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EX-32.3 - EX-32.3 - Inland Residential Properties Trust, Inc.ck0001595627-ex323_7.htm
EX-32.2 - EX-32.2 - Inland Residential Properties Trust, Inc.ck0001595627-ex322_10.htm
EX-32.1 - EX-32.1 - Inland Residential Properties Trust, Inc.ck0001595627-ex321_9.htm
EX-31.3 - EX-31.3 - Inland Residential Properties Trust, Inc.ck0001595627-ex313_6.htm
EX-31.2 - EX-31.2 - Inland Residential Properties Trust, Inc.ck0001595627-ex312_11.htm
EX-31.1 - EX-31.1 - Inland Residential Properties Trust, Inc.ck0001595627-ex311_8.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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: 000-55765

 

Inland Residential Properties Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

80-0966998

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

2901 Butterfield Road, Oak Brook, Illinois

 

60523

(Address of principal executive offices)

 

(Zip Code)

630-218-8000

(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 the filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of May 1, 2017, there were 1,272,194 shares of the registrant’s Class A common stock, 361,849 shares of Class T common stock and 10,784 shares of Class T-3 common stock outstanding.

 

 

 


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I - Financial Information

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016

 

3

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)

 

4

 

 

 

 

 

 

 

Consolidated Statement of Equity for the three months ended March 31, 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)

 

6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

19

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

20

 

 

 

 

 

Part II - Other Information

Item 1.

 

Legal Proceedings

 

21

 

 

 

 

 

Item 1A.

 

Risk Factors

 

21

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

23

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

23

 

 

 

 

 

Item 5.

 

Other Information

 

23

 

 

 

 

 

Item 6.

 

Exhibits

 

23

 

 

 

 

 

Signatures

 

24

 

2


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

2017

(unaudited)

 

 

December 31,

2016

 

ASSETS

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

Land

 

$

6,301,838

 

 

$

6,301,838

 

Building and other improvements

 

 

38,891,395

 

 

 

38,889,177

 

Total real estate

 

 

45,193,233

 

 

 

45,191,015

 

Less: accumulated depreciation

 

 

(2,189,758

)

 

 

(1,822,971

)

Net real estate

 

 

43,003,475

 

 

 

43,368,044

 

Cash and cash equivalents

 

 

12,784,076

 

 

 

9,038,642

 

Accounts and rent receivable

 

 

36,291

 

 

 

17,961

 

Other assets

 

 

376,435

 

 

 

458,316

 

Total assets

 

$

56,200,277

 

 

$

52,882,963

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgages payable, net

 

$

27,447,557

 

 

$

27,447,459

 

Accounts payable and accrued expenses

 

 

379,517

 

 

 

232,736

 

Distributions payable

 

 

157,510

 

 

 

137,207

 

Due to related parties

 

 

5,893,494

 

 

 

5,684,753

 

Other liabilities

 

 

51,253

 

 

 

67,287

 

Total liabilities

 

 

33,929,331

 

 

 

33,569,442

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 50,000,000 shares authorized, none outstanding

 

 

 

 

 

 

Class A common stock, $.001 par value, 320,000,000 shares authorized, 1,232,058 shares and 1,098,858 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

1,232

 

 

 

1,099

 

Class T common stock, $.001 par value, 40,000,000 shares authorized, 336,235 shares and 284,283 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

 

336

 

 

 

284

 

Class T-3 common stock, $.001 par value, 40,000,000 shares authorized, 4,971 shares and none issued and outstanding as of March 31, 2017 as of December 31, 2016, respectively

 

 

5

 

 

 

 

Additional paid in capital (net of offering costs of $9,058,854 and $8,268,768 as of March 31, 2017 and December 31, 2016, respectively)

 

 

29,387,550

 

 

 

25,539,970

 

Distributions and accumulated losses

 

 

(7,118,177

)

 

 

(6,227,832

)

Total stockholders’ equity

 

 

22,270,946

 

 

 

19,313,521

 

Total liabilities and stockholders’ equity

 

$

56,200,277

 

 

$

52,882,963

 

 

See accompanying notes to consolidated financial statements.

 

 

3


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Income:

 

 

 

 

 

 

 

 

Rental income

 

$

903,512

 

 

$

843,236

 

Other property income

 

 

116,243

 

 

 

88,011

 

Total income

 

 

1,019,755

 

 

 

931,247

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Property operating expenses

 

 

263,910

 

 

 

287,733

 

Real estate tax expense

 

 

89,943

 

 

 

87,025

 

General and administrative expenses

 

 

303,854

 

 

 

280,511

 

Business management fee

 

 

68,692

 

 

 

68,591

 

Acquisition related costs

 

 

41,213

 

 

 

 

Depreciation and amortization

 

 

369,396

 

 

 

622,359

 

Total expenses

 

 

1,137,008

 

 

 

1,346,219

 

 

 

 

 

 

 

 

 

 

Operating loss

 

 

(117,253

)

 

 

(414,972

)

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(252,251

)

 

 

(427,027

)

Interest and other income

 

 

10,398

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(359,106

)

 

$

(841,999

)

 

 

 

 

 

 

 

 

 

Net loss per common share, basic and diluted

 

$

(0.24

)

 

$

(1.98

)

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

   and diluted

 

 

1,492,485

 

 

 

425,942

 

 

See accompanying notes to consolidated financial statements.

 

 

4


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENT OF EQUITY

(unaudited)

 

 

 

Common Stock

 

 

Additional

 

 

Distributions

and

 

 

 

 

 

 

 

Class A

 

 

Class T

 

 

Class T-3

 

 

Paid-In

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Losses

 

 

Total

 

Balance at December 31, 2016

 

 

1,098,858

 

 

$

1,099

 

 

 

284,283

 

 

$

284

 

 

 

 

 

$

 

 

$

25,539,970

 

 

$

(6,227,832

)

 

$

19,313,521

 

Proceeds from the offering

 

 

122,948

 

 

 

123

 

 

 

49,209

 

 

 

49

 

 

 

4,971

 

 

 

5

 

 

 

4,302,461

 

 

 

 

 

 

4,302,638

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(790,086

)

 

 

 

 

 

(790,086

)

Discount on shares to related parties

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,556

 

 

 

 

 

 

23,556

 

Issuance of shares from distribution reinvestment plan

 

 

7,348

 

 

 

7

 

 

 

1,961

 

 

 

2

 

 

 

 

 

 

 

 

 

219,266

 

 

 

 

 

 

219,275

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(441,213

)

 

 

(441,213

)

Stock dividends issued

 

 

2,867

 

 

 

3

 

 

 

782

 

 

 

1

 

 

 

 

 

 

 

 

 

90,022

 

 

 

(90,026

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(359,106

)

 

 

(359,106

)

Equity based compensation

 

 

37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,361

 

 

 

 

 

 

2,361

 

Balance at March 31, 2017

 

 

1,232,058

 

 

$

1,232

 

 

 

336,235

 

 

$

336

 

 

 

4,971

 

 

$

5

 

 

$

29,387,550

 

 

$

(7,118,177

)

 

$

22,270,946

 

 

See accompanying notes to consolidated financial statements.

 

 

5


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(359,106

)

 

$

(841,999

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

369,396

 

 

 

622,359

 

Amortization of debt issuance costs

 

 

98

 

 

 

34,233

 

Amortization of equity based compensation

 

 

2,361

 

 

 

2,760

 

Discount on shares issued to related parties

 

 

23,556

 

 

 

14,530

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

14,726

 

 

 

(41,009

)

Accounts and rents receivable

 

 

(18,330

)

 

 

10,339

 

Due to related parties

 

 

131,053

 

 

 

129,619

 

Other liabilities

 

 

(16,034

)

 

 

(24,385

)

Other assets

 

 

81,881

 

 

 

107,524

 

Net cash flows provided by operating activities

 

 

229,601

 

 

 

13,971

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(4,828

)

 

 

 

Net cash flows used in investing activities

 

 

(4,828

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payment of mortgage payable

 

 

 

 

 

(10,363,817

)

Proceeds from offering

 

 

4,302,638

 

 

 

6,341,248

 

Payment of debt issuance costs

 

 

 

 

 

(329

)

Distributions paid

 

 

(201,635

)

 

 

(70,304

)

Payment of offering costs

 

 

(580,342

)

 

 

(845,895

)

Net cash flows provided (used in) by financing activities

 

 

3,520,661

 

 

 

(4,939,097

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

$

3,745,434

 

 

$

(4,925,126

)

Cash and cash equivalents, at beginning of the period

 

 

9,038,642

 

 

 

5,281,172

 

Cash and cash equivalents, at end of period

 

$

12,784,076

 

 

$

356,046

 

 

 

See accompanying notes to consolidated financial statements.

 

6


 

INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

249,796

 

 

$

398,732

 

 

 

 

 

 

 

 

 

 

Distributions payable

 

$

157,510

 

 

$

54,282

 

 

 

 

 

 

 

 

 

 

Accrued offering costs payable

 

$

751,467

 

 

$

309,304

 

 

 

 

 

 

 

 

 

 

Stock dividends issued

 

$

90,026

 

 

$

23,600

 

 

 

 

 

 

 

 

 

 

Common stock issued through distribution reinvestment plan

 

$

219,275

 

 

$

30,427

 

 

See accompanying notes to consolidated financial statements.

 

 

 

7


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2017

(unaudited)

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland Residential Properties Trust, Inc. (which may be referred to herein as the “Company,” “we,” “us,” or “our”) for the year ended December 31, 2016, which are included in the Company’s 2016 Annual Report as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for the fair presentation have been included in this Quarterly Report.

NOTE 1 - ORGANIZATION

The Company was formed on December 19, 2013 to acquire and manage a portfolio of multi-family properties located primarily in the top 100 United States metropolitan statistical areas, which generally contain populations greater than 500,000 people. The Company entered into a business management agreement (as amended, the “Business Management Agreement”) with Inland Residential Business Manager & Advisor, Inc. (the “Business Manager”), an indirect wholly owned subsidiary of Inland Real Estate Investment Corporation (the “Sponsor”), to be the Business Manager to the Company. Substantially all of the Company’s business is conducted through Inland Residential Operating Partnership, L.P. (the “operating partnership”), of which the Company is the sole general partner. The Company elected to be taxed as a real estate investment trust for U.S. federal income tax purposes (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with the tax year ended December 31, 2015.

At March 31, 2017, the Company owned one 194,732 square foot 206 unit multi-family community. During the three months ended March 31, 2017, the property’s daily average occupancy was 96.1% and at March 31, 2017, 200, or 97.1% residential units were leased.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Disclosures discussing all significant accounting policies are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 17, 2017, under the heading “Note 2 - Summary of Significant Accounting Policies.” There has been no change to the Company’s significant accounting policies during the three months ended March 31, 2017. 

General

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 

 

Recent Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new update will require that amounts described as restricted cash and restricted cash equivalents be included in beginning and ending-of-period reconciliation of cash shown on the statement of cash flows. The amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not believe that ASU No. 2016-18 will have a material impact on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ASU No. 2016-02 supersedes the previous leases standard, Leases (Topic 840). The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest

8


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

comparative period presented in the financial statements, with certain practical expedients available. The Company continues to analyze the effect of implementing this guidance, developing an inventory of all leases and identifying any non-lease components in its lease arrangements. The Company is evaluating the impact of implementing the new standard on its consolidated financial statements both from the perspective of lessee and lessor.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, although it will not affect the accounting for rental related revenues. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted but not prior to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company continues to analyze the effect of implementing this guidance, including identifying each of the revenue streams and evaluating potential process changes necessary to meet the standard’s reporting and disclosure requirements. The Company intends to implement the standard retrospectively with the cumulative effect (if any) recognized in retained earnings at the date of initial application.

 

NOTE 3 – EQUITY

 

The Company is authorized to sell up to $1,000,000,000 of shares of common stock consisting of Class A common stock, $.001 par value per share (“Class A Shares”), at a price of $25.00 per share, Class T common stock, $.001 par value per share (“Class T Shares”), at a price of $23.95 per share, and Class T-3 common stock, $.001 par value per share (“Class T-3 Shares” and, together with the Class A Shares and the Class T Shares, the “Shares”), at a price of $24.14 per share, in any combination, in an initial “reasonable best efforts” offering (the “Offering”). The Company is also authorized to issue up to $190,000,000 of Class A, Class T and Class T-3 Shares at a per share price of $23.75, $22.81 and $22.81, respectively, pursuant to the Company’s distribution reinvestment plan (as amended, the “DRP”).  The Company commenced its Offering of Class A Shares and Class T Shares on February 17, 2015 and, effective February 2, 2017, the Company reallocated certain of the remaining shares offered in the Offering to offer Class T-3 Shares.  

 

Excluding DRP proceeds, the Company generated gross proceeds of $3,004,088, $1,178,550 and $120,000 from sales of its Class A Shares, Class T Shares and Class T-3 Shares, respectively, during the three months ended March 31, 2017. As of March 31, 2017, the Company had 1,232,058, 336,235 and 4,971 Class A Shares,  Class T Shares and Class T-3 Shares outstanding, respectively.

 

For the three months ended March 31, 2017, the Company declared cash distributions of $441,213, paid cash distributions of $420,910 and issued stock dividends of 3,649 shares to stockholders.

9


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The Company provides the following programs to facilitate additional investment in the Company’s shares and to provide limited liquidity for stockholders.

 

Distribution Reinvestment Plan

 

The Company provides stockholders with the option to purchase additional shares from the Company by automatically reinvesting cash distributions through the DRP, subject to certain share ownership restrictions. For participants in the DRP, cash distributions paid on Class A Shares, Class T Shares and Class T-3 Shares, as applicable, are used to purchase Class A Shares, Class T Shares and Class T-3 Shares, respectively. Such purchases under the DRP are not subject to selling commissions, dealer manager fees, distribution and stockholder servicing fees or reimbursement of issuer costs in connection with shares of common stock issued through the DRP and are made initially at a price of $23.75, $22.81 and $22.81 per Class A Share, Class T Share and Class T-3
Share, respectively. The price is subject to change after the earlier of (1) the change of the public offering price in a public “reasonable best efforts” offering of the Company’s Class A Shares from $25.00 per Class A Share, Class T Shares from $23.95 per Class T Share or Class T-3 Shares from $24.14 per Class T-3 Share, as applicable, if there is a change, and (2) termination of all “reasonable best efforts” public offerings of the Company’s Class A Shares, Class T Shares or Class T-3 Shares, as applicable.

 

Distributions reinvested through the DRP were $219,275 and $30,427 for the three months ended March 31, 2017 and 2016, respectively.

 

Share Repurchase Program

 

Under the share repurchase program (as amended, the “SRP”), the Company is authorized, in its discretion, to purchase shares from stockholders who purchased their shares from the Company or received their shares through a non-cash transfer and who have held their shares for at least one year, if requested. Subject to funds being available, the Company limits the number of shares repurchased during any calendar year to no more than 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year. Funding for the SRP is limited to the proceeds that the Company receives from the DRP during the same period. In the case of repurchases made upon the death of a stockholder or qualifying disability, as defined in the SRP, neither the one year holding period, the limit regarding funds available from the DRP nor the 5% limit applies. The SRP will immediately terminate if the Company’s shares become listed for trading on a national securities exchange. In addition, the Company’s board of directors, in its sole direction, may, at any time, amend, suspend or terminate the SRP.

 

There were no repurchases through the SRP for the three months ended March 31, 2017 and 2016.

 

NOTE 4 - ACQUISITIONS

2017 Acquisitions

 

During the three months ended March 31, 2017, the Company did not acquire any real estate properties.

 

 

NOTE 5 – MORTGAGES PAYABLE

 

As of March 31, 2017, the Company’s mortgage loan is secured by a first mortgage on the property. Effective September 30, 2016, the Company exercised its option to extend the maturity date for an additional seven year period to September 30, 2023.  The loan requires monthly payments of interest only for five years and thereafter, requires monthly payments of principal and interest based upon a 30-year amortization until maturity. The interest rate on the loan was modified which lowered the fixed interest rate from 3.95% to 3.64% per annum effective September 30, 2016. The loan modification released the Sponsor, and substituted the Company as the guarantor.  As the substitute guarantor, the Company agreed to guarantee the payment of (a) all real estate taxes on the property which accrue or become due during the term of the loan, (b) all costs and expenses (as defined in the guaranty agreement) and (c) any and all losses, damages, costs or expenses of the lender, which arise in consequence of certain events specified in the guaranty agreement.

 

The Company is in compliance with all financial covenants related to its mortgage payable.

10


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

As of March 31, 2017 and December 31, 2016, the Company had the following mortgage payable:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Mortgages

 

Principal

Amount

 

 

Interest

Rate

 

 

Principal

Amount

 

 

Interest

Rate

 

Mortgage payable

 

$

27,450,000

 

 

 

3.64

%

 

$

27,450,000

 

 

 

3.64

%

Unamortized debt issuance costs

 

 

(2,443

)

 

 

 

 

 

 

(2,541

)

 

 

 

 

Total debt

 

$

27,447,557

 

 

 

 

 

 

$

27,447,459

 

 

 

 

 

 

NOTE 6 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus common share equivalents. The Company excludes antidilutive restricted shares from the calculation of weighted-average shares for diluted EPS.  As a result of a net loss for the three months ended March 31, 2017 and 2016, 371 and 207 shares, respectively, were excluded from the computation of diluted EPS, because they would have been antidilutive.

 

NOTE 7 – EQUITY-BASED COMPENSATION

In accordance with the Company’s Employee and Director Incentive Restricted Share Plan (the “RSP”), restricted shares are issued to non-employee directors as compensation.

 

Under the RSP, restricted shares generally vest over a one to three year vesting period from the date of the grant based on the specific terms of the grant.  The grant-date value of the restricted shares is amortized over the vesting period representing the requisite service period. At vesting, any restrictions on the shares lapse. The number of shares that may be issued under the RSP are limited to 5% of outstanding shares. Compensation expense associated with the director restricted shares was $2,361 and $2,760 for the three months ended March 31, 2017 and 2016, respectively, and is included in general and administrative expenses in the accompanying consolidated financial statements. As of March 31, 2017, the Company had $7,894 of unrecognized compensation cost related to the unvested restricted share awards. The weighted average remaining period that compensation expense related to unvested restricted shares will be recognized is 1.41 years. A summary of the status of the restricted shares is presented below:

 

 

 

Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate

Intrinsic

Value

 

Outstanding at December 31, 2016

 

 

804

 

 

$

18,334

 

 

$

18,334

 

Granted

 

 

 

 

 

 

 

 

 

Vested

 

 

(37

)

 

 

(833

)

 

 

(833

)

Forfeited

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2017

 

 

767

 

 

$

17,501

 

 

$

17,501

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 8 – SEGMENT REPORTING

The Company has one reportable segment, multi-family real estate, as defined by U.S. GAAP for the three months ended March 31, 2017 and 2016.

 

 

11


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

NOTE 9 – TRANSACTIONS WITH RELATED PARTIES

The following table summarizes the Company’s related party transactions for the three months ended March 31, 2017 and 2016.

 

 

 

 

Three Months Ended

March 31,

 

 

Amount Unpaid as of

 

 

 

 

 

2017

 

 

2016

 

 

March 31, 2017

 

 

December 31, 2016

 

General and administrative reimbursements

 

(a)

 

$

90,307

 

 

$

91,463

 

 

$

109,373

 

 

$

80,386

 

Affiliate share purchase discounts

 

(b)

 

 

23,556

 

 

 

14,530

 

 

 

 

 

 

 

Total general and administrative costs

 

 

 

$

113,863

 

 

$

105,993

 

 

$

109,373

 

 

$

80,386

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition related costs

 

(c)

 

$

34,858

 

 

$

 

 

$

712,821

 

 

$

686,250

 

Offering costs

 

(d)

 

$

398,029

 

 

$

549,807

 

 

$

1,554,433

 

 

$

1,476,746

 

Business management fee

 

(e)

 

$

68,692

 

 

$

68,591

 

 

$

434,687

 

 

$

365,995

 

Mortgage financing fee

 

(f)

 

$

 

 

$

 

 

$

114,375

 

 

$

114,375

 

Sponsor non-interest bearing advances

 

(g)

 

$

 

 

$

 

 

$

2,950,000

 

 

$

2,950,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property management fee

 

 

 

$

39,145

 

 

$

37,131

 

 

$

 

 

$

 

Property operating expenses

 

 

 

 

93,420

 

 

 

72,706

 

 

 

17,805

 

 

 

11,001

 

Total property operating expenses

 

(h)

 

$

132,565

 

 

$

109,837

 

 

$

17,805

 

 

$

11,001

 

 

(a)

The Business Manager and its affiliates are entitled to reimbursement for certain general and administrative expenses incurred relating to the Company’s administration. Such costs are included in general and administrative expenses in the accompanying consolidated statements of operations. Unpaid amounts are included in due to related parties in the accompanying consolidated balance sheets.

 

(b)

The Company established a discount stock purchase policy for affiliates and affiliates of the Business Manager that enable them to purchase shares of common stock at $22.81 per share. The Company sold 10,756 shares and 6,635 shares to affiliates during the three months ended March 31, 2017 and 2016, respectively.

(c)

Prior to August 8, 2016 under the Business Management Agreement, the Company was required to pay the Business Manager or its affiliates an acquisition fee equal to 1.5% of the “contract purchase price,” as defined in that agreement, of each property and real estate-related asset acquired.   The Business Management Agreement was amended to, among other things, delete the obligation to pay acquisition fees, real estate sales commissions and mortgage financing fees payable to the Business Manager by the Company with respect to transactions occurring on or after August 8, 2016. The Business Manager and its affiliates continue to be reimbursed for acquisition related costs of the Business Manager and its affiliates relating to the Company’s acquisition of properties and real estate assets, regardless of whether the Company acquires the properties or real estate assets, subject to the limits provided in the amended agreement.  Of the $34,858 of total acquisition costs and fees, $16,887 are capitalized and classified in other assets in the accompanying consolidated balance sheets and $17,971 of such costs are included in acquisition related costs in the accompanying consolidated statements of operations.  Acquisition fees earned prior to August 8, 2016, which have been previously accrued for and are owed to the Business Manager, are expected to be paid in the future and are included in due to related parties in the accompanying consolidated balance sheets.  

 

(d)

The Company reimburses the Sponsor and its affiliates for costs and other expenses of the Offering.  Offering costs are offset against the stockholders’ equity accounts. Unpaid amounts are included in due to related parties in the accompanying consolidated balance sheets. An affiliate of the Business Manager also receives selling commissions equal to 6.0% of the sale price for each Class A Share sold,  2.0% of the sale price for each Class T Share sold and 3.0% of the sale price for each Class T-3 Share sold and a dealer manager fee equal to 2.75% of the sale price for each Class A and Class T Share sold and 2.5% of the sale price for each Class T-3 Share sold, the majority of which is re-allowed (paid) to third party soliciting dealers. The Company does not pay selling commissions or the dealer manager fee in connection with shares issued through the DRP and pays no or reduced selling commissions and dealer manager fees in connection with certain special sales. Unpaid amounts are included in due to related parties in the accompanying consolidated balance sheets. The Company pays a distribution and stockholder servicing fee equal to 1.0% per annum of the purchase price per share (or, once reported, the amount of the Company’s estimated value per share) for each Class T Share and Class T-3 Share sold in the Offering. The fee is not paid at the

12


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

time of purchase. The Company accounts for the total fee as a charge to equity at the time each Class T Share or Class T-3 Share is sold in the Offering and records a corresponding payable in due to related parties. The distribution and stockholder servicing fee is payable monthly in arrears as it becomes contractually due. At March 31, 2017 and December 31, 2016, the unpaid fee equal to $384,233 and $335,327, respectively, was recorded in due to related parties in the accompanying consolidated balance sheets.

 

(e)

The Company pays the Business Manager an annual business management fee equal to 0.6% of its “average invested assets,” payable quarterly in an amount equal to 0.15% of the Company’s average invested assets as of the last day of the immediately preceding quarter. “Average invested assets” means, for any period, the average of the aggregate book value of the Company’s assets, including all intangibles and goodwill, invested, directly or indirectly, in equity interests in, and loans secured by, properties, as well as amounts invested in securities or consolidated and unconsolidated joint ventures or other partnerships, before reserves for amortization and depreciation or bad debts, impairments or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the relevant calendar quarter. Unpaid amounts are included in due to related parties in the accompanying consolidated balance sheets.

 

(f)

Prior to August 8, 2016 under the Business Management Agreement, the Company was required to pay the Business Manager or its affiliates a mortgage financing fee equal to 0.25% of the amount available or borrowed under the financing or the assumed debt if the Business Manager or its affiliates provided services in connection with the origination or refinancing of any debt that the Company obtained and used to finance properties or other assets, or that was assumed, directly or indirectly, in connection with the acquisition of properties or other assets. Pursuant to the amended Business Management Agreement, mortgage financing fees were eliminated with respect to transactions occurring on or after August 8, 2016. Mortgage financing fees earned prior to August 8, 2016, which have been previously accrued for and are owed to the Business Manager, are expected to be paid in the future and are included in due to related parties in the accompanying consolidated balance sheets.

 

(g)

This amount represents non-interest bearing advances made by the Sponsor which the Company intends to repay. Unpaid amounts are included in due to related parties in the accompanying consolidated balance sheets.   

 

(h)

The Company pays Inland Residential Real Estate Services, LLC (the “Real Estate Manager”) a monthly property management fee of up to 4% of the gross income from any property managed directly by the Real Estate Manager or its affiliates. The Real Estate Manager may reduce, in its sole discretion, the amount of the management fee payable in connection with a particular property, subject to these limits. The Company also reimburses the Real Estate Manager and its affiliates for property-level expenses that they pay or incur on the Company’s behalf, including the salaries, bonuses, benefits and severance payments for persons performing services, including without limitation acquisition due diligence services, for the Real Estate Manager and its affiliates (excluding the executive officers of the Real Estate Manager and the Company’s executive officers).

 

NOTE 10 – SUBSEQUENT EVENTS

Cash distributions

 

The Company’s board of directors declared cash distributions payable to stockholders of record of Class A, Class T and Class T-3 Shares each day beginning on the close of business April 1, 2017 through the close of business September 30, 2017.  Through that date distributions were declared in a daily amount equal to $0.003424658 per day per Class A Share, $0.002768493 per day per Class T Share and $0.003306849 per day per Class T-3 Share, based on a 365-day period. Distributions were paid monthly in arrears as follows.

 

Distribution Month

 

Month

Distribution Paid

 

Gross Amount

of Distribution

Paid

 

 

Distribution Reinvested

through DRP

 

 

Shares

Issued

 

 

Net Cash Distribution

 

March 2017

 

April 2017

 

$

157,648

 

 

$

83,025

 

 

 

3,526

 

 

$

74,623

 

April 2017

 

May 2017

 

$

158,091

 

 

$

84,132

 

 

 

3,574

 

 

$

73,959

 

 

13


INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Stock dividends

The Company’s board of directors declared a monthly stock dividend of 0.000833333 Class A Shares and 0.000833333 Class T Shares per Class A Share and Class T Share owned, respectively, payable to stockholders of record at the close of business on March 31, 2017. The Company’s board of directors also declared a special stock dividend of 0.01 Class A Shares, 0.01 Class T Shares and 0.01 Class T-3 Shares per Class A Share, Class T Share and Class T-3 Share owned, respectively, payable to stockholders of record at the close of business on May 31, 2017. Stock dividends were issued as follows:

 

Dividend Month

 

Month

Dividend Issued

 

Shares

Issued

 

March 2017

 

April 2017

 

 

1,308

 

 

 

 

 

 

 

 

 Acquisitions

The company purchased the following property from an unaffiliated third party subsequent to March 31, 2017:

Date

Acquired

 

Property Name

 

Location

 

Square

Footage

 

 

Purchase

Price

 

5/3/2017

 

Commons at Town Center

 

Vernon Hills, IL

 

 

116,051

 

 

$

23,000,000

 

Financing

Date

 

Property

 

Interest Rate (stated)

 

 

Principal

Amount

 

 

Maturity

Date

5/3/2017

 

Commons at Town Center

 

3.69% years 1-5

4.00% years 6-7

 

 

$

13,800,000

 

 

5/3/2024

5/3/2017

 

Commons at Town Center

 

 

5.40%

 

 

$

9,200,000

 

 

1/3/2018

 

 

 

 

 

 

 

 

 

 

 

14


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q constitute “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”). Words such as “may,” “could,” “should,” “expect,” “intend,” “plan,” “goal,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “variables,” “potential,” “continue,” “expand,” “maintain,” “create,” “strategies,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of the management of Inland Residential Properties Trust, Inc. (which we refer to herein as the “Company,” “we,” “our” or “us”) based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission on March 17, 2017, and factors described below:

 

There is no established public trading market for our shares, and our stockholders may not be able to sell their shares under our share repurchase program (as amended, the “SRP”) and, if our stockholders are able to sell their shares under the SRP, they may not be able to recover the amount of their investment in our shares;

 

Our board does not have any current plans to list our shares or pursue any other liquidity event, and we cannot guarantee that a liquidity event will occur;

 

To date, we have not generated sufficient cash flow from operations to pay distributions, and, therefore, we have paid, and may continue to pay, distributions from the net proceeds of our “reasonable best efforts” offering (the “Offering”) and distribution reinvestment plan (as amended, the “DRP”), which reduces the amount of cash we ultimately have to invest in assets, negatively impacting the value of our stockholders’ investment and is dilutive to our stockholders;

 

If we fail to raise sufficient funds through our Offering, then we will be unable to build a large diversified portfolio of properties and the poor performance of a single investment could materially adversely affect our overall investment performance;

 

We have incurred net losses on a U.S. GAAP basis for the three months ended March 31, 2017 and 2016 and for the year ended December 31, 2016;

 

Our charter generally limits the total amount we may borrow to 300% of our net assets, equivalent to 75% of the costs of our assets;

 

The interest of later investors in our common stock will be diluted as a result of our payment of stock dividends that have been declared and will be further diluted if we make additional stock dividends;

 

We may not be able to raise capital sufficient to achieve our investment objectives;

 

We have a limited operating history and the prior performance of programs sponsored by Inland Real Estate Investment Corporation (our “Sponsor”) should not be used to predict our future results;

 

Market disruptions may adversely impact many aspects of our operating results and operating condition;

 

The number and value of real estate assets we acquire will depend, in part, on the net proceeds raised in our Offering;

 

We do not have employees and will rely on Inland Residential Business Manager & Advisor, Inc. or our “Business Manager” and Inland Residential Real Estate Services, LLC or our “Real Estate Manager” to manage our business and assets;

 

Persons performing services for our Business Manager and our Real Estate Manager are employed by our Sponsor or its affiliates and face competing demands for their time and service;

 

We do not have arm’s-length agreements with our Business Manager, Real Estate Manager or other affiliates of our Sponsor;

 

Our Sponsor may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager and our Real Estate Manager;

 

We may suffer from delays in selecting, acquiring and developing suitable assets;

 

We rely on entities affiliated with our Sponsor to identify real estate assets;

15


 

 

We pay fees, which may be significant, to our Business Manager, Real Estate Manager and other affiliates of our Sponsor;

 

We have not identified all of the specific real estate assets that we will acquire with the net proceeds raised in our Offering, thus it is a “blind pool” offering;

 

Any properties that we acquire and own may compete with the properties owned by other programs sponsored by our Sponsor or Inland Private Capital Corporation for, among other things, tenants;

 

There are limits on the ownership and transferability of our shares; and

 

If we fail to continue to qualify as a REIT, our operations and distributions to stockholders will be adversely affected.

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Quarterly Report, and may ultimately prove to be incorrect or false. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

The following discussion and analysis relates to the three months ended March 31, 2017 and 2016, respectively and as of March 31, 2017 and December 31, 2016, respectively. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.

Overview

We are an externally managed Maryland corporation formed in December 2013 to acquire and manage a portfolio of multi-family properties located primarily in the top 100 United States metropolitan statistical areas, which generally contain populations greater than 500,000 people. We expect that our real estate portfolio will consist primarily of “stabilized” Class A and Class B multi-family properties. We are managed by our Business Manager. Substantially all of our business is conducted through Inland Residential Operating Partnership, L.P. (the “operating partnership”), of which we are the sole general partner.  We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable year ended December 31, 2015.

We are authorized to sell up to $1,000,000,000 of shares of common stock which consist of Class A Shares, at a price of $25.00 per share, Class T Shares, at a price of $23.95 per share, and Class T-3 Shares, at a price of $24.14 per share, in any combination, on a “reasonable best efforts” basis. We are also authorized to issue up to $190,000,000 of Class A, Class T and Class T-3 Shares at a per share price of $23.75, $22.81 and $22.81, respectively, pursuant to our DRP. We commenced our Offering of Class A Shares and Class T Shares on February 17, 2015 and, effective February 2, 2017, we reallocated certain of the remaining shares being offered in our Offering to offer Class T-3 Shares.

Company Highlights - Three Months Ended March 31, 2017

Property Performance

Community

Location

 

Total

Number of Units

 

 

Average Rental Rate per Unit (a)

 

 

2017 Average Occupancy

 

 

Units leased (b)

 

The Retreat at Market Square

Frederick, MD

 

 

206

 

 

$

1,553

 

 

 

96.1%

 

 

 

97.1%

 

 

(a)

Average rental rate per unit is for the last month of the period presented.

 

(b)

Percent of units leased at March 31, 2017.

During the three months ended March 31, 2017, the number of units leased increased from 197 to 200 or 97.1% from December 31, 2016. 

Capital

Excluding DRP proceeds, we generated gross proceeds of approximately $3.0 million, $1.2 million and $0.1 million from sales of our Class A Shares, Class T Shares and Class T-3 Shares, respectively, during the three months ended March 31, 2017.

16


 

Liquidity and Capital Resources

General

Our primary uses and sources of cash are as follows:

Uses

 

Sources

Short-term liquidity and capital needs such as:

 

Cash receipts from our tenants

Interest on mortgage loan

 

Proceeds from the Offering including the DRP

Property operating expenses

 

Proceeds from our mortgage loans

General and administrative expenses

 

 

 

Distributions to stockholders

 

 

 

 

 

 

Non-transaction based fees payable to our Business

Manager and Real Estate Manager

 

 

 

 

 

 

Payment of offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term liquidity and capital needs such as:

 

 

 

 

 

 

Acquisition of real estate investments

 

 

 

 

 

 

Interest & principal payments on mortgage loan

 

 

 

 

 

 

Payment of offering costs

 

 

 

 

 

 

Capital expenditures

 

 

 

 

 

 

Cash Flow Analysis

 

 

 

Three Months Ended

March 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

2017 vs. 2016

 

Net cash flows provided by operating activities

 

$

229,601

 

 

$

13,971

 

 

$

215,630

 

Net cash flows used in investing activities

 

$

(4,828

)

 

$

 

 

$

(4,828