Steadfast Apartment REIT, Inc. - FORM 10-Q - May 10, 2018

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EX-31.1 - EXHIBIT 31.1 - Steadfast Apartment REIT, Inc.ex311-star3312018.htm
EX-32.2 - EXHIBIT 32.2 - Steadfast Apartment REIT, Inc.ex322-star3312018.htm
EX-32.1 - EXHIBIT 32.1 - Steadfast Apartment REIT, Inc.ex321-star3312018.htm
EX-31.2 - EXHIBIT 31.2 - Steadfast Apartment REIT, Inc.ex312-star3312018.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
 
 
þ     
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2018
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, a 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. (Check one):
 
 
Large Accelerated filer o
Accelerated filer o
 
 
Non-Accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
Emerging growth company þ
 
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 pursuant to Section 3(a) of the Exchange Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of May 4, 2018, there were 51,135,201 shares of the Registrant’s common stock issued and outstanding.
 


STEADFAST APARTMENT REIT, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements



STEADFAST APARTMENT REIT, INC.

CONSOLIDATED BALANCE SHEETS

 
March 31, 2018
 
December 31, 2017
 
(Unaudited)
 
 
ASSETS
Assets:
 
 
 

Real Estate:
 
 
 
Land
$
164,113,072

 
$
164,113,072

Building and improvements
1,397,981,828

 
1,394,779,659

Total real estate, cost
1,562,094,900

 
1,558,892,731

Less accumulated depreciation and amortization
(165,150,626
)
 
(147,726,630
)
Total real estate, net
1,396,944,274

 
1,411,166,101

Cash and cash equivalents
24,202,447

 
27,298,855

Restricted cash
9,587,654

 
11,368,850

Rents and other receivables
2,485,440

 
1,722,065

Other assets
2,725,119

 
2,812,186

Total assets
$
1,435,944,934

 
$
1,454,368,057

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
 
 
 

Accounts payable and accrued liabilities
$
25,395,038

 
$
27,612,665

Notes Payable, net:
 
 
 
    Mortgage notes payable, net
948,763,775

 
948,557,074

    Revolving credit facilities, net
44,875,164

 
44,848,788

Total notes payable, net
993,638,939

 
993,405,862

Distributions payable
3,900,642

 
3,886,730

Due to affiliates
2,178,934

 
2,760,555

Total liabilities
1,025,113,553

 
1,027,665,812

Commitments and contingencies (Note 9)

 

Redeemable common stock
—

 
36,397,062

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, 51,024,374 and 50,842,640 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively
510,244

 
508,426

Convertible stock, $0.01 par value per share; 1,000 shares authorized, issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
10

 
10

Additional paid-in capital
673,041,680

 
633,186,743

Cumulative distributions and net losses
(262,720,553
)
 
(243,389,996
)
Total stockholders’ equity
410,831,381

 
390,305,183

Total liabilities and stockholders’ equity
$
1,435,944,934

 
$
1,454,368,057

 
See accompanying notes to consolidated financial statements.

2

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

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended March 31,
 
2018
 
2017
Revenues:
 
 
 
Rental income
$
36,800,334

 
$
35,503,148

Tenant reimbursements and other
4,566,692

 
4,201,627

Total revenues
41,367,026

 
39,704,775

Expenses:
 
 
 
Operating, maintenance and management
9,974,835

 
9,450,859

Real estate taxes and insurance
5,685,380

 
6,232,047

Fees to affiliates
5,796,678

 
5,638,971

Depreciation and amortization
17,435,350

 
17,398,525

Interest expense
9,092,883

 
7,882,714

General and administrative expenses
1,399,994

 
1,513,512

Acquisition costs
—

 
1,185

Total expenses
49,385,120

 
48,117,813

Net loss
$
(8,018,094
)
 
$
(8,413,038
)
Loss per common share — basic and diluted
$
(0.16
)
 
$
(0.17
)
Weighted average number of common shares outstanding — basic and diluted
50,976,133

 
49,921,129

Distributions declared per share
$
0.222

 
$
0.222

 
See accompanying notes to consolidated financial statements.

3

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

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2017
AND FOR THE THREE MONTHS ENDED MARCH 31, 2018 (Unaudited)
 
 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-In Capital
 
Cumulative Distributions & Net Losses
 
Total
Stockholders’ Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
BALANCE, December 31, 2016
 
49,698,486

 
$
496,985

 
1,000

 
$
10

 
$
625,996,383

 
$
(164,445,092
)
 
$
462,048,286

Issuance of common stock
 
1,583,829

 
15,838

 
—

 
—

 
23,322,254

 
—

 
23,338,092

Transfers to redeemable common stock
 
—

 
—

 
—

 
—

 
(10,025,412
)
 
—

 
(10,025,412
)
Repurchase of common stock
 
(439,675
)
 
(4,397
)
 
—

 
—

 
(6,186,340
)
 
—

 
(6,190,737
)
Distributions declared
 
—

 
—

 
—

 
—

 
—

 
(45,321,063
)
 
(45,321,063
)
Amortization of stock-based compensation
 
—

 
—

 
—

 
—

 
79,858

 
—

 
79,858

Net loss
 
—

 
—

 
—

 
—

 
—

 
(33,623,841
)
 
(33,623,841
)
BALANCE, December 31, 2017
 
50,842,640

 
508,426

 
1,000

 
10

 
633,186,743

 
(243,389,996
)
 
390,305,183

Issuance of common stock
 
383,906

 
3,840

 
—

 
—

 
5,697,190

 
—

 
5,701,030

Transfers from redeemable common stock
 
—

 
—

 
—

 
—

 
37,028,102

 
—

 
37,028,102

Repurchase of common stock
 
(202,172
)
 
(2,022
)
 
—

 
—

 
(2,884,194
)
 
—

 
(2,886,216
)
Distributions declared
 
—

 
—

 
—

 
—

 
—

 
(11,312,463
)
 
(11,312,463
)
Amortization of stock-based compensation
 
—

 
—

 
—

 
—

 
13,839

 
—

 
13,839

Net loss
 
—

 
—

 
—

 
—

 
—

 
(8,018,094
)
 
(8,018,094
)
BALANCE, March 31, 2018
 
51,024,374

 
$
510,244

 
1,000

 
$
10

 
$
673,041,680

 
$
(262,720,553
)
 
$
410,831,381

 
See accompanying notes to consolidated financial statements.

4

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

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 

Net loss
$
(8,018,094
)
 
$
(8,413,038
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,435,350

 
17,398,525

Loss on disposal of buildings and improvements
180,041

 
8,529

Amortization of deferred financing costs
246,274

 
253,732

Amortization of stock-based compensation
13,839

 
19,869

Change in fair value of interest rate cap agreements
(447,614
)
 
255,002

Amortization of loan discount
88,746

 
88,746

Insurance claim recoveries
(143,972
)
 
(11,834
)
Changes in operating assets and liabilities:
 
 
 
Rents and other receivables
(763,375
)
 
(170,380
)
Other assets
534,681

 
585,659

Accounts payable and accrued liabilities
(1,525,012
)
 
(4,683,314
)
Due to affiliates
(513,838
)
 
(1,237,692
)
Net cash provided by operating activities
7,087,026

 
4,093,804

Cash Flows from Investing Activities:
 
 
 
Additions to real estate investments
(3,466,412
)
 
(9,915,481
)
Proceeds from insurance claims
143,972

 
11,834

Net cash used in investing activities
(3,322,440
)
 
(9,903,647
)
Cash Flows from Financing Activities:
 
 
 
Principal payments on mortgage notes payable
(101,943
)
 
(65,721
)
Borrowings from revolving credit facilities
—

 
10,000,000

Payments of commissions on sale of common stock
(56,510
)
 
(57,569
)
Distributions to common stockholders
(5,597,521
)
 
(5,255,684
)
Repurchase of common stock
(2,886,216
)
 
(1,053,198
)
Net cash (used in) provided by financing activities
(8,642,190
)
 
3,567,828

Net decrease in cash, cash equivalents and restricted cash
(4,877,604
)
 
(2,242,015
)
Cash, cash equivalents and restricted cash, beginning of the period
38,667,705

 
38,815,266

Cash, cash equivalents and restricted cash, end of the period
$
33,790,101

 
$
36,573,251


5

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

STEADFAST APARTMENT REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

 
Three Months Ended March 31,
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information:
 
 
 
Interest paid
$
8,705,963

 
$
7,154,208

Supplemental Disclosures of Noncash Flow Transactions:
 
 
 
Increase in distributions payable
$
13,912

 
$
35,200

Distributions paid to common stockholders through common stock issuances pursuant to the distribution reinvestment plan
$
5,701,030

 
$
5,787,328

Decrease in redeemable common stock
$
(36,397,062
)
 
$
(2,387,814
)
(Decrease) increase in redemptions payable
$
(631,040
)
 
$
370,218

Decrease in accounts payable and accrued liabilities from additions to real estate investments
$
(61,575
)
 
$
(1,342,749
)
(Decrease) increase in due to affiliates from additions to real estate investments
$
(11,273
)
 
$
12,037

Decrease in due to affiliates for commissions on sale of common stock
$
(56,510
)
 
$
(57,569
)
 
See accompanying notes to consolidated financial statements.

6

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)


1.         Organization and Business
Steadfast Apartment REIT, Inc. (the “Company”) was formed on August 22, 2013, as a Maryland corporation that 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 (Stockholders’ Equity).
The Company owns and operates a diverse portfolio of multifamily properties located in targeted markets throughout the United States. In addition to the Company’s focus on multifamily properties, the Company may also make selective strategic acquisitions of other types of commercial properties. The Company may also acquire or originate mortgage, mezzanine, bridge and other real estate loans and equity securities of other real estate companies. As of March 31, 2018, 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 (Real Estate).
Public Offering
On December 30, 2013, the Company commenced its initial public offering 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 March 31, 2018, the Company had issued 51,798,081 shares of common stock for gross offering proceeds of $771,327,030, including 4,184,054 shares of common stock issued pursuant to the DRP for gross offering proceeds of $60,892,151.
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. On February 14, 2017, the Company’s board of directors determined an estimated value per share of the Company’s common stock of $14.85 as of December 31, 2016. On March 14, 2018, the Company’s board of directors determined an estimated value per share of the Company’s common stock of $15.18 as of December 31, 2017. 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, $14.85 and $15.18, effective May 1, 2016, March 1, 2017 and April 1, 2018. 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, Steadfast Apartment REIT Operating Partnership, L.P. (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, 2018. Subject to certain restrictions and limitations, the Advisor manages the Company’s day-to-day operations, manages the Company’s portfolio of properties and real estate-related assets, sources and presents investment opportunities to the Company’s board of directors and provides investment management services on the Company’s behalf. The Advisor has also entered into an Advisory Services Agreement with Crossroads Capital Advisors, LLC (“Crossroads Capital Advisors”), whereby Crossroads Capital Advisors provides certain advisory services to the Company on behalf of the Advisor. The Company retained Stira

7

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Capital Markets Group, LLC (formerly known as 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.
Substantially all of the Company’s business is conducted through the Operating Partnership. 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 to the Operating Partnership as a contribution in exchange for partnership interests and the Company’s percentage ownership in the Operating Partnership increased proportionately. 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 pays all of the Company’s administrative costs and expenses, and such expenses are 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, 2017, other than Accounting Standards Update (“ASU”) 2016-18, 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, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2018. 
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The financial statements of the Company’s subsidiaries are prepared using accounting policies consistent with those of the Company.
The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary for a fair and consistent presentation of the results of such periods. Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.



8

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Fair Value Measurements
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other assets and liabilities at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received 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 - The Company has entered into certain 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.

9

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

The following tables reflect the Company’s assets required to be measured at fair value on a recurring basis on the consolidated balance sheets:
 
 
March 31, 2018
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$
—

 
$
795,023

 
$
—

 
 
December 31, 2017
 
 
Fair Value Measurements Using
 
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
  Interest rate cap agreements
 
$
—

 
$
347,409

 
$
—

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, net are classified as Level 3 within the fair value hierarchy.
The fair value of the notes payable, net is estimated using a discounted cash flow analysis using borrowing rates available to the Company for debt instruments with similar terms and maturities. As of March 31, 2018 and December 31, 2017, the fair value of the notes payable was $1,009,923,592 and $1,011,004,179, respectively, compared to the carrying value of $993,638,939 and $993,405,862, respectively.
Distribution Policy
The Company elected to be taxed, and currently qualifies, 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 three months ended March 31, 2018, were based on daily record dates and calculated at a rate of $0.002466 per share per day during the period from January 1, 2018, through March 31, 2018. 
Distributions to stockholders are determined by the board of directors of the Company and are dependent upon a number of factors relating to the Company, including funds available for the payment of distributions, financial condition, the timing of property acquisitions, capital expenditure requirements and annual distribution requirements in order for the Company to qualify as a REIT under the Internal Revenue Code. During the three months ended March 31, 2018 and 2017, the Company declared distributions totaling $0.222 and $0.222 per share of common stock, respectively.

10

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Per Share Data
Basic loss per share attributable to common stockholders for all periods presented are computed by dividing net loss by the weighted average number of shares of the Company’s common stock outstanding during the period. Diluted loss per share is computed based on the weighted average number of shares of the Company’s common stock and all potentially dilutive securities, if any. Distributions declared per common share assume each share was issued and outstanding each day during the period. Nonvested shares of the Company’s restricted common stock and convertible stock give rise to potentially dilutive shares of the Company’s common stock but such shares were excluded from the computation of diluted earnings per share because such shares were anti-dilutive during the period.
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.
Reclassifications
Certain amounts in the Company’s prior period consolidated unaudited financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. During the three months ended March 31, 2018, the Company adopted ASU 2016-18, as further described below. As a result, the Company no longer presents transfers between cash and restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the consolidated statements of cash flows.
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 selected the modified retrospective transition method with a cumulative effect recognized as of the date of adoption and adopted the new standard effective January 1, 2018. The Company identified limited sources of revenues from non-lease components, and the Company did not experience a material impact on its revenue recognition in the consolidated financial statements upon adoption. Additionally, there was no impact to the Company’s recognition of rental revenue, as rental revenue from leasing arrangements was specifically excluded from the standard.
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. The guidance will be effective in the first quarter of 2019 and allows for early adoption. The Company is in the preliminary stages of evaluating the impact of this ASU on its leases both as it relates to the Company acting as a lessor and as a lessee. Based on the preliminary results of its evaluation, as it relates to the former, the Company does not expect any material impact on the recognition of leases in the consolidated financial statements because under this guidance, lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. As it relates to the latter, the Company does not expect a material impact on the recognition of leases in the consolidated financial statements

11

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

because the quantity of leased equipment by the Company is limited. The Company is finalizing its evaluation of this new guidance and plans to adopt this ASU on January 1, 2019.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, that requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company adopted this guidance January 1, 2018 and applied it retrospectively. As a result of adopting ASU 2016-18, the Company began presenting restricted cash along with cash and cash equivalents in its consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of business, that clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. This ASU provides a screen to determine when a set is not a business. If the screen is not met, it (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace the missing elements. 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 adopted this new guidance as of January 1, 2017. The Company did not experience a material impact from adopting this new guidance.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“Subtopic 610-20”): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), that clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset and defines the term in substance nonfinancial asset. ASU 2017-05 also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. Subtopic 610-20, which was issued in May 2014 as part of ASU 2014-09 (discussed above), provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. An entity is required to apply amendments in ASU 2017-05 at the same time it applies the amendments in ASU 2014-09. ASU 2017-05 requires retrospective application and is effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company adopted this guidance January 1, 2018. The Company did not experience a material impact from adopting this new guidance.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The FASB issued ASU 2017-09 to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 requires prospective application and is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this guidance January 1, 2018. The Company did not experience a material impact from adopting this new guidance.
3.          Real Estate
As of March 31, 2018, the Company owned 34 multifamily properties comprising a total of 11,601 apartment homes. The total contract acquisition price of the Company’s real estate portfolio was $1,499,381,750. As of March 31, 2018 and December 31, 2017, the Company’s portfolio was approximately 92.9% and 93.1% occupied and the average monthly rent was $1,128 and $1,137, respectively.

12

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

As of March 31, 2018 and December 31, 2017, accumulated depreciation and amortization related to the Company’s consolidated real estate properties and related intangibles were as follows:
 
 
March 31, 2018
 
 
Assets
 
 
Land
 
Building and Improvements
 
Total Real Estate
Investments in real estate
 
$
164,113,072

 
$
1,397,981,828

 
$
1,562,094,900

Less: Accumulated depreciation and amortization
 
—

 
(165,150,626
)
 
(165,150,626
)
Net investments in real estate and related lease intangibles
 
$
164,113,072

 
$
1,232,831,202

 
$
1,396,944,274

 
 
December 31, 2017
 
 
Assets
 
 
Land
 
Building and Improvements
 
Total Real Estate
Investments in real estate
 
$
164,113,072

 
$
1,394,779,659

 
$
1,558,892,731

Less: Accumulated depreciation and amortization
 
—

 
(147,726,630
)
 
(147,726,630
)
Net investments in real estate and related lease intangibles
 
$
164,113,072

 
$
1,247,053,029

 
$
1,411,166,101

Depreciation and amortization expense was $17,435,350 and $17,398,525 for the three months ended March 31, 2018 and 2017, respectively.
Depreciation of the Company’s buildings and improvements was $17,435,350 and $16,388,413 for the three months ended March 31, 2018 and 2017, respectively.
Amortization of the Company’s tenant origination and absorption costs was $0 and $1,010,112 for the three months ended March 31, 2018 and 2017, respectively. Tenant origination and absorption costs had a weighted-average amortization period as of the date of acquisition of less than one year. As of March 31, 2017, all tenant origination and absorption costs were fully amortized and written off.
Operating Leases
As of March 31, 2018, the Company’s real estate portfolio comprised 11,601 residential apartment homes and was 95.0% 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 $3,686,985 and $3,613,649 as of March 31, 2018 and December 31, 2017, respectively.

As of March 31, 2018 and 2017, no tenant represented over 10% of the Company’s annualized base rent.

13

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

4.          Other Assets
As of March 31, 2018 and December 31, 2017, other assets consisted of:
 
March 31, 2018
 
December 31, 2017
Prepaid expenses
$
902,018

 
$
1,411,353

Interest rate cap agreements
795,023

 
347,409

Other deposits
1,028,078

 
1,053,424

Other assets
$
2,725,119

 
$
2,812,186

5.          Debt
Mortgage Notes Payable
The following is a summary of mortgage notes payable, net secured by real property as of March 31, 2018 and December 31, 2017.
 
 
March 31, 2018
 
 
 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type
 
Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)
 
29
 
12/1/2021 - 9/1/2026
 
1-Mo LIBOR + 1.61%

 
1-Mo LIBOR + 2.48%

 
3.90%
 
$
888,312,403

Fixed rate
 
2
 
7/1/2025 - 5/1/2054
 
4.34
%
 
4.60
%
 
4.51%
 
67,754,949

Mortgage notes payable, gross
 
31
 
 
 
 
 
 
 
3.92%
 
956,067,352

Discount, net(2)
 
 
 
 
 
 
 
 
 
 
 
(2,187,092
)
Deferred financing costs, net(3)
 
 
 
 
 
 
 
 
 
 
 
(5,116,485
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
948,763,775

 
 
December 31, 2017
 
 
 
 
 
 
Interest Rate Range
 
Weighted Average Interest Rate
 
 
Type
 
Number of Instruments
 
Maturity Date Range
 
Minimum
 
Maximum
 
 
Principal Outstanding
Variable rate(1)
 
29
 
12/1/2021 - 9/1/2026
 
1-Mo LIBOR + 1.61%

 
1-Mo LIBOR + 2.48%

 
3.58%
 
$
888,345,717

Fixed rate
 
2
 
7/1/2025 - 5/1/2054
 
4.34
%
 
4.60
%
 
4.51%
 
67,823,579

Mortgage notes payable, gross
 
31
 
 
 
 
 
 
 
3.63%
 
956,169,296

Discount, net(2)
 
 
 
 
 
 
 
 
 
 
 
(2,275,838
)
Deferred financing costs, net(3)
 
 
 
 
 
 
 
 
 
 
 
(5,336,384
)
Mortgage notes payable, net
 
 
 
 
 
 
 
 
 
 
 
$
948,557,074


14

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

___________
(1)
See Note 10 (Derivative Financial Instruments) 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 the debt discount as of March 31, 2018 and December 31, 2017, was $534,447 and $445,701, respectively.
(3)
Accumulated amortization related to deferred financing costs as of March 31, 2018 and December 31, 2017, was $2,454,554 and $2,234,655, respectively.

Refinancing Transactions

On November 29, 2017, three of the Company’s wholly-owned subsidiaries refinanced their existing loans under the Company’s revolving credit facility for an aggregate principal amount of $93,825,000 and entered into new loan agreements (each a “Loan Agreement”), with PNC Bank, National Association, or PNC Bank, for an aggregate principal amount of $100,752,000, (the “November Refinancing Transactions”). Additionally, on December 29, 2017, another three of the Company’s wholly-owned subsidiaries refinanced their existing loans under the revolving credit facility for an aggregate principal amount of $92,475,000 and entered into new loan agreements (each a “Loan Agreement”), with PNC Bank for an aggregate principal amount of $97,080,000 (the “December Refinancing Transactions,” together with the November Refinancing Transactions, the “Refinancing Transactions”).
In the Refinancing Transactions, each Loan Agreement was made pursuant to the Freddie Mac Capital Markets Execution Program (“CME”), as evidenced by a multifamily note. Pursuant to the CME, PNC Bank originates the mortgage loan and then transfers the loan to the Federal Home Loan Mortgage Association. Each Loan Agreement refinanced in November and December provides for a term loan with a maturity of December 1, 2024 or January 1, 2025, respectively, unless the maturity date is accelerated in accordance with its terms. Each loan refinanced in November and December accrues interest at the one-month London Interbank Offered Rate (“LIBOR”) plus 1.94% or 1.88%, respectively. The entire outstanding principal balance and any accrued and unpaid interest on each of the loans are due on the maturity date. Interest and principal payments on the loans are payable monthly in arrears on specified dates as set forth in each loan agreement. Monthly payments are due and payable on the first day of each month commencing on January 1, or February 1, 2018, as applicable.
Revolving Credit Facility
On August 26, 2015, the Company entered into a revolving credit facility (the “Credit Facility”) with PNC Bank in an amount not to exceed $200,000,000, which provided 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 had a maturity date of September 1, 2020, subject to extension (the “Maturity Date”). The maximum amount available to be drawn under the Credit Facility could have been 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, was incurred. Advances made under the Credit Facility were secured by the property for which such advances were used (each a “Loan” and collectively the “Loans”), as evidenced by the Credit Agreement, Multifamily Loan and Security Agreement (the “Loan and Security 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 and Security Agreement, the Note and the Mortgage, the “Loan Documents”). Each Loan was purchased from PNC Bank by the Federal Home Loan Mortgage Corporation (“Freddie Mac”). As of December 31, 2017, the Company had no outstanding balance under the Credit Facility. The Company is in the process of terminating the Credit Facility.

15

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Interest on the outstanding principal balances of the Loans accrued at the one-month 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 were 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 were due and payable in full on the Maturity Date. In addition to monthly interest payments, an unused commitment fee equal to 0.1% of the average daily difference between (1) the amount outstanding and (2) the maximum facility available was 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, was 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 was due and payable monthly. The seasoning fee would 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 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 are 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 March 31, 2018, the interest rate on the LOC Loans was 3.48%. 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.
As of March 31, 2018 and December 31, 2017, the advances obtained and certain financing costs incurred under the Line of Credit, which is included in revolving credit facilities, net, in the accompanying consolidated balance sheets, are summarized in the following table.
 
 
Amount of Advance as of
 
 
March 31, 2018
 
December 31, 2017
Principal balance on revolving line of credit, gross(1)
 
$
45,000,000

 
$
45,000,000

Deferred financing costs, net  on revolving line of credit(2)
 
(124,836
)
 
(151,212
)
Revolving credit facilities, net
 
$
44,875,164

 
$
44,848,788


16

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

___________
(1)
Landings of Brentwood is pledged as collateral for repayment of amounts advanced under the Line of Credit.
(2)
Accumulated amortization related to deferred financing costs in respect of the Line of Credit as of March 31, 2018 and December 31, 2017, was $200,164 and $173,788, respectively.
Maturity and Interest
The following is a summary of the Company’s aggregate maturities as of March 31, 2018:
 
 
 
 
 
 
Maturities During the Years Ending December 31,
 
 
Contractual Obligations
 
Total
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
Principal payments on outstanding debt(1)
 
$
1,001,067,352

 
$
2,184,120

 
$
49,904,419

 
$
8,327,845

 
$
49,841,647

 
$
61,568,950

 
$
829,240,371

___________
(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 March 31, 2018, the Company was in compliance with all debt covenants.
For the three months ended March 31, 2018 and 2017, the Company incurred interest expense of $9,092,883 and $7,882,714, respectively. Interest expense for the three months ended March 31, 2018 and 2017, includes amortization of deferred financing costs of $246,274 and $253,732, net unrealized gains (losses) from the change in fair value of interest rate cap agreements of $447,614 and ($255,002), amortization of loan discount of $88,746 and $88,746 and Credit Facility commitment fees of $7,397 and $13,370, respectively.
Interest expense of $3,081,455 and $2,581,941 was payable as of March 31, 2018 and December 31, 2017, 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 $640,012,497, including 1,011,561 shares of common stock issued

17

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

pursuant to the DRP for total proceeds of $14,414,752, net of offering costs of $84,837,134. Following the termination of the Public Offering, the Company continues to offer shares pursuant to the DRP. As of March 31, 2018, the Company had issued 51,798,081 shares of common stock for offering proceeds of $686,489,896, including 4,184,054 shares of common stock issued pursuant to the DRP for total proceeds of $60,892,151, net of offering costs of $84,837,134. The offering costs primarily consisted of selling commissions and dealer manager fees.
As further discussed in Note 8 (Incentive Award Plan and Independent Director Compensation), the shares of restricted common stock vest and become non-forfeitable in four equal annual installments beginning on the date of grant and ending on the third anniversary of the date of grant or will become fully vested and become non-forfeitable on the earlier to occur of (1) the termination of the independent director’s service as a director due to his or her death or disability, or (2) a change in control of the Company.
The issuance and vesting activity for the three months ended March 31, 2018, and year ended December 31, 2017, for the restricted stock issued to the Company’s independent directors as compensation for services in connection with the independent directors’ re-election to the board of directors at the Company’s annual meeting is as follows:
 
 
Three Months Ended March 31, 2018
 
Year Ended December 31, 2017
Nonvested shares at the beginning of the period
 
7,497

 
9,997

Granted shares
 
—

 
4,998

Vested shares
 
—

 
(7,498
)
Nonvested shares at the end of the period
 
7,497

 
7,497

Additionally, the weighted average fair value of restricted common stock issued to the Company’s independent directors for the three months ended March 31, 2018, and year ended December 31, 2017, is as follows:
Grant Year
 
Weighted Average Fair Value
2017
 
$
14.85

2018
 
n/a

Included in general and administrative expenses is $13,839 and $19,869 for the three months ended March 31, 2018 and 2017, for compensation expense related to the issuance of restricted common stock. As of March 31, 2018, the compensation expense related to the issuance of the restricted common stock not yet recognized was $75,167. The weighted average remaining term of the restricted common stock was approximately one year as of March 31, 2018. As of March 31, 2018, 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 repurchased 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

18

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Company’s enterprise value divided by the number of outstanding shares of common stock on an as-converted basis, in each case calculated as of the date of the conversion.
Preferred Stock
The Charter also provides the Company’s board of directors with the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such shares of preferred stock, the board of directors shall have the power from time to time to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares of preferred stock. The Company’s board of directors is authorized to amend the Charter without the approval of the stockholders to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series that the Company has authority to issue. As of March 31, 2018 and December 31, 2017, 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 14, 2018, February 14, 2017 and March 24, 2016, the Company’s board of directors determined a price per share for the DRP of $15.18, $14.85 and $14.46, effective April 1, 2018, March 1, 2017 and May 1, 2016, respectively, in connection with the determination of an estimated value per share of the Company’s common stock.
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.
Beginning March 29, 2016, the date the Company first published an estimated value per share, 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)(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)
On March 14, 2018, the board of directors of the Company determined to amend the terms of the Company’s share repurchase plan to (1) limit the amount of shares repurchased pursuant to the Company’s share repurchase plan each quarter to $2,000,000 and (2) revise the repurchase price to an amount equal to 93% of the most recently publicly disclosed estimated value per share. The new share repurchase price is $14.12 per share, which represents 93% of the estimated value per share of $15.18. The share repurchase price is further reduced based on how long the stockholder has held the shares as follows:

19

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Share Purchase Anniversary
 
Repurchase Price
on Repurchase Date(1)(4)
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5% of the Share Repurchase Price
2 years
 
95.0% of the Share Repurchase Price
3 years
 
97.5% of the Share Repurchase Price
4 years
 
100.0% of the Share Repurchase Price
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.
(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)
The “Share Repurchase Price” shall be 93% of the Estimated Value Per Share. The “Estimated Value per Share” means the most recently publicly disclosed estimated value per share 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 (defined below) 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 are made quarterly upon written request to the Company at least 15 days prior to the end of the applicable quarter. Repurchase requests are honored approximately 30 days following the end of the applicable quarter (“Repurchase Date”). Stockholders may withdraw their repurchase request at any time up to three business days prior to the Repurchase Date. During the three months ended March 31, 2018, the Company repurchased a total of 202,170 shares with a total repurchase value of $2,886,216 and received requests for repurchases of 309,952 shares with a total repurchase value of $4,262,726. During the three months ended March 31, 2017, the Company repurchased a total of 75,764 shares with a total repurchase value of $1,053,198 and received requests for the repurchase of 102,187 shares with a total repurchase value of $1,423,416.
As of March 31, 2018 and 2017, the Company had 144,442 and 102,187 shares of outstanding and unfulfilled repurchase requests, respectively, and recorded $2,000,000 and $1,423,416 in accounts payable and accrued liabilities on the accompanying consolidated balance sheets related to these unfulfilled repurchase requests, respectively. The Company repurchased the shares of common stock represented by the outstanding repurchase requests as of March 31, 2018 and 2017, on the May 1, 2018, and April 28, 2017, 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 repurchase 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

20

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

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. The Company’s board of directors has further limited the amount of shares that may be repurchased pursuant to the share repurchase plan to $2,000,000 per quarter. 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 again, in its sole discretion, amend, suspend or terminate the share repurchase plan at any time upon 30 days’ notice to its stockholders if it determines that the funds available to fund the share repurchase plan are needed for other business or operational purposes or that amendment, suspension or termination of the share repurchase plan is in the best interest of the Company’s stockholders. Therefore, a stockholder may not have the opportunity to make a repurchase request prior to any potential termination of the Company’s share repurchase plan. The share repurchase plan will terminate in the event that a secondary market develops for the Company’s shares of common stock.
Pursuant to the share repurchase plan, for the three months ended March 31, 2018, the Company reclassified $37,028,102, net of $2,886,216 of fulfilled redemption requests, from temporary equity to permanent equity, which is included as additional paid-in capital on the accompanying consolidated balance sheets. For the three months ended March 31, 2017, the Company reclassified $2,387,814, net of $1,053,198 of fulfilled redemption requests, 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 goal 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 times 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 and stockholders’ overall return on their investment in the Company may be reduced.
To maintain the Company’s qualification as a REIT, the Company must make aggregate annual distributions to its stockholders of at least 90% of its REIT taxable income (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If the Company meets the REIT qualification requirements, the Company generally will not be subject to federal income tax on the income that the Company distributes to its stockholders each year.
Distributions Declared
The Company’s board of directors approved a cash distribution that accrues at a rate of $0.002466 per day for each share of the Company’s common stock during the three months ended March 31, 2018 and 2017, 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. The distributions declared accrue daily to stockholders of record as of the close of business on each day and are payable

21

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

in cumulative amounts on or before the third day of each calendar month with respect to the prior month. There is no guarantee that the Company will continue to pay distributions at this rate or at all.
Distributions declared for the three months ended March 31, 2018 and 2017 were $11,312,463 and $11,078,212, including $5,671,096 and $5,773,757, or 381,892 shares and 392,430 shares, respectively, of common stock attributable to the DRP.
As of March 31, 2018 and December 31, 2017, $3,900,642 and $3,886,730 of distributions declared were payable, which included $1,940,976 and $1,970,910, or 130,705 shares and 132,721 shares of common stock attributable to the DRP, respectively.
Distributions Paid
For the three months ended March 31, 2018 and 2017, the Company paid cash distributions of $5,597,521 and $5,255,684, which related to distributions declared for each day in the period from December 1, 2017, through February 28, 2018, and December 1, 2016, through February 28, 2017, respectively. Additionally, for the three months ended March 31, 2018 and 2017, 383,908 and 396,962 shares of common stock were issued pursuant to the DRP for gross offering proceeds of $5,701,030 and $5,787,328, respectively. For the three months ended March 31, 2018 and 2017, the Company paid total distributions of $11,298,551 and $11,043,012, 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 or was obligated to pay the Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Public Offering, the investment of funds in real estate and real estate-related investments and the management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). Subject to the limitations described below, the Company is also obligated to reimburse the Advisor and its affiliates for organization and offering costs incurred by the Advisor and its affiliates on behalf of the Company, as well as acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company.

22

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

Amounts attributable to the Advisor and its affiliates incurred for the three months ended March 31, 2018 and 2017 and amounts attributable to the Advisor and its affiliates that are payable (prepaid) as of March 31, 2018 and December 31, 2017 are as follows:
 
 
Incurred For The Three Months Ended March 31,
 
Payable (prepaid) as of
 
 
2018
 
2017
 
March 31, 2018
 
December 31, 2017
Consolidated Statements of Operations:
 
 
 
 
 
 
 
 
Expensed
 
 
 
 
 
 
 
 
Investment management fees(1)
 
$
4,262,253

 
$
4,200,140

 
$
3,024

 
$
—

Acquisition expenses(2)
 
—

 
1,185

 
—

 
—

Loan coordination fees(1)
 
—

 
—

 
—

 
728,100

Property management:
 
 
 
 
 
 
 
 
Fees(1)
 
1,191,167

 
1,142,347

 
402,395

 
396,722

Reimbursement of onsite personnel(3)
 
3,562,735

 
3,439,433

 
873,894

 
766,894

Other fees(1)
 
343,258

 
296,484

 
36,945

 
41,950

    Other fees - property operations(3)
 
23,649

 
26,707

 
—

 
—

Other fees - G&A(4)
 
9,299

 
21,145

 
—

 
—

Other operating expenses(4)
 
261,411

 
441,766

 
180,094

 
76,515

Insurance proceeds(5)
 
—

 
(100,000
)
 
—

 
—

     Property insurance(6)
 
379,094

 
40,270

 
(153,412
)
 
(172,717
)
Consolidated Balance Sheets:
 
 
 
 
 
 
 
 
Capitalized
 
 
 
 
 
 
 
 
Capital expenditures(7)
 
5,622

 
—

 
—

 
—

Construction management:
 
 
 
 
 
 
 
 
Fees(7)
 
136,443

 
551,927

 
126,925

 
125,159

Reimbursement of labor costs(7)
 
232,591

 
1,021,294

 
49,828

 
62,876

Additional paid-in capital
 
 
 
 
 
 
 
 
Selling commissions
 
—

 
—

 
505,829

 
562,339

 
 
$
10,407,522

 
$
11,082,698

 
$
2,025,522

 
$
2,587,838

_____________________
(1)
Included in fees to affiliates in the accompanying consolidated statements of operations.
(2)
Included in acquisition costs in the accompanying consolidated statements of operations.
(3)
Included in operating, maintenance and management in the accompanying consolidated statements of operations.
(4)
Included in general and administrative expenses in the accompanying consolidated statements of operations.
(5)
Included in tenant reimbursements and other in the accompanying consolidated statements of operations.

23

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

(6)
Property related insurance expense and the amortization of the prepaid insurance deductible account are included in general and administrative expenses in the accompanying consolidated statements of operations. The amortization of the prepaid property insurance is included in operating, maintenance and management expenses in the accompanying consolidated statements of operations. The prepaid insurance is included in other assets in the accompanying consolidated balance sheets upon payment.
(7)
Included in building and improvements in the accompanying consolidated balance sheets.
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 Financial Industry Regulatory Authority, Inc. (“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 pays 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 (each, a “Property Management Agreement”) 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 at March 31, 2018, ranges from 2.50% 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 60-days’ 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.

24

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

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, support and training services and capital expenditures. The Company also reimburses the Property Manager for the salaries and related benefits of on-site property management employees.
Construction Management Fees and Expenses
The Company has entered into construction management agreements (each, a “Construction Management Agreement”) with Pacific Coast Land & Construction, Inc. (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 ranges 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 certain of its employees for time spent working on capital improvements and renovations.
Property Insurance
The Company deposits amounts with an affiliate of the Sponsor to fund a prepaid insurance deductible account to cover the cost of required insurance deductibles across all properties of the Company and other affiliated entities. Upon filing a major claim, proceeds from the insurance deductible account may be used by the Company or another affiliate of the Sponsor. In addition, the Company deposits amounts with an affiliate of the Sponsor to cover the cost of property and property related insurance across certain properties of the Company.
Other Operating Expense Reimbursement
In addition to the various fees paid to the Advisor, the Company is obligated to pay directly or reimburse all expenses incurred by the Advisor in providing services to the Company, including the Company’s allocable share of the Advisor’s overhead, such as rent, employee costs, utilities and information technology costs. The Company will not reimburse the Advisor for employee costs in connection with services for which the Advisor or its affiliates receive acquisition fees or disposition fees or for the salaries the Advisor pays to the Company’s executive officers.
The Charter limits the Company’s total operating expenses during any four fiscal quarters to the greater of 2% of the Company’s average invested assets or 25% of the Company’s net income for the same period (the “2%/25% Limitation”). The Company may reimburse the Advisor, at the end of each fiscal quarter, for operating expenses incurred by the Advisor; provided, however, that the Company shall not reimburse the Advisor at the end of any fiscal quarter for operating expenses that exceed the 2%/25% Limitation unless the independent directors have determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor must reimburse the Company for the amount by which the Company’s operating expenses for the preceding four fiscal quarters then ended exceed the 2%/25% Limitation, unless approved by the independent directors. For purposes of determining the 2%/25% Limitation amount, “average invested assets” means the 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

25

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

acquisitions that the Company does not close); (g) real estate commissions on the resale of investments; and (h) other expenses connected with the acquisition, disposition, management and ownership of investments (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of real property).
As of March 31, 2018, the Company’s total operating expenses, as defined above, did not exceed the 2%/25% Limitation.
Disposition Fee
If the Advisor or its affiliates provide a substantial amount of services in connection with the sale of a property or real estate-related asset as determined by a majority of the Company’s independent directors, the Company will pay the Advisor or its affiliates one-half of the brokerage commissions paid, but in no event to exceed 1% of the sales price of each property or real estate-related asset sold. To the extent the disposition fee is paid upon the sale of any assets other than real property, it will be included as an operating expense for purposes of the 2%/25% Limitation. In connection with the sale of securities, the disposition fee may be paid to an affiliate of the Advisor that is registered as a FINRA member broker-dealer if applicable FINRA rules would prohibit the payment of the disposition fee to a firm that is not a registered broker-dealer. As of March 31, 2018, the Company had not sold or otherwise disposed of any properties or any real estate-related assets. Accordingly, the Company had not incurred any disposition fees as of March 31, 2018. 
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 Dealer Manager reallowed 100% of sales commissions earned to participating broker-dealers. The Dealer Manager could also reallow to any participating broker-dealer a portion of the dealer manager fee that was attributable to that participating broker-dealer for certain marketing costs of that participating broker-dealer. The Dealer Manager 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 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: 3% at the time of sale and the remaining 4% paid ratably (1% per year) on each of the first four 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 Company terminated the Public Offering on March 24, 2016, and as of March 31, 2018 and December 31, 2017, expects to pay trailing selling commissions of $505,829 and $562,339, respectively, which were charged to additional paid-in capital and 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 award 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 received 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.

26

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)

The Company recorded stock-based compensation expense of $13,839 and $19,869 for the three months ended March 31, 2018 and 2017, 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 (Related Party Arrangements). The Company recorded an operating expense of $55,750 and $61,750 for the three months ended March 31, 2018 and 2017, related to the independent directors annual retainer and attending board meetings, which is included in general and administrative expenses in the accompanying consolidated statements of operations. As of March 31, 2018 and December 31, 2017, $55,750 and $55,750, respectively, related to the independent directors’ annual retainer and board meetings attendance is included in accounts payable and accrued liabilities 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.


27

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

STEADFAST APARTMENT REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 March 31, 2018 and December 31, 2017:
March 31, 2018
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 - 1/1/2021
 
One-Month LIBOR
 
29
 
$
888,368,100

 
1.88%
 
3.21%
 
$
795,023

December 31, 2017
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 - 1/1/2021
 
One-Month LIBOR
 
29
 
$
888,368,100

 
1.56%
 
3.17%
 
$
347,409

The interest rate cap agreements are not designated as effective cash flow hedges. Accordingly, the Company records any changes in the fair value of the interest rate cap agreements as interest expense. The change in the fair value of the interest rate cap agreements for the three months ended March 31, 2018 and 2017, resulted in an unrealized gain (loss) of $447,614 and ($255,002), respectively, which is included in interest expense in the accompanying consolidated statements of operations. During the three months ended March 31, 2018 and 2017, the Company did not acquire any interest rate cap agreements. The fair value of the interest rate cap agreements of $795,023 and $347,409 as of March 31, 2018 and December 31, 2017, respectively, is included in other assets on the accompanying consolidated balance sheets.
11.          Subsequent Events
Distributions Paid
On April 2, 2018, the Company paid distributions of $3,900,642, which related to distributions declared for each day in the period from March 1, 2018, through March 31, 2018, and consisted of cash distributions paid in the amount of $1,959,666 and $1,940,976 in shares issued pursuant to the DRP.
On May 1, 2018, the Company paid distributions of $3,784,139, which related to distributions declared for each day in the period from April 1, 2018 through April 30, 2018 and consisted of cash distributions paid in the amount of $1,893,602 and $1,890,537 in shares issued pursuant to the DRP.
Distributions Declared
On May 8, 2018, 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 July 1, 2018 and ending on September 30, 2018. The distributions will be equal to $0.002466 per share of the Company’s common stock. The distributions for each record date in July 2018, August 2018 and September 2018 will be paid in August 2018, September 2018 and October 2018, respectively. The distributions will be payable to stockholders from legally available funds therefor.



28

PART I — FINANCIAL INFORMATION (continued)


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of Steadfast Apartment REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Steadfast Apartment REIT, Inc., a Maryland corporation, and, as required by context, Steadfast Apartment REIT Operating Partnership, L.P., a Delaware limited partnership, which we refer to as our “operating partnership,” and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or 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 secure resident leases for our multifamily properties at favorable rental rates; 
•
risks inherent in the real estate business, including resident defaults, potential liability relating to environmental matters and the lack of liquidity of real estate investments; 
•
the fact that we pay fees and expenses to our advisor and its affiliates that were not negotiated on an arm’s length basis and the fact that the payment of these fees and expenses increases the risk that our stockholders will not earn a profit on their investment in us; 
•
our ability to retain our executive officers and other key personnel of our advisor, our property manager and other affiliates of our advisor; 
•
our ability to generate sufficient cash flows to pay distributions for our stockholders;
•
legislative or regulatory changes (including changes to the laws governing the taxation of real estate investment trusts, or REITs); 
•
the availability of capital; 
•
changes in interest rates; and 
•
changes to generally accepted accounting principles, or GAAP.
Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this quarterly report. All forward-looking statements are made as of the date of this quarterly report and the risk that actual results will differ materially from the expectations expressed in this quarterly report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this quarterly report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this quarterly report, the inclusion of such forward-looking

29

PART I — FINANCIAL INFORMATION (continued)


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, 2017, filed with the Securities and Exchange Commission, or the SEC, on March 16, 2018.
Overview
We were formed on August 22, 2013, as a Maryland corporation that elected to be taxed, and currently qualifies, as a REIT. We invest in and manage a diverse portfolio of multifamily properties located in targeted markets throughout the United States. In addition to our focus on multifamily properties, we may also make selective strategic acquisitions of other types of commercial properties. We may also acquire or originate mortgage, mezzanine, bridge and other real estate loans and equity securities of other real estate companies.
On December 30, 2013, we commenced our initial public offering of up to 66,666,667 shares of common stock at an initial price of $15.00 per share and up to 7,017,544 shares of common stock pursuant to our distribution reinvestment plan at an initial price of $14.25 per share. On March 24, 2016, we terminated our initial public offering. As of March 24, 2016, we had sold 48,625,651 shares of common stock for gross offering proceeds of $724,849,631, including 1,011,561 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $14,414,752. Following the termination of our initial public offering, we have continued to offer shares of our common stock pursuant to our distribution reinvestment plan. As of March 31, 2018, we had sold 51,798,081 shares of common stock for gross proceeds of $771,327,030, including 4,184,054 shares of common stock issued pursuant to our distribution reinvestment plan for gross offering proceeds of $60,892,151.
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. On February 14, 2017, our board of directors determined an estimated value per share of our common stock of $14.85 as of December 31, 2016. On March 14, 2018, our board of directors determined an estimated value per share of our common stock of $15.18 as of December 31, 2017. In connection with the determination of an estimated value per share, our board of directors determined a price per share for the distribution reinvestment plan of $14.46, $14.85 and $15.18, effective May 1, 2016, March 1, 2017 and April 1, 2018. In the future, our board of directors may, in its sole discretion and from time to time, change the price at which we offer shares pursuant to our distribution reinvestment plan to reflect changes in our estimated value per share and other factors that our board of directors deems relevant.
Subject to certain restrictions and limitations, Steadfast Apartment Advisor, LLC, which we refer to as our “advisor,” manages our day-to-day operations and our portfolio of properties and real estate-related assets. Our advisor sources and presents investment opportunities to our board of directors. Our advisor also provides investment management, marketing, investor relations and other administrative services on our behalf.
Substantially all of our business is conducted through Steadfast Apartment REIT Operating Partnership, L.P., our operating partnership. We are the sole general partner of our operating partnership and one of our wholly-owned subsidiaries is the only limited partner of our operating partnership. As we accepted subscriptions for shares of common stock, we transferred substantially all of the net proceeds of the initial 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 of 1986, as amended, or the Internal Revenue Code, which classification could result in our operating partnership being taxed as a corporation, rather than as a disregarded entity. In addition to the administrative and operating costs and expenses incurred by our operating partnership in acquiring and operating our investments, our operating partnership will pay all of our administrative costs and expenses, and such expenses will be treated as expenses of our operating partnership.
We 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 would be subject to federal income tax on our taxable income at regular corporate rates and would 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.

30

PART I — FINANCIAL INFORMATION (continued)


Market Outlook
The economy in the United States has improved since the last recession; however, there is no assurance that economic conditions will continue to improve or will not worsen in the future. We believe economic and demographic trends will benefit our existing portfolio and that we have unique future investment opportunities, particularly in the multifamily sector. Home ownership rates are near all-time lows. 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 rental housing over home ownership. Demographic studies suggest that Baby Boomers are downsizing their suburban homes and relocating to multifamily apartments. Millennials are renting multifamily apartments due to high levels of student debt and increased credit standards in order to qualify for a home mortgage. According to the Federal Reserve Bank of New York, aggregate student debt has surpassed automotive, home equity lines of credit and credit card debt. Millennials are also 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 $45,000 to $65,000. Our plan is to provide rental housing for these generational groups as they age. We believe these factors will continue to contribute to the demand for multifamily housing.
Our Real Estate Portfolio
As of March 31, 2018, we owned the 34 multifamily apartment communities listed below:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
1
 
Villages at Spring Hill Apartments
 
Spring Hill, TN
 
5/22/2014
 
176

 
$
14,200,000

 
$
9,888,255

 
95.5
%
 
93.8
%
 
$
1,058

 
$
1,076

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

 
27,864,250

 
19,438,144

 
94.5
%
 
93.5
%
 
955

 
942

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

 
21,500,000

 
14,977,248

 
93.5
%
 
94.6
%
 
871

 
926

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

 
23,500,000

 
16,370,480

 
94.4
%
 
91.4
%
 
889

 
880

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

 
98,500,000

 
73,416,111

 
91.2
%
 
88.6
%
 
1,234

 
1,272

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

 
49,000,000

 
34,196,251

 
91.4
%
 
91.4
%
 
1,013

 
973

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

 
40,000,000

 
27,884,830

 
94.8
%
 
92.9
%
 
1,367

 
1,344

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

 
25,000,000

 
17,409,170

 
93.8
%
 
91.7
%
 
1,057

 
1,061

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

 
51,000,000

 
35,573,646

 
92.2
%
 
92.5
%
 
1,141

 
1,136

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

 
19,200,000

 
13,328,054

 
94.9
%
 
93.5
%
 
834

 
837

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

 
29,500,000

 
21,575,355

 
94.1
%
 
93.2
%
 
1,067

 
1,072

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

 
32,115,000

 
22,374,331

 
91.8
%
 
90.4
%
 
1,675

 
1,747


31

PART I — FINANCIAL INFORMATION (continued)


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Monthly Occupancy(1)
 
Average Monthly Rent(2)
 
 
Property Name
 
Location
 
Purchase Date
 
Number of Units
 
Contract Purchase Price
 
Mortgage Debt Outstanding(3)
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
13
 
Heritage Place Apartments
 
Franklin, TN
 
4/27/2015
 
105

 
$
9,650,000

 
$
7,048,417

 
89.5
%
 
96.2
%
 
$
922

 
$
1,052

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

 
16,450,000

 
11,406,124

 
92.2
%
 
90.6
%
 
972

 
966

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

 
72,000,000

 
50,231,332

 
92.9
%
 
93.5
%
 
937

 
946

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

 
37,600,000

 
26,183,450

 
92.4
%
 
94.4
%
 
1,092

 
1,120

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

 
53,400,000

 
37,212,894

 
94.7
%
 
94.2
%
 
1,183

 
1,178

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

 
66,800,000

 
45,144,457

 
90.6
%
 
92.7
%
 
871

 
881

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

 
39,480,000

 
29,496,411

 
95.0
%
 
94.6
%
 
1,004

 
1,049

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

 
38,500,000

 
29,759,342

 
96.2
%
 
94.7
%
 
1,383

 
1,391

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

 
32,600,000

 
25,409,973

 
95.2
%
 
95.6
%
 
1,304

 
1,290

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

 
46,200,000

 
34,069,192

 
93.4
%
 
93.1
%
 
1,509

 
1,515

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

 
52,200,000

 
41,104,880

 
94.4
%
 
96.6
%
 
1,309

 
1,331

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

 
36,250,000

 
24,154,949

 
90.7
%
 
90.7
%
 
1,003

 
972

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

 
60,500,000

 
45,196,446

 
91.4
%
 
92.1
%
 
1,591

 
1,652

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

 
58,500,000

 
43,294,592

 
90.6
%
 
92.2
%
 
1,293

 
1,340

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

 
40,300,000

 
28,091,457

 
92.4
%
 
94.6
%
 
1,236

 
1,242

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

 
51,400,000

 
44,646,959

 
91.5
%
 
92.3
%
 
962

 
958

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

 
44,200,000

 
33,656,258

 
95.5
%
 
95.5
%
 
1,341

 
1,381

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

 
47,750,000

 
—

 
93.5
%
 
94.9
%
 
1,145

 
1,139

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

 
32,400,000

 
—

 
95.4
%
 
94.5
%
 
1,163

 
1,171

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

 
110,000,000

 
—

 
94.2
%
 
96.0
%
 
1,175

 
1,175

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

 
55,772,500

 
41,680,049

 
91.0
%
 
91.2
%
 
991

 
958

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

 
66,050,000

 
44,544,718

 
93.4
%
 
94.3
%
 
1,498

 
1,527

 
 
 
 
 
 
 
 
11,601

 
$
1,499,381,750

 
$
948,763,775

 
92.9
%
 
93.1
%
 
$
1,128

 
$
1,137

_____________________
(1)
As of March 31, 2018, our portfolio was approximately 95.0% leased, calculated using the number of occupied and contractually leased units divided by total units.
(2)
Average monthly rent is based upon the effective rental income after considering the effect of vacancies, concessions and write-offs.

32

PART I — FINANCIAL INFORMATION (continued)


(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 $45,000,000 and associated deferred financing costs of $124,836 related to the line of credit 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 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, 2017 filed with the SEC on March 16, 2018. There have been no significant changes to our accounting policies during the period covered by this report, except as discussed in Note 2 to our condensed consolidated unaudited financial statements in this quarterly report.
Income Taxes
We elected to be taxed as, and currently qualify 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 would be subject to federal income tax on our taxable income at regular corporate income tax rates and generally would 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 March 31, 2018 and December 31, 2017, 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 all tax years through December 31, 2017.
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 cash flow from operations. As a result, our distribution rate and payment frequency may vary from time to time. However, to qualify as a REIT for tax purposes, we must make distributions equal to at least 90% of our “REIT taxable income” each year.
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 three months ended March 31, 2018 and 2017, 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 common stock.

33

PART I — FINANCIAL INFORMATION (continued)


The distributions declared and paid during the fiscal quarter ended March 31, 2018, along with the amount of distributions reinvested pursuant to the distribution reinvestment plan were as follows:
 
 
 
 
 
 
Distributions Paid(3)
 
Sources of Distributions Paid
 
 
Period
 
Distributions Declared(1)
 
Distributions Declared Per Share(1)(2)
 
Cash
 
Reinvested
 
Total
 
Cash Flow From Operations
 
Notes Payable
 
Net Cash Provided by Operating Activities
First Quarter 2018
 
$
11,312,463

 
$
0.222

 
$
5,597,521

 
$
5,701,030

 
$
11,298,551

 
$
7,087,026

 
$
4,211,525

 
$
7,087,026

____________________
(1)
Distributions during the first quarter of 2018 were based on daily record dates and calculated at a rate of $0.002466 per share per day.
(2)
Assumes each share was issued and outstanding each day during the period presented.
(3)
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately three days following month end.
For the three months ended March 31, 2018, we paid aggregate distributions of $11,298,551, including $5,597,521 of distributions paid in cash and 383,908 shares of our common stock issued pursuant to our distribution reinvestment plan for $5,701,030. For the three months ended March 31, 2018, our net loss was $8,018,094, we had funds from operations, or FFO, of $9,417,256 and net cash provided by operations of $7,087,026. For the three months ended March 31, 2018, we funded $7,087,026 and $4,211,525, or 63% and 37%, of total distributions paid, including shares issued pursuant to our distribution reinvestment plan, from net cash provided by operating activities and from proceeds from the refinancing of our credit facility. Since inception, of the $116,874,279 in total distributions paid through March 31, 2018, including shares issued pursuant to our distribution reinvestment plan, 70% of such amounts were funded from cash flow from operations, 12% were funded from proceeds from our revolving line of credit and the refinancing of our credit facility and 18% were funded from net public offering proceeds. For information on how we calculate FFO and the reconciliation of FFO to net loss, see “—Funds from Operations and Modified Funds from Operations.”
Our long-term policy is to pay distributions solely from cash flow from operations. Because we may receive income from interest or rents at various times during our fiscal year and because we may need cash flow from operations during a particular period to fund capital expenditures and other expenses, we expect that 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.
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.
With respect to other commercial properties, we expect in the future to include provisions in our leases designed to protect us from the impact of inflation. These provisions include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases annual reimbursement of operating expenses above a certain allowance.
As of March 31, 2018, we had not entered into any material leases as a lessee.

34

PART I — FINANCIAL INFORMATION (continued)


REIT Compliance
To qualify as a REIT for tax purposes, we are required to distribute at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP) to our stockholders. We must also meet certain asset and income tests, as well as other requirements. We monitor the operations and transactions that may potentially impact our REIT status. If we fail to qualify as a REIT in any taxable year, we would 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. At March 31, 2018, our debt was approximately 56% of the value of our properties, as determined by the most recent valuations performed by an independent third-party appraiser as of December 31, 2017. 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. Under our Articles of Amendment and Restatement, or our charter, we are prohibited from borrowing in excess of 300% of the value of our net assets, which generally approximates to 75% of the aggregate cost of our assets, though we may exceed this limit only under certain circumstances.
In addition to making investments in accordance with our investment objectives, we use our capital resources to make certain payments to our advisor and its affiliates. 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 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 $24,202,447 as of March 31, 2018;
•
various forms of secured and unsecured financing;
•
borrowings under master repurchase agreements;
•
equity capital from joint venture partners; and
•
proceeds from our distribution reinvestment plan.
Over the short term, we believe that our sources of capital, specifically our cash balances, 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 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 operating activities as well as providing capital for investment in future development and other joint ventures along with potential forward purchase commitments.
On May 18, 2016, we entered into a secured revolving line of credit facility with PNC Bank, National Association, or 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 maturity date of May 17, 2019, subject to extension, as further described in the loan agreement entered into by certain of our wholly-owned subsidiaries with PNC Bank in connection with the acquisition of the Landings of Brentwood property. As of March 31, 2018, $45,000,000 was outstanding on our line of credit. We have the option to select the interest rate in respect of the outstanding unpaid principal amount of the line of credit loans from the following options (1) the sum of the Base Rate (as defined in the loan agreement) plus 0.60% or (2) a rate per annum fixed for the applicable LIBOR Interest Period (as defined in the loan agreement) equal to the sum of the London Interbank Offered Rate (LIBOR) plus 1.60%. Monthly interest payments are due and payable in arrears on the first day of each month until the line of credit maturity date. The entire outstanding principal balance and any accrued and unpaid

35

PART I — FINANCIAL INFORMATION (continued)


interest on the line of credit loans are due and payable in full on the line of credit maturity date. For additional information on our line of credit, see Note 5 (Debt) to the unaudited 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 March 31, 2018, we owned 34 multifamily properties. During the three months ended March 31, 2018, net cash provided by operating activities was $7,087,026 compared to net cash provided by operating activities of $4,093,804 for the three months ended March 31, 2017. The increase in net cash provided by operating activities is primarily due to changes in accounts payable and accrued liabilities, amounts due to affiliates and changes in the fair value of our interest rate cap agreements. We expect to continue to generate cash flows from operations as we stabilize the operations of our property portfolio and complete our value-enhancement program.

Cash Flows Used in Investing Activities
During the three months ended March 31, 2018, net cash used in investing activities was $3,322,440 compared to $9,903,647 during the three months ended March 31, 2017. The decrease in net cash used in investing activities was primarily the result of fewer additions to real estate investments during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. Net cash used in investing activities during the three months ended March 31, 2018, consisted of the following:
•
$3,466,412 of cash used for improvements to real estate investments; and
•
$143,972 of cash provided by proceeds from insurance claims.
Cash Flows from Financing Activities
During the three months ended March 31, 2018, net cash used in financing activities was $8,642,190 compared to net cash provided by financing activities of $3,567,828 during the three months ended March 31, 2017. The decrease in net cash used in financing activities is due to a decrease in proceeds from borrowings on credit facilities from $10,000,000 during the three months ended March 31, 2017, compared to no borrowings during the three months ended March 31, 2018, partially offset by an increase in redemptions of common stock during the three months ended March 31, 2018. Net cash provided by financing activities during the three months ended March 31, 2018, consisted of the following:
•
$56,510 of payments of commissions on sales of common stock;
•
$101,943 of principal payments on mortgage notes payable;
•
$2,886,216 of cash paid for the repurchase of common stock; and
•
$5,597,521 of net cash distributions to our stockholders, after giving effect to distributions reinvested by stockholders of $5,701,030.
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. At March 31, 2018, our debt was approximately 56% of the value of our properties, as determined by the most recent valuations performed by an independent third-party appraiser as of December 31, 2017. 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. Under our charter, we are prohibited from borrowing in excess of 300% of our net assets, which generally approximates to 75% of the aggregate cost of our assets unless such excess is approved by a majority of the independent directors and disclosed to stockholders, along with a justification for such excess, in our next quarterly report. In such event, we will monitor our debt levels and take action to reduce any such excess as practicable. Our aggregate borrowings are reviewed by our board of directors at least quarterly. As of March 31, 2018, our aggregate borrowings were not in excess of 300% of the value of our net assets.

36

PART I — FINANCIAL INFORMATION (continued)


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 in connection with the management of our asset portfolio and costs incurred by our advisor in providing services to us.
As of March 31, 2018, we had indebtedness totaling an aggregate principal amount of $993,638,939, including the net discount on a note payable of $2,187,092 and the net deferred financing costs of $5,241,321. The following is a summary of our contractual obligations as of March 31, 2018:
 
 
 
 
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)
 
$
271,961,141

 
$
29,800,608

 
$
76,679,147

 
$
71,663,220

 
$
93,818,166

Principal payments on outstanding debt obligations(2)
 
1,001,067,352

 
2,184,120

 
58,232,264

 
111,410,597

 
829,240,371

Total
 
$
1,273,028,493

 
$
31,984,728

 
$
134,911,411

 
$
183,073,817

 
$
923,058,537

________________
(1)
Projected interest payments on outstanding debt obligations are based on the outstanding principal amounts and interest rates in effect at March 31, 2018. We incurred interest expense of $9,092,883 during the three months ended March 31, 2018, including amortization of deferred financing costs totaling $246,274, net unrealized gains from the change in fair value of interest rate cap agreements of $447,614, amortization of loan discount of $88,746 and credit facility commitment fees of $7,397.
(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.
Our debt obligations contain customary financial and non-financial debt covenants. As of March 31, 2018, we were in compliance with all debt covenants.
Results of Operations
Overview
The discussion that follows is based on our consolidated results of operations for the three months ended March 31, 2018 and 2017. The ability to compare one period to another is affected by our value-enhancement strategy. As of March 31, 2018 and 2017, we owned 34 multifamily properties. The increase in rents and occupancy are the primary cause of the increase in operating income and expenses, as further discussed below.
Our results of operations for the three months ended March 31, 2018 and 2017, are not indicative of those expected in future periods. For the three months ended March 31, 2018 and 2017, we continued to perform value-enhancements projects, which may have a significant impact on our future results of operations. In general, we expect that our revenues 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 NOI. For more information on NOI and a reconciliation of NOI (a non-GAAP financial measure) to net loss, see “—Net Operating Income.”

37

PART I — FINANCIAL INFORMATION (continued)


Consolidated Results of Operations for the Three Months Ended March 31, 2018 and 2017
The following table summarizes the consolidated results of operations for the three months ended March 31, 2018 and 2017:
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
2018
 
2017
 
Change $
 
Change %
Total revenues
 
$
41,367,026

 
$
39,704,775

 
$
1,662,251

 
4
 %
Operating, maintenance and management
 
(9,974,835
)
 
(9,450,859
)
 
(523,976
)
 
6
 %
Real estate taxes and insurance
 
(5,685,380
)
 
(6,232,047
)
 
546,667

 
(9
)%
Fees to affiliates
 
(5,796,678
)
 
(5,638,971
)
 
(157,707
)
 
3
 %
Depreciation and amortization
 
(17,435,350
)
 
(17,398,525
)
 
(36,825
)
 
—
 %
Interest expense
 
(9,092,883
)
 
(7,882,714
)
 
(1,210,169
)
 
15
 %
General and administrative expenses
 
(1,399,994
)
 
(1,513,512
)
 
113,518

 
(8
)%
Acquisition costs
 
—

 
(1,185
)
 
1,185

 
(100
)%
Net loss
 
$
(8,018,094
)
 
$
(8,413,038
)
 
$
394,944

 
(5
)%
 
 
 
 
 
 
 
 
 
NOI(1)
 
$
23,985,291

 
$
22,442,003

 
$
1,543,288

 
7
 %
FFO(2)
 
$
9,417,256

 
$
8,985,487

 
$
431,769

 
5
 %
MFFO(2)
 
$
8,969,642

 
$
9,241,674

 
$
(272,032
)
 
(3
)%
______________
(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 the National Association of Real Estate Investment Trusts, or NAREIT, established the measurement tool of FFO. Since its introduction, FFO has become a widely used non-GAAP financial measure among REITs. Additionally, we use modified funds from operations, or MFFO, as defined by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association), or 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 March 31, 2018, we had a net loss of $8,018,094 compared to $8,413,038 for the three months ended March 31, 2017. The decrease in net loss of $394,944 over the comparable prior year period was primarily due to the increase in total revenues of $1,662,251, the decrease in real estate taxes and insurance of $546,667, the decrease in general and administrative expenses of $113,518 and the decrease in acquisition costs of $1,185, partially offset by the increase in interest expense of $1,210,169, the increase in fees to affiliates of $157,707, the increase in operating, maintenance and management expenses of $523,976 and the increase in depreciation and amortization expense of $36,825. 

38

PART I — FINANCIAL INFORMATION (continued)


Total revenues
Total revenues were $41,367,026 for the three months ended March 31, 2018, compared to $39,704,775 for the three months ended March 31, 2017. The increase of $1,662,251 was primarily due to increases in average monthly occupancy and average monthly rents as a result of ordinary monthly rent increases and the completion of our value-enhancement projects. Average monthly occupancy increased from 92.2% as of March 31, 2017, to 92.9% as of March 31, 2018, and average monthly rents per unit increased from $1,113 as of March 31, 2017, to $1,128 as of March 31, 2018. 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 $9,974,835 for the three months ended March 31, 2018, compared to $9,450,859 for the three months ended March 31, 2017. The increase of $523,976 was primarily due to increases in repairs and maintenance costs, turnover costs and payroll expenses during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. 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 $5,685,380 for the three months ended March 31, 2018, compared to $6,232,047 for the three months ended March 31, 2017. The decrease of $546,667 was primarily due to a decrease in prior year tax adjustments at certain properties located in the state of Texas during the three months ended March 31, 2018, compared to the three months ended March 31, 2017. 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.
Fees to affiliates
Fees to affiliates were $5,796,678 for the three months ended March 31, 2018, compared to $5,638,971 for the three months ended March 31, 2017. The increase of $157,707 was primarily due to an increase in investment management fees as a result of the increase in cost of investment from additions to our real estate assets as well as an increase in property management fees as a result of the increase in revenue. 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 increased investment management fees from anticipated increases in the cost of investments and increased property management fees from anticipated increases in future rental income.
Depreciation and amortization
Depreciation and amortization expenses were $17,435,350 for the three months ended March 31, 2018, compared to $17,398,525 for the three months ended March 31, 2017. Depreciation and amortization expenses were consistent, with no meaningful changes from the three months ended March 31, 2017 to the three months ended March 31, 2018. 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 March 31, 2018, was $9,092,883 compared to $7,882,714 for the three months ended March 31, 2017. The increase of $1,210,169 was primarily due to the increase in the notes payable, net balance of $11,601,031 since March 31, 2017, due to financing incurred in connection with the refinancing of six multifamily properties since March 31, 2017, as well as increases in LIBOR from March 31, 2017 to March 31, 2018 that impact the interest on our variable rate loans. Included in interest expense is the amortization of deferred financing costs of $246,274 and $253,732, unrealized gain on derivative instruments of $447,614 and unrealized loss of $255,002, amortization of loan discount of $88,746 and $88,746 and credit facility commitment fees of $7,397 and $13,370 for the three months ended March 31, 2018 and 2017, respectively. We expect interest expense in future periods to vary based on our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.
General and administrative expenses
General and administrative expenses for the three months ended March 31, 2018, were $1,399,994 compared to $1,513,512 for the three months ended March 31, 2017. These general and administrative costs consisted primarily of transfer agent fees, legal fees, insurance premiums, audit fees, other professional fees and independent director compensation. The decrease of $113,518 was primarily due to the decrease in our advisor’s overhead allocation to us for the three months ended March 31,

39

PART I — FINANCIAL INFORMATION (continued)


2018, compared to the three months ended March 31, 2017. We expect general and administrative expenses to decrease as a percentage of total revenues.
Acquisition costs
There were no acquisition costs for the three months ended March 31, 2018, compared to $1,185 for the three months ended March 31, 2017. Acquisition costs were minimal due to the fact that no properties were acquired during the year ended December 31, 2017, and the three months ended March 31, 2018. We do not expect to incur significant acquisition costs in future periods as we have invested all of the proceeds from our initial public offering.
Property Operations for the Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017
For purposes of evaluating comparative operating performance, we categorize our properties as “same-store” or “non-same-store.” A “same-store” property is a property that was owned at January 1, 2017. A “non-same-store” property is a property that was acquired, placed into service or disposed of after January 1, 2017. As of March 31, 2018, 34 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 March 31, 2018 and 2017:
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
2018
 
2017
 
Change $
 
Change %
Same-store properties:
 
 
 
 
 
 
 
 
Revenues
 
$
41,179,931

 
$
39,563,742

 
$
1,616,189

 
4.1
%
Operating expenses
 
17,194,640

 
17,121,739

 
72,901

 
0.4
%
Net operating income
 
23,985,291

 
22,442,003

 
1,543,288

 
6.9
%
 
 
 
 
 
 
 
 
 
Non-same-store properties:
 
 
 
 
 
 
 
 
Net operating income
 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
Total net operating income(1)
 
$
23,985,291

 
$
22,442,003

 
$
1,543,288

 
 
________________
(1)
See “—Net Operating Income” below for a reconciliation of NOI to net loss.
Net Operating Income
Same-store net operating income for the three months ended March 31, 2018, was $23,985,291 compared to $22,442,003 for the three months ended March 31, 2017. The 6.9% increase in same-store net operating income was a result of a 4.1% increase in same-store rental revenues partially offset by a 0.4% increase in same-store operating expenses.
Revenues
Same-store revenues for the three months ended March 31, 2018, were $41,179,931 compared to $39,563,742 for the three months ended March 31, 2017. The 4.1% increase in same-store revenues was primarily due to average rent increases at the same-store properties from $1,113 as of March 31, 2017, to $1,128 as of March 31, 2018, as a result of ordinary monthly rent increases and the completion of value-enhancement projects. In addition, same-store occupancy increased from 92.2% as of March 31, 2017, to 92.9% as of March 31, 2018.
Operating Expenses
Same-store operating expenses for the three months ended March 31, 2018 were $17,194,640 compared to $17,121,739 for the three months ended March 31, 2017. The increase in same-store operating expenses was primarily attributable to an increase in repairs and maintenance costs and turnover costs during the three months ended March 31, 2018, compared to the three months ended March 31, 2017.

40

PART I — FINANCIAL INFORMATION (continued)


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 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 months ended March 31, 2018 and 2017, computed in accordance with GAAP:
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Net loss
 
$
(8,018,094
)
 
$
(8,413,038
)
Fees to affiliates(1)
 
4,262,253

 
4,200,140

Depreciation and amortization
 
17,435,350

 
17,398,525

Interest expense
 
9,092,883

 
7,882,714

General and administrative expenses
 
1,399,994

 
1,513,512

Acquisition costs
 
—

 
1,185

Other gains(2)
 
(187,095
)
 
(141,035
)
Net operating income
 
$
23,985,291

 
$
22,442,003

____________________

41

PART I — FINANCIAL INFORMATION (continued)


(1)
Fees to affiliates for the three months ended March 31, 2018, exclude property management fees of $1,191,167 and other fees of $343,258 that are included in NOI. Fees to affiliates for the three months ended March 31, 2017, exclude property management fees of $1,142,347 and other fees of $296,484 that are included in NOI.
(2)
Other gains for the three months ended March 31, 2018 and 2017, includes 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, NAREIT, an industry trade group, has promulgated a measure known as funds from operations, or FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended by the REIT industry as a supplemental performance measure. FFO is not equivalent to our net income (loss) as determined under GAAP.
We define FFO, a non-GAAP financial measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income (loss) computed in accordance with GAAP, excluding gains or losses from sales of property and non-cash impairment charges of real estate related investments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In particular, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment 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

42

PART I — FINANCIAL INFORMATION (continued)


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 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 are not capitalized, as discussed below, and affect our operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring our properties and once our portfolio is in place. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our properties have been acquired. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry. Further, we believe MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on our operating performance during the periods in which properties are acquired.
We define MFFO, a non-GAAP financial measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the 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, except with respect to certain acquisition fees and expenses as discussed below. 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. Currently under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income. However, following the recent publication of ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of business (“ASU 2017-01”), acquisition fees and expenses are capitalized and depreciated under certain conditions. We have elected to early adopt ASU 2017-01 and for any future acquisitions this would result in a substantial part of acquisition fees and expenses being capitalized and therefore not excluded from the calculation of MFFO but captured as depreciation in calculating FFO. 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 offering of shares 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

43

PART I — FINANCIAL INFORMATION (continued)


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, that are not capitalized, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties. Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to our current operating performance. By excluding such changes that may reflect anticipated and unrealized gains or losses, we believe MFFO provides useful supplemental information.
Presentation of this information is intended to provide useful information to investors as they compare the operating performance to that of other public, non-listed REITs, although it should be noted that not all public, non-listed REITs calculate FFO and MFFO the same way, so comparisons with other public, non-listed REITs may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with GAAP measurements as an indication of our performance. MFFO has limitations as a performance measure in an offering such as ours where the price of a share of common stock is a stated value and there is no regular net asset value determinations during the offering stage and for a period thereafter. 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 months ended March 31, 2018 and 2017:
 
 
For the Three Months Ended March 31,
 
 
2018
 
2017
Reconciliation of net loss to MFFO:
 
 
 
 
Net loss
 
$
(8,018,094
)
 
$
(8,413,038
)
  Depreciation of real estate assets
 
17,435,350

 
16,388,413

  Amortization of lease-related costs
 
—

 
1,010,112

FFO
 
9,417,256

 
8,985,487

  Acquisition fees and expenses (1)(2)
 
—

 
1,185

  Unrealized (gain) loss on derivative instruments
 
(447,614
)
 
255,002

MFFO
 
$
8,969,642

 
$
9,241,674

________________
(1)
By excluding expensed acquisition costs that are not capitalized, management believes MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s

44

PART I — FINANCIAL INFORMATION (continued)


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. Following the recent publication of ASU 2017-01, acquisition fees and expenses are capitalized and depreciated under certain conditions. We elected to early adopt ASU 2017-01 but did not experience a material impact from adopting this new guidance. 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.
(2)
Acquisition fees and expenses for the three months ended March 31, 2018 and 2017 include acquisition expenses of $0 and $1,185, respectively, that did not meet the criteria for capitalization under ASU 2017-01 and are recorded in acquisition costs in the accompanying consolidated statements of operations. FFO and MFFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Off-Balance Sheet Arrangements
As of March 31, 2018, 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 to the unaudited 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 March 31, 2018, the fair value of our fixed rate debt was $67,006,594 and the carrying value of our fixed rate debt was $67,449,541. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated at March 31, 2018. 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

45

PART I — FINANCIAL INFORMATION (continued)


and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.
Conversely, movements in interest rates on our variable rate debt will change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums will result in changes in the fair value of floating rate instruments. At March 31, 2018, the fair value of our variable rate debt was $942,916,998 and the carrying value of our variable rate debt was $926,189,398. Based on interest rates as of March 31, 2018, if interest rates are 100 basis points higher during the 12 months ending March 31, 2019, interest expense on our variable rate debt would increase by $9,473,429 and if interest rates are 100 basis points lower during the 12 months ending March 31, 2019, interest expense on our variable rate debt would decrease by $9,875,654.
At March 31, 2018, the weighted-average interest rate of our fixed rate debt and variable rate debt was 4.51% and 3.88%, respectively. The weighted-average interest rate of our blended fixed and variable rates was 3.92% at March 31, 2018. The weighted-average interest rate represents the actual interest rate in effect at March 31, 2018 (consisting of the contractual interest rate), using interest rate indices as of March 31, 2018, 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 March 31, 2018, we did not have counterparty risk on our interest rate cap agreements as the underlying variable rates for each of our interest rate cap agreements as of March 31, 2018 were not in excess of the capped rates. See also Note 10 to the unaudited 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 Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act). In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. 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 at the reasonable assurance level as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

46

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 16, 2018.

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain actions
and proceedings that may be initiated by our stockholders.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the U.S. District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of our company, (ii) any action asserting a claim of breach of any duty owed by any of our directors or officers or employees to us or to our stockholders, (iii) any action asserting a claim against us or any of our directors or officers or employees arising pursuant to any provision of the Maryland General Corporation Law, or the MGCL, or our charter or bylaws or (iv) any action asserting a claim against us or any of our directors or officers or employees that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring or holding any interest in our shares shall be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. Our board of directors, without stockholder approval, adopted this provision of the bylaws so that we can respond to such litigation more efficiently and reduce the costs associated with our responses to such litigation, particularly litigation that might otherwise be brought in multiple forums. This exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers, agents or employees, if any, and may discourage lawsuits against us and our directors, officers, agents or employees, if any. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings notwithstanding that the MGCL expressly provides that the charter or bylaws of a Maryland corporation may require that any internal corporate claim be brought only in courts sitting in one or more specified jurisdictions, we may incur additional costs that we do not currently anticipate associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition and results of operations.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2018, we did not sell any equity securities that were not registered under the Securities Act of 1933, or the Securities Act.
During the three months ended March 31, 2018, we fulfilled repurchase requests and repurchased shares of our common stock pursuant to our share repurchase plan as follows:

47

PART II — OTHER INFORMATION (continued)

 
 
Total Number of Shares Requested to be Repurchased(1)
 
Total Number of Shares Repurchased
 
Average Price Paid per Share(2)(3)
 
Approximate Dollar Value of Shares Available That May Yet Be Repurchased Under the Program
January 2018
 
79,896

 
185,218

 
$
14.24

 
(4) 
February 2018
 
76,777

 
15,861

 
14.64

 
(4) 
March 2018
 
153,279

 
1,092

 
14.48

 
(4) 
 
 
309,952

 
202,171

 
 
 
 
____________________
(1)
We generally repurchase shares approximately 30 days following the end of the applicable quarter in which requests were received. At March 31, 2018, we had $2,000,000, representing 144,442 shares of outstanding and unfulfilled repurchase requests, all of which were fulfilled on May 1, 2018.
(2)
During the three months ended March 31, 2018, we repurchased 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 be the amount the respective stockholder paid to acquire the shares from us.
(3)
From inception through March 31, 2018, our share repurchases have been funded exclusively from the net proceeds we received from the sale of shares under our distribution reinvestment plan.
(4)
The number of shares that may be repurchased pursuant to the share repurchase plan 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 net proceeds we received from the sale of shares under the distribution reinvestment plan during the prior calendar year, plus such additional funds as may be reserved for that purpose by our board of directors. Our board of directors has further limited the amount of shares that may be repurchased pursuant to our share repurchase plan to $2,000,000 per quarter.
Item 3. Defaults Upon Senior Securities
None.
Item 4.  Mine Safety Disclosures
Not applicable.
Item 5.  Other Information
None.

48

PART II — OTHER INFORMATION (continued)

Item 6.   Exhibits
EXHIBIT LIST
Exhibit
 
Description
3.1

 
3.2

 
4.1

 
4.2

 
4.3

 
4.5

 
4.6

 
31.1*

 
31.2*

 
32.1**

 
32.2**

 
____________________________
*
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.



49

SIGNATURES 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
Steadfast Apartment REIT, Inc.
 
 
 
 
 
 
Date:
May 10, 2018
By:
/s/ Rodney F. Emery
 
 
 
Rodney F. Emery
 
 
 
Chief Executive Officer and Chairman of the Board
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
May 10, 2018
By:
/s/ Kevin J. Keating
 
 
 
Kevin J. Keating
 
 
 
Chief Financial Officer and Treasurer
 
 
 
(Principal Financial and Accounting Officer)



50

Steadfast Apartment REIT, Inc. Reports