Resource Apartment REIT III, Inc. - FORM 10-Q - August 10, 2018

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EX-32.2 - EXHIBIT 32.2 - Resource Apartment REIT III, Inc.rareitiii-20180630x10qex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Apartment REIT III, Inc.rareitiii-20180630x10qex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Apartment REIT III, Inc.rareitiii-20180630x10qex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Apartment REIT III, Inc.rareitiii-20180630x10qex311.htm
EX-10.2 - EXHIBIT 10.2 - Resource Apartment REIT III, Inc.reitiii-advisoryagmtrenewa.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 June 30, 2018
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 000-55923
 reitiiilogocoolgreya07.jpg
RESOURCE APARTMENT REIT III, Inc.   
(Exact name of registrant as specified in its charter)
Maryland
 
47-4608249
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)
 
 
 
 (215) 231-7050
(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 o 
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer                  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
 
Smaller reporting company þ
 
 
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 provided pursuant to Section 7(a)(2)(B) of the Securities Act. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
As of August 8, 2018, there were 629,487 outstanding shares of Class A common stock, 1,098,113 outstanding shares of Class T common stock, 4,993,555 outstanding shares of Class R common stock and 133,274 outstanding shares of Class I common stock of Resource Apartment REIT III, Inc.


RESOURCE APARTMENT REIT III, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q

 
 
PAGE
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 





Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expects," "intend," "may," "plan," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We are dependent on Resource REIT Advisor, LLC (our "Advisor") to select investments and conduct our operations. Our Advisor has a limited operating history and limited experience operating a public company. This limited experience makes our future performance difficult to predict.
•
Our executive officers and some of our directors are also officers, directors, managers or key professionals of our Advisor, Resource Securities LLC (our "Dealer Manager") and other entities affiliated with Resource Real Estate, LLC (our "Sponsor"). As a result, these individuals face conflicts of interest, including significant conflicts created by our Advisor’s compensation arrangements with us and other programs sponsored by our Sponsor and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
•
We pay substantial fees to and expenses of our Advisor, its affiliates and participating broker-dealers, which payments increase the risk that our stockholders will not earn a profit on their investment.
•
Our Advisor and its affiliates receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us.
•
There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would be in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount.
•
We may lack property diversification if we do not raise substantial funds in our initial public offering.
•
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our Advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable.
•
We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our Sponsor, which could limit our ability to make distributions and could decrease the value of an investment in us.
•
Our failure to qualify as a real estate investment trust for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.
All forward-looking statements should be read in light of the risks described above and identified in the "Risk Factors" section of our Registration Statement on Form S-11 (File No. 333-207740) filed with the Securities and Exchange Commission, as the same may be amended and supplemented from time to time.


PART I. FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2018
 
December 31, 2017
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental properties, net
 
$
73,626,913

 
$
29,443,089

Identified intangible assets, net
 
555,808

 
321,468

Total investments
 
74,182,721

 
29,764,557

 
 
 
 
 
Cash
 
30,663,307

 
23,752,810

Restricted cash
 
762,602

 
192,064

Tenant receivables, net
 
899

 
2,138

Due from related parties
 
8,465

 
4,571

Subscriptions receivable
 
619,500

 
413,084

Prepaid expenses and other assets
 
240,869

 
188,332

Deferred offering costs
 
5,534,646

 
5,409,942

Total assets
 
$
112,013,009

 
$
59,727,498

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Liabilities:
 
 
 
 

Mortgage notes payable, net
 
$
55,017,315

 
$
22,778,370

Accounts payable and accrued expenses
 
412,945

 
257,060

Accrued real estate taxes
 
352,184

 
—

Due to related parties
 
11,355,135

 
9,021,884

Tenant prepayments
 
48,749

 
21,078

Security deposits
 
148,106

 
62,724

Distributions payable
 
697,125

 
453,877

Total liabilities
 
$
68,031,559

 
$
32,594,993

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Preferred stock, par value $0.01: 10,000,000 shares authorized, none issued and outstanding
 
—

 
—

Convertible stock, par value $0.01: 50,000 shares authorized, issued and outstanding
 
500

 
500

Class A common stock, par value $0.01: 25,000,000 shares authorized, 628,238 and 621,754 issued and outstanding, respectively
 
6,282

 
6,218

Class T common stock, par value $0.01: 25,000,000 shares authorized, 1,097,400 and 1,081,226 issued, respectively 1,095,246 and 1,081,226 outstanding, respectively
 
10,953

 
10,812

Class R common stock, par value $0.01: 750,000,000 shares authorized, 4,431,251 and 2,058,008 issued and outstanding, respectively
 
44,313

 
20,580

Class I common stock, par value $0.01: 75,000,000 shares authorized, 133,232 and 36,118 issued and outstanding, respectively
 
1,332

 
361

Additional paid-in capital
 
52,724,267

 
32,323,424

Accumulated other comprehensive loss
 
(28,462
)
 
(11,192
)
Accumulated deficit
 
(8,777,735
)
 
(5,218,198
)
Total stockholders’ equity
 
$
43,981,450

 
$
27,132,505

Total liabilities and stockholders’ equity
 
$
112,013,009

 
$
59,727,498


The accompanying notes are an integral part of these consolidated financial statements.
4

RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
1,721,683

 
$
51,713

 
$
2,544,864

 
$
101,154

Utilities income
 
79,732

 
—

 
114,205

 
—

Ancillary tenant fees
 
25,781

 
—

 
31,246

 
—

Total revenues
 
1,827,196

 
51,713

 
2,690,315

 
101,154

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Rental operating - expenses
 
346,784

 
13,680

 
483,280

 
28,967

Rental operating - payroll
 
199,196

 
—

 
278,532

 
—

Rental operating - real estate taxes
 
182,989

 
5,831

 
307,192

 
11,634

    Subtotal- rental operating
 
728,969

 
19,511

 
1,069,004

 
40,601

Acquisition costs
 
—

 
83,233

 
—

 
83,233

Property management fees
 
2,344

 
2,580

 
4,361

 
4,762

Management fees - related parties
 
290,565

 
6,730

 
426,491

 
13,457

General and administrative
 
527,348

 
238,385

 
955,120

 
540,404

Loss on disposal of assets
 
3,879

 
—

 
6,488

 
—

Depreciation and amortization expense
 
1,152,791

 
23,392

 
1,714,946

 
48,698

Total expenses
 
2,705,896

 
373,831

 
4,176,410

 
731,155

Loss before other income (expense)
 
(878,700
)
 
(322,118
)
 
(1,486,095
)
 
(630,001
)
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
Other income
 
—

 
—

 
—

 
1,500

Interest income
 
44,292

 
3,903

 
70,214

 
5,484

Interest expense
 
(554,042
)
 
(13,039
)
 
(798,724
)
 
(25,980
)
Net loss
 
$
(1,388,450
)
 
$
(331,254
)
 
$
(2,214,605
)
 
$
(648,997
)
 
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
 
Designated derivatives, fair value adjustments
 
(21,309
)
 
—

 
(17,270
)
 
—

Total other comprehensive loss
 
(21,309
)
 
—

 
(17,270
)
 
—

Comprehensive loss
 
$
(1,409,759
)
 
$
(331,254
)
 
$
(2,231,875
)
 
$
(648,997
)












The accompanying notes are an integral part of these consolidated financial statements.
5

RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - (continued)
(unaudited)

 
 
Three Months Ended 
June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
Class A common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class A common stockholders
 
$
(154,200
)
 
$
(140,820
)
 
$
(272,603
)
 
$
(323,547
)
Net loss per Class A share, basic and diluted
 
$
(0.25
)
 
$
(0.25
)
 
$
(0.44
)
 
$
(0.65
)
Weighted average Class A common shares outstanding, basic and diluted
 
626,103

 
559,739

 
624,518

 
501,031

 
 
 
 
 
 
 
 
 
Class T common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class T common stockholders
 
$
(291,749
)
 
$
(190,434
)
 
$
(526,069
)
 
$
(325,450
)
Net loss per Class T share, basic and diluted
 
$
(0.27
)
 
$
(0.27
)
 
$
(0.48
)
 
$
(0.67
)
Weighted average Class T common shares outstanding, basic and diluted
 
1,089,943

 
696,020

 
1,086,970

 
486,845

 
 
 
 
 
 
 
 
 
Class R common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class R common stockholders
 
$
(921,259
)
 
$
—

 
$
(1,390,069
)
 
$
—

Net loss per Class R share, basic and diluted
 
$
(0.24
)
 
$
—

 
$
(0.42
)
 
$
—

Weighted average Class R common shares outstanding, basic and diluted
 
3,848,272

 
—

 
3,280,470

 
—

 
 
 
 
 
 
 
 
 
Class I common stock:
 
 
 
 
 
 
 
 
Net loss attributable to Class I common stockholders
 
$
(21,242
)
 
$
—

 
$
(25,864
)
 
$
—

Net loss per Class I share, basic and diluted
 
$
(0.17
)
 
$
—

 
$
(0.30
)
 
$
—

Weighted average Class I common shares outstanding, basic and diluted
 
124,071

 
—

 
87,192

 
—



The accompanying notes are an integral part of these consolidated financial statements.
6

RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(unaudited)

 
 
Common Stock
 
Convertible Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Accumulated Deficit
 
Total
 
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
A Shares
 
T Shares
 
R Shares
 
I Shares
 
Shares
 
Amount
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance, at January 1, 2018
 
621,754

 
1,081,226

 
2,058,008

 
36,118

 
$
6,218

 
$
10,812

 
$
20,580

 
$
361

 
50,000

 
$
500

 
$
32,323,424

 
$
(11,192
)
 
$
(5,218,198
)
 
$
27,132,505

Issuance of common stock
 
—

 
—

 
2,330,100

 
96,897

 
—

 
—

 
23,301

 
969

 
—

 
—

 
23,032,256

 
—

 
—

 
23,056,526

Offering costs
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,217,795
)
 
—

 
—

 
(3,217,795
)
Cash distributions declared
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,344,932
)
 
(1,344,932
)
Common stock issued through distribution reinvestment plan
 
6,484

 
16,174

 
43,143

 
217

 
64

 
162

 
432

 
2

 
—

 
—

 
604,867

 
—

 
—

 
605,527

Other comprehensive income
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17,270
)
 
—

 
(17,270
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(2,214,605
)
 
(2,214,605
)
Share redemptions
 
—

 
(2,154
)
 
—

 
—

 
—

 
(21
)
 
—

 
—

 
—

 
—

 
(18,485
)
 
—

 
—

 
(18,506
)
Balance, at June 30, 2018
 
628,238

 
1,095,246

 
4,431,251

 
133,232

 
$
6,282

 
$
10,953

 
$
44,313

 
$
1,332

 
50,000

 
$
500

 
$
52,724,267

 
$
(28,462
)
 
$
(8,777,735
)
 
$
43,981,450




The accompanying notes are an integral part of this consolidated financial statement.
7


RESOURCE APARTMENT REIT III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(2,214,605
)
 
$
(648,997
)
Adjustment to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
 
Loss on disposal of assets
 
6,488

 
—

Depreciation and amortization
 
1,714,946

 
48,698

Amortization of deferred financing costs
 
41,222

 
818

Changes in operating assets and liabilities:
 
 
 
 
Tenant receivable, net
 
1,239

 
(212
)
Due from related parties
 
(3,894
)
 
(1,288
)
Prepaid expenses and other assets
 
(15,462
)
 
(83,544
)
Due to related parties
 
354,187

 
751,834

Accounts payable and accrued expenses
 
436,328

 
(141,375
)
Tenant prepayments
 
23,064

 
—

Security deposits
 
14,182

 
2,800

Net cash provided by (used in) operating activities
 
357,695

 
(71,266
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Property acquisitions
 
(12,859,966
)
 
—

Deposit for property acquisition
 
—

 
(1,000,000
)
Capital expenditures
 
(529,118
)
 
(11,484
)
Net cash used in investing activities
 
(13,389,084
)
 
(1,011,484
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Net proceeds from issuance of common stock
 
21,454,364

 
10,582,825

Redemptions of common stock
 
(18,506
)
 
—

Payments on borrowings
 
(17,002
)
 
(13,753
)
Payment of deferred financing costs
 
(410,275
)
 
—

Distributions paid on common stock
 
(496,157
)
 
(38,656
)
Net cash provided by financing activities
 
20,512,424

 
10,530,416

 
 
 
 
 
Net increase in cash and restricted cash
 
7,481,035

 
9,447,666

Cash and restricted cash at beginning of period
 
23,944,874

 
3,359,269

Cash and restricted cash at end of period
 
$
31,425,909

 
$
12,806,935

 
 
 
 
 
Reconciliation to consolidated balance sheets:
 
 
 
 
Cash
 
$
30,663,307

 
$
12,801,170

Restricted Cash
 
762,602

 
5,765

Cash and restricted cash at end of period
 
$
31,425,909

 
$
12,806,935


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource Apartment REIT III, Inc. (the "Company") was organized in Maryland on July 15, 2015. The Company is offering up to $1.1 billion of shares of its common stock, consisting of up to $1.0 billion of shares in its primary offering and up to $100.0 million of shares pursuant to its distribution reinvestment plan (the "DRIP"). The Company’s primary offering will close on April 27, 2019. Through July 2, 2017, the Company offered shares of Class A and Class T common stock at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock in its primary offering and commenced offering shares of Class R and Class I common stock.
The initial prices per share for each class of shares of the Company's common stock through June 30, 2018 were as follows:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$
—

 
$
—

 
$
9.52

 
$
9.13

Offering Price under the DRIP
 
$
9.60

 
$
9.09

 
$
9.14

 
$
8.90

On June 29, 2018, the Company determined its net asset value ("NAV") per share. Effective July 2, 2018, the price per share for each class of shares of the Company's common stock became:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$
—

 
$
—

 
$
9.68

 
$
9.28

Offering Price under the DRIP
 
$
9.05

 
$
9.05

 
$
9.05

 
$
9.05

As of June 30, 2018, the Company has raised aggregate gross offering proceeds of approximately $58.6 million from the sale of 601,207 Class A shares, 1,049,996 Class T shares, 4,379,813 Class R shares and 132,882 Class I shares of common stock.
Resource REIT Advisor, LLC (the "Advisor"), an indirect wholly-owned subsidiary of Resource America, Inc. ("RAI"), contributed $200,000 to the Company in exchange for 20,000 shares of Class A common stock on August 10, 2015. On June 29, 2016, RAI purchased 222,222 shares of Class A common stock for $2.0 million in the offering. On August 5, 2016, the Advisor exchanged 5,000 shares of Class A common stock for 50,000 shares of convertible stock. Under limited circumstances, these shares may be converted into shares of the Company's Class A common stock satisfying the Company's obligation to pay the Advisor an incentive fee and diluting its other stockholders’ interest in the Company.
RAI is a wholly-owned subsidiary of C-III Capital Partners, LLC ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls the Advisor, Resource Securities LLC ("Resource Securities"), the Company's dealer manager, and Resource Apartment Manager III, LLC (the "Manager"), the Company's property manager. C-III also controls all of the shares of the Company's common stock held by RAI and the Advisor.
The Company’s objective is to take advantage of Resource Real Estate, LLC’s (the "Sponsor") multifamily investing and lending platforms to invest in apartment communities in order to provide the investor with growing cash flow and increasing asset values. The Company intends to acquire underperforming apartments which it will renovate and stabilize in order to increase rents. To a lesser extent, the Company may also seek to originate and acquire commercial real estate debt secured by apartments having the same characteristics. At June 30, 2018, the Company owned three apartment properties located in Alexandria, Virginia, Jacksonville, Florida, and Austell, Georgia.
The Company elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, for the year ended December 31, 2017. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes all of its REIT taxable income to its stockholders. The Company also operates its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.

The accompanying notes are an integral part of these consolidated financial statements.
8
RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

The consolidated financial statements and the information and tables contained in the notes thereto are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), pertaining to interim financial statements in Form 10-Q. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2017. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the six months ended June 30, 2018 may not necessarily be indicative of the results of operations for the full year ending December 31, 2018.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Basis of Presentation
The accompanying consolidated financial statements have been prepared in conformity with GAAP.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary
 
Number of Units
 
Property Location
Resource Apartment REIT III Holdings, LLC
 
N/A
 
N/A
Resource Apartment REIT III OP, LP
 
N/A
 
N/A
RRE Payne Place Holdings, LLC
 
11
 
Alexandria, VA
RRE Bay Club Holdings, LLC
 
220
 
Jacksonville, FL
RRE Tramore Village Holdings, LLC
 
324
 
 Austell, GA
 
 
555
 
 
All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company does not evaluate performance on a relationship-specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single operating segment for reporting purposes in accordance with GAAP.
Concentration of Risk
As of June 30, 2018, two of the Company's three properties represented 97% of the Company's real estate assets. As a result, the geographic concentration of the Company's portfolio makes it susceptible to adverse economic developments in both the Jacksonville, Florida and suburban Atlanta, Georgia real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.



RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. On January 1, 2018, the Company adopted ASU No. 2014-09 using the modified retrospective approach. The majority of the Company’s revenue is derived from residential rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU No. 2016-02, "Leases", as discussed below. Revenue streams that are in the scope of the new standards include (but are not limited to) administrative and late fees and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties.  The accounting for these revenue streams were not affected by the adoption of ASU No. 2014-09, nor was there a cumulative effect of initially applying the standard.
In August 2016, FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice.  On January 1, 2018, the Company adopted ASU No. 2016-15 and the adoption did not have a material effect on its consolidated financial statements and disclosures.
In November 2016, FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash," which provides guidance on the classification of restricted cash in the statement of cash flows. On January 1, 2018, the Company adopted ASU No. 2016-18. As a result of adopting the new guidance, $1,968 of restricted cash, which was previously included as operating cash inflows within the consolidated statements of cash flows for the six months ended June 30, 2017, has been removed and is now included in the cash and restricted cash line items at the beginning and the end of period.
In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 850): Clarifying the Definition of Business," which 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. On January 1, 2018, the Company adopted ASU No. 2017-01. During the six months ended June 30, 2018, the Company acquired one investment property which did not meet the revised definition of a business and, accordingly, accounted for the acquisition as an asset acquisition. For investment property additions accounted for as business combinations, acquisition fees and acquisition costs were included in acquisition costs on the consolidated statements of operations and comprehensive loss. For investment property additions accounted for as asset acquisitions, all such costs are included in the purchase price that is allocated between land, building and improvements, furniture, fixtures, and equipment and intangible assets on the consolidated balance sheets, based on their respective fair values. The Company believes all future acquisitions will be accounted for as asset acquisitions, not business combinations.
 Accounting Standards Issued But Not Yet Effective
In February 2016, FASB issued ASU No. 2016-02, "Leases" and amended by ASU No. 2018-09, “Codification Improvements" in July 2018, which is intended to improve financial reporting about leasing transactions and requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. In September 2017, FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provides additional implementation guidance on the previously issued ASU No. 2016-02.  ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is continuing to evaluate this guidance; however, the Company expects that its operating leases where it is the lessor will be accounted for on its balance sheet similar to its current accounting with the underlying leased asset recognized as real estate. For leases in which the Company is the lessee, primarily consisting of a parking space lease and office equipment leases, the Company expects to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

In July 2018, FASB issued ASU No. 2018-11, “Leases: Targeted Improvements” an additional amendment to ASU No. 2016-02.  Although the Company is still evaluating this guidance, the Company believes it will apply the practical expedient allowed in this new guidance to combine lease and associated nonlease components by class of underlying asset.  In addition, the Company is expected to utilize the optional method for adopting the new leasing guidance and not restate comparative periods. 
In June 2016, FASB issued ASU No. 2016-03 "Financial Instruments - Credit Losses", which requires measurement and recognition of expected credit losses for financial assets held. The standard update is effective for the Company beginning January 1, 2019. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2016-03 to have a significant impact on its consolidated financial statements due to the fact that the Company did not have instruments subject to this guidance at June 30, 2018.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures. ASU No. 2017-04 will be effective for the Company beginning December 15, 2019. Early application is permitted. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2017-04 to have a significant impact on its consolidated financial statements due to the fact that the Company did not have any goodwill subject to this guidance at June 30, 2018.
In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for the Company on January 1, 2019, with early adoption permitted in any interim period. The Company is continuing to evaluate this guidance and assessing the impact of this guidance on its consolidated financial statements.
In July 2018, FASB issued ASU No. 2018-09, "Codification Improvements". This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is evaluating this guidance to determine the impact it may have on its consolidated financial statements.
Real Estate Investments
The Company records acquired rental properties at fair value on the acquisition date. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the asset using the straight line method. The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
5.0 to 27.5 years
Furniture, fixtures, and equipment
3.0 to 5.0 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Weighted average remaining term of related lease
Improvements and replacements in excess of $1,000 are capitalized when they have a useful life greater than or equal to one year. The Manager earns a construction management fee of 5% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. There were no impairment losses recorded on long lived assets during the three and six months ended June 30, 2018 and 2017.
Loans Held for Investment
The Company records acquired real estate loans at cost and reviews them for potential impairment at each balance sheet date. A loan receivable is considered impaired when it becomes probable, based on current information, that the Company will be unable to collect all amounts due according to the loan’s contractual terms. The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or the fair value of the collateral. If a loan is deemed to be impaired, the Company will record a reserve for loan losses through a charge to income for any shortfall. Failure to recognize impairment would result in the overstatement of the carrying values of the Company’s real estate loans receivable and an overstatement of the Company’s net income.
The Company may acquire real estate loans at a discount due to credit quality. Revenues from these loans are recorded under the effective interest method. Under this method an effective interest rate ("EIR") is applied to the cost basis of the real estate loan receivable. The EIR that is calculated when the real estate loan is acquired remains constant and is the basis for subsequent impairment testing and income recognition. If the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate loan receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the real estate loan receivable has been fully recovered.
Interest income from loans receivable will be recognized based on the contractual terms of the debt instrument. Fees related to any buydown of the interest rate will be deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income. Closing costs related to the purchase of a loan receivable will be amortized over the term of the loan and accreted as an adjustment against interest income. There were no loans held for investment on the Company's consolidated balance sheets as of both June 30, 2018 and December 31, 2017.
Allocation of Purchase Price of Acquired Assets
On January 1, 2018, the Company adopted ASU 2017-01. Acquisitions that do not meet the definition of a business under this guidance are accounted for as asset acquisitions. In most cases, the Company believes acquisitions of real estate will no longer be considered a business combination as in most cases substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if the Company determines that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, the Company will then perform an assessment to determine whether the set is a business by using the framework outlined in the ASU. If the Company determines that the acquired asset is not a business, the Company will allocate the cost of the acquisition including transaction costs to the assets acquired or liabilities assumed based on their related fair value.
Upon the acquisition of real properties, the Company allocates the purchase price to tangible assets, consisting of land, building, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, other value of in-place leases and value of tenant relationships, based in each case on their fair values.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases, which the Company expects will range from one month to one year.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are determined by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered in the

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the initial term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the fair value of these assets and liabilities, which could impact the amount of the Company’s reported net income.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease. The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are approximately $3.9 million and $102,000 for the 12 month periods ending June 30, 2019 and 2020, respectively, and none thereafter.
Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents and utility reimbursements pursuant to underlying tenant lease agreements. The Company also receives other ancillary fees for administration of leases, late payments, amenities and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties.  As discussed earlier, the Company adopted ASU No. 2014-09 beginning January 1, 2018.  A performance obligation is a promise in a contract to transfer a distinct good or service to a customer.  The Company records the utility reimbursement income and ancillary charges in the period when the performance obligation is completed, either at a point in time or on a monthly basis as the service is utilized. 
Tenant Receivables
Tenant receivables are stated in the consolidated financial statements as amounts due from tenants net of an allowance for uncollectible receivables. Payment terms vary and receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole. The Company writes off receivables when they become uncollectible. At June 30, 2018 and December 31, 2017, there were allowances for uncollectible receivables of $0 and $370, respectively.
Income Taxes
The Company elected to be taxed as a REIT commencing with its taxable year ended December 31, 2017. As a REIT, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies, on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries ("TRSs"). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. At June 30, 2018 and December 31, 2017, the Company did not treat any of its subsidiaries as a TRS.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.
Legislation commonly known as the Tax Cuts and Jobs Act ("TCJA") was signed into law on December 22, 2017. The TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations (including REITs), generally effective for taxable years beginning after December 31, 2017. The Company is continuing to evaluate this legislation but it does not expect it to have a significant impact.
Earnings Per Share
Basic earnings per share are computed by dividing net income (loss) attributable to common stockholders for each period by the weighted-average common shares outstanding during the period for each share class. Diluted net income (loss) per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. None of the 50,000 shares of convertible stock (discussed in Note 10) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of June 30, 2018 (were such date to represent the end of the contingency period). For the purposes of calculating earnings per share, all common shares and per share information in the financial statements have been retroactively adjusted for the effect of any stock dividends and stock splits. For the three and six months ended June 30, 2018 and 2017, common shares potentially issuable to settle distributions payable are excluded from the calculation of diluted earnings per share calculations, as their inclusion would be anti-dilutive.
In accordance with the FASB Accounting Standards Codification ("ASC") 260-10-45, "Earnings Per Share", the Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on their relative percentage of each class of shares to the total number of outstanding shares. The Company did not have any participating securities outstanding other than Class A common stock, Class T common stock, Class R common stock and Class I common stock during the periods presented (see Note 9).
Organization and Offering Costs
Organization and offering costs (other than selling commissions, dealer manager fees, and distribution and shareholder servicing fees) of the Company are initially being paid by the Advisor on behalf of the Company.
Pursuant to the advisory agreement between the Company and the Advisor, the Company is obligated to reimburse the Advisor for organization and other offering costs paid by the Advisor on behalf of the Company, up to an amount equal to 4.0% of gross offering proceeds as of the termination of the initial public offering if the Company raises less than $500.0 million in the primary portion of the initial public offering and 2.5% of gross offering proceeds as of the termination of the initial public offering if the Company raises $500.0 million or more in the primary portion of the initial public offering.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

On April 13, 2018, the board of directors approved an amendment to the advisory agreement that provides that the Company is not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses.
A portion of deferred offering costs will be charged to equity upon the sale of each share of common stock sold under the public offering. Through June 30, 2018, the Company has charged approximately $2.1 million to equity for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal, printing and similar costs. At June 30, 2018, the Advisor has advanced approximately $7.6 million of these costs on behalf of the Company, of which approximately $5.5 million has been deferred at June 30, 2018.
Organization costs, which include all expenses incurred by the Company in connection with its formation, including but not limited to legal fees and other costs to incorporate, are expensed as incurred. There can be no assurance that the Company's plans to raise capital will be successful. Prior to the Company breaking escrow, the Advisor incurred $104,266 of formation and other operating expenses on the Company's behalf, which will not be reimbursed to the Advisor.
Outstanding Class T shares issued in the Company's primary offering are subject to a 1% annual distribution and shareholder servicing fee for five years from the date on which such shares were issued. The Company will cease paying the distribution and shareholder servicing fee on each Class T share prior to the fifth anniversary of its issuance on the earliest of the following, should any of these events occur: (i) the date at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from the Company's primary offering (i.e., excluding proceeds from sales pursuant to the DRIP); (ii) the date on which the Company lists its common stock on a national securities exchange; and (iii) the date of a merger or other extraordinary transaction in which the Company is a party and in which the common stock is exchanged for cash or other securities. The Company cannot predict if or when any of these events will occur.
Outstanding Class R shares issued in the Company's primary offering are also subject to a 1% annual distribution and shareholder servicing fee.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from its primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of its assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between the Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company's transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through its distribution reinvestment plan).
The Company records distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability will be relieved over time, as the fees are paid to the Dealer Manager, or as the fees are adjusted (if the fees are no longer payable pursuant to the conditions described above.) For issued Class T shares, the Company has accrued an estimate of total distribution and shareholder servicing fees of $489,035 for the full five year period at June 30, 2018 based on a total of 5% of the gross proceeds from all Class T shares sold, of which the Company paid $113,742 cumulatively through June 30, 2018. For issued Class R shares, the Company has accrued an estimate of total distribution and shareholder servicing fees of $1,246,620 at June 30, 2018 based on a total of 3% of the gross proceeds from all Class R shares sold, of which the Company paid $156,896 cumulatively through June 30, 2018. The total accrual of approximately $1.5 million is included in due to related parties on the Company's consolidated balance sheet at June 30, 2018.



RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net loss.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
    The following table presents the Company's supplemental cash flow information:
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Non-cash operating, financing and investing activities:
 
 
 
 
Offering costs payable to related parties
 
$
1,428,461

 
$
1,857,736

Offering costs payable to third parties
 
(32,311
)
 
(60,850
)
Distribution and shareholder servicing fee payable to related parties
 
475,502

 
427,376

Cash distributions on common stock declared but not yet paid
 
697,125

 
18,862

Stock issued from distribution reinvestment plan
 
605,527

 
32,306

Stock dividend issued
 
—

 
251,567

Subscriptions receivable
 
619,500

 
—

Escrow deposits funded directly by mortgage notes payable
 
243,637

 
—

 
 
 
 
 
Non-cash activity related to acquisitions:
 
 
 
 
Mortgage notes payable used to acquire real property
 
32,381,363

 
—

 
 
 
 
 
Cash paid during the year for:
 
 
 
 
Interest
 
$
644,876

 
$
20,986


NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. The following table presents a summary of the components of the Company's restricted cash:
 
 
June 30, 2018
 
December 31, 2017
Real estate taxes
 
$
408,021

 
$
32,115

Insurance
 
25,873

 
8,227

Capital improvements
 
328,708

 
151,722

Total
 
$
762,602

 
$
192,064

In addition, the Company designated unrestricted cash for capital expenditures of approximately $5.8 million and $1.9 million at June 30, 2018 and December 31, 2017, respectively.





RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

NOTE 5 - RENTAL PROPERTIES, NET
The following table presents the Company's investment in rental properties:
 
June 30, 2018
 
December 31, 2017
Land
$
11,470,060

 
$
4,740,979

Building and improvements
62,515,432

 
24,923,994

Furniture, fixtures, and equipment
1,076,303

 
256,992

Construction in progress
55,514

 
13,395

 
75,117,309

 
29,935,360

Less: accumulated depreciation
(1,490,396
)
 
(492,271
)
Total rental property, net
$
73,626,913

 
$
29,443,089

Depreciation expense for the three and six months ended June 30, 2018 was $715,940 and $998,662, respectively. Depreciation expense for the three and six months ended June 30, 2017 was $10,503 and $20,828, respectively.
Loss on disposal of assets: During the three and six months ended June 30, 2018, the Company recorded losses on the disposal of assets of $3,879 and $6,488, respectively, due to the replacement of appliances at its rental properties in conjunction with unit upgrades. There were no losses on the disposal of assets for the same periods in 2017.

NOTE 6 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of in-place rental leases. The net carrying value of the acquired in-place leases at June 30, 2018 and December 31, 2017 was $555,808 and $321,468, respectively, net of the accumulated amortization of $1,168,058 and $451,775, respectively. At June 30, 2018, the weighted average remaining life of the rental leases was four months.
Amortization for the three months ended June 30, 2018 and 2017 was $436,851 and $12,888, respectively. Amortization for the six months ended June 30, 2018 and 2017 was $716,284 and $27,870, respectively. At June 30, 2018, expected amortization for the in-place rental leases for the next 12 months is $555,808 and none thereafter.

NOTE 7 - MORTGAGE NOTES PAYABLE, NET
The following table presents a summary of the Company's mortgage notes payable, net at June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
December 31, 2017
Collateral
 
Outstanding Borrowings
 
Deferred Financing Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Deferred Financing Costs, net
 
Carrying Value
Payne Place
 
$
1,577,504

 
$
(31,168
)
 
$
1,546,336

 
$
1,594,507

 
$
(32,126
)
 
$
1,562,381

Bay Club
 
21,520,000

 
(280,181
)
 
21,239,819

 
21,520,000

 
(304,011
)
 
21,215,989

Tramore Village
 
32,625,000

 
(393,840
)
 
32,231,160

 
—

 
—

 
—

Total
 
$
55,722,504

 
$
(705,189
)
 
$
55,017,315

 
$
23,114,507

 
$
(336,137
)
 
$
22,778,370






RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

The following table presents additional information about the Company's mortgage notes payable, net:
Collateral
 
Maturity Date
 
Annual Interest Rate
 
 
 
Average Monthly Debt Service
 
Average Monthly Escrow
Payne Place
 
1/1/2047
 
3.11%
 
(1)(5) 
 
$
6,948

 
$
2,084

Bay Club
 
8/1/2024
 
3.96%
 
(2)(4) 
 
71,874

 
41,560

Tramore Village
 
4/1/2025
 
3.89%
 
(3)(4) 
 
105,684

 
36,537

 
(1)
Fixed rate until January 1, 2020, when the fixed rate of the note changes to variable rate based on six-month LIBOR plus 2.25%, with an all-in interest rate floor of 2.50% and ceiling of 9.50%.
(2)    Variable rate based on one-month LIBOR of 2.09% (at June 30, 2018) plus 1.87%, with a maximum interest rate of 5.75%.
(3)     Variable rate based on one-month LIBOR of 2.09% (at June 30, 2018) plus 1.80%, with a maximum interest rate of 6.25%.
(4)    Monthly interest-only payment currently required.
(5)    RAI co-guarantees this loan with the Company. See Note 8 for more details.
    
All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty for a period of the term.
On March 22, 2018, the Company, through a wholly owned subsidiary, entered into a seven-year, $32.6 million secured mortgage loan with Berkadia Commercial Mortgage LLC, an unaffiliated lender, secured by Tramore Village (the "Tramore Mortgage Loan"). The Tramore Mortgage Loan matures on April 1, 2025. The Tramore Mortgage Loan bears interest at a rate of LIBOR plus 1.80%, with a maximum interest rate of 6.25%. Monthly payments are interest only for the first 36 months.
Beginning on May 1, 2021, the Company will pay both principal and interest based on a 30 year amortization period. Any remaining principal balance and all accrued and unpaid interest and fees will be due at maturity. The Company may prepay the Tramore Mortgage Loan in full at any time (1) after April 1, 2019 and until December 31, 2024 upon payment of a prepayment premium equal to 1% of the principal amount prepaid; and (2) after December 31, 2024 with no prepayment premium. The non-recourse carveouts under the loan documents for the Tramore Mortgage Loan are guaranteed by the Company.
The following table presents the Company's annual principal payments on outstanding borrowings for each of the next five 12-month periods ending June 30, and thereafter:
2019
 
$
34,807

2020
 
348,219

2021
 
523,785

2022
 
1,035,345

2023
 
1,076,569

Thereafter
 
52,703,779

 
 
$
55,722,504

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three months ended June 30, 2018 and 2017, amortization of deferred financing costs of $27,323 and $490, respectively, was included in interest expense. During the six months ended June 30, 2018 and 2017, amortization of deferred financing costs of $41,222 and $818, respectively, was included in interest expense. Accumulated amortization at June 30, 2018 and December 31, 2017 was $66,311 and $22,314, respectively.



RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

The following table presents the Company's estimated amortization of the existing deferred financing costs for the next five 12-month periods ending June 30, and thereafter:
2019
 
$
109,562

2020
 
109,445

2021
 
108,102

2022
 
106,274

2023
 
104,029

Thereafter
 
167,777

 
 
$
705,189


NOTE 8 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Relationship with the Advisor
The Company is externally managed and advised by the Advisor. Pursuant to the terms of the advisory agreement, the Advisor provides the Company with its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not expect to have any employees. The Advisor is not obligated to dedicate any specific portion of its time or its employees' time to the Company’s business. The Advisor and any employees of the Sponsor or its affiliates acting on behalf of the Advisor, are at all times subject to the supervision and oversight of the Company’s board of directors and have only such functions and authority as the Company delegates to it. Effective April 28, 2018, the Company renewed the advisory agreement with the Advisor through April 27, 2019. The terms of the agreement are identical to those of the advisory agreement in effect through April 27, 2018 except that it includes the amendment described below.
During the course of the offering, the Advisor will provide offering-related services to the Company and will advance funds to the Company for both operating costs and organization and offering costs. These amounts will be reimbursed to the Advisor from the proceeds from the offering, subject to the aforementioned limits on organization and offering expense reimbursements, although there can be no assurance that the Company’s plans to raise capital will be successful. At June 30, 2018, the Advisor has advanced organization and offering costs on a cumulative basis on behalf of the Company of approximately $7.6 million.
The advisory agreement has a one-year term and may be renewed for an unlimited number of successive one-year terms upon the approval of the Conflicts Committee of the Company's board of directors. Under the advisory agreement, the Advisor will receive fees and will be reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire or originate loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to 0.083% (one-twelfth of 1.0%) of the cost of each asset at the end of each month, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.
Disposition fees. The Advisor will earn a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also will pay directly or reimburse the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

of up to 4.0% of gross offering proceeds if the Company raises less than $500.0 million in the primary offering and 2.5% of gross offering proceeds if the Company raises more than $500.0 million in the primary offering. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees. Prior to the Company breaking escrow, the Advisor incurred $104,266 of formation and other operating expenses the Company's behalf, which will not be reimbursed to the Advisor.
On April 13, 2018, the board of directors approved an amendment to the advisory agreement that provides that the Company is not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by the Advisor on the Company’s behalf through March 31, 2018 until after the termination of the primary portion of the Company’s ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by the Advisor on the Company’s behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of the Company’s ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses.
Relationship with Resource Apartment Manager III, LLC
The Manager manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments that it manages and an oversight fee on any real property investments that are managed by third parties. Property management fees are deducted directly from the property's operating account by the property manager. Any property management fees paid to unaffiliated third party property managers in excess of 4.5% of actual gross receipts will be reimbursed to the Company by the Advisor. At June 30, 2018 and December 31, 2017, the Advisor owed the Company $788 and $4,192, respectively, for property management fees in excess of the 4.5% cap paid to the unaffiliated third party property manager.
Construction management fees. The Manager earns a construction management fee equal to 5.0% of actual aggregate costs to construct improvements to a property.
Debt servicing fees. The Manager will earn a debt servicing fee equal to 2.75% of gross receipts from real estate-related debt investments.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company. The Company is obligated to reimburse the Manager or other affiliates for such shared operating expenses.
Relationship with Resource Securities
Resource Securities, an affiliate of the Advisor, serves as the Company’s dealer manager and is responsible for marketing the Company’s shares during the public offering.
Dealer manager fee and selling commissions. Pursuant to the terms of the amended and restated dealer manager agreement with Resource Securities, the Company generally pays Resource Securities a selling commission of up to 3.0% of gross offering proceeds from the sale of Class R shares and a dealer manager fee of up to 3.5% of gross offering proceeds from the sale of Class R shares (but the aggregate of such fees shall not exceed 5.5% of gross offering proceeds). The Company generally pays Resource Securities a dealer manager fee of up to 1.5% of gross offering proceeds from the sale of the Class I shares. Prior to July 3, 2017, the Company generally paid Resource Securities selling commissions up to 7.0% of gross primary offering proceeds from the sale of Class A shares and up to 2.0% of gross primary offering proceeds from the sale of Class T shares and a dealer manager fee of up to 3.0% of gross primary offering proceeds from the sale of either Class A or Class T shares. Resource Securities allows all selling commissions earned and a portion of the dealer manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

plan. Additionally, the Company may reimburse Resource Securities for bona fide due diligence expenses. No selling commissions or dealer manager fees were paid in connection with the sales of Class A shares to the Advisor or RAI.
Distribution and shareholder servicing fee. Resource Securities is paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class T common stock sold in the primary offering for five years from the date on which each share is issued up to a total of 5.0%. Resource Securities is also paid an annual fee of 1.0% of the purchase price (or, once reported, the NAV) per share of Class R common stock sold in the primary offering.  The Company will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10.0% of the gross proceeds from the primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the Company with or into another entity, or the sale or other disposition of all or substantially all of our assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between Resource Securities and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and Resource Securities advises the Company’s transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through the distribution reinvestment plan).
Relationship with RAI and C-III
Property loss pool. The Company's properties participate in a property loss self-insurance pool with other properties directly and indirectly managed by RAI and C-III, which is backed by a catastrophic insurance policy.   Substantially all of the receivables from related parties represent insurance deposits held in escrow by RAI and C-III related to the self-insurance pool which, if unused, will be returned to the Company. The pool covers losses up to $2.5 million, in aggregate, after a $25,000 deductible per incident. Claims beyond the insurance pool limits will be covered by the catastrophic insurance policy, which covers claims up to $250.0 million, after a $100,000 deductible per incident. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limited could have a material adverse effect on the Company's financial condition and operating results. During the three and six months ended June 30, 2018, the Company paid $40,985 into the property loss insurance pool.
General liability loss pool. The Company's properties also participated in a general liability pool with other properties directly and indirectly managed by RAI and C-III until April 22, 2017. The pool covered claims up to $50,000 per incident through April 22, 2017. Effective April 23, 2017, the loss pool was eliminated and the Company now participates (with other properties directly and indirectly managed by RAI and C-III) in a general liability policy. The insured limit for the general liability policy is $76.0 million in total claims, after a $25,000 deductible per incident.
Internal audit fees. RAI performs internal audit services for the Company.
Other transactions. RAI co-guarantees the mortgage on Payne Place with the Company until such time as the Company achieves the following: (a) owns a minimum of five apartment complexes; (b) has a minimum net worth of $50 million; (c) has liquidity of no less than $5 million; and (d) has an aggregate portfolio leverage of no more than 65% (see Note 7 for further details).
The Company paid The Planning & Zoning Resource Company, a subsidiary of C-III, $1,980 for a zoning report in connection with its acquisition of Tramore Village during the six months ended June 30, 2018.
The Company participates in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries for coverage up to $100.0 million. 






RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

The following table presents the Company's amounts receivable from and amounts payable to such related parties:
 
June 30, 2018
 
December 31, 2017
Due from related parties:
 
 
 
Advisor
$
788

 
$
4,192

RAI and affiliate - insurance funds held in escrow
7,677

 
379

 
$
8,465

 
$
4,571

Due to related parties:
 
 
 
Advisor:
 
 
 
Acquisition-related reimbursements
$
—

 
$
6,533

Asset management fees
—

 
—

Organization and offering costs
7,596,402

 
6,167,941

Operating expense reimbursements (including prepaid expenses)
2,211,918

 
1,810,658

 
9,808,320

 
7,985,132

Manager:
 
 
 
Property management fees
25,330

 
10,800

Operating expense reimbursements
6,454

 
3,592

 
31,784

 
14,392

RAI:
 
 
 
 Internal audit fee
11,750

 
3,500

Operating expense reimbursements
4,191

 
6,625

 
15,941

 
10,125

Resource Securities:
 
 
 
Selling commissions and dealer-manager fees
34,073

 
22,720

Distribution and shareholder servicing fee
1,465,017

 
989,515

 
1,499,090

 
1,012,235

 
 
 
 
 
$
11,355,135

 
$
9,021,884














RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

The following table presents the Company's fees earned by and expenses incurred from such related parties:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Fees earned / expenses incurred:
 
 
 
 
 
 
 
Advisor:
 
 
 
 
 
 
 
Acquisition fees and acquisition-related reimbursements (1)
$
—

 
$
—

 
$
1,018,719

 
$
—

Asset management fees (2)
212,613

 
6,730

 
310,821

 
13,457

Debt financing fees (3)
—

 
—

 
163,125

 
—

Organization and offering costs (4)
747,018

 
1,010,962

 
1,428,461

 
1,857,736

Operating expense reimbursement (5)
148,772

 
162,526

 
401,260

 
314,205

 
 
 
 
 
 
 
 
Manager:
 
 
 
 
 
 
 
Property management fees (2)
$
77,952

 
$
—

 
$
115,670

 
$
—

Construction management fees (1)
12,318

 
—

 
28,166

 
—

Operating expense reimbursements (6)
23,209

 
—

 
26,397

 
—

 
 
 
 
 
 
 
 
RAI:
 
 
 
 
 
 
 
Internal audit fee (5)
$
11,750

 
$
—

 
$
15,250

 
$
—

 
 
 
 
 
 
 
 
Resource Securities:
 
 
 
 
 
 
 
Selling commissions and dealer-manager fees (7)
$
568,559

 
$
403,514

 
$
1,222,695

 
$
636,033

Distribution and shareholder servicing fee (7)
305,130

 
291,316

 
659,906

 
443,471

 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
The Planning & Zoning Resource Company (1)
$
—

 
$
—

 
$
1,980

 
$
—


(1)     Included in Rental properties, net on the consolidated balance sheets.
(2)    Included in Management fees - related parties on the consolidated statements of operations and comprehensive loss.
(3)    Included in Mortgage notes payable on the consolidated balance sheets.
(4)
Organizational expenses were expensed when incurred and offering costs are included in Deferred offering costs and Stockholders' equity on the consolidated balance sheets.
(5)
Included in General and administrative on the consolidated statements of operations and comprehensive loss and excludes third party costs that are advanced by the Advisor.
(6)
Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.
(7)    Included in Stockholders' equity on the consolidated balance sheets.







RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

NOTE 9 - EARNINGS PER SHARE
The following table presents a reconciliation of the Company's basic and diluted earnings/(loss) per share for the periods presented:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(1,388,450
)
 
$
(331,254
)
 
$
(2,214,605
)
 
$
(648,997
)
Less: Class A common stock cash distributions declared
81,956

 
30,709

 
165,068

 
38,400

Less: Class T common stock cash distributions declared
119,360

 
22,858

 
235,694

 
26,250

Less: Class R common stock cash distributions declared
530,248

 
—

 
908,929

 
—

Less: Class I common stock cash distributions declared
25,556

 
—

 
35,241

 
—

Undistributed net loss attributable to common stockholders
$
(2,145,570
)
 
$
(384,821
)
 
$
(3,559,537
)
 
$
(713,647
)
 
 
 
 
 
 
 
 
Class A common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class A common stockholders
$
(236,156
)
 
$
(171,529
)
 
$
(437,671
)
 
$
(361,947
)
Class A common stock cash distributions declared
81,956

 
30,709

 
165,068

 
38,400

Net loss attributable to Class A common stockholders
$
(154,200
)
 
$
(140,820
)
 
$
(272,603
)
 
$
(323,547
)
Net loss per Class A common share, basic and diluted
$
(0.25
)
 
$
(0.25
)
 
$
(0.44
)
 
$
(0.65
)
Weighted-average number of Class A common shares outstanding, basic and diluted (1)
626,103

 
559,739

 
624,518

 
501,031

 
 
 
 
 
 
 
 
Class T common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class T common stockholders
$
(411,109
)
 
$
(213,292
)
 
$
(761,763
)
 
$
(351,700
)
Class T common stock cash distributions declared
119,360

 
22,858

 
235,694

 
26,250

Net loss attributable to Class T common stockholders
$
(291,749
)
 
$
(190,434
)
 
$
(526,069
)
 
$
(325,450
)
Net loss per Class T common share, basic and diluted
$
(0.27
)
 
$
(0.27
)
 
$
(0.48
)
 
$
(0.67
)
Weighted-average number of Class T common shares outstanding, basic and diluted
1,089,943

 
696,020

 
1,086,970

 
486,845

 
 
 
 
 
 
 
 
Class R common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class R common stockholders
$
(1,451,507
)
 
$
—

 
$
(2,298,998
)
 
$
—

Class R common stock cash distributions declared
530,248

 
—

 
908,929

 
—

Net loss attributable to Class R common stockholders
$
(921,259
)
 
$
—

 
$
(1,390,069
)
—

$
—

Net loss per Class R common share, basic and diluted
$
(0.24
)
 
$
—

 
$
(0.42
)
 
$
—

Weighted-average number of Class R common shares outstanding, basic and diluted
3,848,272

 
—

 
3,280,470

 
—

 
 
 
 
 
 
 
 
Class I common stock:
 
 
 
 
 
 
 
Undistributed net loss attributable to Class I common stockholders
$
(46,798
)
 
$
—

 
$
(61,105
)
 
$
—

Class I common stock cash distributions declared
25,556

 
—

 
35,241

 
—

Net loss attributable to Class I common stockholders
$
(21,242
)
 
$
—

 
$
(25,864
)
 
$
—

Net loss per Class I common share, basic and diluted
$
(0.17
)
 
$
—

 
$
(0.30
)
 
$
—

Weighted-average number of Class I common shares outstanding, basic and diluted
124,071

 
—

 
87,192

 
—

 
(1)
Weighted-average number of shares excludes the convertible stock as they are not participating securities.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

NOTE 10 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10 million shares of its $0.01 par value preferred stock. At June 30, 2018, no shares of preferred stock were issued or outstanding.
Convertible Stock
The Company’s charter authorizes the Company to issue 50,000 shares of its $0.01 par value convertible stock. On August 5, 2016, the Company's board of directors approved the issuance of 50,000 convertible shares in exchange of 5,000 shares of Class A common stock. At June 30, 2018, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor. The convertible stock will convert into shares of the Company’s Class A common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 6% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange or the Company consummates a merger pursuant to which consideration received by the stockholders is securities of another issuer that are listed on a national securities exchange.
Each of these two events is a "Triggering Event."  Upon a Triggering Event, the Company's convertible stock will, unless its advisory agreement has been terminated or not renewed on account of a material breach by its Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
(A)
15% of the amount, if any, by which
(1)
the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds
(2)
the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by
(B) the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.
No triggering events have occurred as of June 30, 2018.
Common Stock
The Company’s charter authorizes the issuance of one billion shares of common stock with a par value of $0.01 per share, of which, the Company has allocated 750 million shares as Class R common stock, 75 million shares as Class I common stock, 25 million shares as Class A common stock and 25 million shares as Class T common stock. 125 million shares of the Company's $0.01 par value common stock remain undesignated. As of July 3, 2017, the Company ceased offering shares of Class A and Class T common stock and commenced the offering of Class R and Class I common stock in its primary offering.








RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)


At June 30, 2018, shares of the Company's $0.01 par value Class A, Class T, Class R, and Class I common stock have been issued as follows:
 
 
Class A
 
Class T
 
Class R
 
Class I
 
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
Shared issued through primary offering (1)
 
586,207

 
$
5,601,476

 
1,049,996

 
$
9,943,465

 
4,379,813

 
$
41,689,091

 
132,882

 
$
1,203,820

Shares issued through stock dividends
 
12,860

 
—

 
15,495

 
—

 
—

 
—

 
—

 
—

Shares issued through distribution reinvestment plan
 
14,171

 
136,042

 
31,909

 
290,044

 
51,438

 
470,146

 
350

 
3,118

Shares issued in conjunction with the Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
200,000

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
628,238

 
$
5,937,518

 
1,097,400

 
$
10,233,509

 
4,431,251

 
$
42,159,237

 
133,232

 
$
1,206,938

Shares redeemed and retired
 
—

 
 
 
(2,154
)
 
 
 
—

 
 
 
—

 
 
Total shares outstanding at June 30, 2018
 
628,238

 
 
 
1,095,246

 
 
 
4,431,251

 
 
 
133,232

 
 
 
(1)    Includes 222,222 of Class A shares issued to RAI.
Redemptions
During the six months ended June 30, 2018, the Company redeemed shares of its outstanding Class T common stock as follows:
Period
 
Total Number of Shares Redeemed
 
Average Price Paid per Share
January 2018
 
—

 
—

February 2018
 
—

 
—

March 2018
 
2,154

 
$
8.59

April 2018
 
—

 
—

May 2018
 
—

 
—

June 2018
 
—

 
—

 
 
2,154

 
 
All redemptions requests tendered were honored during the six months ended June 30, 2018.
The Company will not redeem in excess of 5% of the weighted-average number of shares of common stock outstanding during the 12-month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.
The Company's board of directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

Distributions
Cash Distributions
During the six months ended June 30, 2018, the Company's board of directors declared cash distributions on the outstanding shares of all classes of its common stock based on daily record dates for the period from March 30, 2018 through September 27, 2018, which were or will be paid on April 30, 2018, May 31, 2018, June 29, 2018, July 31, 2018, August 31, 2018, and September 28, 2018.
The distributions declared for the periods from March 30, 2018 through June 28, 2018 were calculated based on stockholders of record each day during these periods at a rate of (i) $0.001434521 per share per day less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock.
The distributions declared for the periods from June 29, 2018 through September 27, 2018 were calculated based on stockholders of record each day during these periods at a rate of (i) $0.001458630 per share per day less (ii) the applicable daily distribution and shareholder servicing fees accrued for and allocable to any class of common stock.
Distributions are generally paid to stockholders on the last business day of the month for which the distribution has accrued. Distributions reinvested pursuant to the distribution reinvestment plan are reinvested in shares of the same class as the shares on which distributions are made.
The following table presents information regarding the Company's distributions declared and paid to stockholders during the three and six months ended June 30, 2018:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
Distributions declared
 
$
81,956

 
$
119,360

 
$
530,248

 
$
25,556

 
$
757,120

 
$
165,068

 
$
235,694

 
$
908,929

 
$
35,241

 
$
1,344,932

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions reinvested in shares of common stock paid
 
39,943

 
97,821

 
293,936

 
1,309

 
433,009

 
62,249

 
147,024

 
394,323

 
1,931

 
605,527

Cash distributions paid
 
66,965

 
57,011

 
218,042

 
17,112

 
359,130

 
100,690

 
85,405

 
289,719

 
20,343

 
496,157

Total distributions paid
 
$
106,908

 
$
154,832

 
$
511,978

 
$
18,421

 
$
792,139

 
$
162,939

 
$
232,429

 
$
684,042

 
$
22,274

 
$
1,101,684

At June 30, 2018, the Company had accrued $697,125 for the cash distributions paid or to be paid on July 31, 2018, August 31, 2018, September 28, 2018, which is reported in distributions payable in the consolidated balance sheet.
Stock Dividends
On October 7, 2016, the Company's board of directors authorized a stock dividend in the amount of 0.005 shares of common stock to all common stockholders of record as of the close of business on December 31, 2016. On February 22, 2017, the Company's board of directors authorized a stock dividend, in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on March 31, 2017. On April 25, 2017, the Company's board of directors authorized a stock dividend in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on July 1, 2017. The stock dividends were issued in the same class of shares as the shares for which such stockholder received the stock dividend. The Company issued the stock dividends on January 13, 2017, April 13, 2017, and July 14, 2017, respectively.

NOTE 11 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its financial instruments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on quoted prices when available or, if quoted prices are not

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature. The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.
The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.
During the six months ended June 30, 2018, derivatives (interest rate caps) of $28,500 were acquired in conjunction with the acquisition financing of Tramore Village. Derivatives are reported at fair value in the consolidated balance sheets and are valued by a third party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2).
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2018
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$
—

 
$
14,638

 
$
—

 
$
14,638

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate caps
 
$
—

 
$
3,408

 
$
—

 
$
3,408

The carrying and fair values of the Company’s mortgage notes payable - outstanding borrowings, which were not carried at fair value on the consolidated balance sheets at June 30, 2018 and December 31, 2017, were as follows:
 
 
June 30, 2018
 
December 31, 2017
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Mortgage notes payable- outstanding borrowings
 
$
55,722,504

 
$
53,521,010

 
$
23,114,507

 
$
22,236,396

The carrying amount of the mortgage notes payable presented above is the outstanding borrowings excluding premium or discount and deferred finance costs, net. The fair value of mortgage notes payable was estimated using a discounted cash flow model and rates available to the Company for debt with similar terms and remaining maturities.

RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

NOTE 12 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into one interest rate cap that was designated as a cash flow hedge. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2018, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives will be recognized directly in earnings. During the three and six months ended June 30, 2018 and 2017, the Company recorded no hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. At June 30, 2018, the Company estimates that an additional $1,028 will be reclassified as an increase to interest expense over the next 12 months.
The following table presents the Company's outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk at June 30, 2018 and December 31, 2017:
 
 
Interest Rate Derivative
 
Number of Instruments
 
Notional Amount
 
Maturity Dates
June 30, 2018
 
Interest rate cap
 
2
 
$
54,145,000

 
August 1, 2020 and April 1, 2021
December 31, 2017
 
Interest rate cap
 
1
 
$
21,520,000

 
August 1, 2020
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheets at June 30, 2018 and December 31, 2017:
Asset Derivatives
 
Liability Derivatives
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Prepaid expenses and other assets
 
$
14,638

 
Prepaid expenses and other assets
 
$
3,408

 
—
 
$
—

 
N/A
 
$
—


RESOURCE APARTMENT REIT III, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30 2018
(unaudited)

NOTE 13 - OPERATING EXPENSE LIMITATION
Under its charter, the Company must limit its total operating expenses to the greater of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.
Operating expenses for the four fiscal quarters ended June 30, 2018 exceeded the charter imposed limitation; however, the conflicts committee of the Company's board of directors determined that the relationship of the Company's operating expenses to its average invested assets was justified for these periods given the costs of operating a public company and the early stage of the Company's operations.

NOTE 14 - SUBSEQUENT EVENTS
On July 9, 2018, the Company entered into an agreement to purchase Matthews Reserve, a 212-unit multifamily apartment complex located in Matthews, North Carolina, for $33.8 million with an expected closing in the third quarter of 2018.

On July 18, 2018, the Company's board of directors approved a Second Amended and Restated Share Redemption Program (the “Amended SRP”).  The Amended SRP provides that, for all shares redeemed in connection with a stockholder’s death, qualifying disability or confinement to a long-term care facility, the redemption price will be equal to the Company's most recent estimated value per share, which is currently $9.05.  The Amended SRP will become effective on August 23, 2018.

On July 23, 2018, the Company entered into an agreement to purchase The Park at Kensington, a 204-unit multifamily apartment complex located in Riverview, Florida, for $28.85 million with an expected closing in the third quarter of 2018. On August 2, the purchase price was adjusted to $28.7 million.

The Company has evaluated subsequent events through the filing of these financial statements and determined no events have occurred, other than those discussed above, that would require adjustments to or additional disclosure in the consolidated financial statements.




ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Apartment REIT III, Inc. and the notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2017. As used herein, the terms "we," "our" and "us" refer to Resource Apartment REIT III, Inc., a Maryland corporation, and, as required by context, Resource Apartment REIT III OP, LP, a Delaware limited partnership, and to their subsidiaries.
Overview
Resource Apartment REIT III, Inc. is a Maryland corporation that intends to take advantage of its sponsor's multifamily investing and lending platforms to invest in apartment communities in order to provide stockholders with growing cash flow and increasing asset values. We intend to acquire underperforming apartments which we will renovate and stabilize in order to increase rents. To a lesser extent, we will also seek to originate and acquire commercial real estate debt secured by apartments. We cannot predict, however, the ultimate allocation of net proceeds from our initial public offering between property acquisitions and debt investments at this time because this allocation will depend, in part, on market conditions and opportunities and on the amount of financing that we are able to obtain with respect to the types of assets in which we seek to invest. If we are not able to raise a substantial amount of offering proceeds, our plan of operation will be scaled down considerably, and we would expect to acquire a limited number of assets. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource REIT Advisor, LLC (our "Advisor") presents us with attractive investment opportunities that allow us to meet the real estate investment trust ("REIT") requirements under the Internal Revenue Code of 1986, as amended, our portfolio composition may vary from what we initially expect.

Results of Operations
We were formed on July 15, 2015. We commenced active real estate operations on August 19, 2016 with the acquisition of our first multifamily property. At June 30, 2018, we owned three multifamily properties. As such, we had limited operating results during the three and six months ended June 30, 2018 and 2017.
Our management is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting our targeted portfolio or the U.S. apartment community industry, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.













Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
The following table sets forth the results of our operations:
 
 
Three Months Ended June 30,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
1,721,683

 
$
51,713

Utilities income
 
79,732

 
—

Ancillary tenant fees
 
25,781

 
—

Total revenues
 
1,827,196

 
51,713

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating - expenses
 
346,784

 
13,680

Rental operating - payroll
 
199,196

 
—

Rental operating - real estate taxes
 
182,989

 
5,831

    Subtotal- rental operating
 
728,969

 
19,511

Acquisition costs
 
—

 
83,233

Property management fees
 
2,344

 
2,580

Management fees - related parties
 
290,565

 
6,730

General and administrative
 
527,348

 
238,385

Loss on disposal of assets
 
3,879

 
—

Depreciation and amortization expense
 
1,152,791

 
23,392

Total expenses
 
2,705,896

 
373,831

Loss before other income (expense)
 
(878,700
)
 
(322,118
)
 
 
 
 
 
Other income (expense):
 
 
 
 
Interest income
 
44,292

 
3,903

Interest expense
 
(554,042
)
 
(13,039
)
Net loss
 
$
(1,388,450
)
 
$
(331,254
)
















The following table presents the results of operations separated into two categories: property activity and company level activity for the three months ended June 30, 2018 and 2017:
 
 
For the three months ended June 30, 2018
 
For the three months ended June 30, 2017
 
 
Property activity
 
Company level activity
 
Total
 
Property activity
 
Company level activity
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
1,721,683

 
$
—

 
$
1,721,683

 
$
51,713

 
$
—

 
$
51,713

Utility income
 
79,732

 
—

 
79,732

 
—

 
—

 
—

Ancillary tenant fees
 
25,781

 
—

 
25,781

 
—

 
—

 
—

Total revenues
 
1,827,196

 
—

 
1,827,196

 
51,713

 
—

 
51,713

 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Rental operating - expenses
 
346,784

 
—

 
346,784

 
13,680

 
—

 
13,680

Rental operating - payroll
 
199,196

 
—

 
199,196

 
—

 
—

 
—

Rental operating - real estate taxes
 
182,989

 
—

 
182,989

 
5,831

 
—

 
5,831

    Subtotal- rental operating
 
728,969

 
—

 
728,969

 
19,511

 
—

 
19,511

Acquisition costs
 
—

 
—

 
—

 
83,233

 
—

 
83,233

Property management fees
 
2,344

 
—

 
2,344

 
2,580

 
—

 
2,580

Management fees - related parties
 
77,952

 
212,613

 
290,565

 
—

 
6,730

 
6,730

General and administrative
 
71,679

 
455,669

 
527,348

 
1,849

 
236,536

 
238,385

Loss on disposal of assets
 
3,879

 
—

 
3,879

 
—

 
—

 
—

Depreciation and amortization expense
 
1,152,791

 
—

 
1,152,791

 
23,392

 
—

 
23,392

Total expenses
 
2,037,614

 
668,282

 
2,705,896

 
130,565

 
243,266

 
373,831

Loss before other income (expense)
 
(210,418
)
 
(668,282
)
 
(878,700
)
 
(78,852
)
 
(243,266
)
 
(322,118
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
20

 
44,272

 
44,292

 
37

 
3,866

 
3,903

Interest expense
 
(554,042
)
 
—

 
(554,042
)
 
(13,039
)
 
—

 
(13,039
)
Net loss
 
$
(764,440
)
 
$
(624,010
)
 
$
(1,388,450
)
 
$
(91,854
)
 
$
(239,400
)
 
$
(331,254
)
Total revenues
Total revenues for the three months ended June 30, 2018 increased by approximately $1.8 million as compared to the three months ended June 30, 2017 due to three properties owned at June 30, 2018 as compared to one property owned at June 30, 2017.
Rental operating - expenses, payroll, and real estate taxes
Rental operating - expenses, payroll, and real estate taxes expense for the three months ended June 30, 2018 increased by approximately $709,000 as compared to the three months ended June 30, 2017 due to three properties owned at June 30, 2018 as compared to one property owned at June 30, 2017.
Management fees - related parties
Management fees - related parties expense for the three months ended June 30, 2018 increased by approximately $284,000 as compared to the three months ended June 30, 2017 due to an increase in property management fees and asset management fees due to the acquisition of two additional properties.




General and administrative
General and administrative expense for the three months ended June 30, 2018 increased by approximately $289,000 as compared to the three months ended June 30, 2017 due to increases in payroll expense allocated from the Advisor, professional fees, and software costs related to internal and external reporting.
Loss on disposal of assets
Loss on disposal of assets for the three months ended June 30, 2018 was approximately $4,000 due to the replacement of appliances at our rental properties in conjunction with unit upgrades. During the three months ended June 30, 2017, we did not incur any such costs.
Depreciation and amortization
Depreciation and amortization expense for the three months ended June 30, 2018 increased by approximately $1.1 million as compared to the three months ended June 30, 2017 due to three properties owned at June 30, 2018, with net asset values of approximately $73.6 million as compared to one property owned at June 30, 2017, with a net asset value of approximately $2.4 million.
Interest expense
Interest expense for the three months ended June 30, 2018 increased by approximately $541,000 as compared to the three months ended June 30, 2017 due to three properties owned at June 30, 2018, which secured debt totaling approximately $55.0 million, as compared to one property owned at June 30, 2017, which secured debt totaling approximately $1.6 million.





















Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
The following table sets forth the results of our operations:
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Revenues:
 
 
 
 
Rental income
 
$
2,544,864

 
$
101,154

Utilities income
 
114,205

 
—

Ancillary tenant fees
 
31,246

 
—

Total revenues
 
2,690,315

 
101,154

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating - expenses
 
483,280

 
28,967

Rental operating - payroll
 
278,532

 
—

Rental operating - real estate taxes
 
307,192

 
11,634

    Subtotal- rental operating
 
1,069,004

 
40,601

Acquisition costs
 
—

 
83,233

Property management fees
 
4,361

 
4,762

Management fees - related parties
 
426,491

 
13,457

General and administrative
 
955,120

 
540,404

Loss on disposal of assets
 
6,488

 
—

Depreciation and amortization expense
 
1,714,946

 
48,698

Total expenses
 
4,176,410

 
731,155

Loss before other income (expense)
 
(1,486,095
)
 
(630,001
)
 
 
 
 
 
Other income (expense):
 
 
 
 
Other income
 
—

 
1,500

Interest income
 
70,214

 
5,484

Interest expense
 
(798,724
)
 
(25,980
)
Net loss
 
$
(2,214,605
)
 
$
(648,997
)















The following table presents the results of operations separated into two categories: property activity and company level activity for the six months ended June 30, 2018 and 2017:
 
 
For the six months ended June 30, 2018
 
For the six months ended June 30, 2017
 
 
Property activity
 
Company level activity
 
Total
 
Property activity
 
Company level activity
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
2,544,864

 
$
—

 
$
2,544,864

 
$
101,154

 
$
—

 
$
101,154

Utility income
 
114,205

 
—

 
114,205

 
—

 
—

 
—

Ancillary tenant fees
 
31,246

 
—

 
31,246

 
—

 
—

 
—

Total revenues
 
2,690,315

 
—

 
2,690,315

 
101,154

 
—

 
101,154

 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Rental operating - expenses
 
483,280

 
—

 
483,280

 
28,967

 
—

 
28,967

Rental operating - payroll
 
277,262

 
1,270

 
278,532

 
—

 
—

 
—

Rental operating - real estate taxes
 
307,192

 
—

 
307,192

 
11,634

 
—

 
11,634

    Subtotal- rental operating
 
1,067,734

 
1,270

 
1,069,004

 
40,601

 
—

 
40,601

Acquisition costs
 
—

 
—

 
—

 
83,233

 
—

 
83,233

Property management fees
 
4,361

 
—

 
4,361

 
4,762

 
—

 
4,762

Management fees - related parties
 
115,670

 
310,821

 
426,491

 
—

 
13,457

 
13,457

General and administrative
 
92,121

 
862,999

 
955,120

 
2,797

 
537,607

 
540,404

Loss on disposal of assets
 
6,488

 
—

 
6,488

 
—

 
—

 
—

Depreciation and amortization expense
 
1,714,946

 
—

 
1,714,946

 
48,698

 
—

 
48,698

Total expenses
 
3,001,320

 
1,175,090

 
4,176,410

 
180,091

 
551,064

 
731,155

Loss before other income (expense)
 
(311,005
)
 
(1,175,090
)
 
(1,486,095
)
 
(78,937
)
 
(551,064
)
 
(630,001
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Other income
 
—

 
—

 
—

 
1,500

 
—

 
1,500

Interest income
 
190

 
70,024

 
70,214

 
79

 
5,405

 
5,484

Interest expense
 
(798,724
)
 
—

 
(798,724
)
 
(25,980
)
 
—

 
(25,980
)
Net loss
 
$
(1,109,539
)
 
$
(1,105,066
)
 
$
(2,214,605
)
 
$
(103,338
)
 
$
(545,659
)
 
$
(648,997
)
Total revenues
Total revenues for the six months ended June 30, 2018 increased by approximately $2.6 million as compared to the six months ended June 30, 2017 due to three properties owned at June 30, 2018 as compared to one property owned at June 30, 2017.
Rental operating - expenses, payroll, and real estate taxes
Rental operating - expenses, payroll, and real estate taxes expense for the six months ended June 30, 2018 increased by approximately $1.0 million as compared to the six months ended June 30, 2017 due to three properties owned at June 30, 2018 as compared to one property owned at June 30, 2017.
Management fees - related parties
Management fees - related parties expense for the six months ended June 30, 2018 increased by approximately $413,000 as compared to the six months ended June 30, 2017 due to an increase in property management fees and asset management fees due to the acquisition of two additional properties.
General and administrative
General and administrative expense for the six months ended June 30, 2018 increased by approximately $415,000 as compared to the six months ended June 30, 2017 due to increases in payroll expense allocated from the Advisor, professional fees, and software costs related to internal and external reporting.


Loss on disposal of assets
Loss on disposal of assets for the six months ended June 30, 2018 was approximately $6,000 due to the replacement of appliances at our rental properties in conjunction with unit upgrades. During the six months ended June 30, 2017, we did not incur any such costs.
Depreciation and amortization
Depreciation and amortization expense for the six months ended June 30, 2018 increased by approximately $1.7 million as compared to the six months ended June 30, 2017 due to three properties owned at June 30, 2018, with net asset values of approximately $73.6 million as compared to one property owned at June 30, 2017, with a net asset value of approximately $2.4 million.
Interest expense
Interest expense for the six months ended June 30, 2018 increased by approximately $773,000 as compared to the six months ended June 30, 2017 due to three properties owned at June 30, 2018, which secured debt totaling approximately $55.0 million, as compared to one property owned at June 30, 2017, which secured debt totaling approximately $1.6 million.

Liquidity and Capital Resources
We are offering and selling to the public in our public offering up to $1.1 billion in shares of common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our distribution reinvestment plan ("DRIP"). Through July 2, 2017, we offered shares of Class A and Class T common stock in our primary offering at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock
The initial prices per share for each class of shares of our common stock through June 30, 2018 were as follows:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$
—

 
$
—

 
$
9.52

 
$
9.13

Offering Price under the DRIP
 
$
9.60

 
$
9.09

 
$
9.14

 
$
8.90

On June 29, 2018, we determined our net asset value per share. Effective July 2, 2018, the price per share for each class of shares of our common stock became:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$
—

 
$
—

 
$
9.68

 
$
9.28

Offering Price under the DRIP
 
$
9.05

 
$
9.05

 
$
9.05

 
$
9.05

We anticipate deriving the capital required to purchase real estate investments and conduct our operations from the proceeds of our initial public offering and any future offerings we may conduct, from secured or unsecured financings from banks or other lenders and from proceeds from the sale of assets. In addition, our Advisor has and will advance funds to us for certain accrued organization and offering costs. As of June 30, 2018, we have purchased three properties using both offering proceeds and debt financing.
If we are unable to raise substantial funds in the offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise substantial funds in our offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. As of June 30, 2018, we have raised approximately $58.6 million in our public offering.
We intend to make reserve allocations as necessary to aid our objective of preserving capital for our investors by supporting the maintenance and viability of properties we acquire in the future. If reserves and any other available income become insufficient


to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms.
Capital Expenditures
We deployed a total of $529,118 during the six months ended June 30, 2018 for capital expenditures:
Multifamily Community
 
Capital deployed during six months ended June 30, 2018
 
Remaining capital
budgeted
Payne Place
 
$
6,100

 
$
39,327

Bay Club
 
505,060

 
1,357,444

Tramore Village
 
17,958

 
4,387,438

 
 
$
529,118

 
 
Gross offering proceeds
At June 30, 2018, shares of our $0.01 par value Class A, Class T, Class R, and Class I common stock have been issued as follows:
 
 
Class A
 
Class T
 
Class R
 
Class I
 
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
 
Shares Issued
 
Gross Proceeds
Shared issued through primary offering
 
586,207

 
$
5,601,476

 
1,049,996

 
$
9,943,465

 
4,379,813

 
$
41,689,091

 
132,882

 
$
1,203,820

Shares issued through stock dividends
 
12,860

 
—

 
15,495

 
—

 
—

 
—

 
—

 
—

Shares issued through distribution reinvestment plan
 
14,171

 
136,042

 
31,909

 
290,044

 
51,438

 
470,146

 
350

 
3,118

Shares issued in conjunction with the Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
200,000

 
—

 
—

 
—

 
—

 
—

 
—

Total
 
628,238

 
$
5,937,518

 
1,097,400

 
$
10,233,509

 
4,431,251

 
$
42,159,237

 
133,232

 
$
1,206,938

Shared redeemed and retired
 
—

 
 
 
(2,154
)
 
 
 
—

 
 
 
—

 
 
Total shares outstanding at June 30, 2018
 
628,238

 
 
 
1,095,246

 
 
 
4,431,251

 
 
 
133,232

 
 
Mortgage Debt
The following table presents a summary of our mortgage notes payable, net:
 
 
June 30, 2018
 
December 31, 2017
Collateral
 
Outstanding Borrowings
 
Deferred Financing Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Deferred Financing Costs, net
 
Carrying Value
Payne Place
 
$
1,577,504

 
$
(31,168
)
 
$
1,546,336

 
$
1,594,507

 
$
(32,126
)
 
$
1,562,381

Bay Club
 
21,520,000

 
(280,181
)
 
21,239,819

 
21,520,000

 
(304,011
)
 
21,215,989

Tramore Village
 
32,625,000

 
(393,840
)
 
32,231,160

 
—

 
—

 
—

Total
 
$
55,722,504

 
$
(705,189
)
 
$
55,017,315

 
$
23,114,507

 
$
(336,137
)
 
$
22,778,370

For maturity dates, related interest rates, monthly debt service, and monthly escrow payments, see Note 7 of the notes to our consolidated financial statements.
As of June 30, 2018, the weighted average interest rate of all our outstanding indebtedness was 3.90%.


Although there is no limit on the amount we can borrow to acquire a single real estate investment, we may not leverage our assets with debt financing such that our borrowings are in excess of 300% of our net assets unless a majority of our independent directors find substantial justification for borrowing a greater amount. Examples of such a substantial justification include, without limitation, obtaining funds for the following: (i) to repay existing obligations, (ii) to pay sufficient distributions to maintain REIT status, or (iii) to buy an asset where an exceptional acquisition opportunity presents itself and the terms of the debt agreement and the nature of the asset are such that the debt does not increase the risk that we would become unable to meet our financial obligations as they became due. On a total portfolio basis, however, based on current lending market conditions, we expect to leverage our assets in an amount equal to 55% to 60% of the cost of our assets.
We may finance the acquisition costs of individual real estate investments, as well as the acquisition costs of all or a group of real estate investments acquired by us, by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Under these circumstances, our Advisor anticipates that certain properties acquired will serve as collateral for the debt we incur to acquire those particular properties and that we will seek to obtain nonrecourse financing for the acquisition of the properties. However, there is no guarantee that our Advisor will be successful in obtaining financing arrangements on a property-by-property basis and that the loans would be nonrecourse to us. Additionally, we may obtain corporate-level financing through a line of credit from third-party financial institutions or other commercial lenders. Our assets will serve as collateral for this type of debt incurred to acquire real estate investments. We may also obtain seller financing with respect to specific assets that we acquire.
Organization and Offering Costs
We incur organization and offering costs in pursuit of our capital raise. Our organization and offering costs (other than selling commissions, the dealer manager fees and distribution and shareholder servicing fees) are initially being paid by the Advisor on our behalf. Organization costs include all expenses that we incur in connection with our formation, including but not limited to legal fees and other costs to incorporate.
Pursuant to the advisory agreement, we will be obligated to reimburse the Advisor for organization and offering costs paid by the Advisor on our behalf, up to an amount equal to 4.0% of gross offering proceeds as of the termination of this offering if we raise less than $500.0 million in the primary offering, and 2.5% of gross offering proceeds as of the termination of this offering if we raise $500.0 million or more in the primary offering. However, if we raise the maximum offering amount in the primary offering, we expect organization and offering expenses (other than selling commissions, the dealer manager fee and the distribution and shareholder servicing fee) to be approximately $10.0 million or 1% of gross offering proceeds. These organization and offering expenses include all actual expenses (other than selling commissions, the dealer manager fee and the distribution and shareholder servicing fee), including reimbursements to our Advisor for the portion of named executive officer salaries allocable to activities related to this offering, to be incurred on our behalf and paid by us in connection with the offering.
On April 13, 2018, our board of directors approved an amendment to the advisory agreement that provides that we are not responsible for the reimbursement of any unreimbursed organization and offering expenses or operational expenses incurred by our Advisor on our behalf through March 31, 2018 until after the termination of the primary portion of our ongoing initial public offering. Additionally, the amendment provides that such unreimbursed organization and offering expenses or operational expenses incurred or paid by our Advisor on our behalf through March 31, 2018 will be reimbursed ratably starting after the termination of the primary portion of our ongoing initial public offering through April 30, 2021 for organization and offering expenses and through April 30, 2020 for operating expenses.
A portion of deferred offering costs will be charged to equity upon the sale of each share of common stock sold under the public offering. Through June 30, 2018, we have charged approximately $2.1 million to equity for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal, printing and similar costs. At June 30, 2018, the Advisor has incurred approximately $7.6 million of these costs on our behalf, of which approximately $5.5 million has been deferred at June 30, 2018.
Organization costs, which include all expenses incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate, are expensed as incurred. There can be no assurance that our plans to raise capital will be successful.
Outstanding Class T shares issued in our primary offering are subject to a 1.0% annual distribution and shareholder servicing fee for five years from the date on which such share is issued. We will cease paying the distribution and shareholder servicing fee on each Class T share prior to the fifth anniversary of its issuance on the earliest of the following, should any of these events occur: (i) the date at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds


from our primary offering (i.e., excluding proceeds from sales pursuant to our DRIP); (ii) the date on which we list our common stock on a national securities exchange; and (iii) the date of a merger or other extraordinary transaction in which we are a party and in which our common stock is exchanged for cash or other securities. We cannot predict if or when any of these events will occur.
Outstanding Class R shares issued in our primary offering are also subject to a 1.0% annual distribution and shareholder servicing fee.  We will cease paying the distribution and shareholder servicing fee with respect to Class R shares held in any particular account, and those Class R shares will convert into a number of Class I shares determined by multiplying each Class R share to be converted by the applicable "Conversion Rate," on the earlier of (i) the date after the termination of the primary offering at which, in the aggregate, underwriting compensation from all sources equals 10% of the gross proceeds from our primary offering; (ii) a listing of the Class I shares on a national securities exchange; (iii) a merger or consolidation of the company with or into another entity, or the sale or other disposition of all or substantially all of our assets; and (iv) the end of the month in which the total underwriting compensation (which consists of selling commissions, dealer manager fees and distribution and shareholder servicing fees) paid with respect to such Class R shares purchased in a primary offering is not less than 8.5% (or a lower limit, provided that, in the case of a lower limit, the agreement between the Dealer Manager and the broker-dealer in effect at the time Class R shares were first issued to such account sets forth the lower limit and the Dealer Manager s advises our transfer agent of the lower limit in writing) of the gross offering price of those Class R shares purchased in such primary offering (excluding shares purchased through our distribution reinvestment plan).
We record the distribution and shareholder servicing fees as a reduction to additional paid-in capital and the related liability in an amount equal to the maximum fees payable in relation to the Class T and Class R shares on the date the shares are issued. The liability will be relieved over time, as the fees are paid to the Dealer Manager, or as the fees are adjusted (if the fees are no longer payable pursuant to the conditions described above). For issued Class T shares, we have accrued an estimate of the total distribution and shareholder servicing fees of $489,035 for the full five year period at June 30, 2018, of which we paid $113,742 cumulatively through June 30, 2018. For issued Class R shares, we have accrued an estimate of the total distribution and shareholder servicing fees of $1,246,620 at June 30, 2018, of which we paid $156,896 cumulatively through June 30, 2018.
Acquisition and Asset Management Costs
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. During our acquisition stage, we expect to make payments to our Advisor in connection with the acquisition of real estate investments. In addition, we expect to continue to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us.
Operating Expenses
At the end of each fiscal quarter, our Advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.
Operating expenses for the four fiscal quarters ended June 30, 2018 exceeded the charter imposed limitation; however, the conflicts committee determined that the relationship of our operating expenses to our average invested assets was justified for these periods given the costs of operating a public company and the early stage of our operations.
"Average invested assets" means the average monthly book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. "Total operating expenses" means all expenses paid or incurred by us, as determined under accounting principles generally accepted in the United States ("GAAP"), that are in any way related to our operation, including advisory fees, but excluding (i) 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, registration and stock exchange listing of our stock; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees paid in accordance with the NASAA Statement of Policy Regarding Real Estate Investment Trusts (the "NASAA REIT Guidelines"); (vi) acquisition fees and expenses (including expenses relating to potential investments that we do not close); (vii) real estate commissions on the sale of property; and (viii) other fees and expenses connected with the acquisition, disposition, management and ownership of real estate interests, loans or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property).


Distributions
Cash Distributions
For the three and six months ended June 30, 2018, we declared and paid aggregate distributions, which were paid from operating activities, debt financing, and offering proceeds, as follows:
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
 
Class A
 
Class T
 
Class R
 
Class I
 
Total
Distributions declared
 
$
81,956

 
$
119,360

 
$
530,248

 
$
25,556

 
$
757,120

 
$
165,068

 
$
235,694

 
$
908,929

 
$
35,241

 
$
1,344,932

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions reinvested in shares of common stock paid
 
$
39,943

 
$
97,821

 
$
293,936

 
$
1,309

 
$
433,009

 
$
62,249

 
$
147,024

 
$
394,323

 
$
1,931

 
$
605,527

Cash distributions paid
 
66,965

 
57,011

 
218,042

 
17,112

 
359,130

 
100,690

 
85,405

 
289,719

 
20,343

 
496,157

Total distributions paid
 
$
106,908

 
$
154,832


$
511,978


$
18,421


$
792,139

 
$
162,939

 
$
232,429

 
$
684,042

 
$
22,274

 
$
1,101,684

At June 30, 2018, we had accrued $697,125 for the cash distributions paid or to be paid on July 31, 2018, August 31, 2018, September 28, 2018, which is reported in distributions payable in the consolidated balance sheet and included in the distributions declared above.
Distributions paid, distributions declared and sources of distributions paid were as follows for the six months ended June 30, 2018:
 
Distributions Paid
 
 
 
Distributions Declared
 
Sources of Distributions Paid
2018
Cash
 
Distributions Reinvested (DRIP)
 
Total
 
Cash Provided by Operating Activities
 
Total
 
Per Share(1)
 
Operating Activities
 
Offering Proceeds
 
Debt Financing
 
 
 
 
 
 
Amount Paid / Percent of Total
 
Amount Paid / Percent of Total
 
Amount Paid / Percent of Total
First quarter
$
137,027

 
$
172,518

 
$
309,545

 
$
39,801

 
$
587,812

 
$0.131
 
$39,801/12.9%
 
$269,744/87.1%
 
- / -
Second quarter
359,130

 
433,009

 
792,139

 
317,894

 
757,120

 
$0.133
 
$317,894/40.1%
 
$474,243/59.9%
 
- / -
Total
$
496,157

 
$
605,527

 
$
1,101,684

 
$
357,695

 
$
1,344,932

 
 
 
 
 
 
 
 
 
(1)    Distributions for Class T and Class R shareholders were reduced for the distribution and shareholder servicing fee.









Cash distributions paid since inception were as follows:
Fiscal Period Paid
 
Per Share (1)
 
Distributions
Reinvested in
Shares of
Common Stock
 
Net
Cash
Distributions
 
Total
Aggregate
Distributions
12 months ended December 31, 2016
 
$.000547945 per day
 
$
4,380

 
$
11,524

 
$
15,904

Seven months ended July 31, 2017
 
$.000547945 per day
 
41,012

 
47,682

 
88,694

Five months ended December 31, 2017
 
$.001434521 per day
 
248,431

 
227,843

 
476,274

Three months ended March 31, 2018
 
$.001434521 per day
 
172,518

 
137,027

 
309,545

Three months ended June 30, 2018
 
$.001458630 per day
 
433,009

 
359,130

 
792,139

 
 
 
 
$
899,350

 
$
783,206

 
$
1,682,556


(1)    Distributions for Class T and Class R shareholders were reduced for the distribution and shareholder servicing fee.
Our net loss attributable to common stockholders for the six months ended June 30, 2018 was $2,214,605 and net cash provided by operating activities was $357,695. Our cumulative cash distributions and net loss attributable to common stockholders from inception through June 30, 2018 are $1,682,556 and approximately $6.1 million, respectively. We have funded our cumulative distributions, which include net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from our public offering and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.
Stock Dividends
On October 7, 2016, our board of directors authorized a stock dividend in the amount of 0.005 shares of common stock to all common stockholders of record as of the close of business on December 31, 2016. On February 22, 2017, our board of directors authorized a stock dividend, in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on March 31, 2017. On April 25, 2017, our board of directors authorized a stock dividend in the amount of 0.01 shares of common stock to all common stockholders of record as of the close of business on July 1, 2017. The stock dividends were issued in the same class of shares as the shares for which such stockholder received the stock dividend. We issued the stock dividends on January 13, 2017, April 13, 2017, and July 14, 2017, respectively.

Funds from Operations and Modified Funds from Operations
Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.


Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Institute for Portfolio Alternatives, or IPA. MFFO excludes from FFO the following items:
(1)
acquisition fees and expenses (incurred prior to January 1, 2018, as explained below);
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our offering and acquisition stages are complete, primarily because, prior to January 1, 2018, as explained below, it excluded acquisition expenses that affect property operations only in the period in which the property is acquired. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:
•
Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Under current GAAP, acquisition costs related to business combinations are expensed and are capitalized for asset acquisitions.  Prior to January 1, 2018, all of our acquisitions were accounted for as business combinations and their related costs were expensed.  On January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Update No. 2017-01, and we anticipate that most property acquisitions will be treated as asset acquisitions and the related costs will be capitalized.  Acquisition costs will continue to be funded from both the proceeds of debt financing and the proceeds of property dispositions, not from cash flows from operations.  We believe that by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those costs paid to our Advisor or third parties.
•
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.


•
Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
•
Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.
•
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our offering and acquisition stages are completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry. MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments. However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.
Neither FFO nor MFFO should be considered as an alternative to net income attributable to common stockholders, nor is an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we intend to continue to acquire properties as part of our ongoing operations, acquisition costs and other adjustments that are increases to MFFO are, and may continue to be, a significant use of cash. Accordingly, FFO and MFFO should be reviewed in connection with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.
The following section presents our calculation of FFO and MFFO and provides additional information related to our operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net loss attributable to common stockholders - GAAP
$
(1,388,450
)
 
$
(331,254
)
 
$
(2,214,605
)
 
$
(648,997
)
Depreciation expense
715,940

 
10,503

 
998,662

 
20,828

FFO attributable to common stockholders
(672,510
)
 
(320,751
)
 
(1,215,943
)
 
(628,169
)
Adjustments for straight-line rents
5,513

 
(781
)
 
6,458

 
1,943

Amortization of intangible lease assets
436,851

 
12,888

 
716,284

 
27,870

Acquisition costs
—

 
83,233

 
—

 
83,233

MFFO attributable to common stockholders
$
(230,146
)
 
$
(225,411
)
 
$
(493,201
)
 
$
(515,123
)


Critical Accounting Policies
For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2017 under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies."
Subsequent Events    
We have evaluated subsequent events and determined that no events have occurred, which would require an adjustment to or additional disclosure in the consolidated financial statements, except for the following:

On July 9, 2018, we entered into an agreement to purchase Matthews Reserve, a 212-unit multifamily apartment complex located in Matthews, North Carolina, for 33.8 million with an expected closing in the third quarter of 2018.

On July 18, 2018, our board of directors approved a Second Amended and Restated Share Redemption Program (the “Amended SRP”).  The Amended SRP provides that, for all shares redeemed in connection with a stockholder’s death, qualifying disability or confinement to a long-term care facility, the redemption price will be equal to our most recent estimated value per share, which is currently $9.05.  The Amended SRP will become effective on August 23, 2018.

On July 23, 2018, we entered into an agreement to purchase The Park at Kensington, a 204-unit multifamily apartment complex located in Riverview, Florida, for 28.85 million with an expected closing in the third quarter of 2018. On August 2, the purchase price was adjusted to $28.7 million.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of June 30, 2018.
Changes in Internal Control over Financial Reporting
      There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II.                      OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
From time to time, we may become party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in 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 governmental authorities.

ITEM 1A.    RISK FACTORS
Risk factors have been omitted as permitted under rules applicable to smaller reporting companies.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
During the period covered by this report, we did not sell any unregistered securities.
Use of Proceeds
On April 28, 2016, our Registration Statement on Form S-11 (File No. 333-207740), covering our initial public offering of up to $1.1 billion in shares of common stock, was declared effective under the Securities Act of 1933. We retained Resource Securities LLC (our "Dealer Manager") as the dealer manager for our offering.
We are offering up to $1.1 billion of shares of our common stock, consisting of up to $1.0 billion of shares in our primary offering and up to $100.0 million of shares pursuant to our DRIP. Through July 2, 2017, we offered shares of Class A and Class T common stock in our primary offering at prices of $10.00 per share and $9.47 per share, respectively. As of July 3, 2017, we ceased offering shares of Class A and Class T common stock in our primary offering and commenced offering shares of Class R and Class I common stock in our primary offering at prices of $9.52 per share and $9.13 per share, respectively. The initial offering price for shares offered pursuant to the DRIP was $9.60 per share for Class A common stock, $9.09 per share for Class T common stock, $9.14 per share for Class R common stock and $8.90 per share for Class I common stock.
On June 29, 2018, we determined our net asset value ("NAV") per share. Effective July 2, 2018, the price per share for each class of shares of our common stock became:
 
 
Class A
 
Class T
 
Class R
 
Class I
Primary Offering Price
 
$
—

 
$
—

 
$
9.68

 
$
9.28

Offering Price under the DRIP
 
$
9.05

 
$
9.05

 
$
9.05

 
$
9.05

At June 30, 2018, a total of 601,207 Class A shares, including shares purchased by both our Advisor and RAI, 1,049,996 Class T shares, 4,379,813 Class R shares and 132,882 Class I shares of common stock have been issued in connection with our public offering resulting in gross offering proceeds of approximately $58.6 million. From the commencement of our public offering through June 30, 2018, we incurred selling commissions, dealer manager fees, other underwriting compensation and other organization and offering costs in the amounts set forth below. We generally paid selling commissions and dealer manager fees to our Dealer Manager for the sale of shares in our primary offering and our Dealer Manager reallowed all selling commissions and a portion of the dealer manager fees to participating broker-dealers. In addition, we reimburse our Advisor and Dealer Manager for certain organizational and offering costs.


Type of Expense
 
Amount
Selling commissions
 
$
1,396,768

Dealer manager fees
 
1,722,672

Distribution and shareholder servicing fee (1)
 
1,735,655

Other organization and offering costs (2)
 
2,151,310

Total expenses
 
$
7,006,405

 
(1)
Outstanding Class T and R shares issued in our primary offering are subject to a 1% annual distribution and shareholder servicing fee from the date on which each share is issued. Such fees are not paid from offering proceeds and do not reduce the amount of net offering proceeds to us. At June 30, 2018, $1,465,017 of these fees are unpaid and included in due to related parties on our consolidated balance sheets.
(2)
At June 30, 2018, this amount is included in due to related parties on the consolidated balance sheets.

From the commencement of our initial public offering through June 30, 2018, the net offering proceeds to us, after deducting the total expenses incurred as described above, excluding the distribution and shareholder servicing fee as such fees do not reduce the net offering proceeds to us, were approximately $53.4 million. As of June 30, 2018, we have used the net proceeds from our ongoing initial public offering and debt financing to acquire approximately $75.2 million in real estate investments. Of the amount used for the purchase of these investments, approximately $1.6 million was paid to our Advisor as acquisition fees and approximately $86,000 was paid to other affiliates for acquisition expense reimbursements. As of June 30, 2018, our Advisor has incurred costs on our behalf of approximately $7.6 million.
Share Redemption Program
Our common stock is currently not listed on a national securities exchange and we will not seek to list our common stock unless and until such time as our board of directors determines that the listing of our common stock would be in the best interests of our stockholders. In order to provide stockholders with the benefit of some interim liquidity, our board of directors has adopted a share repurchase program that enables our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. The terms of our share repurchase program are more flexible in cases involving the death or disability of a stockholder. We may reject any request for repurchase of shares. Repurchases of shares of our common stock, when requested, generally will be made quarterly. We will not redeem in excess of 5% of the weighted-average number of shares of common stock outstanding during the 12-month period immediately prior to the effective date of redemption. In addition, we are only authorized to repurchase shares using proceeds from our DRIP plus 1.0% of the operating cash flow from the previous fiscal year (to the extent positive) and any additional operating funds, if any, as our Board in its sole discretion may reserve for this purpose. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.
Unless the shares of our common stock were repurchased in connection with a stockholder’s death or qualifying disability, the purchase price for shares repurchased under our share repurchase program were as set forth below until the determination of our NAV on June 30, 2018 ("NAV Pricing Date"):
Share Purchase Anniversary
 
Redemption Price as a Percentage of Purchase Price
Less than 1 year
 
No Repurchase Allowed
1 year
 
92.5%
2 years
 
95.0%
Notwithstanding the foregoing, until the NAV Pricing Date, shares received as a stock dividend were redeemed at a purchase price of $0.00. In addition, the purchase price per share was adjusted for any stock combinations, splits, recapitalizations and the like with respect to the shares of common stock and reduced by the aggregate amount of net sale or refinance proceeds per share, if any, distributed to the stockholder prior to the repurchase date. Shares repurchased in connection with a stockholder’s death or qualifying disability were repurchased at a price per share equal to 100% of the amount the stockholder paid for each share, or, 100% of our NAV, as determined by our board of directors, subject to any special distributions previously made to our stockholders. Shares repurchased in connection with a stockholder’s other exigent circumstances, such as bankruptcy, within one


year from the purchase date, will be repurchased at a price per share equal to the price per share we would pay had the stockholder held the shares for one year from the purchase date, and at all other times in accordance with the terms described above. A stockholder must have beneficially held the shares for at least one year prior to offering them for sale to us through our share repurchase program, unless the shares are being repurchased in connection with a stockholder’s death, qualifying disability, or certain other exigent circumstances. Our Board of Directors reserves the right, in its sole discretion, at any time and from time to time, to waive the one-year holding period requirement in the event of the death or qualifying disability of a stockholder, other involuntary exigent circumstances such as bankruptcy, or a mandatory distribution requirement under a stockholder’s IRA.
During the three months ended June 30, 2018, we did not redeem any shares of our common stock.
ITEM 6.    EXHIBITS
Exhibit No.
 
Description
3.1
 
3.2
 
3.3
 
3.4
 
3.5
 
4.1
 
4.2
 
4.3
 
4.4
 
10.1
 
10.2
 
31.1
 
31.2
 
32.1
 
32.2
 
99.1
 
99.2
 
101.1
 
Interactive Data Files


SIGNATURES

Pursuant to the requirements of Section 12 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.
 
RESOURCE APARTMENT REIT III, INC.
 
 
August 10, 2018
By:           /s/ Alan F. Feldman
 
Alan F. Feldman
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
August 10, 2018
By:           /s/ Steven R. Saltzman
 
Steven R. Saltzman
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)


Resource Apartment REIT III, Inc. Reports