UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

FOR THE TRANSITION PERIOD FROM                 TO                

COMMISSION FILE NUMBER: 000-55765

 

Inland Residential Properties Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

630-218-8000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

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

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

 

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

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

As of August 2, 2018, there were 1,489,222 shares of the registrant’s Class A common stock, 408,816 shares of Class T common stock and 261,967 shares of Class T-3 common stock outstanding.

 

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

TABLE OF CONTENTS

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENT OF EQUITY

(unaudited)

 

See accompanying notes to consolidated financial statements.

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited)

 

 

See accompanying notes to consolidated financial statements.

 

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

(unaudited)

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited consolidated financial statements of Inland Residential Properties Trust, Inc. (which may be referred to herein as the “Company,” “we,” “us,” or “our”) for the year ended December 31, 2017, which are included in the Company’s 2017 Annual Report on Form 10-K/A, as certain footnote disclosures contained in such audited consolidated financial statements have been omitted from this Quarterly Report.

NOTE 1 - ORGANIZATION

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

At June 30, 2018, the Company owned real estate consisting of three multi-family communities totaling 623 units.  The properties consist of 677,142 square feet of residential and 10,609 square feet of retail gross leasable area. During the six months ended June 30, 2018, the properties’ weighted average daily occupancy for residential was 94.2% and at June 30, 2018, 605 units, or 97.1% of the total residential units were leased. At June 30, 2018, 100% of the retail units were occupied.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Disclosures discussing all significant accounting policies are set forth in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 21, 2018, under the heading “Note 2 - Summary of Significant Accounting Policies.” There has been no change to the Company’s significant accounting policies during the six months ended June 30, 2018 except as noted below.

General

The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. In the opinion of management, all adjustments necessary for a fair statement, in all material respects, of the financial position and results of operations for the periods are presented. Actual results could differ from those estimates. The results of operations for the interim periods are not necessarily indicative of the results for the entire year.

 

Recently Adopted Accounting Pronouncements

In November 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new update will require that amounts described as restricted cash and restricted cash equivalents be included in beginning and ending-of-period reconciliation of cash shown on the statement of cash flows. The amendment was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. At June 30, 2018, the Company does not have restricted cash in its consolidated balance sheets and therefore, the new guidance has had no impact to its consolidated financial statements or related disclosures.

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company selected the modified retrospective transition method which would include a cumulative effect of applying the standard on January 1, 2018. As the Company has reviewed its revenue streams and has concluded its previous recognition of revenue is in compliance with the new standard, no cumulative effect adjustment is required. Common area

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

maintenance reimbursements that may be impacted will not be addressed until the Company's adoption of ASU No. 2016-02, Leases (Topic 842) considering its revisions to accounting for common area maintenance.

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. On July 30, 2018 the FASB issued ASU No. 2018-11, Targeted Improvements, Leases (Topic 842), which would provide lessors with a practical expedient, by class of underlying assets, to not separate non-lease components from the related lease components and, instead, to account for those components as a single lease component, if certain criteria are met. ASU No. 2018-11 also provides companies with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Both ASU No. 2016-02 and ASU No 2018-11 are effective for the Company on January 1, 2019, with early adoption permitted. The Company is continuing to evaluate this guidance and the impact on its consolidated financial statements. The Company expects to utilize the practical expedients in the amendment as part of its adoption of ASU No. 2016-02.

 

NOTE 3 – EQUITY

 

The Company commenced an offering of shares of Class A common stock, $.001 par value per share (“Class A Shares”) and shares of Class T common stock, $.001 par value per share (“Class T Shares”) on February 17, 2015 (the “Offering”) and, effective February 2, 2017, the Company reallocated certain of the remaining shares offered in the Offering to offer shares of Class T-3 common stock, $.001 par value per share (“Class T-3 Shares”). The Company ceased accepting subscription agreements dated after December 31, 2017 and terminated the Offering on January 3, 2018. Excluding the distribution reinvestment plan (as amended, the “DRP”), the Company issued 1,401,711 Class A Shares, 390,230 Class T Shares and 255,666 Class T-3 Shares generating gross proceeds of approximately $50 million from the Offering. As of June 30, 2018, the Company had 1,486,010, 408,507 and 260,903 Class A Shares, Class T Shares and Class T-3 Shares outstanding, respectively.

 

On February 2, 2018, the Company’s board of directors determined an estimated per share net asset value (“Estimated Per Share NAV”) for each class of its common stock. The Company intends to publish an updated estimated value of its shares on at least an annual basis.

 

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

 

Distribution Reinvestment Plan

 

The Company provides stockholders with the option to purchase additional shares from the Company by automatically reinvesting cash distributions through the DRP, subject to certain share ownership restrictions. For participants in the DRP, cash distributions paid on Class A Shares, Class T Shares and Class T-3 Shares, as applicable, are used to purchase Class A Shares, Class T Shares and Class T-3 Shares, respectively. Such purchases under the DRP are not subject to selling commissions, dealer manager fees, distribution and stockholder servicing fees or reimbursement of issuer costs in connection with shares of common stock issued through the DRP. Under the DRP, beginning with the February 2018 distribution payment made to stockholders in March 2018 until the Company announces new estimated per share net asset values, distributions may be reinvested for shares of common stock at the applicable Estimated Per Share NAV.

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

Distributions reinvested through the DRP were $648,707 and $479,079 for the six months ended June 30, 2018 and 2017, respectively.

 

Share Repurchase Program

 

Under the share repurchase program (as amended, the “SRP”), the Company is authorized, in its discretion, to purchase shares from stockholders who purchased their shares from the Company or received their shares through a non-cash transfer and who have held their shares for at least one year, if requested. Subject to funds being available, the Company limits the number of shares repurchased during any calendar year to 5% of the number of shares of common stock outstanding on December 31st of the previous calendar year. Funding for the SRP is limited to the proceeds that the Company receives from the DRP during the same period. In the case of repurchases made upon the death of a stockholder or qualifying disability, as defined in the SRP, neither the one year holding period, the limit regarding funds available from the DRP nor the 5% limit applies. The SRP will immediately terminate if the Company’s shares become listed for trading on a national securities exchange. In addition, the Company’s board of directors, in its sole direction, may, at any time, amend, suspend or terminate the SRP.

 

Repurchases through the SRP were $359,861 during the six months ended June 30, 2018. There were no repurchases through the SRP during the six months ended June 30, 2017.

 

 

NOTE 4 – ACQUISITIONS

 

During the six months ended June 30, 2018, the Company did not acquire any real estate properties.

 

 

NOTE 5 – ACQUIRED INTANGIBLE ASSETS

The following table summarizes the Company’s identified intangible assets and liabilities as of June 30, 2018 and December 31, 2017:

As of June 30, 2018, the weighted average amortization period for acquired in place lease intangibles is 3.6 years.

The portion of the purchase price allocated to acquired in place lease value is amortized on a straight-line basis over the acquired leases’ weighted average remaining term.

Amortization pertaining to acquired in place lease value is summarized below:

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

Estimated amortization of the respective intangible lease assets and liabilities as of June 30, 2018 for each of the five succeeding years and thereafter is as follows:  

 

 

 

NOTE 6 – MORTGAGES AND NOTE PAYABLE, NET

As of June 30, 2018 and December 31, 2017, the Company had the following mortgages and note payable:

 

 

 

The Company estimates the fair value of its total debt by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments of comparable maturities by the Company’s lenders using Level 3 inputs.  The carrying value of the Company’s debt excluding unamortized debt issuance costs was $63,180,000 and $66,680,000 as of June 30, 2018 and December 31, 2017, respectively, and its estimated fair value was $60,953,330 and $65,281,610 as of June 30, 2018 and December 31, 2017, respectively.

 

Mortgages

 

The mortgage loans require compliance with certain covenants such as debt service ratios, investment restrictions and distribution limitations.  As of June 30, 2018, the Company is in compliance with all financial covenants related to its mortgage loans.

The scheduled principal payments and maturities on the Company’s mortgages are as follows:

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The weighted average years to maturity for the Company’s debt is 6.72 years.

Note Payable

The Company paid in full the outstanding balance of its note payable and accrued interest in January 2018.

 

NOTE 7 – DISTRIBUTIONS

 

The Company currently pays distributions based on daily record dates, payable in arrears the following month.  From January 1, 2018 through February 28, 2018, distributions were declared in a daily amount equal to $0.003424658 per Class A Share, $0.002768493 per Class T Share and $0.003306849 per Class T-3 Share, based on a 365-day period. From March 1 through March 31, 2018, distributions were declared in a daily amount equal to $0.003424658 per Class A Share, $0.002758488 per Class T Share and $0.003323017 per Class T-3 Share, based on a 365-day period. From April 1, 2018 through June 30, 2018, distributions were declared in a daily amount equal to $0.003424658 per Class A Share, $0.002758356 per Class T Share and $0.003306849 per Class T-3 Share, based on a 365-day period. The Company issued 22,396 in stock dividends during the six months ended June 30, 2017. The table below presents the distributions paid and declared for the three and six months ended June 30, 2018 and 2017.

 

 

NOTE 8 – EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period (the “common shares”). Diluted EPS is computed by dividing net income (loss) by the common shares plus common share equivalents. The Company excludes antidilutive restricted shares from the calculation of weighted-average shares for diluted EPS.  As a result of a net loss for the three and six months ended June 30, 2018, 735 and 699 shares, respectively, were excluded from the computation of diluted EPS, because they would have been antidilutive. As a result of a net loss for the three and six months ended June 30, 2017, 811 and 761 shares, respectively, were excluded from the computation of diluted EPS, because they would have been antidilutive. The Company does not apply the two-class method for calculating EPS as its share classes only differ on the timing of its payment of distribution and stockholder servicing fees.

 

NOTE 9 – EQUITY-BASED COMPENSATION

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

 

Under the RSP, restricted shares generally vest over a one to three year vesting period from the date of the grant based on the specific terms of the grant.  The grant-date value of the restricted shares is amortized over the vesting period representing the requisite service period. At vesting, any restrictions on the shares lapse. The number of shares that may be issued under the RSP is limited to 5% of

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

outstanding shares. Compensation expense associated with the director restricted shares is included in general and administrative expenses in the accompanying consolidated financial statements. Compensation expense under the RSP was $2,707 and $6,018 for the three and six months ended June 30, 2018, respectively. Compensation expense under the RSP was $2,778 and $5,139 for the three and six months ended June 30, 2017, respectively. As of June 30, 2018, the Company had $6,875 of unrecognized compensation expense related to the unvested restricted share awards. The weighted average remaining period that compensation expense related to unvested restricted shares will be recognized is 1.35 years. A summary of the status of the restricted shares is presented below:

 

 

NOTE 10 – SEGMENT REPORTING

The Company has one reportable segment, multi-family real estate, as defined by U.S. GAAP for the three and six months ended June 30, 2018 and 2017.

 

 

NOTE 11 – TRANSACTIONS WITH RELATED PARTIES

 

The following table summarizes the Company’s related party transactions for the three and six months ended June 30, 2018 and 2017. The Sponsor and its affiliates will not require repayment of acquisition related costs (fee), certain offering costs, mortgage financing fee and Sponsor non-interest bearing advances until subsequent to 12 months from the issuance of this report.

 

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

 

 

 

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INLAND RESIDENTIAL PROPERTIES TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

 

 

 

NOTE 12 – SUBSEQUENT EVENTS

Cash distributions

 

The Company’s board of directors declared cash distributions payable to stockholders of record of Class A, Class T and Class T-3 Shares each day beginning on the close of business July 1, 2018 through the close of business October 31, 2018.  Through that date distributions were declared in a daily amount equal to $0.003424658 per Class A Share, $0.002758356 per Class T Share and $0.003306849 per Class T-3 Share, based on a 365-day period. Distributions were paid monthly in arrears as follows.

 

 

 

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

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “may,” “could,” “should,” “expect,” “intend,” “plan,” “goal,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “variables,” “potential,” “continue,” “expand,” “maintain,” “create,” “strategies,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of the management of Inland Residential Properties Trust, Inc. (which we refer to herein as the “Company,” “we,” “our” or “us”) based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K/A for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 21, 2018, and factors described below:

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

The following discussion and analysis relates to the three and six months ended June 30, 2018 and 2017 and as of June 30, 2018 and December 31, 2017. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included in this report.

Overview

We are an externally managed Maryland corporation formed in December 2013 to primarily acquire and manage a portfolio of multi-family properties located primarily in the top 100 United States metropolitan statistical areas, which generally contain populations greater than 500,000 people. Our real estate portfolio consists of “stabilized” Class A multi-family properties. We are managed by our Business Manager. Substantially all of our business is conducted through Inland Residential Operating Partnership, L.P., of which we are the sole general partner.  We elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2015.

We commenced our Offering of Class A and Class T Shares on February 17, 2015 and, effective February 2, 2017, we reallocated certain of the remaining shares being offered in our Offering to offer Class T-3 Shares.  We ceased accepting subscriptions agreements dated after December 31, 2017 and terminated the Offering on January 3, 2018.  Excluding the DRP, the Company issued 1,401,711 Class A Shares, 390,230 Class T Shares and 255,666 Class T-3 Shares generating gross proceeds of approximately $50 million from the Offering.

On February 5, 2018, the Company reported an estimated per share net asset value for each class of its common stock equal to $23.15, $24.32 and $23.55 per Class A Share, Class T Share and Class T-3 Share, respectively.

Our fixed operating expenses, including property operating expenses and expenses related to operating as a public reporting company, relative to our gross income is disproportionately large due to the size of our portfolio. As a result, during prior periods, operating income did not generate sufficient cash flow to fully cover distribution payments.  However, during the most recent six month period ended June 30, 2018, distribution payments were covered in full from operating cash flow.  We continue to review alternative strategies that could produce positive cash flow or generate a liquidity event. These strategies could include a sale of our assets.

Select Property Information

As of June 30, 2018, we owned three communities located in three states consisting of 623 residential units.  In addition, we own ground level retail space totaling 10,609 square feet at one property.  We own and lease retail space at our properties when we believe the retail space will increase the attractiveness of our communities and add convenience to our residents. The table below presents information for each of our communities as of June 30, 2018.

 

Our communities include garden-style apartments generally defined as properties with multiple one to three story buildings in landscaped settings and mid-rise apartments situated in more urban settings.  The following table sets forth a summary of our communities by building type as of June 30, 2018.

 

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Liquidity and Capital Resources

General

As of June 30, 2018, and December 31, 2017, we had total debt outstanding excluding unamortized debt issuance costs of approximately $63.2 million and $66.7 million, respectively, which bore interest at a weighted average interest rate of 3.73% per annum. As of June 30, 2018, and December 31, 2017, our borrowings were 60% and 63%, respectively, of the purchase price of our investment properties.  As of June 30, 2018, the weighted average years to maturity for our mortgages was approximately 6.72 years.  We do not anticipate significant capital expenditures to our properties in 2018.  At June 30, 2018 and December 31, 2017 our cash and cash equivalent balance was $4.5 million and $7.6 million, respectively.  Our primary uses and sources of cash are as follows:

 

Cash Flow Analysis

 

Operating activities

Cash provided by operating activities increased $1.0 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to cash generated from property operations from our acquisitions, timing of payments including real estate taxes and cash receipts.

Investing activities

We have not acquired any properties in 2018 and do not presently intend to acquire additional properties unless we are able to access additional sources of capital.

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Financing activities

For the six months ended June 30, 2018, cash used by financing activities was $4.4 million and for the six months ended June 30, 2017, cash provided by financing activities was $30.6 million. The decrease in cash was primarily because we obtained a mortgage loan and a mezzanine loan in an aggregate amount of $22.9 million to finance our acquisitions in 2017. During the six months ended June 30, 2018, we paid off our note payable in an aggregate amount of $3.5 million. During the six months ended June 30, 2018 and 2017, we generated proceeds from the sale of our shares, net of offering costs paid, of approximately $0.1 million and $8.1 million, respectively. Proceeds from our offering decreased during the six months ended June 30, 2018 compared to the six months ended June 30, 2017 as we terminated our offering on January 3, 2018. During the six months ended June 30, 2018, we paid approximately $1.3 million in distributions net of $0.6 million reinvested in the DRP. During the six months ended June 30, 2017, we paid $0.9 million distributions net of $0.5 million reinvested in the DRP.  We repurchased $0.4 million of shares in 2018.

Distributions

A summary of the cash distributions declared and paid, and cash flows provided by operations for the six months ended June 30, 2018 and 2017 is as follows:

 

Results of operations

The following discussion is based on our consolidated financial statements for the three and six months ended June 30, 2018 and 2017.

This section describes and compares our results of operations for the three and six months ended June 30, 2018 and 2017. We generate almost all of our net operating income from property operations. In order to evaluate our overall portfolio, management analyzes the net operating income of our property that we have owned and operated for both periods presented, in their entirety, referred to herein as “same store” properties. By evaluating the property net operating income of our “same store” properties, management is able to

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monitor the operations of our existing properties for comparable periods to measure the performance of our current portfolio and determine the effects of our new acquisitions on net income.

 

 

Comparison of the three months ended June 30, 2018 and 2017

 

A total of one multi-family property was acquired on or before April 1, 2017 and represents our “same store” property during the three months ended June 30, 2018 and 2017.  “Non-same store,” as reflected in the table below, consists of properties acquired after April 1, 2017. For the three months ended June 30, 2018, two properties constituted non-same store properties, and for the three months ended June 30, 2017 one property was considered a non-same store property.  The following table presents property net operating income broken out between same store and non-same store, prior to amortization of intangibles, interest, and depreciation and amortization for the three months ended June 30, 2018 and 2017, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

 

 

Net loss. Net loss was $533,942 and $704,794 for the three months ended June 30, 2018 and 2017, respectively.

 

Total property net operating income.  On a “same store” basis, comparing the results of operations of our investment property owned during the three months ended June 30, 2018, with the results of the same investment property owned during the three months ended June 30, 2017, property net operating income increased $34,461.  The increase is due to decreased property operating expenses and increased other property income.

 

“Non-same store” total property net operating income increased $643,725 during 2018 as compared to 2017. The increase is a result of acquiring two additional properties after April 1, 2017.

General and Administrative expenses.  General and administrative expenses decreased $65,145 in 2018 compared to 2017.  This decrease is primarily due to a decrease in legal fees.

Acquisition related costs.  Acquisition related expenses decreased $30,266 in 2018 compared to 2017. The decrease is attributed to no acquisition related activity in 2018.

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Business management fee. Business management fees increased $66,800 in 2018 compared to 2017. The increase is due to the acquisition of two additional properties which increased assets under management.

Depreciation and Amortization.  Depreciation and amortization increased $343,452 in 2018 compared to 2017. The increase is due to acquisitions after April 1, 2017.

Interest Expense.  Interest expense increased $183,767 in 2018 compared to 2017. The increase is due to borrowings to fund acquisitions in 2017. The average debt balance increased approximately $20,400,000 in 2018 compared to 2017.

Interest and other income.  Interest and other income decreased $8,726.  The decrease is primarily due to lower interest earned as a result of lower cash balances in 2018 compared to 2017.

 

Comparison of the six months ended June 30, 2018 and 2017

 

A total of one multi-family property was acquired on or before January 1, 2017 and represents our “same store” property during the six months ended June 30, 2018 and 2017.  “Non-same store,” as reflected in the table below, consists of properties acquired after January 1, 2017. For the six months ended June 30, 2018, two properties constituted non-same store properties, and for the six months ended June 30, 2017 one property was considered a non-same store property. The following table presents property net operating income broken out between same store and non-same store, prior to amortization of intangibles, interest, and depreciation and amortization for the six months ended June 30, 2018 and 2017, along with a reconciliation to net loss, calculated in accordance with U.S. GAAP.

 

Net loss. Net loss was $1,339,932 and $1,063,900 for the six months ended June 30, 2018 and 2017, respectively.

 

Total property net operating income.  On a “same store” basis, comparing the results of operations of our investment property owned during the six months ended June 30, 2018, with the results of the same investment property owned during the six months

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ended June 30, 2017, property net operating income decreased $3,226.  The decrease is primarily due to increased property operating expenses.  

 

“Non-same store” total property net operating income increased $1,503,833 during 2018 as compared to 2017. The increase is a result of acquiring two additional properties after January 1, 2017.

General and Administrative expenses.  General and administrative expenses increased $111,601 in 2018 compared to 2017.  This increase is primarily due to growth in our portfolio and valuation related costs.

Acquisition related costs.  Acquisition related expenses decreased $71,479 in 2018 compared to 2017. The decrease is attributed to no acquisition related activity in 2018.

Business management fee. Business management fees increased $156,523 in 2018 compared to 2017. The increase is due to the acquisition of two additional properties in mid 2017 which increased assets under management.

Depreciation and Amortization.  Depreciation and amortization increased $1,024,669 in 2018 compared to 2017. The increase is due to acquisitions during 2017.

Interest Expense.  Interest expense increased $543,150 in 2018 compared to 2017. The increase is due to borrowings to fund acquisitions in 2017. The average debt balance increased approximately $28,650,000 in 2018 compared to 2017.

Interest and other income.  Interest and other income decreased $12,175.  The decrease is primarily due to lower interest earned as a result of lower cash balances in 2018 compared to 2017.

Critical Accounting Policies

 

Disclosures discussing all significant accounting policies are set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 21, 2018, under the heading “Critical Accounting Policies”. There have been no changes to our critical accounting policies during the six months ended June 30, 2018.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Subsequent Events

For information related to subsequent events, reference is made to Note 12 – “Subsequent Events” which is included in our June 30, 2018 Notes to Consolidated Financial Statements in Item 1.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to purchase properties or other real estate assets, maintain liquidity and fund capital expenditures or operations. As of June 30, 2018, we had outstanding debt of approximately $63.2 million, excluding mortgage premium and unamortized debt issuance costs, bearing interest rates ranging from 3.64% to 3.88% per annum. The weighted average interest rate was 3.73%. As of June 30, 2018, the weighted average years to maturity for our mortgages was approximately 6.72 years.

As of June 30, 2018 and December 31, 2017, we did not have any variable rate debt. As of June 30, 2018, our fixed-rate debt consisted of secured mortgage financings with a carrying value of $63.2 million and a fair value of $61.0 million. As of December 31, 2017, our fixed-rate debt consisted of secured mortgage financings and a note payable with a carrying value of $66.7 million and a fair value of $65.3 million. Changes in interest rates do not affect interest expense incurred on our fixed-rate debt until their maturity or earlier repayment, but interest rates do affect the fair value of our fixed-rate debt obligations. If market interest rates were to increase by 1% (100 basis points), the fair value of our fixed-rate debt would decrease by $3.4 million at June 30, 2018. If market interest rates were to decrease by 1% (100 basis points), the fair value of our fixed-rate debt would increase by $3.6 million at June 30, 2018.

 

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Item 4.  Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II - Other Information

Item 1.  Legal Proceedings

We are not a party to, and none of our properties are subject to, any material pending legal proceedings.

Item 1A.  Risk Factors

The following risk factors supplement the risk factors set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2017.

 

We have incurred net losses on a U.S. GAAP basis for the six months ended June 30, 2018 and 2017.

We have incurred net losses on a U.S. GAAP basis for the six months ended June 30, 2018 and 2017 of $1.3 million and $1.1 million, respectively. Our losses can be attributed, in part, to property operating, interest, general and administrative expenses, and non-cash charges for depreciation and amortization. We may incur net losses in the future, which could have a material adverse impact on our financial condition, operations, cash flow, and our ability to service our indebtedness and pay distributions to our stockholders. We are subject to all of the business risks and uncertainties associated with any business. As of June 30, 2018, we had acquired three multi-family communities. We cannot assure our stockholders that, in the future, we will be profitable or that we will realize growth in the value of our assets.

 

Our fixed operating expenses constitute a greater percentage of our gross income due to the size of our portfolio and, as a result, may make it more difficult to generate sufficient income to provide for a full return of invested capital to stockholders.

 

Our fixed operating expenses, including property operating expenses and expenses related to operating as a public reporting company, relative to our gross income is disproportionately large due to the size of our portfolio.  As a result, the Company historically has been unable to cover its distribution payments to stockholders from operating cash flows, although the Company did fund distributions during the most recent six month period ended June 30, 2018 from operating cash flows.  A smaller portfolio increases the likelihood that any single property’s performance would materially affect our overall investment performance and the value of our stockholders’ investment.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Equity Securities

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act.

Share Repurchase Program

The SRP is designed to provide eligible stockholders with limited, interim liquidity by enabling them to sell shares back to us. The terms under which we may repurchase shares may differ between repurchases upon the death or “qualifying disability” of a stockholder or “Exceptional Repurchases” and all other repurchases or “Ordinary Repurchases.”

In the case of Ordinary Repurchases, we may repurchase shares beneficially owned by a stockholder continuously for at least one year and who purchased their shares from us or received their shares through a non-cash transfer, if requested, if we choose to repurchase them. However, in the event a stockholder is having all of his or her shares repurchased, our board may waive the one-year holding requirement for shares purchased under our DRP. We may make Ordinary Repurchases only if we have sufficient funds available to complete the repurchase. In any given calendar month, we are authorized to use only the proceeds from our DRP during that month to make Ordinary Repurchases; provided that, if we have excess funds during any particular month, we may, but are not obligated to, carry those excess funds to the subsequent calendar month for the purpose of making Ordinary Repurchases. Subject to funds being available, in the case of Ordinary Repurchases, we limit the number of shares repurchased during any calendar year to no more than 5% of the number of Class A Shares, Class T Shares and Class T-3 Shares outstanding on December 31st of the previous calendar year. In the event that we determine not to repurchase all of the shares presented during any month, including as a result of having insufficient funds or satisfying the 5% limit, to the extent we decide to repurchase shares, shares will be repurchased on a pro rata basis up to the limits described above. Any stockholder whose Ordinary Repurchase request has been partially accepted in a particular calendar month will have the remainder of his or her request included with all new repurchase requests we have received in the immediately following calendar month, unless he or she chooses to withdraw that request.

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Prior to our initial valuation date, the repurchase price for Ordinary Repurchases was equal to $21.60 per Class A Share, $21.61 per Class T Share and $21.61 per Class T-3 Share. After the initial valuation date, the repurchase price is equal to 96.0% of the most recent applicable estimated value per share reported by us. Accordingly, until we announce new estimated per share net asset values, the repurchase price for Ordinary Repurchases is $22.22 per Class A Share, $23.35 per Class T Share and $22.61 per Class T-3 Share, beginning with the February 28, 2018 repurchase date.

Prior to our initial valuation date, the repurchase price for Exceptional Repurchases was equal to $22.50 per Class A Share, $22.51 per Class T Share and $22.51 per Class T-3 Share. After the initial valuation date, the repurchase price is equal to 100.0% of the most recent applicable estimated value per share reported by us. Accordingly, until we announce new estimated per share net asset values, the repurchase price for Exceptional Repurchases is $23.15 per Class A Share, $24.32 per Class T Share and $23.55 per Class T-3 Share, beginning with the February 28, 2018 repurchase date. Exceptional Repurchases are not subject to a one-year holding period, or the 5% repurchase limit discussed above, and may be repurchased with funds from any source.

The SRP will immediately terminate if our shares become listed for trading on a national securities exchange. In addition, our board of directors, in its sole discretion, may, at any time, amend, suspend or terminate the SRP. During the three months ended June 30, 2018, we repurchased 12,906 Class A Shares, 2,909 Class T Shares and no Class T-3 Shares under the SRP.

 

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not Applicable.

Item 5.  Other Information

Not Applicable.

Item 6.  Exhibits

The representations, warranties and covenants made by us in any agreement filed as an exhibit to this Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to, or with, you. Moreover, these representations, warranties and covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto and are incorporated herein by reference.

 

 

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Exhibit Index

 

 

 

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SIGNATURES

Pursuant to the requirements 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.

 

 

 

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