regulatory Authority, Inc. Through the termination of our initial public offering, underwriting compensation paid by us did not exceed 10% of the gross offering proceeds raised in our initial public offering.
When recognized, organization costs are expensed as incurred. Offering costs, including selling commissions and dealer manager fees, are deferred and charged to stockholders’ equity as such amounts are reimbursed to the advisor, the dealer manager or their affiliates from gross offering proceeds.
Income Taxes
We have elected to be taxed as a REIT under the Internal Revenue Code and have operated as such commencing with the taxable year ended December 31, 2014. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to our stockholders. However, we believe we are organized and operate in such a manner as to qualify for treatment as a REIT.
We follow the income tax guidance under GAAP to recognize, measure, present and disclose in our consolidated financial statements uncertain tax positions that we have taken or expect to take on a tax return. As of March 31, 2016 and December 31, 2015, we did not have any liabilities for uncertain tax positions that we believe should be recognized in our consolidated financial statements. We have not been assessed interest or penalties by any major tax jurisdictions. Our evaluation was performed for the tax years ended December 31, 2015 and 2014.
Distributions
Our board of directors has declared daily distributions that are paid on a monthly basis. We expect to continue paying monthly distributions unless our results of operations, our general financial condition, general economic conditions or other factors prohibit us from doing so. We may declare distributions in excess of our funds from operations. As a result, our

33


PART I — FINANCIAL INFORMATION (continued)


distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year.
Distributions declared (1) accrue daily to our stockholders of record as of the close of business on each day, (2) are payable in cumulative amounts on or before the third day of each calendar month with respect to the prior month and (3) were calculated at a rate of $0.002466 per share per day during the year ended December 31, 2015 and $0.002459 per share per day during the three months ended March 31, 2016, which, if paid over a 365-day period and 366-day period, respectively, is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of common stock.
The distributions declared and paid for the last five fiscal quarters ended March 31, 2016, along with the amount of distributions reinvested pursuant to the distribution reinvestment plan were as follows:
 
 
 
 
 
 
Distributions Paid(3)
 
Sources of Distributions Paid
 
Net Cash Provided by (Used In) Operating Activities
Period
 
Distributions Declared(1)
 
Distributions Declared Per Share(1)(2)
 
Cash
 
Reinvested
 
Total
 
Cash Flow From Operations
 
Offering Proceeds
 
First Quarter 2015
 
$
2,709,299

 
$
0.222

 
$
1,113,641

 
$
1,096,309

 
$
2,209,950

 
$

 
$
2,209,950

 
$
(1,539,065
)
Second Quarter 2015
 
4,244,754

 
0.224

 
1,807,842

 
2,001,634

 
3,809,476

 

 
3,809,476

 
(1,340,411
)
Third Quarter 2015
 
5,586,074

 
0.227

 
2,420,013

 
2,744,538

 
5,164,551

 

 
5,164,551

 
(2,745,332
)
Fourth Quarter 2015
 
7,019,501

 
0.227

 
2,984,593

 
3,436,193

 
6,420,786

 
2,365,843

 
4,054,943

 
2,365,843

First Quarter 2016
 
9,062,865

 
0.224

 
3,793,326

 
4,442,439

 
8,235,765

 
8,235,765

 

 
8,745,759

 
 
$
28,622,493

 
$
1.124

 
$
12,119,415

 
$
13,721,113

 
$
25,840,528

 
$
10,601,608

 
$
15,238,920

 
$
5,486,794

____________________
(1)
Distributions during fiscal year 2015 and the first quarter of 2016 were based on daily record dates and calculated at a rate of $0.002466 and $0.002459 per share per day, respectively.
(2)
Assumes each share was issued and outstanding each day during the period presented.
(3)
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately three days following month end.
For the three months ended March 31, 2016, we paid aggregate distributions of $8,235,765, including $3,793,326 of distributions paid in cash and 311,750 shares of our common stock issued pursuant to our distribution reinvestment plan for $4,442,439. For the three months ended March 31, 2016, our net loss was $10,267,922, we had funds from operations, or FFO, of $7,087,854 and net cash provided by operations of $8,745,759. For the three months ended March 31, 2016, we funded all distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with cash flow from operations. Since inception, on a cumulative basis, all distributions have been paid from offering proceeds. For information on how we calculate FFO and the reconciliation of FFO to net loss, see “—Funds from Operations and Modified Funds from Operations.”
Our long-term policy is to pay distributions solely from cash flow from operations. Because we may receive income from interest or rents at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that at least during the early stages of our development and from time to time during our operational stage, we will declare distributions in anticipation of cash flow that we expect to receive during a later period, and we expect to pay these distributions in advance of our actual receipt of these funds. In these instances, our board of directors has the authority under our organizational documents, to the extent permitted by Maryland law, to fund distributions from sources such as borrowings, offering proceeds or advances and the deferral of fees and expense reimbursements by our advisor, in its sole discretion. We have not established a limit on the amount of proceeds we may use from our initial public offering to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have fewer funds available for investments.
Inflation
Substantially all of our multifamily property leases are for a term of one year or less. In an inflationary environment, this may allow us to realize increased rents upon renewal of existing leases or the beginning of new leases. Short-term leases generally will minimize our risk from the adverse effects of inflation, although these leases generally permit residents to leave

34


PART I — FINANCIAL INFORMATION (continued)


at the end of the lease term and therefore will expose us to the effects of a decline in market rents. In a deflationary rent environment, we may be exposed to declining rents more quickly under these shorter term leases.
As of March 31, 2016, we had not entered into any leases as a lessee.
REIT Compliance
To qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.
Liquidity and Capital Resources
We use secured borrowings, and intend to use in the future secured and unsecured borrowings, for the acquisition of properties. After we have invested all of the net offering proceeds from our initial public offering, we expect our borrowings will be approximately 55% to 60% of the value of our properties (after debt amortization) and other real estate-related assets. For valuation purposes, the value of a property will equal the value determined by an independent third party appraiser or qualified independent valuation expert. Under our Articles of Amendment and Restatement, or our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets, which generally approximates to 75% of the aggregate cost of our assets, though we may exceed this limit only under certain circumstances.
In addition to making investments in accordance with our investment objectives, we use our capital resources to make certain payments to our advisor and dealer manager. During our organization and offering stage, these payments included payments to the dealer manager for sales commissions and the dealer manager fee and payments to our advisor for reimbursement of certain organization and offering expenses. Our advisor has agreed to reimburse us within 60 days of the end of the month in which our initial public offering ends to the extent that sales commissions, the dealer manager fee and other organization and offering expenses incurred by us exceed 15% of our gross offering proceeds. During our operating stage, we make payments to our advisor in connection with the acquisition of investments, the management of our assets and costs incurred by our advisor in providing services to us.
Our principal demand for funds will be to acquire investments in accordance with our investment strategy, to fund value-enhancement and other capital improvement projects, to pay operating expenses and interest on our outstanding indebtedness and to make distributions to our stockholders. Over time, we intend to generally fund our cash needs, other than asset acquisitions, from operations. Otherwise, we expect that our principal sources of working capital will include:
current unrestricted cash balance, which was $155,862,935 as of March 31, 2016;
various forms of secured and unsecured financing;
borrowings under master repurchase agreements;
cash flow from operations;
equity capital from joint venture partners; and
proceeds from our distribution reinvestment plan.
Over the short term, we believe that our sources of capital, specifically our cash balances, remaining proceeds from our public offering, cash flow from operations, our ability to raise equity capital from joint venture partners and our ability to obtain various forms of secured and unsecured financing, including financing pursuant to our credit facility described below, will be adequate to meet our liquidity requirements and capital commitments.
Over the longer term, in addition to the same sources of capital we will rely on to meet our short-term liquidity requirements, we may also utilize additional secured and unsecured financings and equity capital from joint venture partners. We may also conduct additional public or private offerings. We expect these resources will be adequate to fund our operating activities, debt service and distributions, and will be sufficient to fund our ongoing acquisition activities as well as providing capital for investment in future development and other joint ventures along with potential forward purchase commitments.

35


PART I — FINANCIAL INFORMATION (continued)


On August 26, 2015, we entered into a revolving credit facility with PNC Bank, National Association, in an amount not to exceed $200,000,000, which provides for advances to purchase properties or refinance existing properties from time to time (subject to certain debt service and loan to value requirements). The credit facility has a maturity date of September 1, 2020, subject to extension. The maximum amount that may be drawn under the credit facility may be increased up to $350,000,000 at anytime during the period from January 1, 2016 to 12 months prior to the maturity date. Advances made under the credit facility will be secured by the property for which such advances are used. As of March 31, 2016, $184,999,979 was outstanding on our revolving line of credit, net. Interest on the outstanding principal balances of advances accrue at the one-month London Interbank Offered Rate (LIBOR) plus (1) the servicing spread of 0.05% and (2) the net spread, based on the debt service coverage ratio, of between 1.80% and 2.10%, as further described in the applicable notes. Monthly interest payments are due and payable on the first date of each month until the maturity date. The entire outstanding principal balance and any accrued and unpaid interest on all advances are due and payable in full on the maturity date. We continue to evaluate possible other sources of capital, including, without limitation, entering into additional credit facilities. There can be no assurance that we will be able to obtain any such financing on favorable terms, if at all. For additional information on our credit facility, see Note 5 to the consolidated financial statements contained in this quarterly report.
We may, but are not required to, establish working capital reserves from offering proceeds out of cash flow generated by our investments or out of proceeds from the sale of our investments. We do not anticipate establishing a general working capital reserve; however, we may establish capital reserves with respect to particular investments. We also may, but are not required to, establish reserves out of cash flow generated by investments or out of net sale proceeds in non-liquidating sale transactions. Our lenders also may require working capital reserves.
To the extent that the working capital reserve is insufficient to satisfy our cash requirements, additional funds may be provided from cash generated from operations or through short-term borrowing. In addition, subject to certain limitations described in our charter, we may incur indebtedness in connection with the acquisition of any real estate asset, refinance the debt thereon, arrange for the leveraging of any previously unfinanced property or reinvest the proceeds of financing or refinancing in additional properties.
Cash Flows Used in Operating Activities
 We commenced real estate operations with the acquisition of our first multifamily property on May 22, 2014. As of March 31, 2016, we owned 31 multifamily properties. During the three months ended March 31, 2016, net cash provided by operating activities was $8,745,759 compared to net cash used in operating activities of $1,539,065 for the three months ended March 31, 2015. The change in net cash provided by operating activities is primarily due to increases in net loss, restricted cash, due to affiliates and depreciation and amortization expense, partially offset by a decrease in accounts payable and accrued liabilities associated with 31 multifamily properties owned as of March 31, 2016 compared to the 12 multifamily properties owned as of March 31, 2015. We expect to continue to generate cash flows from operations as we stabilize the operations of our property portfolio and complete our value-enhancement program.
Cash Flows Used in Investing Activities
During the three months ended March 31, 2016, net cash used in investing activities was $42,770,447 compared to $160,151,120 during the three months ended March 31, 2015. The decrease in net cash used in investing activities was primarily the result of our acquisition of one multifamily property during the three months ended March 31, 2016 compared to five acquisitions of multifamily properties during the three months ended March 31, 2015. Net cash used in investing activities during the three months ended March 31, 2016 consisted of the following:
$31,700,000 of cash used related to the acquisition of one multifamily property;
$9,475,667 of cash used for improvements to real estate investments;
$1,800,100 of cash used for deposits for potential real estate investments; and
$205,320 of cash provided by restricted cash accounts related to replacement reserves.

36


PART I — FINANCIAL INFORMATION (continued)


Cash Flows from Financing Activities
During the three months ended March 31, 2016, net cash provided by financing activities was $158,501,246 compared to $164,308,898 during the three months ended March 31, 2015. Net cash provided by financing activities during the three months ended March 31, 2016 consisted of the following:
$162,649,387 of cash provided by offering proceeds related to our initial public offering, net of (1) payments of commissions on sales of common stock and related dealer manager fees in the amount of $16,690,922 and (2) the reimbursement of other offering costs to affiliates in the amount of $2,737,880;
$62,933 of cash used for principal payments on mortgage notes payable;
$291,882 of cash paid for the redemption of common stock; and
$3,793,326 of net cash distributions, after giving effect to distributions reinvested by stockholders of $4,442,439.
Contractual Commitments and Contingencies
We use secured debt and intend to use in the future secured and unsecured debt as a means of providing additional funds for the acquisition of our properties. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. After we have invested all of the net offering proceeds from our initial public offering, we expect that our borrowings will be approximately 55% to 60% of the value of our properties (after debt amortization) and other real estate-related assets. For valuation purposes, the value of a property will equal the value determined by an independent third party appraiser or qualified independent valuation expert. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets unless such excess is approved by a majority of the independent directors and disclosed to stockholders, along with a justification for such excess, in our next quarterly report. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of March 31, 2016, our aggregate borrowings were not in excess of 300% of the value of our net assets.
In addition to using our capital resources for investing purposes and meeting our debt obligations, we expect to use our capital resources to make certain payments to our advisor. We expect to make payments to our advisor or its affiliates in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets, the management of the development or improvement of our assets and costs incurred by our advisor in providing services to us.
As of March 31, 2016, we had indebtedness totaling an aggregate principal amount of $850,914,382, including the net deferred financing costs of $5,255,447. The following is a summary of our contractual obligations as of March 31, 2016:
 
 
 
 
Payments due by period
Contractual Obligations
 
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Interest payments on outstanding debt obligations(1)
 
$
194,457,326

 
$
17,540,349

 
$
46,521,103

 
$
44,639,300

 
$
85,756,574

Principal payments on outstanding debt obligations
 
856,169,829

 
214,771

 
2,855,129

 
200,653,837

 
652,446,092

Total
 
$
1,050,627,155

 
$
17,755,120

 
$
49,376,232

 
$
245,293,137

 
$
738,202,666

________________
(1)
Projected interest payments on outstanding debt obligations are based on the outstanding principal amounts and interest rates in effect at March 31, 2016. We incurred interest expense of $6,531,549 during the three months ended March 31, 2016, including amortization of deferred financing costs totaling $211,290 and net unrealized losses from the change in fair value of interest rate cap agreements of $499,740.

37


PART I — FINANCIAL INFORMATION (continued)


Results of Operations
Overview
The discussion that follows is based on our consolidated results of operations for the three months ended March 31, 2016 and 2015. The ability to compare one period to another is significantly affected by acquisitions completed and dispositions made during those periods. We commenced real estate operations on May 22, 2014 in connection with the acquisition of our first investment, the Villages at Spring Hill Apartments. As of March 31, 2016, we owned 31 multifamily properties compared to owning 12 multifamily properties at March 31, 2015. The increase in our property portfolio is the primary cause of the increases in operating income and expenses, as further discussed below.

Our results of operations for the three months ended March 31, 2016 and 2015 are not indicative of those expected in future periods. We have not yet invested all of the proceeds from our offering and expect to continue to deploy capital, increase our borrowings and make future acquisitions, which would have a significant impact on our future results of operations. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

To provide additional insight into our operating results, we are also providing a detailed analysis of same-store versus non-same-store net operating income, or NOI. For more information on NOI and a reconciliation of NOI (a non-GAAP measure) to net loss, see “—Net Operating Income.”
Consolidated Results of Operations for the Three Months Ended March 31, 2016 and 2015
The following table summarizes the consolidated results of operations for the three months ended March 31, 2016 and 2015:
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Total revenues
 
$
32,519,919

 
$
7,745,819

 
$
24,774,100

 
320
 %
Operating, maintenance and management
 
(7,705,961
)
 
(1,900,733
)
 
(5,805,228
)
 
305
 %
Real estate taxes and insurance
 
(4,910,802
)
 
(1,140,952
)
 
(3,769,850
)
 
330
 %
Fees to affiliates
 
(4,910,716
)
 
(3,464,033
)
 
(1,446,683
)
 
42
 %
Depreciation and amortization
 
(17,355,776
)
 
(5,356,169
)
 
(11,999,607
)
 
224
 %
Interest expense
 
(6,531,549
)
 
(1,760,583
)
 
(4,770,966
)
 
271
 %
General and administrative expenses
 
(1,166,753
)
 
(576,432
)
 
(590,321
)
 
102
 %
Acquisition costs
 
(206,284
)
 
(1,026,215
)
 
819,931

 
(80
)%
Net loss
 
$
(10,267,922
)
 
$
(7,479,298
)
 
$
(2,788,624
)
 
37
 %
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
18,706,734

 
$
4,416,015

 
$
14,290,719

 
324
 %
FFO(2)
 
$
7,087,854

 
$
(2,123,129
)
 
$
9,210,983

 
434
 %
MFFO(2)
 
$
8,127,519

 
$
1,933,064

 
$
6,194,455

 
320
 %
______________
(1)
NOI is a non-GAAP financial measure used by investors and our management to evaluate and compare the performance of our properties and to determine trends in earnings. However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of our properties and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs, all of which are significant economic costs. For additional information on how we calculate NOI and a reconciliation of NOI to net loss, see “—Net Operating Income.”
(2)
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the difference between real estate values and historical cost accounting for real

38


PART I — FINANCIAL INFORMATION (continued)


estate assets the Board of Governors of NAREIT established the measurement tool of FFO. Since its introduction, FFO has become a widely used non-GAAP financial measure among REITs. Additionally, we use modified funds from operations, or MFFO, as defined by the Investment Program Association as a supplemental measure to evaluate our operating performance. MFFO is based on FFO but includes certain adjustments we believe are necessary due to changes in accounting and reporting under GAAP since the establishment of FFO. Neither FFO nor MFFO should be considered as alternatives to net loss or other measurements under GAAP as indicators of our operating performance, nor should they be considered as alternatives to cash flow from operating activities or other measurements under GAAP as indicators of liquidity. For additional information on how we calculate FFO and MFFO and a reconciliation of FFO and MFFO to net loss, see “—Funds From Operations and Modified Funds From Operations.”
Net loss
For the three months ended March 31, 2016, we had a net loss of $10,267,922 compared to $7,479,298 for the three months ended March 31, 2015. The increase in net loss of $2,788,624 over the comparable prior year period was primarily due to the increase in operating, maintenance and management expenses of $5,805,228, the increase in real estate taxes and insurance of $3,769,850, the increase in fees to affiliates of $1,446,683, the increase in depreciation and amortization expense of $11,999,607, the increase in interest expense of $4,770,966 and the increase in general and administrative expenses of $590,321, partially offset by the increase in total revenues of $24,774,100 and the decrease in acquisition costs of $819,931. The increase in these expenses was due primarily to the increase in our property portfolio from 12 multifamily properties at March 31, 2015 to 31 multifamily properties at March 31, 2016.
Total revenues
Total revenues were $32,519,919 for the three months ended March 31, 2016 compared to $7,745,819 for the three months ended March 31, 2015. The increase of $24,774,100 was primarily due to operating 31 multifamily properties at March 31, 2016 compared to 12 multifamily properties at March 31, 2015. Our total units increased by 6,281 from 3,794 at March 31, 2015 to 10,075 at March 31, 2016. Average monthly rents per unit increased from $980 as of March 31, 2015 to $1,043 as of March 31, 2016 and average monthly occupancy increased to 93.4% as of March 31, 2016 from 92.8% as of March 31, 2015. We expect rental income and tenant reimbursements to increase in future periods as a result of ordinary monthly rent increases, improved occupancy and our value-enhancement strategy.
Operating, maintenance and management expenses
Operating, maintenance and management expenses were $7,705,961 for the three months ended March 31, 2016 compared to $1,900,733 for the three months ended March 31, 2015. The increase of $5,805,228 was primarily due to operating 31 multifamily properties as of March 31, 2016 compared to 12 multifamily properties as of March 31, 2015. We expect that these amounts will increase in future periods as a result of anticipated future acquisitions of real estate but will decrease as a percentage of total revenues.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $4,910,802 for the three months ended March 31, 2016 compared to $1,140,952 for the three months ended March 31, 2015. The increase of $3,769,850 was due to the acquisition of 19 multifamily properties since March 31, 2015 and real estate taxes and insurance expenses for a full reporting period on properties acquired during March 31, 2015. We expect these amounts to increase in future periods as a result of anticipated future acquisitions of real estate and ordinary municipal property tax increases.
Fees to affiliates
Fees to affiliates were $4,910,716 for the three months ended March 31, 2016 compared to $3,464,033 for the three months ended March 31, 2015. The increase of $1,446,683 was primarily due to the increase in investment management and property management fees as a result of the growth of our portfolio. We expect fees to affiliates related to the on-going management of our real estate portfolio to increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments and a full year of operations for the multifamily property acquired during the three months ended March 31, 2016. We expect fees to affiliates related to initial acquisition and financing activities to decrease in future periods as a result of the termination of our offering and the decrease in anticipated future acquisitions of real estate and real estate-related investments.

39


PART I — FINANCIAL INFORMATION (continued)


Depreciation and amortization
Depreciation and amortization expenses were $17,355,776 for the three months ended March 31, 2016 compared to $5,356,169 for the three months ended March 31, 2015. The increase of $11,999,607 was primarily due to the net increase in depreciable and amortizable assets of $755,968,790 since March 31, 2015. We expect these amounts to increase in future periods as a result of anticipated future acquisitions of real estate and enhancements to our real estate portfolio.
Interest expense
Interest expense for the three months ended March 31, 2016 was $6,531,549 compared to $1,760,583 for the three months ended March 31, 2015. The increase of $4,770,966 was primarily due to the increase in the notes payable balance (before deducting deferred financing fees) of $583,558,729 since March 31, 2015 due to financing incurred in connection with the acquisition of 15 multifamily properties since March 31, 2015 and the subsequent financing of two multifamily properties (initially acquired entirely in cash). Included in interest expense is the amortization of deferred financing costs of $211,290 and $43,578, the unrealized loss on derivative instruments of $499,740 and $664,110 and credit facility commitment fees of $3,463 and $0 for the three months ended March 31, 2016 and 2015, respectively. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
General and administrative expenses
General and administrative expenses for the three months ended March 31, 2016 were $1,166,753 compared to $576,432 for the three months ended March 31, 2015. These general and administrative costs consisted primarily of legal fees, insurance premiums, audit fees, other professional fees and independent director compensation. The increase of $590,321 was primarily due to the acquisition of 19 multifamily properties since March 31, 2015 and the continuing operation of the properties owned as of March 31, 2015. We expect general and administrative expenses to decrease as a percentage of total revenue.
Acquisition costs
Acquisition costs for the three months ended March 31, 2016 were $206,284 compared to $1,026,215 for the three months ended March 31, 2015. The decrease of $819,931 was due primarily to the acquisition of one multifamily property with an aggregate purchase price of $32,400,000 during the three months ended March 31, 2016, compared to the acquisition of five multifamily properties with an aggregate purchase price of $156,815,000 during the three months ended March 31, 2015. We expect acquisition costs to decrease in future periods as we expect to acquire substantially fewer properties and real estate-related investments in future periods.
Property Operations for the Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” A “same-store” property is a property that was owned at January 1, 2015. A “non-same-store” property is a property that was acquired, placed into service or disposed of after January 1, 2015. As of March 31, 2016, seven properties were categorized as same-store properties.

40


PART I — FINANCIAL INFORMATION (continued)


The following table presents the same-store and non-same-store results from operations for the three months ended March 31, 2016 and 2015:
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Same-store properties:
 
 
 
 
 
 
 
 
Revenues
 
$
7,555,713

 
$
7,100,406

 
$
455,307

 
6
%
Operating expenses
 
3,287,024

 
3,066,638

 
220,386

 
7
%
Net operating income
 
4,268,689

 
4,033,768

 
234,921

 
6
%
 
 
 
 
 
 
 
 
 
Non-same-store properties:
 
 
 
 
 
 
 
 
Net operating income
 
14,438,045

 
382,247

 
14,055,798

 
 
 
 
 
 
 
 
 
 
 
Total net operating income(1)
 
$
18,706,734

 
$
4,416,015

 
$
14,290,719

 
 
________________
(1)
See “—Net Operating Income” below for a reconciliation of NOI to net loss.
Net Operating Income
Same-store net operating income for the three months ended March 31, 2016 was $4,268,689 compared to $4,033,768 for the three months ended March 31, 2015. The 6% increase in same-store net operating income was a result of a 6% increase in same-store rental revenues partially offset by a 7% increase in same-store operating expenses.
Revenues
Same-store revenues for the three months ended March 31, 2016 were $7,555,713 compared to $7,100,406 for the three months ended March 31, 2015. The 6% increase in same-store revenues was primarily due to average rent increases at the same-store properties from $926 as of March 31, 2015 to $974 as of March 31, 2016, as a result of ordinary monthly rent increases and the completion of value-enhancement projects.
Operating Expenses
Same-store operating expenses for the three months ended March 31, 2016 were $3,287,024 compared to $3,066,638 for the three months ended March 31, 2015. The increase in same-store operating expenses was primarily attributable to an increase in property taxes at Terrace Cove Apartment Homes, Club at Summer Valley and Villages at Spring Hill Apartments for the three months ended March 31, 2016.
Net Operating Income
Net Operating Income, or NOI, is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties, to determine trends in earnings and to compute the fair value of our properties as it is not affected by (1) the cost of funds, (2) acquisition costs, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (5) general and administrative expenses and other gains and losses that are specific to us. The cost of funds is eliminated from net income (loss) because it is specific to our particular financing capabilities and constraints. The cost of funds is also eliminated because it is dependent on historical interest rates and other costs of capital as well as past decisions made by us regarding the appropriate mix of capital which may have changed or may change in the future. Acquisition costs and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner.
Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the

41


PART I — FINANCIAL INFORMATION (continued)


time of sale which will usually change from period to period. These gains and losses can create distortions when comparing one period to another or when comparing our operating results to the operating results of other real estate companies that have not made similarly timed purchases or sales. We believe that eliminating these costs from net income is useful because the resulting measure captures the actual revenue generated and actual expenses incurred in operating our properties as well as trends in occupancy rates, rental rates and operating costs.
However, the usefulness of NOI is limited because it excludes general and administrative costs, interest expense, interest income and other expense, acquisition costs, certain fees to affiliates, depreciation and amortization expense and gains or losses from the sale of properties, and other gains and losses as stipulated by GAAP, the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, all of which are significant economic costs. NOI may fail to capture significant trends in these components of net income which further limits its usefulness.
NOI is a measure of the operating performance of our properties but does not measure our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. This measure should be analyzed in conjunction with net income (loss) computed in accordance with GAAP and discussions elsewhere in “—Results of Operations” regarding the components of net income (loss) that are eliminated in the calculation of NOI. Other companies may use different methods for calculating NOI or similarly entitled measures and, accordingly, our NOI may not be comparable to similarly entitled measures reported by other companies that do not define the measure exactly as we do.
The following is a reconciliation of our NOI to net loss for the three months ended March 31, 2016 and 2015 computed in accordance with GAAP:
 
 
For the Three Months Ended March 31,
 
 
2016
 
2015
Net loss
 
$
(10,267,922
)
 
$
(7,479,298
)
Fees to affiliates (1)
 
3,714,294

 
3,175,914

Depreciation and amortization
 
17,355,776

 
5,356,169

Interest expense
 
6,531,549

 
1,760,583

General and administrative expenses
 
1,166,753

 
576,432

Acquisition costs
 
206,284

 
1,026,215

Net operating income
 
$
18,706,734

 
$
4,416,015

____________________
(1)
Fees to affiliates for the three months ended March 31, 2016 and 2015 excludes property management fees of $928,519 and $223,849 and other fees of $267,903 and $64,270, respectively, that are included in NOI.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, a non-GAAP financial measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and non-cash impairment charges of real estate related investments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment

42


PART I — FINANCIAL INFORMATION (continued)


charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges. Our FFO calculation complies with NAREIT’s policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or as requested or required by lessees for operational purposes in order to maintain the value disclosed. We believe that since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative. Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO, which excludes the impact of real estate related depreciation and amortization, provides a more complete understanding of our performance to investors and to management, and when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO, and MFFO as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.
Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses. Management believes these fees and expenses do not affect our overall long-term operating performance. Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation. While other start-up entities may also experience significant acquisition activity during their initial years, we believe that public, non-listed REITs, like us, are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after acquisition activity ceases. Our board of directors will determine to pursue a liquidity event when it believes that the then-current market conditions are favorable. However, our board of directors does not anticipate evaluating a liquidity event (i.e., listing of our common stock on a national exchange, a merger or sale of our company or another similar transaction) until five years after the completion of our offering stage. Thus, as a limited life REIT, we will not continuously purchase assets and will have a limited life.
Due to the above factors and other unique features of publicly registered, non-listed REITs, the Investment Program Association, or IPA, an industry trade group, has standardized a measure known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which we believe to be another appropriate supplemental measure to reflect the operating performance of a public, non-listed REIT having the characteristics described above. MFFO is not equivalent to our net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate with a limited life and targeted exit strategy, as currently intended. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.
We define MFFO, a non-GAAP financial measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the

43


PART I — FINANCIAL INFORMATION (continued)


IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized. While we rely on our advisor for managing interest rate, hedge and foreign exchange risk, we do not retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such non-recurring gains and losses in calculating MFFO, as such gains and losses are not reflective of on-going operations.
Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. These expenses are paid in cash by us. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property. In the event that proceeds from our initial public offering are not available to fund our reimbursement of acquisition fees and expenses incurred by our advisor, such fees and expenses will need to be reimbursed to our advisor from other sources, including debt, operational earnings or cash flow, net proceeds from the sale of properties, or from ancillary cash flows. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to our stockholders. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.
Our management uses MFFO and the adjustments used to calculate MFFO in order to evaluate our performance against other public, non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter. As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate in this manner. We believe that our use of MFFO and the adjustments used to calculate MFFO allow us to present our performance in a manner that reflects certain characteristics that are unique to public, non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors. By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no regular net asset value determination during the early stage of the offering. MFFO is useful in assisting management and investors in assessing the sustainability of

44


PART I — FINANCIAL INFORMATION (continued)


operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed. MFFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining MFFO.
Neither the SEC, NAREIT nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, NAREIT or another regulatory body may decide to standardize the allowable adjustments across the non-listed REIT industry and in response to such standardization we may have to adjust our calculation and characterization of FFO or MFFO accordingly.
Our calculation of FFO and MFFO is presented in the following table for the three months ended March 31, 2016 and 2015:
 
 
For the Three Months Ended March 31,
 
 
2016
 
2015
Reconciliation of net loss to MFFO:
 
 
 
 
Net loss
 
$
(10,267,922
)
 
$
(7,479,298
)
  Depreciation of real estate assets
 
11,730,973

 
2,512,825

  Amortization of lease-related costs
 
5,624,803

 
2,843,344

FFO
 
7,087,854

 
(2,123,129
)
  Acquisition fees and expenses (1)(2)
 
539,925

 
3,392,083

  Unrealized loss on derivative instruments
 
499,740

 
664,110

MFFO
 
$
8,127,519

 
$
1,933,064

________________
(1)
By excluding expensed acquisition costs, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition fees and expenses include payments to our advisor or third parties. Acquisition fees and expenses under GAAP are considered operating expenses and as expenses included in the determination of net income (loss) and income (loss) from continuing operations, both of which are performance measures under GAAP. All paid and accrued acquisition fees and expenses will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by us, unless earnings from operations or net sales proceeds from the disposition of properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to the property. In the event that proceeds from our initial public offering are not available to fund our reimbursement of acquisition fees and expenses incurred by our advisor, such fees and expenses will need to be reimbursed to the advisor from other sources, including debt, operational earnings or cash flow, net proceeds from the sale of properties, or from ancillary cash flows. The acquisition of properties, and the corresponding acquisition fees and expenses, is the key operational feature of our business plan to generate operational income and cash flow to fund distributions to its stockholders.
(2)
Acquisition fees and expenses for the three months ended March 31, 2016 and 2015 includes acquisition fees of $333,641 and $1,609,063 and loan coordination fees of $0 and $756,805, respectively, that are recorded in fees to affiliates in the accompanying consolidated statements of operations. Acquisition fees and expenses for the three months ended March 31, 2016 and 2015 also includes acquisition expenses of $206,284 and $1,026,215, respectively, that are recorded in acquisition costs in the accompanying consolidated statements of operations.
FFO and MFFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Off-Balance Sheet Arrangements
As of March 31, 2016, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

45


PART I — FINANCIAL INFORMATION (continued)


Related-Party Transactions and Agreements
We have entered into agreements with our advisor and its affiliates, whereby we pay certain fees to, or reimburse certain expenses of, our advisor or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, organization and offering costs, sales commissions, dealer manager fees, asset and property management fees and expenses, leasing fees and reimbursement of certain operating costs. Refer to Note 7 of our unaudited condensed consolidated financial statements included in this quarterly report for a discussion of the various related-party transactions, agreements and fees.
Item 3. Qualitative and Quantitative Disclosure About Market Risk
We may be exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We may be also exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We have managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, collars, floors and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.
We borrow funds and make investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. At March 31, 2016, the fair value of our fixed rate debt was $71,358,147 and the carrying value of our fixed rate debt was $67,869,123. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated at March 31, 2016. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.
Conversely, movements in interest rates on our variable rate debt will change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums will result in changes in the fair value of floating rate instruments. At March 31, 2016, the fair value of our variable rate debt was $767,272,519 and the carrying value of our variable rate debt was $783,045,259. Based on interest rates as of March 31, 2016, if interest rates are 100 basis points higher during the 12 months ending March 31, 2017, interest expense on our variable rate debt would increase by $8,010,176 and if interest rates are 100 basis points lower during the 12 months ending March 31, 2017, interest expense on our variable rate debt would decrease by $3,502,449.
At March 31, 2016, the weighted-average interest rate of our fixed rate debt and variable rate debt was 4.51% and 2.53%, respectively. The weighted-average interest rate of our blended fixed and variable rates was 2.68% at March 31, 2016. The weighted-average interest rate represents the actual interest rate in effect at March 31, 2016 (consisting of the contractual interest rate), using interest rate indices as of March 31, 2016, where applicable.
We will also be exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty will owe us, which creates credit risk for us. If the fair value of a derivative contract is negative, we will owe the counterparty and, therefore, do not have credit risk. We will seek to minimize the credit risk in derivative instruments by entering into transactions with high-quality counterparties. As of March 31, 2016, we did not have counterparty risk on our interest rate cap agreements as the underlying variable rates for each of our interest rate caps as of March 31, 2016 were not in excess of the capped rates. See also Note 10 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

46


PART I — FINANCIAL INFORMATION (continued)


Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, management, including our chief executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e)) under the Securities Exchange Act of 1934, as amended, or the Exchange Act). Based upon, and as of the date of, the evaluation, our chief executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

47


PART II — OTHER INFORMATION

PART II
Item 1. Legal Proceedings
From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.
Item 1A. Risk Factors
There have been no material changes to the risk factors contained in Part I, Item 1A set forth in our Annual Report on Form 10-K filed with the SEC on March 29, 2016.
Item 2. Unregistered Sales of Equity Securities and use of Proceeds
During the three months ended March 31, 2016, we did not sell any equity securities that were not registered under the Securities Act of 1933, or the Securities Act.
Our Registration Statement on Form S-11 (File No. 333-191049), registering a public offering of up to $1,100,000,000 in shares of our common stock, was declared effective under the Securities Act on December 30, 2013, at which time we commenced our initial public offering. Our initial public offering terminated on March 24, 2016. Upon termination of our initial public offering, we had sold 48,625,651 shares of our common stock, including 1,011,561 shares issued pursuant to the distribution reinvestment plan, for gross offering proceeds of $724,849,631.
On April 5, 2016, we registered with the SEC up to 10,000,000 shares of our common stock to be issued to existing shareholders pursuant to the distribution reinvestment plan.
From inception through March 31, 2016, we had recognized selling commissions, dealer manager fees and organization and other offering costs in our public offering in the amounts set forth below. The dealer manager for our public offering reallowed all of the selling commissions and a portion of the dealer manager fees to participating broker-dealers.
Type of Expense Amount
 
Amount
 
Estimated/Actual
 
Percentage of Offering Proceeds
Selling commissions and dealer manager fees
 
$
67,517,778

 
Actual
 
9.50
%
Other organization and offering costs
 
17,078,076

 
Actual
 
2.40
%
Total expenses
 
$
84,595,854

 
Actual
 
11.91
%
Total public offering proceeds (excluding DRP proceeds)
 
$
710,434,879

 
Actual
 
100.00
%
Percentage of public offering proceeds used to pay for organization and offering costs
 
11.91
%
 
Actual
 
11.91
%
From the commencement of our initial public offering through March 31, 2016, the net offering proceeds to us, after deducting the total expenses incurred as described above, were $640,253,777, including net offering proceeds from our distribution reinvestment plan of $14,414,752. For the period from inception through March 31, 2016, the ratio of the cost of raising equity capital to the gross amount of equity capital raised was approximately 11.91%.
The net proceeds from our public offering have been used to invest in and manage a diverse portfolio of multifamily properties located in targeted markets throughout the United States. In addition to our focus on multifamily properties, we may also make selective strategic acquisitions of other types of commercial properties with the remaining proceeds from our public offering. We may also acquire or originate mortgage, mezzanine, bridge and other real estate loans and equity securities of other real estate companies. As of March 31, 2016, we had invested in 31 multifamily properties for a total purchase price of $1,267,559,250. These property acquisitions were funded from proceeds of our public offering and $802,015,019 in secured financings.



48


PART II — OTHER INFORMATION (continued)

During the three months ended March 31, 2016, we fulfilled redemption requests and redeemed shares of our common stock pursuant to our share repurchase plan as follows:
 
 
Total Number of Shares Requested to be Redeemed(1)
 
Total Number of Shares Redeemed
 
Average Price Paid per Share(2)
 
Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2016
 
3,749

 
21,599

 
$
13.51

 
(3) 
February 2016
 
3,419

 

 

 
(3) 
March 2016
 
14,596

 

 

 
(3) 
 
 
21,764

 
21,599

 
 
 
 
____________________
(1)
We generally redeem shares on the last business day of the month following the end of each fiscal quarter in which requests were received. At March 31, 2016, we had $295,439, representing 21,764 shares, of outstanding and unfulfilled redemption requests, all of which were fulfilled on April 29, 2016.
(2)
Pursuant to the plan, as amended, we currently redeem shares at prices determined as follows:
92.5% of the estimated value per share for stockholders who have held their shares for at least one year;
95.0% of the estimated value per share for stockholders who have held their shares for at least two years;
97.5% of the estimated value per share for stockholders who have held their shares for at least three years; and
100% of the estimated value per share for stockholders who have held their shares for at least four years.
Notwithstanding the above, the redemption price for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” will be the amount paid to acquire the shares from us.
(3)
The number of shares that may be redeemed pursuant to the share repurchase plan during any calendar year is limited to: (1) 5% of the weighted-average number of shares outstanding during the prior calendar year and (2) those that can be funded from the net proceeds we received from the sale of shares under the distribution reinvestment plan during the prior calendar year, plus such additional funds as may be reserved for that purpose by our board of directors.
Item 3. Defaults Upon Senior Securities
None.
Item 4.  Mine Safety Disclosures
Not applicable.
Item 5.  Other Information
None.

49


PART II — OTHER INFORMATION (continued)

Item 6.   Exhibits
EXHIBIT LIST
Exhibit
 
Description
3.1

 
Articles of Amendment and Restatement of Steadfast Apartment REIT, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Registrant’s Registration Statement on Form S-11, filed December 16, 2013, Commission File No. 333-191049 (“Form S-11 Amendment No. 3”))
3.2

 
Bylaws of Steadfast Apartment REIT, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11, filed September 6, 2013, Commission File No. 333-191049)
4.1

 
Form of Distribution Reinvestment Plan (incorporated by reference to Appendix C to the prospectus, dated April 15, 2015, of the Registrant)
4.2

 
Form of Redemption Request Form (incorporated by reference to Appendix D to the prospectus, dated April 15, 2015, of the Registrant)
4.3

 
Form of Application for Transfer (incorporated by reference to Appendix E to the prospectus, dated April 15, 2015, of the Registrant)
31.1

 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2

 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002
32.2

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002


50


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.
 
 
Steadfast Apartment REIT, Inc.
 
 
 
 
 
 
Date:
May 13, 2016
By:
/s/ Rodney F. Emery
 
 
 
Rodney F. Emery
 
 
 
Chief Executive Officer and Chairman of the Board
 
 
 
 
Date:
May 13, 2016
By:
/s/ Kevin J. Keating
 
 
 
Kevin J. Keating
 
 
 
Treasurer
 
 
 
(Principal Financial and Accounting Officer)



51