Steadfast Apartment REIT, Inc. - FORM 10-Q - November 10, 2016

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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 September 30, 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 November 4, 2016, there were 49,564,966 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

 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
ASSETS
Assets:
 
 
 

Real Estate:
 
 
 
Land
$
164,113,072

 
$
130,350,873

Building and improvements
1,351,598,080

 
1,094,714,957

Tenant origination and absorption costs
6,009,020

 
12,999,943

Total real estate, cost
1,521,720,172

 
1,238,065,773

Less accumulated depreciation and amortization
(67,269,729
)
 
(31,037,647
)
Total real estate, net
1,454,450,443

 
1,207,028,126

Cash and cash equivalents
18,542,727

 
31,386,377

Restricted cash
13,261,953

 
13,335,169

Rents and other receivables
1,562,361

 
4,504,879

Other assets
2,641,884

 
2,437,643

Total assets
$
1,490,459,368

 
$
1,258,692,194

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 

Accounts payable and accrued liabilities
$
27,668,279

 
$
18,988,582

Notes payable:
 
 
 
Mortgage notes payable, net
751,609,357

 
665,841,269

Revolving credit facilities, net
199,865,460

 
184,924,756

Total notes payable, net
951,474,817

 
850,766,025

Distributions payable
3,640,148

 
2,563,769

Due to affiliates
3,702,914

 
4,407,877

Total liabilities
986,486,158

 
876,726,253

Commitments and contingencies (Note 9)

 

Redeemable common stock
23,152,096

 
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, 49,342,548 and 35,504,854 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
493,425

 
355,048

Convertible stock, $0.01 par value per share; 1,000 shares authorized, issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
10

 
10

Additional paid-in capital
625,976,679

 
456,614,453

Cumulative distributions and net losses
(145,649,000
)
 
(84,404,930
)
Total stockholders’ equity
480,821,114

 
372,564,581

Total liabilities and stockholders’ equity
$
1,490,459,368

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental income
$
33,397,060

 
$
18,010,874

 
$
93,287,332

 
$
36,487,551

Tenant reimbursements and other
3,960,879

 
2,181,812

 
11,261,749

 
4,199,702

Total revenues
37,357,939

 
20,192,686

 
104,549,081

 
40,687,253

Expenses:
 
 
 
 
 
 
 
Operating, maintenance and management
9,754,819

 
5,607,063

 
25,807,704

 
11,082,156

Real estate taxes and insurance
5,083,703

 
2,239,371

 
15,483,039

 
5,270,842

Fees to affiliates
7,412,526

 
7,751,727

 
19,081,916

 
17,335,703

Depreciation and amortization
16,633,722

 
12,493,027

 
49,915,893

 
25,562,812

Interest expense
6,547,052

 
4,086,542

 
19,283,573

 
7,938,509

General and administrative expenses
1,259,368

 
610,641

 
3,406,931

 
2,018,031

Acquisition costs
555,563

 
1,624,174

 
1,673,136

 
4,662,394

Total expenses
47,246,753

 
34,412,545

 
134,652,192

 
73,870,447

Net loss
$
(9,888,814
)
 
$
(14,219,859
)
 
$
(30,103,111
)
 
$
(33,183,194
)
Loss per common share — basic and diluted
$
(0.20
)
 
$
(0.58
)
 
$
(0.65
)
 
$
(1.78
)
Weighted average number of common shares outstanding — basic and diluted
49,212,732

 
24,641,077

 
46,247,332

 
18,654,201

Distributions declared per share
$
0.226

 
$
0.227

 
$
0.674

 
$
0.673

 
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 NINE MONTHS ENDED SEPTEMBER 30, 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
)
Repurchase 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
 
13,945,610

 
139,456

 
—

 
—

 
206,725,195

 
—

 
206,864,651

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

 
—

 
—

 
—

 
(17,659,380
)
 
—

 
(17,659,380
)
Transfers to redeemable common stock
 
—

 
—

 
—

 
—

 
(14,134,773
)
 
—

 
(14,134,773
)
Repurchase of common stock
 
(107,916
)
 
(1,079
)
 
—

 
—

 
(1,479,702
)
 
—

 
(1,480,781
)
Other offering costs to affiliates
 
—

 
—

 
—

 
—

 
(4,165,911
)
 
—

 
(4,165,911
)
Distributions declared
 
—

 
—

 
—

 
—

 
—

 
(31,140,959
)
 
(31,140,959
)
Amortization of stock-based compensation
 
—

 
—

 
—

 
—

 
76,797

 
—

 
76,797

Net loss
 
—

 
—

 
—

 
—

 
—

 
(30,103,111
)
 
(30,103,111
)
BALANCE, September 30, 2016
 
49,342,548

 
$
493,425

 
1,000

 
$
10

 
$
625,976,679

 
$
(145,649,000
)
 
$
480,821,114

 
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)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash Flows from Operating Activities:
 
 
 

Net loss
$
(30,103,111
)
 
$
(33,183,194
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
49,915,893

 
25,562,812

Loss on disposal of buildings and improvements
6,663

 
—

Amortization of deferred financing costs
676,447

 
220,287

Amortization of stock-based compensation
76,797

 
63,482

Change in fair value of interest rate cap agreements
691,969

 
2,206,162

Insurance claim recoveries
(651,325
)
 
—

Changes in operating assets and liabilities:
 
 
 
Restricted cash for operating activities
(532,060
)
 
(9,846,842
)
Rents and other receivables
(176,557
)
 
(1,138,489
)
Other assets
(780,110
)
 
(1,214,660
)
Accounts payable and accrued liabilities
7,653,323

 
12,304,416

Due to affiliates
(3,420
)
 
(598,782
)
Net cash provided by (used in) operating activities
26,774,509

 
(5,624,808
)
Cash Flows from Investing Activities:
 
 
 
Acquisition of real estate investments
(210,030,200
)
 
(617,662,481
)
Additions to real estate investments
(35,439,298
)
 
(8,323,406
)
Escrow deposits for pending real estate acquisitions
(7,092,300
)
 
(20,073,700
)
Restricted cash for investing activities
605,276

 
(721,297
)
Purchase of interest rate cap agreements
(116,100
)
 
(2,248,826
)
Insurance claim recoveries
651,325

 
—

Net cash used in investing activities
(251,421,297
)
 
(649,029,710
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of mortgage notes payable
41,850,000

 
331,070,500

Principal payments on mortgage notes payable
(190,865
)
 
—

Borrowings from revolving credit facilities
15,000,000

 
114,600,000

Proceeds from issuance of common stock
193,953,604

 
269,681,317

Payments of commissions on sale of common stock and related dealer manager fees
(16,804,019
)
 
(26,025,010
)
Reimbursement of other offering costs to affiliates
(5,485,093
)
 
(4,228,397
)
Payment of deferred financing costs
(1,005,250
)
 
(3,543,623
)
Distributions to common stockholders
(14,034,458
)
 
(5,341,496
)
Repurchase of common stock
(1,480,781
)
 
(202,317
)
Net cash provided by financing activities
211,803,138

 
676,010,974

Net (decrease) increase in cash and cash equivalents
(12,843,650
)
 
21,356,456

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

 
28,595,826

Cash and cash equivalents, end of period
$
18,542,727

 
$
49,952,282


5

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

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental Disclosures of Cash Flow Information:
 
 
 
Interest paid
$
18,834,579

 
$
4,632,711

Supplemental Disclosures of Noncash Transactions:
 
 
 
Increase in distributions payable
$
1,076,379

 
$
1,356,150

Application of escrow deposits to acquire real estate
$
7,092,300

 
$
15,473,600

Assumption of mortgage notes payable to acquire real estate
$
47,100,000

 
$
24,808,919

Discount on assumed mortgage notes payable
$
(2,721,540
)
 
$
—

(Decrease) increase in amounts payable to affiliates for other offering costs
$
(1,319,182
)
 
$
741,208

Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan
$
16,030,122

 
$
5,842,481

Increase in redeemable common stock
$
14,134,773

 
$
5,640,163

Increase in redemptions payable
$
384,037

 
$
43,199

Increase in accounts payable and accrued liabilities from additions to real estate investments
$
642,337

 
$
476,656

(Decrease) increase in due to affiliates from additions to real estate investments
$
(237,722
)
 
$
520,026

Increase in due to affiliates for commissions on sale of common stock and related dealer manager fees
$
855,361

 
$
—

 
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
September 30, 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 sole 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 limited partnership interests and the Company’s percentage ownership in the Operating Partnership increased proportionately.
As of September 30, 2016, the Company owned 34 multifamily properties comprising a total of 11,601 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 the termination of the Public Offering, 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. As of September 30, 2016, the Company had issued 49,430,739 shares of common stock for gross offering proceeds of $736,437,314, including 1,816,711 shares of common stock issued pursuant to the DRP for gross offering proceeds of $26,002,435.
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, 2017. 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

7

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

(“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 Sponsor, 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, 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 adopting 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 and nine months ended September 30, 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.

8

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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 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:
 
 
September 30, 2016
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$
—

 
$
73,330

 
$
—


9

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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

 
$
649,199

 
$
—

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 September 30, 2016 and December 31, 2015, the fair value of the notes payable was $949,901,475 and $827,207,564, respectively, compared to the carrying value of $951,474,817 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 nine months ended September 30, 2016 were based on daily record dates and calculated at a rate of $0.002459 per share per day during the period from January 1, 2016 through September 30, 2016.
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 and nine months ended September 30, 2016, the Company declared distributions totaling $0.226 and $0.674 per share of common stock, respectively. During the three and nine months ended September 30, 2015, the Company declared distributions totaling $0.227 and $0.673 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

10

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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 nine months ended September 30, 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 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 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.

11

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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, that 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-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. Upon adoption, the Company reclassified net debt issuance costs related to both mortgage notes payable and line-of-credit arrangements of $4,361,001 and $1,434,540, respectively, as of September 30, 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.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force), that clarifies how certain cash receipts and cash payments should be classified on the statement of cash flows. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company does not expect there to be a material impact from adopting this new guidance.
3.          Real Estate
As of September 30, 2016, the Company owned 34 multifamily properties comprising a total of 11,601 apartment homes. The total acquisition price of the Company’s real estate portfolio was $1,499,381,750. As of September 30, 2016 and December 31, 2015, the Company’s portfolio was approximately 93.1% and 93.6% occupied and the average monthly rent was $1,091 and $1,037, respectively.

12

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

Current Year Acquisitions
During the nine months ended September 30, 2016, the Company acquired the following properties:
 
 
 
 
 
 
 
 
Purchase Price Allocation
 
 
 
 
 
 
 
 
Real Estate
 
Mortgage Notes payable
 
 
Property Name
 
Location
 
Purchase Date
 
Units
 
Land
 
Buildings and Improvements
 
Tenant Origination and Absorption Costs
 
Discount on Assumed Liabilities(1)
 
Contract Purchase Price
 Fielder’s Creek
 
Englewood, CO
 
3/23/2016
 
217

 
$
4,219,943

 
$
27,504,988

 
$
675,069

 
$
—

 
$
32,400,000

Landings of Brentwood
 
Brentwood, TN
 
5/18/2016
 
724

 
14,525,434

 
92,234,848

 
3,239,718

 
—

 
110,000,000

1250 West Apartments
 
Marietta, GA
 
8/12/2016
 
468

 
9,304,511

 
45,161,290

 
1,306,699

 
—

 
55,772,500

Sixteen50 @ Lake Ray Hubbard
 
Rockwall, TX
 
9/29/2016
 
334

 
5,712,310

 
56,153,547

 
1,462,603

 
2,721,540

 
66,050,000

 
 
 
 
 
 
1,743

 
$
33,762,198

 
$
221,054,673

 
$
6,684,089

 
$
2,721,540

 
$
264,222,500

___________
(1)
Loan discount is amortized to interest expense over the remaining term of the assumed mortgage notes payable and is included in mortgage notes payable, net in the accompanying consolidated balance sheets.
As of September 30, 2016 and December 31, 2015, accumulated depreciation and amortization related to the Company’s consolidated real estate properties and related intangibles were as follows:
 
 
September 30, 2016
 
 
Assets
 
 
Land
 
Building and Improvements
 
Tenant Origination and Absorption
 
Total Real Estate
Investments in real estate
 
$
164,113,072

 
$
1,351,598,080

 
$
6,009,020

 
$
1,521,720,172

Less: Accumulated depreciation and amortization
 
—

 
(64,491,528
)
 
(2,778,201
)
 
(67,269,729
)
Net investments in real estate and related lease intangibles
 
$
164,113,072

 
$
1,287,106,552

 
$
3,230,819

 
$
1,454,450,443



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


13

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

Depreciation and amortization expense was $16,633,722 and $49,915,893 for the three and nine months ended September 30, 2016, and $12,493,027 and $25,562,812 for the three and nine months ended September 30, 2015, respectively.
Depreciation of the Company’s buildings and improvements was $14,334,454 and $39,002,300 for the three and nine months ended September 30, 2016, and $6,786,834 and $13,534,142 for the three and nine months ended September 30, 2015, respectively.
Amortization of the Company’s tenant origination and absorption costs was $2,299,268 and $10,913,593 for the three and nine months ended September 30, 2016, and $5,706,193 and $12,028,670 for the three and nine months ended September 30, 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 September 30, 2016, the Company’s real estate portfolio comprised 11,601 apartment homes and was 96.2% leased 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 $3,276,304 and $2,332,451 as of September 30, 2016 and December 31, 2015, respectively.
As of September 30, 2016 and 2015, no tenant represented over 10% of the Company’s annualized base rent.
4.          Other Assets
As of September 30, 2016 and December 31, 2015, other assets consisted of:
 
September 30, 2016
 
December 31, 2015
Prepaid expenses
$
1,493,158

 
$
1,025,130

Interest rate cap agreements
73,330

 
649,199

Other deposits
1,075,396

 
763,314

Other assets
$
2,641,884

 
$
2,437,643


14

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

5.          Debt
Mortgage Notes Payable
The following is a summary of mortgage notes payable, net secured by real property as of September 30, 2016 and December 31, 2015.


September 30, 2016






Interest Rate Range

Weighted Average Interest Rate


Type

Number of Instruments

Maturity Date Range

Minimum

Maximum


Principal Outstanding
Variable rate(1)

23

12/1/2021 - 9/1/2026

1-Mo LIBOR + 1.61%


1-Mo LIBOR + 2.48%


2.59%

$
690,536,100

Fixed rate

2

7/1/2025 - 5/1/2054

4.34
%

4.60
%

4.51%

68,155,798

Mortgage notes payable, gross

25

 
 
 
 
 

2.75%

758,691,898

Discount, net
 
 
 
 
 
 
 
 
 
 
 
(2,721,540
)
Deferred financing costs, net(2)
 
 
 
 
 
 
 
 
 
 
 
(4,361,001
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
751,609,357

 
 
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 September 30, 2016 and December 31, 2015 was $780,989 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

15

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

be drawn under the Credit Facility may be increased up to $350,000,000 at any time 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 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”).
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 day 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 2.68% as of September 30, 2016. In addition to monthly interest payments, an unused commitment fee equal to 0.1% of the average daily difference between the amount of (1) the commitment and (2) 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 (1) maximum facility available and (2) 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.
Revolving Line of Credit
On May 18, 2016, the Company entered into a secured revolving line of credit facility (the “Line of Credit”) with PNC Bank in an amount not to exceed $65,000,000. The Line of Credit provides for advances (each, an “LOC Loan” and collectively, the “LOC Loans”) solely for the purpose of financing the costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The Line of Credit has a maturity date of May 17, 2019, subject to extension (the “LOC Maturity Date”), as further described in the Loan Agreement (the “LOC Loan Agreement”) entered into by certain of the Company’s wholly-owned subsidiaries with PNC Bank in connection with the acquisition of the Landings of Brentwood property (the “Mortgaged Property”). Advances made under the Line of Credit will be secured by the Mortgaged Property, as evidenced by the LOC Loan Agreement, the Revolving Credit Loan Note (the “LOC Note”), the Deed of Trust and a Guaranty from the Company (the “LOC Guaranty,” together with the LOC Loan Agreement and the LOC Note, the “LOC Loan Documents”).
The Company has the option to select the interest rate in respect of the outstanding unpaid principal amount of the LOC Loans from the following options (the “Interest Rate Options”): (1) the sum of the Base Rate (as defined in the LOC Loan Agreement) plus 0.60%, or (2) a rate per annum fixed for the applicable LIBOR Interest Period (as defined in the LOC Loan Agreement) equal to the sum of LIBOR plus 1.60%. The Company may select different Interest Rate Options and different LIBOR Interest Periods to apply simultaneously to the LOC Loans comprising of different Borrowing Tranches (as defined in the LOC Loan Agreement) and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the LOC Loans comprising any Borrowing Tranche provided that there may not be at any time outstanding more than eight Borrowing Tranches. Monthly interest payments are due and payable in arrears on the first day of each month and on the LOC Maturity Date. The entire outstanding principal balance and any accrued and unpaid interest on the LOC Loans are due and payable in full on the LOC Maturity Date. As of September 30, 2016, the interest rate on the LOC Loans was 2.13%. In addition to monthly interest payments, the Company will pay PNC Bank a non-refundable commitment fee equal to (a) the average daily difference between (i) the maximum principal amount of the LOC Loans minus (ii) the aggregate outstanding principal amount of all advances multiplied by (b) 0.15%. The commitment fee shall be payable in arrears on the first day of each calendar quarter until the LOC Maturity Date.

16

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

As of September 30, 2016 and December 31, 2015, the advances obtained and certain financing costs incurred under the Credit Facility and the Line of Credit, which are included in revolving credit facilities, net, in the accompanying consolidated balance sheets, are summarized in the following table.
 
 
 
 
Amount of Advance as of
Collateralized Property(1)
 
Date of Advance
 
September 30, 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

Principal balance on revolving credit facility, gross
 
 
 
186,300,000

 
186,300,000

Principal balance on revolving line of credit, gross
 
 
 
15,000,000

 
—

Principal balance on revolving credit facilities, gross
 
 
 
201,300,000

 
186,300,000

Deferred financing costs, net  on revolving credit facility(2)
 
 
 
(1,149,396
)
 
(1,375,244
)
Deferred financing costs, net  on revolving line of credit(3)
 
 
 
(285,144
)
 
—

Revolving credit facilities, net
 
 
 
$
199,865,460

 
$
184,924,756

___________
(1)
Each property is pledged as collateral for repayment of amounts advanced under the Credit Facility.
(2)
Accumulated amortization related to deferred financing costs in respect of the Credit Facility as of September 30, 2016 and December 31, 2015, was $314,590 and $88,742, respectively.
(3)
Accumulated amortization related to deferred financing costs in respect of the Line of Credit as of September 30, 2016 and December 31, 2015, was $39,856 and $0, respectively.
Maturity and Interest
The following is a summary of the Company’s aggregate maturities as of September 30, 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)
 
$
959,991,898

 
$
65,012

 
$
325,372

 
$
2,625,886

 
$
20,465,554

 
$
196,358,931

 
$
740,151,143

______________
(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 and debt discount associated with the notes payable.
The Company’s notes payable contain customary financial and non-financial debt covenants. As of September 30, 2016, the Company was in compliance with all financial and non-financial debt covenants.

17

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

For the three and nine months ended September 30, 2016, the Company incurred interest expense of $6,547,052 and $19,283,573, respectively. Interest expense for the three and nine months ended September 30, 2016 includes amortization of deferred financing costs of $242,077 and $676,447, net unrealized losses from the change in fair value of interest rate cap agreements of $73,518 and $691,969 and Credit Facility commitment fees of $56,597 and $71,514, respectively.
For the three and nine months ended September 30, 2015, the Company incurred interest expense of $4,086,542 and $7,938,509, respectively. Interest expense for the three and nine months ended September 30, 2015 includes amortization of deferred financing costs of $117,487 and $220,287 and net unrealized losses from the change in fair value of interest rate cap agreements of $1,038,080 and $2,206,162, respectively.
Interest expense of $2,067,387 and $1,633,915 was payable as of September 30, 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 24, 2016, the date of the termination of the Public Offering, 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. Following the termination of the Public Offering, the Company continues to offer shares pursuant to the DRP. As of September 30, 2016, the Company had issued 49,430,739 shares of common stock for offering proceeds of $651,600,180, including 1,816,711 shares of common stock issued pursuant to the DRP for total proceeds of $26,002,435, net of offering costs of $84,837,134. The offering costs primarily consist of selling commissions and dealer manager fees. Offering proceeds include $0 and $3,119,075 of amounts due from the Company’s transfer agent as of September 30, 2016 and December 31, 2015, respectively, which are included in rents and other receivables in the accompanying consolidated balance sheets.
On August 13, 2015 and August 11, 2016, the Company granted 1,666 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 and $14.46 per share, respectively, 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.

18

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

The issuance and vesting activity for the nine months ended September 30, 2016 and year ended December 31, 2015 for the restricted stock issued to the Company’s independent directors is as follows:
 
 
Nine Months Ended September 30, 2016
 
Year Ended December 31, 2015
Nonvested shares at the beginning of the period
 
11,247

 
11,248

Granted shares
 
4,998

 
4,998

Vested shares
 
(6,248
)
 
(4,999
)
Nonvested shares at the end of the period
 
9,997

 
11,247

Included in general and administrative expenses is $39,306 and $76,797 for the three and nine months ended September 30, 2016 and $35,348 and $63,482 for the three and nine months ended September 30, 2015, respectively, for compensation expense related to the issuance of restricted common stock. As of September 30, 2016, the compensation expense related to the issuance of the restricted common stock not yet recognized was $117,908. The weighted average remaining term of the restricted common stock was 1.25 years as of September 30, 2016. As of September 30, 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 September 30, 2016 and December 31, 2015, no shares of the Company’s preferred stock were issued and outstanding.
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 purchase price per share under the DRP was initially $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, in connection with the determination of an estimated value per share of the Company’s common stock. As a result, distributions

19

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

that accrued during the month of April 2016, which were paid in May 2016, were reinvested at $14.25 per share on the May distribution payment date pursuant to the DRP. Beginning on the June 2016 distribution payment date, distributions were 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)(4)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of Estimated Value per Share
2 years
 
95.0% of Estimated Value per Share
3 years
 
97.5% of Estimated Value per Share
4 years
 
100.0% of Estimated Value per Share
In the event of a stockholder’s death or disability(2)
 
Average Issue Price for Shares(3)
________________
(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 does not apply to repurchases requested within two years after the death or disability of a stockholder.

20

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

(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 plan, the “Estimated Value per Share” will equal the most recently publicly disclosed estimated value per share of the Company as determined by the Company’s board of directors.
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 and nine months ended September 30, 2016, the Company repurchased a total of 64,483 and 107,916 shares with a total repurchase value of $892,515 and $1,480,781 and received requests for the repurchase of 48,658 and 134,555 shares with a total repurchase value of $675,918 and $1,862,902, respectively. During the three and nine months ended September 30, 2015, the Company repurchased a total of 6,601 and 13,501 shares with a total repurchase value of $98,862 and $202,317 and received requests for the repurchase of 5,267 and 16,503 shares with a total repurchase value of $76,750 and $245,164, respectively.
As of September 30, 2016 and September 30, 2015, the Company had 48,658 and 5,267 shares of outstanding and unfulfilled repurchase requests, and recorded $675,918 and $76,750 in accounts payable and accrued liabilities on the accompanying consolidated balance sheets related to these unfulfilled repurchase requests, respectively. The Company repurchased the outstanding repurchase requests as of September 30, 2016 and 2015 of $675,918 and $76,750 on the October 31, 2016 and October 30, 2015 Repurchase Dates, respectively.
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 repurchases 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.
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

21

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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 and nine months ended September 30, 2016, the Company reclassified $4,996,560 and $14,134,773, net of $892,515 and $1,480,781 of fulfilled repurchase requests, and for the three and nine months ended September 30, 2015, $2,645,676 and $5,640,163, net of $98,862 and $202,317 of fulfilled repurchase 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 to fund distributions from sources other than cash flow from operations. 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 and nine months ended September 30, 2015, which, if paid over a 365-day period 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. During the period from January 1, 2016 to September 30, 2016, cash distributions accrue at a rate of $0.002459 per day for each share, which, if paid over a 366-day period, 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 and nine months ended September 30, 2016 were $11,135,168 and $31,140,959, including $5,899,834 and $16,578,221, or 408,011 and 1,155,416 shares of common stock, attributable to the DRP.
Distributions declared for the three and nine months ended September 30, 2015 were $5,586,074 and $12,540,127, including $2,971,637 and $6,597,098, or 208,536 and 462,954 shares of common stock, attributable to the DRP.
As of September 30, 2016 and December 31, 2015, $3,640,148 and $2,563,769 of distributions declared were payable, which included $1,928,379 and $1,380,280, or 133,360 shares and 96,862 shares of common stock, attributable to the DRP.

22

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

Distributions Paid
For the three and nine months ended September 30, 2016, the Company paid cash distributions of $5,220,413 and $14,034,458, which related to distributions declared for each day in the period from June 1, 2016 through August 31, 2016 and December 1, 2015 through August 31, 2016, respectively. Additionally, for the three and nine months ended September 30, 2016, 407,266 shares and 1,116,900 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $5,889,074 and $16,030,122, respectively. For the three and nine months ended September 30, 2016, the Company paid total distributions of $11,109,487 and $30,064,580, respectively. 
For the three and nine months ended September 30, 2015, the Company paid cash distributions of $2,420,013 and $5,341,496, which related to distributions declared for each day in the period from June 1, 2015 through August 31, 2015 and December 1, 2014 through August 31, 2015, respectively. Additionally, for the three and nine months ended September 30, 2015, 192,599 shares and 409,999 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $2,744,538 and $5,842,481, respectively. For the three and nine months ended September 30, 2015, the Company paid total distributions of $5,164,551 and $11,183,977, 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. 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 DRP, 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.

23

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

Amounts attributable to the Advisor and its affiliates incurred for the three and nine months ended September 30, 2016 and 2015 and amounts outstanding to the Advisor and its affiliates as of September 30, 2016 and December 31, 2015 are as follows:
 
 
Incurred For the
 
Incurred For the
 
Payable (Prepaid) as of
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
2016
 
2015
 
September 30, 2016
 
December 31, 2015
Consolidated Statements of Operations:
 
 
 
 
 
 
 
 
 
 
 
 
Expensed
 
 
 
 
 
 
 
 
 
 
 
 
Investment management fees(1)
 
$
3,903,992

 
$
2,065,532

 
$
10,916,305

 
$
4,198,328

 
$
26,817

 
$
1,051,175

Acquisition fees(1)
 
1,247,350

 
2,561,266

 
2,766,209

 
6,891,098

 
684,498

 
510,718

Acquisition expenses(2)
 
288,509

 
927,643

 
773,414

 
2,780,293

 
21,535

 
145,600

Loan coordination fees(1)
 
889,500

 
2,353,989

 
1,539,500

 
4,704,794

 
471,000

 
—

Property management:
 
 
 
 
 
 
 
 
 
 
 
 
Fees(1)
 
1,072,183

 
582,945

 
3,000,555

 
1,182,106

 
361,814

 
288,488

Reimbursement of onsite personnel(3)
 
3,403,458

 
1,932,568

 
9,460,534

 
3,874,342

 
729,666

 
412,223

Other fees(1)
 
299,501

 
187,995

 
859,347

 
359,377

 
36,423

 
31,072

Other fees - G&A(4)
 
10,411

 
—

 
10,411

 
—

 
—

 
—

Other operating expenses(4)
 
284,711

 
303,260

 
980,495

 
954,635

 
170,319

 
66,218

Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
 
 
 
 
Insurance deductible reserve account(5)
 
40,270

 
12,290

 
64,850

 
12,290

 
(120,811
)
 
(24,580
)
Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
      Construction management:
 
 
 
 
 
 
 
 
 
 
 
 
    Fees(6)
 
808,149

 
244,614

 
2,113,545

 
535,040

 
118,090

 
127,375

    Reimbursement of labor costs(6)
 
1,067,347

 
9,189

 
2,659,400

 
18,232

 
227,391

 
455,826

Additional paid-in capital
 
 
 
 
 
 
 
 
 
 
 
 
Other offering costs reimbursement
 
—

 
1,853,313

 
4,165,911

 
4,969,605

 
—

 
1,319,182

Selling commissions
 
—

 
5,604,446

 
12,017,003

 
17,936,003

 
855,361

 
—

Dealer manager fees
 
—

 
2,509,032

 
5,642,377

 
8,089,007

 
—

 
—

 
 
$
13,315,381

 
$
21,148,082

 
$
56,969,856

 
$
56,505,150

 
$
3,582,103

 
$
4,383,297

_____________________
(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 consolidated statements of operations.
(5)
Included in other assets in the accompanying consolidated balance sheets.
(6)
Included in building and improvements in the accompanying consolidated balance sheets.

24

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

Organization and Offering Costs
Organization and offering costs include all expenses (other than sales commissions and the dealer manager fee) 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. Following the termination of the Public Offering, the Advisor had an obligation to reimburse the Company to the extent total organization and offering expenses (including sales commissions and dealer manager fees) borne by the Company exceeded 15% of the gross proceeds raised in the Primary Offering. Total organization and offering expenses borne by the Company did not exceed 15% of the gross offering proceeds in the Public 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. 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, whose parent company indirectly owns 25% 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 September 30, 2016 and December 31, 2015, the Advisor had incurred $5,139,326 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 expenses during the applicable periods.
The amount of reimbursable organization and offering (“O&O”) costs that have been paid or recognized from inception through September 30, 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
 
$
46,367,068

 
6.53
%
Broker dealer fees
 
21,151,573

 
2.98
%
Offering cost reimbursements
 
17,318,493

 
2.44
%
Organizational costs reimbursements
 
42,882

 
0.01
%
Total O&O cost reimbursements recorded by the Company
 
$
84,880,016

 
11.95
%

25

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

When recognized, organizational costs are expensed as incurred. From inception through September 30, 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 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 or the Company’s proportionate share thereof in the case of investments made through joint ventures. Such fee is calculated including acquisition fees, acquisition expenses and any debt attributable to such investments.
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. 
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 September 30, 2016 ranges from 2.5% 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. Each Property Management Agreement has an initial one-year term and will continue thereafter on a month-to-month basis unless either party gives a 60-day prior notice of its desire to terminate the Property Management Agreement, provided that the Company may terminate the Property Management Agreement at any time upon a determination of gross negligence, willful misconduct or bad acts of the Property Manager or its employees or upon an uncured breach of the Property Management Agreement upon 30 days’ prior written notice to the Property Manager.
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.

26

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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. 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.
Insurance Deductible Reserve
The Company deposits with an affiliate of the Sponsor moneys to fund an insurance deductible reserve account to cover the cost of required insurance deductibles across all multifamily properties of the Company and other affiliated entities. Upon filing a major claim, proceeds from the insurance deductible reserve account may be used by the Company or another affiliate of the Sponsor.
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 such excess is approved by the independent directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the 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).
At September 30, 2016, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation.

27

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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 1.0% 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 September 30, 2016 the Company had not sold or otherwise disposed of any properties or real estate-related assets. Accordingly, the Company had not incurred any disposition fees as of September 30, 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 is 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 is attributable to that participating broker-dealer for certain marketing costs of that participating broker-dealer. The Dealer Manager negotiated 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 September 30, 2016, expects to pay trailing selling commissions subsequent to that date of $855,361, which were charged to additional paid-in capital and are 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.
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 receives 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 August 13, 2015 and August 11, 2016, 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 each of the 2015 and 2016 annual meetings of stockholders. The Company recorded stock-based compensation expense of $39,306 and $76,797 for the three and nine

28

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

months ended September 30, 2016 and $35,348 and $63,482 for the three and nine months ended September 30, 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 $60,750 and $180,250 for the three and nine months ended September 30, 2016 and $55,750 and $180,250 for the three and nine months ended September 30, 2015 related to the independent directors’ annual retainer and board meeting attendance, which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of September 30, 2016 and December 31, 2015, $60,750 and $61,750 related to the independent directors’ annual retainer and board meetings attendance is included in due to affiliates in the consolidated balance sheets.
9.          Commitments and Contingencies
Economic Dependency 
The Company is dependent on the Advisor for certain services that are essential to the Company, including 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 the Advisor is unable to provide such 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, Dallas/Fort Worth, Texas and Nashville, Tennessee 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.
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.

29

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

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 September 30, 2016 and December 31, 2015:
September 30, 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
 
23
 
$
690,536,100

 
0.53%
 
2.77%
 
$
73,330

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 and nine months ended September 30, 2016 resulted in an unrealized loss of $73,518 and $691,969 and for the three and nine months ended September 30, 2015 resulted in an unrealized loss of $1,038,080 and $2,206,162, respectively, which is included in interest expense in the accompanying consolidated statements of operations. During the nine months ended September 30, 2016 and 2015, the Company acquired interest rate cap agreements of $116,100 and $2,248,826, respectively. The fair value of the interest rate cap agreements of $73,330 and $649,199 as of September 30, 2016 and December 31, 2015, is included in other assets on the accompanying consolidated balance sheets.
11.          Pro Forma Information
The following table summarizes, on an unaudited basis, the consolidated pro forma results of operations of the Company for the three and nine months ended September 30, 2016 and 2015. The Company acquired two properties during the three months ended September 30, 2016 and four properties during the nine months ended September 30, 2016. These properties contributed $6,195,426 of revenues and $3,337,541 of net loss, including $5,626,692 of depreciation and amortization, to the Company’s results of operations from the date of acquisition to September 30, 2016. The following unaudited pro forma information for the three and nine months ended September 30, 2016 and 2015 has been provided to give effect to the acquisitions of the properties as if they had occurred on January 1, 2015. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had these acquisitions occurred on this date, nor does it purport to predict the results of operations for future periods.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
39,573,261

 
$
37,586,349

 
$
118,719,782

 
$
112,759,046

Net loss
 
$
(7,745,386
)
 
$
(15,239,009
)
 
$
(23,236,161
)
 
$
(49,356,426
)
The pro forma information reflects adjustments for actual revenues and expenses of the properties acquired during the three and nine months ended September 30, 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

30

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(unaudited)

charged had the Company acquired the properties 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 properties; and (3) transaction costs have been adjusted for the acquisition of the properties.
12.          Subsequent Events
Distributions Paid
On October 3, 2016, the Company paid distributions of $3,640,148, which related to distributions declared for each day in the period from September 1, 2016 through September 30, 2016 and consisted of cash distributions paid in the amount of $1,711,769 and $1,928,379 in shares issued pursuant to the DRP.
On November 1, 2016, the Company paid distributions of $3,770,876, which related to distributions declared for each day in the period from October 1, 2016 through October 31, 2016 and consisted of cash distributions paid in the amount of $1,779,629 and $1,991,247 in shares issued pursuant to the DRP.
Distributions Declared
On November 9, 2016, the Company’s board of directors approved and authorized a daily distribution to stockholders of record as of the close of business on each day of the period commencing on January 1, 2017 and ending on March 31, 2017. The distributions will be equal to $0.002466 per share of the Company’s common stock. The distributions for each record date in January 2017, February 2017 and March 2017 will be paid in February 2017, March 2017 and April 2017, respectively. The distributions will be payable to stockholders from legally available funds therefor.



31

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 (the “Quarterly Report”) 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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; 
•
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 REITs); 
•
the availability of capital; 
•
changes in interest rates; and 
•
changes to 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 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

32

PART I — FINANCIAL INFORMATION (continued)


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 SEC on March 29, 2016.
Overview
We were formed on August 22, 2013, as a Maryland corporation that has elected to qualify as a REIT. We intend to use the remaining net proceeds from our ongoing 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 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 DRP at an initial price of $14.25 per share. 
On March 24, 2016, we terminated our 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 DRP for gross offering proceeds of $14,414,752. We continue to offer shares pursuant to our DRP. As of September 30, 2016, we had sold 49,430,739 shares of common stock for gross proceeds of $736,437,314, including 1,816,711 shares of common stock issued pursuant to our DRP for gross offering proceeds of $26,002,435.
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 DRP 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 DRP 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 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 Public 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, 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 under certain statutory provisions. Failing to qualify as a REIT could materially and adversely affect our net income and results of operations.

33

PART I — FINANCIAL INFORMATION (continued)


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 September 30, 2016, we owned the 34 multifamily properties listed below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1) as of
 
Average Monthly Rent(2) as of
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
Sep 30, 2016
 
Dec 31, 2015
 
Sep 30, 2016
 
Dec 31, 2015
1
 
Villages at Spring Hill Apartments
 
Spring Hill, TN
 
5/22/2014
 
176

 
$
14,200,000

 
$
9,873,833

 
94.9
%
 
97.2
%
 
$
957

 
$
901

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

 
27,864,250

 
19,413,062

 
94.5
%
 
94.1
%
 
885

 
860

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

 
21,500,000

 
14,957,848

 
93.8
%
 
94.6
%
 
877

 
886

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

 
23,500,000

 
16,349,275

 
91.8
%
 
93.8
%
 
902

 
870

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

 
98,500,000

 
73,354,109

 
89.8
%
 
93.8
%
 
1,225

 
1,128

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

 
49,000,000

 
34,151,629

 
92.8
%
 
96.0
%
 
913

 
873

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

 
40,000,000

 
27,836,175

 
96.8
%
 
93.7
%
 
1,215

 
1,102

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

 
25,000,000

 
17,385,740

 
90.1
%
 
91.7
%
 
1,075

 
1,014

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

 
51,000,000

 
35,543,360

 
90.9
%
 
92.7
%
 
1,056

 
955

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

 
19,200,000

 
13,301,003

 
94.9
%
 
91.7
%
 
807

 
809

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

 
29,500,000

 
22,012,207

 
92.7
%
 
88.6
%
 
1,037

 
846

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

 
32,115,000

 
22,347,902

 
94.5
%
 
97.3
%
 
1,760

 
1,688

13
 
Heritage Place Apartments
 
Franklin, TN
 
4/27/2015
 
105

 
9,650,000

 
7,069,307

 
92.4
%
 
93.3
%
 
1,003

 
942

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

 
16,450,000

 
11,364,214

 
93.9
%
 
91.1
%
 
892

 
811

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

 
72,000,000

 
50,189,217

 
95.0
%
 
95.1
%
 
906

 
893

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

 
37,600,000

 
26,151,564

 
95.1
%
 
93.1
%
 
1,050

 
943


34

PART I — FINANCIAL INFORMATION (continued)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1) as of
 
Average Monthly Rent(2) as of
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
Sep 30, 2016
 
Dec 31, 2015
 
Sep 30, 2016
 
Dec 31, 2015
17
 
Hearthstone at City Center
 
Aurora, CO
 
6/25/2015
 
360

 
$
53,400,000

 
$
37,172,570

 
93.6
%
 
93.9
%
 
$
1,076

 
$
1,053

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

 
66,800,000

 
45,106,509

 
92.3
%
 
92.0
%
 
827

 
786

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

 
39,480,000

 
29,470,218

 
95.0
%
 
95.3
%
 
1,039

 
989

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

 
38,500,000

 
28,808,289

 
95.8
%
 
94.3
%
 
1,335

 
1,292

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

 
32,600,000

 
24,393,512

 
93.7
%
 
94.0
%
 
1,226

 
1,217

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

 
46,200,000

 
34,031,344

 
96.1
%
 
93.1
%
 
1,504

 
1,389

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

 
52,200,000

 
39,049,781

 
95.2
%
 
92.9
%
 
1,200

 
1,227

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

 
36,250,000

 
24,555,798

 
91.7
%
 
91.0
%
 
924

 
1,018

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

 
60,500,000

 
45,154,153

 
95.9
%
 
96.2
%
 
1,674

 
1,667

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

 
58,500,000

 
43,213,752

 
89.0
%
 
90.1
%
 
1,160

 
1,292

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

 
40,300,000

 
28,064,830

 
87.5
%
 
92.4
%
 
1,262

 
1,226

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

 
51,400,000

 
38,455,106

 
90.5
%
 
95.2
%
 
885

 
868

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

 
44,200,000

 
33,068,064

 
88.7
%
 
90.5
%
 
1,298

 
1,337

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

 
47,750,000

 
—

 
92.6
%
 
97.3
%
 
1,064

 
1,024

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

 
32,400,000

 
—

 
94.5
%
 
—
%
 
1,042

 
—

32
 
Landings of Brentwood
 
Brentwood, TN
 
5/18/2016
 
724

 
110,000,000

 
—

 
92.3
%
 
—
%
 
1,211

 
—

33
 
1250 West Apartments
 
Marietta, GA
 
8/12/2016
 
468

 
55,772,500

 
41,644,111

 
95.5
%
 
—
%
 
989

 
—

34
 
Sixteen50 @ Lake Ray Hubbard
 
Rockwall, TX
 
9/29/2016
 
334

 
66,050,000

 
43,907,836

 
95.8
%
 
—
%
 
1,612

 
—

 
 
 
 
 
 
 
 
11,601

 
$
1,499,381,750

 
$
937,396,318

 
93.1
%
 
93.6
%
 
$
1,091

 
$
1,037

________________
(1)
At September 30, 2016, our portfolio was approximately 96.2% 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 and loan discount associated with the loans for each individual property listed above but excludes the principal balance of $15,000,000 and associated deferred financing costs of $921,501 related to the revolving credit facilities 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 statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of

35

PART I — FINANCIAL INFORMATION (continued)


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) paid by us in connection with our Public Offering, including legal, accounting, tax, 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 Public Offering. Any such reimbursement did not exceed actual expenses incurred by our Advisor. Following the termination of our Public Offering, our Advisor had an obligation to 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 Public Offering. No amounts were owed to us by our Advisor pursuant to the Advisory Agreement because total organization and offering expenses did not exceed 15% of the gross offering proceeds raised in our Public Offering.
To the extent we did not pay the full sales commissions or dealer manager fee for shares sold in our 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 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. Through the termination of our Public Offering, underwriting compensation paid by us did not exceed 10% of the gross offering proceeds raised in our 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 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 September 30, 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

36

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, which if paid each day over a 365-day period is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of common stock. During the period from January 1, 2016 through September 30, 2016, distributions declared were calculated at a rate of $0.002459 per share per day, which if paid over a 366-day period is equivalent to a 6.0% annualized distribution rate based on a purchase price of $15.00 per share of common stock.
The distributions paid during each of the last five fiscal quarters ended September 30, 2016, along with the amount of distributions reinvested pursuant to the DRP were as follows:
 
 
 
 
 
 
Distributions Paid(3)
 
Sources of Distributions Paid
 
Net Cash (Used In) Provided by Operating Activities
Period
 
Distributions Declared(1)
 
Distributions Declared Per Share(1)(2)
 
Cash
 
Reinvested
 
Total
 
Cash Flow From Operations
 
Offering Proceeds
 
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

Second Quarter 2016
 
10,942,926

 
0.224

 
5,020,719

 
5,698,609

 
10,719,328

 
8,524,217

 
2,195,111

 
8,524,217

Third Quarter 2016
 
11,135,168

 
0.226

 
5,220,413

 
5,889,074

 
11,109,487

 
9,504,533

 
1,604,954

 
9,504,533

 
 
$
43,746,534

 
$
1.128

 
$
19,439,064

 
$
22,210,853

 
$
41,649,917

 
$
28,630,358

 
$
13,019,559

 
$
26,395,020

____________________
(1)
Distributions during fiscal year 2015 and the nine months ended September 30, 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 and nine months ended September 30, 2016, we paid aggregate distributions of $11,109,487 and $30,064,580, including $5,220,413 and $14,034,458 of distributions paid in cash and 407,266 and 1,116,900 shares of our common stock issued pursuant to our DRP for $5,889,074 and $16,030,122. For the three and nine months ended September 30, 2016, our net loss was $9,888,814 and $30,103,111, we had funds from operations (“FFO”) of $6,744,908 and $19,812,782 and net cash provided by operations of $9,504,533 and $26,774,509. For the three and nine months ended September 30, 2016, we funded $9,504,533, or 86%, and $26,264,515, or 87%, of distributions paid respectively, from net cash provided by operating activities and $1,604,954, or 14%, and $3,800,065, or 13%, respectively, from net Public Offering proceeds, which includes net cash distributions and distributions reinvested by stockholders. 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 sources other than cash flow from operations to fund distributions. If we pay distributions from sources other than cash flow from operations, we will have fewer funds available for investments.

37

PART I — FINANCIAL INFORMATION (continued)


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 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 September 30, 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 will monitor the business and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates.
Liquidity and Capital Resources
We use secured borrowings, and intend to use in the future secured and unsecured borrowings. Upon investing all of the net offering proceeds from our Public Offering, our borrowings were approximately 61% of the value of our properties (after debt amortization) and other real estate-related assets. Going forward, 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 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, we made payments to the Dealer Manager for sales commissions and the dealer manager fees and payments to our Advisor for reimbursement of certain organization and offering expenses. Currently, 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 $18,542,727 as of September 30, 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 DRP.
Over the short term, we believe that our sources of capital, specifically our cash balances, cash flow from operations, our ability to raise equity capital from joint venture partners and our ability to obtain various forms of secured and unsecured financing including financing pursuant to our Credit Facility and Line of Credit 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 conduct additional public or private offerings of our securities. 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

38

PART I — FINANCIAL INFORMATION (continued)


activities as well as providing capital for investment in future development and other joint ventures along with potential forward purchase commitments.
On August 26, 2015, we entered into the Credit Facility with 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 maximum amount that may be drawn under the Credit Facility may be increased up to $350,000,000 at any time 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 September 30, 2016, $185,150,604 was outstanding on the Credit Facility, 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 day 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. For additional information on our Credit Facility, see Note 5 to the consolidated financial statements contained in this Quarterly Report.

On May 18, 2016, we entered into the Line of Credit with PNC Bank in an amount not to exceed $65,000,000. The Line of Credit provides for advances solely for the purpose of financing the costs in connection with acquisitions and development of real estate projects and for general corporate purposes (subject to certain debt service and loan to value requirements). The Line of Credit has a LOC Maturity Date of May 17, 2019, subject to extension, as further described in the LOC Loan Agreement entered into by certain of our wholly-owned subsidiaries with PNC Bank in connection with the acquisition of the Mortgaged Property, the Landings of Brentwood. As of September 30, 2016, $14,714,856 was outstanding on our Line of Credit, net. We have the option to select the interest rate in respect of the outstanding unpaid principal amount of the LOC Loans from the following options as follows: (1) the sum of the Base Rate (as defined in the LOC Loan Agreement) plus 0.60% or (2) a rate per annum fixed for the applicable LIBOR Interest Period (as defined in the LOC Loan Agreement) equal to the sum of LIBOR plus 1.60%. Monthly interest payments are due and payable in arrears on the first day of each month and on the LOC Maturity Date. The entire outstanding principal balance and any accrued and unpaid interest on the LOC Loans are due and payable in full on the LOC Maturity Date. For additional information on our Line of Credit, see Note 5 to the consolidated financial statements contained in this Quarterly Report. 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.
Cash Flows Provided by Operating Activities
We commenced real estate operations with the acquisition of our first multifamily property on May 22, 2014. As of September 30, 2016, we owned 34 multifamily properties. During the nine months ended September 30, 2016, net cash provided by operating activities was $26,774,509 compared to net cash used in operating activities of $5,624,808 for the nine months ended September 30, 2015. The change in net cash provided by operating activities is primarily due to increases in depreciation and amortization and restricted cash partially offset by a decrease in net loss, due to affiliates and accounts payable and accrued liabilities associated with 34 multifamily properties owned as of September 30, 2016 compared to the 24 multifamily properties owned as of September 30, 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 nine months ended September 30, 2016, net cash used in investing activities was $251,421,297 compared to $649,029,710 during the nine months ended September 30, 2015. The decrease in net cash used in investing activities was primarily the result of our acquisition of four multifamily properties during the nine months ended September 30, 2016 compared to 17 acquisitions of multifamily properties during the nine months ended September 30, 2015. Net cash used in investing activities during the nine months ended September 30, 2016 consisted of the following:
•
$210,030,200 of cash used related to the acquisition of four multifamily properties;
•
$35,439,298 of cash used for improvements to real estate investments;
•
$7,092,300 of cash used for deposits for potential real estate investments;
•
$605,276 of cash provided by restricted cash accounts related to replacement reserves;

39

PART I — FINANCIAL INFORMATION (continued)


•
$116,100 of cash used to purchase interest rate cap agreements; and
•
$651,325 of cash provided by proceeds from insurance claims.
Cash Flows from Financing Activities
During the nine months ended September 30, 2016, net cash provided by financing activities was $211,803,138 compared to $676,010,974 during the nine months ended September 30, 2015. The decrease in net cash provided by financing activities is due primarily to the decrease in proceeds from issuance of mortgage notes payable, borrowings from credit facilities and issuance of common stock from $331,070,500, $114,600,000 and $269,681,317, respectively, during the nine months ended September 30, 2015 to $41,850,000, $15,000,000 and $193,953,604, respectively, during the nine months ended September 30, 2016. Net cash provided by financing activities during the nine months ended September 30, 2016 consisted of the following:
•
$171,664,492 of cash provided by offering proceeds related to our Public Offering, net of (1) payments of commissions on sales of common stock and related dealer manager fees in the amount of $16,804,019 and (2) the reimbursement of other offering costs to affiliates in the amount of $5,485,093;
•
$40,653,885 of proceeds from issuance of mortgage notes payable, net of deferred financing costs in the amount of $1,005,250 and principal payments of $190,865;
•
$15,000,000 of proceeds from borrowings from revolving credit facilities;
•
$1,480,781 of cash paid for the repurchase of common stock; and
•
$14,034,458 of net cash distributions, after giving effect to distributions reinvested by stockholders of $16,030,122.
Contractual Commitments and Contingencies
We use secured debt, and intend to use in the future secured and unsecured debt. We believe that the careful use of borrowings will help us achieve our diversification goals and potentially enhance the returns on our investments. Upon investing all of the net offering proceeds from our Public Offering, our borrowings were approximately 61% of the value of our properties (after debt amortization) and other real estate-related assets. Going forward, we expect that our borrowings will be approximately 65% 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 September 30, 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 in connection with the management of our asset portfolio and costs incurred by our Advisor in providing services to us.
As of September 30, 2016, we had indebtedness totaling an aggregate principal amount of $951,474,817, including the net discount on a note payable of $2,721,540 and the net deferred financing costs of $5,795,541. The following is a summary of our contractual obligations as of September 30, 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)
 
$
208,671,752

 
$
6,456,144

 
$
52,414,651

 
$
50,876,458

 
$
98,924,499

Principal payments on outstanding debt obligations(2)
 
959,991,898

 
65,012

 
2,951,258

 
216,824,485

 
740,151,143

Total
 
$
1,168,663,650

 
$
6,521,156

 
$
55,365,909

 
$
267,700,943

 
$
839,075,642

________________

40

PART I — FINANCIAL INFORMATION (continued)


(1)
Projected interest payments on outstanding debt obligations are based on the outstanding principal amounts and interest rates in effect at September 30, 2016. We incurred interest expense of $6,547,052 and $19,283,573 during the three and nine months ended September 30, 2016, including amortization of deferred financing costs totaling $242,077 and $676,447, net unrealized losses from the change in fair value of interest rate cap agreements of $73,518 and $691,969 and credit facility commitment fees of $56,597 and $71,514, respectively.
(2)
Projected principal payments on outstanding debt obligations are based on the terms of the notes payable agreements. Amounts exclude the amortization of the debt discount and net deferred financing costs associated with certain notes payable.
Results of Operations
Overview
The discussion that follows is based on our consolidated results of operations for the three and nine months ended September 30, 2016 and 2015. The ability to compare one period to another is significantly affected by acquisitions completed and distributions 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 September 30, 2016, we owned 34 multifamily properties compared to owning 24 multifamily properties as of September 30, 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 and nine months ended September 30, 2016 and 2015 are not indicative of those expected in future periods. For the three and nine months ended September 30, 2016, we continue the process of value-enhancement projects, which may 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 organic rent increases and anticipated value-enhancement projects.
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 (“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 September 30, 2016 Compared to the Three Months Ended September 30, 2015
The following table summarizes the consolidated results of operations for the three months ended September 30, 2016 and 2015:
 
 
For the Three Months Ended September 30,
 
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Total revenues
 
$
37,357,939

 
$
20,192,686

 
$
17,165,253

 
85
 %
Operating, maintenance and management
 
(9,754,819
)
 
(5,607,063
)
 
(4,147,756
)
 
74
 %
Real estate taxes and insurance
 
(5,083,703
)
 
(2,239,371
)
 
(2,844,332
)
 
127
 %
Fees to affiliates
 
(7,412,526
)
 
(7,751,727
)
 
339,201

 
(4
)%
Depreciation and amortization
 
(16,633,722
)
 
(12,493,027
)
 
(4,140,695
)
 
33
 %
Interest expense
 
(6,547,052
)
 
(4,086,542
)
 
(2,460,510
)
 
60
 %
General and administrative expenses
 
(1,259,368
)
 
(610,641
)
 
(648,727
)
 
106
 %
Acquisition costs
 
(555,563
)
 
(1,624,174
)
 
1,068,611

 
(66
)%
Net loss
 
$
(9,888,814
)
 
$
(14,219,859
)
 
$
4,331,045

 
(30
)%
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
21,147,733

 
$
11,575,312

 
$
9,572,421

 
83
 %
FFO(2)
 
$
6,744,908

 
$
(1,726,832
)
 
$
8,471,740

 
491
 %
MFFO(2)
 
$
9,510,839

 
$
5,850,677

 
$
3,660,162

 
63
 %
______________

41

PART I — FINANCIAL INFORMATION (continued)


(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 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 (“MFFO”) as defined by the Investment Program Association (the “IPA”) 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 September 30, 2016, we had a net loss of $9,888,814 compared to a net loss of $14,219,859 for the three months ended September 30, 2015. The decrease in net loss of $4,331,045 over the comparable prior year period was primarily due to the decrease in acquisition costs of $1,068,611 due to the acquisition of two multifamily properties during the three months ended September 30, 2016 compared to the acquisition of six multifamily properties in three months ended September 30, 2015, the decrease in fees to affiliates of $339,201 and the increase in total revenues of $17,165,253, offset by the increase in operating, maintenance and management expenses of $4,147,756, the increase in real estate taxes and insurance of $2,844,332, the increase in depreciation and amortization expense of $4,140,695, the increase in interest expense of $2,460,510 and the increase in general and administrative expenses of $648,727. The increase in these expenses was due primarily to the increase in our property portfolio from 24 multifamily properties at September 30, 2015 to 34 multifamily properties at September 30, 2016.
Total revenues
Total revenues were $37,357,939 for the three months ended September 30, 2016 compared to $20,192,686 for the three months ended September 30, 2015. The increase of $17,165,253 was primarily due to owning 34 multifamily properties at September 30, 2016 compared to 24 multifamily properties at September 30, 2015. Our total units increased by 3,710 from 7,891 at September 30, 2015 to 11,601 at September 30, 2016. Average monthly rents per unit increased from $1,000 as of September 30, 2015 to $1,091 as of September 30, 2016. We expect rental income and tenant reimbursements to increase in future periods as a result of ordinary monthly rent increases, improved occupancy and the implementation of our value-enhancement strategy.
Operating, maintenance and management expenses
Operating, maintenance and management expenses for the three months ended September 30, 2016 were $9,754,819 compared to $5,607,063 for the three months ended September 30, 2015. The increase of $4,147,756 was primarily due to operating 34 multifamily properties as of September 30, 2016 compared to 24 multifamily properties as of September 30, 2015. We expect that these amounts will decrease as a percentage of total revenues as we implement operational efficiencies at our multifamily properties.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $5,083,703 for the three months ended September 30, 2016 compared to $2,239,371 for the three months ended September 30, 2015. The increase of $2,844,332 was due to the acquisition of 10 multifamily properties since September 30, 2015 and real estate taxes and insurance expenses for a full reporting period on properties acquired during the three months ended September 30, 2015. We expect these amounts may increase in future periods as a result of municipal property tax rate increases as well as increases in the assessed value of our property portfolio.

42

PART I — FINANCIAL INFORMATION (continued)


Fees to affiliates
Fees to affiliates were $7,412,526 for the three months ended September 30, 2016 compared to $7,751,727 for the three months ended September 30, 2015. The decrease of $339,201 was primarily due to the decrease in acquisition fees and loan coordination fees as a result of the acquisition of two multifamily properties during the three months ended September 30, 2016 compared to the acquisition of six multifamily properties in three months ended September 30, 2015, partially offset by an increase in investment management and property management fees as a result of the growth in 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 a full period of operations for the two multifamily properties acquired during the three months ended September 30, 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 the Public Offering and the decrease in anticipated future acquisitions of real estate and real estate-related investments.
Depreciation and amortization
Depreciation and amortization expenses were $16,633,722 for the three months ended September 30, 2016 compared to $12,493,027 for the three months ended September 30, 2015. The increase of $4,140,695 was primarily due to the net increase in depreciable and amortizable assets of $531,044,028 since September 30, 2015. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.
Interest expense
Interest expense for the three months ended September 30, 2016 was $6,547,052 compared to $4,086,542 for the three months ended September 30, 2015. The increase of $2,460,510 was primarily due to the increase in the notes payable balance (before deducting deferred financing fees and loan discount) of $289,860,339 since September 30, 2015 due to financing incurred in connection with the acquisition of seven multifamily properties since September 30, 2015. Included in interest expense is the amortization of deferred financing costs of $242,077 and $117,487, the unrealized loss on derivative instruments of $73,518 and $1,038,080 and credit facility commitment fees of $56,597 and $11,968 for the three months ended September 30, 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 September 30, 2016 were $1,259,368 compared to $610,641 for the three months ended September 30, 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 $648,727 was primarily due to the acquisition of 10 multifamily properties since September 30, 2015 and the continuing operation of the properties owned as of September 30, 2015. We expect general and administrative expenses to decrease as a percentage of total revenues.
Acquisition costs
Acquisition costs for the three months ended September 30, 2016 were $555,563 compared to $1,624,174 for the three months ended September 30, 2015. The decrease of $1,068,611 was due primarily to the acquisition of two multifamily properties with an aggregate purchase price of $121,822,500 during the three months ended September 30, 2016, compared to the acquisition of six multifamily properties with an aggregate purchase price of $245,230,000 during the three months ended September 30, 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.

43

PART I — FINANCIAL INFORMATION (continued)


Consolidated Results of Operations for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
The following table summarizes the consolidated results of operations for the nine months ended September 30, 2016 and 2015:
 
 
For the Nine Months Ended September 30,
 
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Total revenues
 
$
104,549,081

 
$
40,687,253

 
$
63,861,828

 
157
 %
Operating, maintenance and management
 
(25,807,704
)
 
(11,082,156
)
 
(14,725,548
)
 
133
 %
Real estate taxes and insurance
 
(15,483,039
)
 
(5,270,842
)
 
(10,212,197
)
 
194
 %
Fees to affiliates
 
(19,081,916
)
 
(17,335,703
)
 
(1,746,213
)
 
10
 %
Depreciation and amortization
 
(49,915,893
)
 
(25,562,812
)
 
(24,353,081
)
 
95
 %
Interest expense
 
(19,283,573
)
 
(7,938,509
)
 
(11,345,064
)
 
143
 %
General and administrative expenses
 
(3,406,931
)
 
(2,018,031
)
 
(1,388,900
)
 
69
 %
Acquisition costs
 
(1,673,136
)
 
(4,662,394
)
 
2,989,258

 
(64
)%
Net loss
 
$
(30,103,111
)
 
$
(33,183,194
)
 
$
3,080,083

 
(9
)%
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
58,745,836

 
$
22,792,772

 
$
35,953,064

 
158
 %
FFO(2)
 
$
19,812,782

 
$
(7,620,382
)
 
$
27,433,164

 
360
 %
MFFO(2)
 
$
26,483,596

 
$
10,844,066

 
$
15,639,530

 
144
 %
______________
(1)
See “—Net Operating Income” below for a reconciliation of NOI to net loss.
(2)
See “—Funds From Operations and Modified Funds From Operations” below for a reconciliation of FFO and MFFO to net loss.
Net loss
For the nine months ended September 30, 2016, we had a net loss of $30,103,111 compared to $33,183,194 for the nine months ended September 30, 2015. The decrease in net loss of $3,080,083 over the comparable prior year period was primarily due to the increase in total revenues of $63,861,828 and the decrease in acquisition costs of $2,989,258 offset by the increase in operating, maintenance and management expenses of $14,725,548, the increase in real estate taxes and insurance of $10,212,197, the increase in fees to affiliates of $1,746,213, the increase in depreciation and amortization expense of $24,353,081, the increase in interest expense of $11,345,064 and the increase in general and administrative expenses of $1,388,900. The increase in these expenses was due primarily to the increase in our property portfolio from 24 multifamily properties at September 30, 2015 to 34 multifamily properties at September 30, 2016.
Total revenues
Total revenues were $104,549,081 for the nine months ended September 30, 2016 compared to $40,687,253 for the nine months ended September 30, 2015. The increase of $63,861,828 was primarily due to owning 34 multifamily properties at September 30, 2016 compared to 24 multifamily properties at September 30, 2015. Additionally, our total units increased by 3,710 from 7,891 at September 30, 2015 to 11,601 at September 30, 2016. Average monthly rents per unit increased from $1,000 as of September 30, 2015 to $1,091 as of September 30, 2016. We expect rental income and tenant reimbursements to increase in future periods as a result of ordinary monthly rent increases, improved occupancy and the implementation of our value-enhancement strategy.
Operating, maintenance and management expenses
Operating, maintenance and management expenses were $25,807,704 for the nine months ended September 30, 2016 compared to $11,082,156 for the nine months ended September 30, 2015. The increase of $14,725,548 was primarily due to operating 34 multifamily properties as of September 30, 2016 compared to 24 multifamily properties as of September 30, 2015.

44

PART I — FINANCIAL INFORMATION (continued)


We expect that these amounts will decrease as a percentage of total revenues as we implement operational efficiencies at our multifamily properties.
Real estate taxes and insurance
Real estate taxes and insurance expenses were $15,483,039 for the nine months ended September 30, 2016 compared to $5,270,842 for the nine months ended September 30, 2015. The increase of $10,212,197 was due to the acquisition of 10 multifamily properties since September 30, 2015 and real estate taxes and insurance expenses for a full reporting period on properties acquired during the nine months September 30, 2015. We expect these amounts may increase in future periods as a result of municipal property tax increases as well as increases in the assessed value of our property portfolio.
Fees to affiliates
Fees to affiliates were $19,081,916 for the nine months ended September 30, 2016 compared to $17,335,703 for the nine months ended September 30, 2015. The increase of $1,746,213 was primarily due to the increase in investment management and property management fees as a result of the growth of our portfolio, partially offset by a decrease in acquisition fees and loan coordination fees as a result of the acquisition of four multifamily properties during the nine months ended September 30, 2016 compared to the acquisition of 17 multifamily properties during the nine months ended September 30, 2015.
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 period of operations for the four multifamily properties acquired during the nine months ended September 30, 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 the Public Offering and the decrease in anticipated future acquisitions of real estate and real estate-related investments.
Depreciation and amortization
Depreciation and amortization expenses were $49,915,893 for the nine months ended September 30, 2016 compared to $25,562,812 for the nine months ended September 30, 2015. The increase of $24,353,081 was primarily due to the net increase in depreciable and amortizable assets of $531,044,028 since September 30, 2015. We expect these amounts to increase slightly in future periods as a result of anticipated future enhancements to our real estate portfolio.
Interest expense
Interest expense for the nine months ended September 30, 2016 was $19,283,573 compared to $7,938,509 for the nine months ended September 30, 2015. The increase of $11,345,064 was primarily due to the increase in the notes payable balance (before deducting deferred financing fees and loan discount) of $289,860,339 since September 30, 2015 due to financing incurred in connection with the acquisition of seven multifamily properties since September 30, 2015. Included in interest expense is the amortization of deferred financing costs of $676,447 and $220,287, the unrealized loss on derivative instruments of $691,969 and $2,206,162 and credit facility commitment fees of $71,514 and $11,968 for the nine months ended September 30, 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 nine months ended September 30, 2016 were $3,406,931 compared to $2,018,031 for the nine months ended September 30, 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 $1,388,900 was primarily due to the acquisition of 10 multifamily properties since September 30, 2015 and the continuing operation of the properties owned as of September 30, 2015. We expect general and administrative expenses to decrease as a percentage of total revenues.
Acquisition costs
Acquisition costs for the nine months ended September 30, 2016 were $1,673,136 compared to $4,662,394 for the nine months ended September 30, 2015. The decrease of $2,989,258 was due primarily to the acquisition of four multifamily properties with an aggregate purchase price of $264,222,500 during the nine months ended September 30, 2016, compared to the acquisition of 17 multifamily properties with an aggregate purchase price of $657,945,000 during the nine months ended September 30, 2015. We expect acquisition costs to decrease in future periods as we expect to acquire fewer properties and real estate-related investments in future periods.

45

PART I — FINANCIAL INFORMATION (continued)


Property Operations for the Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 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 July 1, 2015. A “non-same-store” property is a property that was acquired, placed into service or disposed of after July 1, 2015. As of September 30, 2016, 18 properties were categorized as same-store properties.
The following table presents the same-store and non-same-store results from operations for the three months ended September 30, 2016 and 2015:
 
 
For the Three Months Ended September 30,
 
 
 
 
 
 
2016
 
2015
 
Change $
 
Change %
Same-store properties:
 
 
 
 
 
 
 
 
Revenues
 
$
19,400,743

 
$
18,293,821

 
$
1,106,922

 
6.1
%
Operating expenses
 
8,670,970

 
7,804,069

 
866,901

 
11.1
%
Net operating income
 
10,729,773

 
10,489,752

 
240,021

 
2.3
%
 
 
 
 
 
 
 
 
 
Non-same-store properties:
 
 
 
 
 
 
 
 
Net operating income
 
10,417,960

 
1,085,560

 
9,332,400

 
 
 
 
 
 
 
 
 
 
 
Total net operating income(1)
 
$
21,147,733

 
$
11,575,312

 
$
9,572,421

 
 
________________
(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 September 30, 2016 was $10,729,773 compared to $10,489,752 for the three months ended September 30, 2015. The 2.3% increase in same-store net operating income was due to a 6.1% increase in same-store rental revenues offset by a 11.1% increase in same-store operating expenses.
Revenues
Same-store revenues for the three months ended September 30, 2016 were $19,400,743 compared to $18,293,821 for the three months ended September 30, 2015. The 6.1% increase in same-store revenues was primarily due to average rent increases at the same-store properties from $939 as of September 30, 2015 to $999 as of September 30, 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 September 30, 2016 were $8,670,970 compared to $7,804,069 for the three months ended September 30, 2015. The increase in same-store operating expenses was primarily attributable to property tax increases at Preston Hills at Mill Creek, The Residences on McGinnis Ferry and Reveal on Cumberland for the three months ended September 30, 2016.
Net Operating Income
NOI is a non-GAAP financial measure of performance. NOI is used by investors and our management to evaluate and compare the performance of our properties, to 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

46

PART I — FINANCIAL INFORMATION (continued)


future. Acquisition costs and non-operating fees to affiliates are eliminated because they do not reflect continuing operating costs of the property owner.
Depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets are eliminated because they may not accurately represent the actual change in value in our multifamily properties that result from use of the properties or changes in market conditions. While certain aspects of real property do decline in value over time in a manner that is reasonably captured by depreciation and amortization, the value of the properties as a whole have historically increased or decreased as a result of changes in overall economic conditions instead of from actual use of the property or the passage of time. Gains and losses from the sale of real property vary from property to property and are affected by market conditions at the time of sale which will usually change from period to period. 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 and nine months ended September 30, 2016 and 2015 computed in accordance with GAAP:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net loss
 
$
(9,888,814
)
 
$
(14,219,859
)
 
$
(30,103,111
)
 
$
(33,183,194
)
Fees to affiliates(1)
 
6,040,842

 
6,980,787

 
15,222,014

 
15,794,220

Depreciation and amortization
 
16,633,722

 
12,493,027

 
49,915,893

 
25,562,812

Interest expense
 
6,547,052

 
4,086,542

 
19,283,573

 
7,938,509

General and administrative expenses
 
1,259,368

 
610,641

 
3,406,931

 
2,018,031

Acquisition costs
 
555,563

 
1,624,174

 
1,673,136

 
4,662,394

Other gains and losses(2)
 
—

 
—

 
(652,600
)
 
—

Net operating income
 
$
21,147,733

 
$
11,575,312

 
$
58,745,836

 
$
22,792,772

____________________
(1)
Fees to affiliates for the three and nine months ended September 30, 2016 exclude property management fees of $1,072,183 and $3,000,555 and other fees of $299,501 and $859,347, respectively, that are included in NOI. Fees to affiliates for the three and nine months ended September 30, 2015 exclude property management fees of $582,945 and $1,182,106 and other fees of $187,995 and $359,377, respectively, that are included in NOI.
(2)
Other gains and losses for the three and nine months ended September 30, 2016 include non-recurring insurance claim recoveries that are not included in NOI.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, as discussed below, The National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has promulgated a measure known as FFO, which we

47

PART I — FINANCIAL INFORMATION (continued)


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 (“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 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 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

48

PART I — FINANCIAL INFORMATION (continued)


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 (the “Practice Guideline”), issued by the 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 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

49

PART I — FINANCIAL INFORMATION (continued)


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 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 and nine months ended September 30, 2016 and 2015:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Reconciliation of net loss to MFFO:
 
 
 
 
 
 
 
 
Net loss
 
$
(9,888,814
)
 
$
(14,219,859
)
 
$
(30,103,111
)
 
$
(33,183,194
)
  Depreciation of real estate assets
 
14,334,454

 
6,786,834

 
39,002,300

 
13,534,142

  Amortization of lease-related costs
 
2,299,268

 
5,706,193

 
10,913,593

 
12,028,670

FFO
 
6,744,908

 
(1,726,832
)
 
19,812,782

 
(7,620,382
)
  Acquisition fees and expenses(1)(2)
 
2,692,413

 
6,539,429

 
5,978,845

 
16,258,286

  Unrealized loss on derivative instruments
 
73,518

 
1,038,080

 
691,969

 
2,206,162

MFFO
 
$
9,510,839

 
$
5,850,677

 
$
26,483,596

 
$
10,844,066

________________
(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 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.

50

PART I — FINANCIAL INFORMATION (continued)


(2)
Acquisition fees and expenses for the three and nine months ended September 30, 2016 include loan coordination fees of $889,500 and $1,539,500 and acquisition fees of $1,247,350 and $2,766,209, respectively, that are recorded in fees to affiliates in the accompanying consolidated statements of operations. Acquisition fees and expenses for the three and nine months ended September 30, 2016 also include acquisition expenses of $555,563 and $1,673,136, respectively, that are recorded in acquisition costs in the accompanying consolidated statements of operations. Acquisition fees and expenses for the three and nine months ended September 30, 2015 include acquisition fees of $2,561,266 and $6,891,098 respectively, and loan coordination fees of $2,353,989 and $4,704,794, respectively, that are recorded in fees to affiliates in the accompanying consolidated statements of operations. Acquisition fees and expenses for the three and nine months ended September 30, 2015 also include acquisition expenses of $1,624,174 and $4,662,394, 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 September 30, 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.
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. Quantitative and Qualitative Disclosures 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 September 30, 2016, the fair value of our fixed rate debt was $73,697,142 and the carrying value of our fixed rate debt was $67,769,550. 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 September 30, 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 September 30, 2016, the fair value of our variable rate debt was $876,204,333 and the

51

PART I — FINANCIAL INFORMATION (continued)


carrying value of our variable rate debt was $883,705,267. Based on interest rates as of September 30, 2016, if interest rates are 100 basis points higher during the 12 months ending September 30, 2017, interest expense on our variable rate debt would increase by $9,042,227 and if interest rates are 100 basis points lower during the 12 months ending September 30, 2017, interest expense on our variable rate debt would decrease by $4,802,417.
At September 30, 2016, the weighted-average interest rate of our fixed rate debt and variable rate debt was 4.51% and 2.60%, respectively. The weighted-average interest rate of our blended fixed and variable rates was 2.73% at September 30, 2016. The weighted-average interest rate represents the actual interest rate in effect at September 30, 2016 (consisting of the contractual interest rate), using interest rate indices as of September 30, 2016, where applicable.
We may 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 September 30, 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 September 30, 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.
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 Rules 13a-15(e) and Rule 15d-15(e) under the Securities 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 September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

52

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 September 30, 2016, we did not sell any equity securities that were not registered under 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 Public Offering. Our Public Offering terminated on March 24, 2016. Upon termination of our Public Offering, we had sold 48,625,651 shares of our common stock, including 1,011,561 shares issued pursuant to the DRP 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 DRP.
From inception through September 30, 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
 
$
67,518,641

 
Actual
 
9.50
%
Other organization and offering costs
 
17,361,375

 
Actual
 
2.44
%
Total expenses
 
$
84,880,016

 
Actual
 
11.95
%
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
 
11.95
%
 
Actual
 
11.95
%
From the commencement of our Public Offering through September 30, 2016, the net offering proceeds to us, after deducting the total expenses incurred as described above, were $651,557,298, including net offering proceeds from our DRP of $26,002,435. For the period from inception through September 30, 2016, the ratio of the cost of raising equity capital to the gross amount of equity capital raised was approximately 11.95%.
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 September 30, 2016, we had invested in 34 multifamily properties for a total purchase price of $1,499,381,750. These property acquisitions were funded from proceeds of our Public Offering and $890,965,019 in secured financings.

53

PART II — OTHER INFORMATION (continued)

During the three months ended September 30, 2016, we fulfilled repurchase requests and repurchased shares of our common stock pursuant to our share repurchase plan as follows:
 
 
Total Number of Shares Requested to be Repurchased(1)
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(2)
 
Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program
July 2016
 
22,751

 
64,483

 
$
13.84

 
(3) 
August 2016
 
10,736

 
—

 
—

 
(3) 
September 2016
 
15,171

 
—

 
—

 
(3) 
 
 
48,658

 
64,483

 
 
 
 
____________________
(1)
We generally repurchase shares approximately 30 days following the end of the applicable quarter in which requests were received. At September 30, 2016, we had $675,918, representing 48,658 shares of outstanding and unfulfilled repurchase requests, all of which were fulfilled on October 31, 2016.
(2)
Pursuant to the plan, as amended, we currently repurchase 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 repurchase price for repurchases sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” will initially be the amount paid to acquire the shares from us.
(3)
The number of shares that may be repurchased 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 DRP 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.

54

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)
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 Subscription Agreement (incorporated by reference to Appendix B to the prospectus, dated April 15, 2015, of the Registrant)
4.2

 
Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Exhibit 4.1 to Post-Effective Amendment No. 12 to Form S-11 on Form S-3, filed April 4, 2016, Commission File No. 333-191049
4.3

 
Form of Redemption Request Form (incorporated by reference to Appendix D to the prospectus, dated April 15, 2015, of the Registrant)
4.4

 
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 Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*

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

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

 
XBRL Instance Document.
101.SCH*

 
XBRL Taxonomy Extension Schema Document.
101.CAL*

 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB*

 
XBRL Taxonomy Extension Labels Linkbase Document.
101.PRE*

 
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF*

 
XBRL Taxonomy Extension Definition Linkbase Document.
_______________
*
 
Filed herewith.
**
 
In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.


55

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:
November 10, 2016
By:
/s/ Rodney F. Emery
 
 
 
Rodney F. Emery
 
 
 
Chief Executive Officer and Chairman of the Board
 
 
 
 
Date:
November 10, 2016
By:
/s/ Kevin J. Keating
 
 
 
Kevin J. Keating
 
 
 
Treasurer
 
 
 
(Principal Financial and Accounting Officer)



56

Steadfast Apartment REIT, Inc. Reports